Of the myriad lessons we can take away from the financial crisis, the need for grounded, fact-based realism, rather than unquestioning, economic dogma, is on the top of my list. If policymakers and economic actors had listened to the Talebs, Roubinis and Shillers of the world early on, America's economic bubble may have deflated before it popped (or at least stopped inflating). Instead, the "musical chairs theory of markets" took hold, and when the music stopped, the entire economic edifice collapsed (and continues to do so).
Yet, as the world enters a multi-speed recovery, I can't help but asking, has sober caution given way to steadfast pessimism? Have predictions of gloom clouded the economic debate?
For example, in spite of the economic successes coming from emerging markets, particularly in Asia, prophecies of doom seem to make for better headlines. And it's not just the most outspoken, such Niall Ferguson and Matt Taibbi, who are expressing disillusionment. Paul Volcker, former Federal Reserve Chairman and head of Barack Obama's Economic Recovery Advisory Board, seems to be struggling to stay positive. In a recent interview with Germany's Spiegel, Volcker had this to say:
SPIEGEL: So what do you expect in the very near future?
Volcker: As an American, I have to be an optimist. But we have got a big challenge and we have to face up to it. And as you know, there is a lot of concern about the dysfunction of the political system.
SPIEGEL: So it is becoming harder to be an optimist?
Volcker: It's a challenge.
Doubt is spreading beyond the beleaguered West, to the brightest patches of the global economy. For example, Reuters' Martin Hutchinson is worried about....Brazil.
His latest analysis starts out upbeat:
South America's biggest economy has outdone most other nations in 2008-09 thanks to diversified resources, sensible monetary policy and generally sound fiscal policy. The flexibility of a floating exchange rate helped too; the 35 percent devaluation of the Brazilian real in autumn 2008 cushioned the decline in exports and allowed domestic monetary easing to assist an early recovery from the credit crisis.
So far, so good. Sage economic policy, coupled with a (relatively brief) currency devaluation from a historically high value helped Brazil brush off the worst financial crisis in 80 years.
Alas, all good things must come to an end:
There are problems emerging. The stronger currency has hit exports. Public spending, already high by emerging market standards, has risen by 16 percent compared to last year. The primary budget surplus, before interest payments, is less than a third of the statutory target - a dangerous shortfall given Brazil's beg debts. Only monetary policy remains on safe ground.
Clearly Hutchinson missed the recent news from PFC energy portraying Brazil as one of five key oil powers of the future. And this interview with the Economist's Brazil correspondent (and the subsequent 20+ page report), outlining the strengths of Brazil's recovery. Or the fact that investment banks and capital markets are converging on Brazil.
Fortunately, unadulterated pessimism hasn't won out everywhere. Warren Buffet certainly remains faithful in an eventual rebound. Tyler Cowen also has an interesting optimist's take, arguing that the 'naughties' (ie the past decade) have actually been quite good, especially for developing countries:
Some people are saying naughties were the worst decade ever, but that's more true for the global relations of the United States than for the level of human well-being in the world as a whole. Even in the U.S., a lot of social indicators improved. Elsewhere Chinese growth continued, Indian growth moved into the big time (in the gross reckoning we're already at well over two billion people), a lot of Eastern Europe was successfully absorbed into the EU, Indonesia made slow but steady progress. Brazil may have turned a corner, and Africa had a better-than-lately decade in terms of economic growth. Communism didn't really come back. Admittedly the Middle East is a tougher call. Canada did strikingly well, as did Australia. There was lots of progress on public health, including in the war against AIDS. The internet truly blossomed and human creativity continued.
While irrational exuberance is never welcome, neither is pessimism in perpetuity. As we head into a new decade, one can only hope that the economic debate, much like economic growth, will become more nuanced.