Writings to the end of March 2009
Keywords: Macroeconomics & Money;
The following is a summary of my writing on the Global Financial Crisis beginning in August 2007, when it became evident that the world financial system (and probably the world economy) was going to face great stress. I compiled it to enable me to reflect on and monitor my thinking, but it may be of interest to others. (The list does not record various broadcasting and other media contributions.)
What may be not evident is that underpinning what I have been writing is close attention to the international debate. I have a friend who sweeps the major daily papers in English and sends me articles, I read hard copy of magazines, there are blogs and I am dialogue with colleagues here and overseas.
(The dates for Listener columns are the cover date. The column would be finalised about three weeks before. Other items would be finalised much closer to the presentation data, and often subject to (typically) minor revisions after.).
Columns published between April 2009 and September 2010 can be found at www.eastonbh.ac.nz/?p=1353
 The turbulence struck in early August 2007 when uncertainty over the value of some financial assets resulted in the money markets seizing up. I responded with .Of Ninjas and Private Equity: Will there be a worldwide financial crash? (www.eastonbh.ac.nz/?p=852, 25 August, 2007) to alert readers but also to explain the origins of some of those assets which were later to be called ‘toxic’.
(There had been a number of pre-August 2007 which reflected worries about the US economy, although I did not focus enough of the financial bubble. e.g. Yankee Dollar Blues: How will the US correct its external deficit? (www.eastonbh.ac.nz/?p= 643, 12 March 2005) .Recovery and Deficit: Where is the US economy going? (www.eastonbh.ac.nz/?p=508, 21 February 2004) and .Millennium Depression (www.eastonbh.ac.nz/?p=174). (See.)
The column concentrates on housing mortgages. I had long been aware that the valuation of other financial instruments could be problematic: .Corporate Chaos: Is the collapse of Enron and Worldcom the beginning of an end? (www.eastonbh.ac.nz/?p=89, July 2002) There are many other articles on Enron. Reflecting, I realise I have not written in detail on ‘mark-to-market’. Will one day.)
 A month later it was necessary to give an explanation of market value in .Value Judgements: What is the value of your house? (www.eastonbh.ac.nz/?p=852, 22 September 2007), using the readers’s housing experience as an illustration of the general problem.
(This column was very much informed by a note I had prepared in April 2007: .Housing Prices Relative to Consumer Prices (www.eastonbh.ac.nz/?p=837). See also .Housing Mortgage Stress: How Much Has it Risen? written for the Sunday Star-Times (www.eastonbh.ac.nz/?p=849, 5 August 2007). See also my concerns about household debt: A Fate Worse Than Debt: We owe too much. Go figure. (www.eastonbh.ac.nz/?p=789, 9 September 2006).)
 One of the frustrations of the experience was the message that at the time that the global crisis was not serious. The subtitle of .Recession Procession: Ignore the happy brigade.. The forces of recession are already in motion (www.eastonbh.ac.nz/?p=873, 1 December 2007) reflects that concern. Note this column is about the impending world difficulties, not a local recession.
 I dont recall thinking of .Public Debate? Yeah, Right: Current economic debate rarely extends beyond hearsay and uninformed opinion (www.eastonbh.ac.nz/?p=874, 15 December 2007) as a contribution to the analysis of the Global Financial Crisis. although there was a glancing reference in it. Its purpose was to celebrate 30 years of writing Listener columns, and to make a sort of policy statement. Had I foreseen the standard of public discussion over the following year, the column might have been more vitriolic.
 Not surprisingly commodity and exchange rate markets became turbulent too. .New World Order: The days of having a dominant world currency are coming to an end (www.eastonbh.ac.nz/?p=880, 9 February 2008) was intended to provide some background to the headlines of the day, while preparing readers for the long term.
 As we ran up to the 2008 budget, there was the usual uninformed cacophony demanding tax cuts. This fiscal conservative wrote .A Good Keynes Man: Alan Bollard’s not a Grinch, he’s just doing his job. (www.eastonbh.ac.nz/?p=889, 5 April 2008)
 Still running up to the 2008 budget and the unremitting cry for tax cuts continuing, I repeated the theme in an international context. .Bubble Trouble: The liquidity drunks have taken over the economic asylum (www.eastonbh.ac.nz/?p=891, 3 May 2008) also provides of an account how excessive world liquidity from the American fiscal injection had got us into the mess.
 Through much of 2008, many journalists seemed consumed with portraying the (then Labour) Government in a poor light. I’ll leave those who study the politics of the media to analyse that, but one consequence was that they were misleading the public about the state of the economy and the options available. Or perhaps it was that having under-reported the impending international recession, the media flipped to the other extreme over the domestic one. .Media Messes: Are journalists making the economic situation seem worse? (www.eastonbh.ac.nz/?p=894, 31 May 2008) The actions of anyone (unwisely) taking any notice of them would have deepened the shallow 2008 New Zealand recession.
(The 2008 New Zealand recession was largely self induced – a consequence of the medium term cycles generated by the floating exchange rate. It is not quite true that it had nothing to do with the evolving Global Financial Crisis – it intensified it – but it was something different. Perhaps the commentators got the two muddled. I need to write this up some day.)
 The time came to move the macro-argument on. So I wrote about the regulatory problem in .Financial Ruin: Aftershocks from the liquidity earthquake (www.eastonbh.ac.nz/?p=904, 14 June 2008) reaching out to the audience by referring to the New Zealand experience. But it is really about the international one.
 The uninformed calls for tax cuts continued. I responded with . So You Want Tax Cuts? Cutting ‘wasteful’ public spending will not be easy. (www.eastonbh.ac.nz/?p=905, 28 June 2008) It will be interesting to see how the uninformed will respond to the fiscal crisis described in .
 Looking back I can see how many of my columns were responses to the inadequacies of the public debate, which was imbalanced towards the simple, the uninformed and the crude. Monetary policy was not exempt. .Shock Value: From manic muddle to melancholic mess. (www.eastonbh.ac.nz/?p=914, .23 August 2008) The column is also persisting with the message that things are pretty troubled out there.
 By about this time the uninformed commentators thought that Keynesianism had been resurrected. Their Keynesianism was presented badly and seemed to suggest that the undisciplined to do what they liked. It had little to do with John Maynard Keynes. And so .Keynes to the Kingdom: An “exclusive” interview with economist Dr Brian Easton (www.eastonbh.ac.nz/?p=915, .6 September 2008) where I tried to explain what modern Keynesianism is on about in a small open multi-sectoral economy.
 By late September 2008, The world financial system was in chaos. Headlines included the bankrupting of one of the US merchant banks (Lehman Bros) and the (partial or full) nationalisation of other financial institutions (such as AIG, Fanny Mae and Freddie Mac). I was in journalistic difficulties. because New Zealand was in the midst of an election whose economic context was that nothing had happened since July 2007 which might require a rethinking of economic policy. It was as if those involved were thinking it was still summer, while the storm clouds of winter were billowing on the horizon. What was I to do, especially as I have a policy that my columns do not comment on electoral matters during the high season of the election? So I wrote about what was happening overseas, trying to give some insight as to how to think about the financial crisis: .Kerr-ching! Choosing the vanilla type of financial institution has its advantages. (www.eastonbh.ac.nz/?p=918, 18 October 2008) Part of its purpose was the less complex financial activities should not be condemned.
 By now it was becoming clear to even the uninformed that there was a Global Financial Crisis. To the informed it was evident too that this one was so far outside their experience and they were struggling to understand it. I set out the stages of a financial crisis in .Future Shock: Hard times are ahead – and they won’t be over soon (www.eastonbh.ac.nz/?p=919, 1 November 2008)
 Even the New Zealand academy began to think about the issues. So I gave my first presentation at an Institute of Policy Studies seminar on 6 November 2008: .Responding to a Severe Recession: This one will be different. (www.eastonbh.ac.nz/?p=923)
 Election over, it was time to return to the big themes (if I ever left them). .Swing Low: Is the global “millennium recession” arriving too late? (www.eastonbh.ac.nz/?p=920, 15 November 2008)
(I opened the column confessing to my prediction earlier in the decade of a Millennium Depression. (www.eastonbh.ac.nz/?p=174) As the column explains, particularities – especially the Bush tax cuts – delayed its arrival, making it worse. What is instructive from the website list on the millennium depression is how in my previous writing I had spent so much time looking at lesser financial crises which had occurred throughout the 1990 – none of them had the catastrophic monetary jamming which characterises the Global Financial Crisis,)
 At a second Institute of Policy Studies seminar on 22 November 2008 I chose to give a paper .Cycles and Depressions in New Zealand History (www.eastonbh.ac.nz/?p=926) which analysed previous great downswings (or whatever one wishes to call them). The precipitant was various people saying they thought this time would be as bad as the Long (Rogernomics) Recession. It and the Asian Crisis of 1997/1998 were the only ones the younger ones had experienced personally. Sadly, too many economists are not taught the general theory of depressions nor have read much economic history.
(I have been looking at the downswing issue since the 1970s. Perhaps the first version of the paper – Three New Zealand Depressions (www.eastonbh.ac.nz/?p=353) – was published in 1980. I have done a lot of work on the Great Depression (1929-1934) – see chapter 4 of In Stormy Seas. (www.eastonbh.ac.nz/?p=100) and I have probably done more research on the Long (Rogernomics) Recession (1986-1994) than any other economist. By coincidence at about this time I was reviewing my earlier work on the Long Depression (1878-1895) as a part of my main activity of the year, writing about the nineteenth century for a history of New Zealand from an economic perspective. I dont say this in the paper, but the next downswing may be more like the Long Depression than the others – an external shock or two giving a long but shallow depression.)
 As luck would have it, I was invited to address the Christmas function of the Wellington Branch of the Institute of Directors on 4 December 2008. At a time meant for genial hospitality, I was faced with telling them about the gloomy Prospects for the New Year. (www.eastonbh.ac.nz/?p=922)
 With the new government settling in, and the increasing expectation that the mild 2008 recession would not be ending soon, but persisting through 2009 and perhaps beyond, my Listener columns began to turn their attention to what should (or should not) be done. So .Not So Simple: Why we shouldn’t have a tax cut right now. (www.eastonbh.ac.nz/?p=930, 13 December 2008) Note how it argues for a shifting of fiscal policy in the same policy framework as previous columns, but implemented in different circumstances.
 One had no sense of this from the public debate, but I am certain the last few months of 2008 were very tough for the banking fraternity – both here and internationally. One banker remarked to me that he was making up a new policy every day, not because he wanted to, but because with the financial system operating outside its traditional range it was necessary to. It has been said that the throughout the world orthodox central bankers had to introduce unorthodox policies. New Zealand has been well served by our Reserve Bank. .Well Played, Bollard: My team of the year is the Reserve Bank of New Zealand. (www.eastonbh.ac.nz/?p=932, 27 December 2008)
 I published little on the crisis in January, but I was reading and preparing for the rest of the year. By now I was in the habit of waking up each morning and asking ‘what dreadful event happened over night?’ because – as I said to the Wellington Directors – Northern Hemisphere markets and regulators dont sleep while New Zealand is on its summer holidays. The first February column was a review of where we were: .Balancing Act: What goes down may well come back up, but who knows when? (www.eastonbh.ac.nz/?p=935, 7 February 2009).
 Public presentations began. On 10 February I spoke to the Wellington Branch of the New Zealand Institute of International Affairs on .The World Economy in 2008: And After (www.eastonbh.ac.nz/?p=937), which gave me the opportunity to talk a little about how over the years the world had got into its current situation, and what the long term outcome was likely to be.
 Two days later (12 February 2009), in a rather different forum – ‘Drinking Liberally’, I gave a paper in two parts. The first part was on the current state of The World Economy (www.eastonbh.ac.nz/?p=939). …
… and after the audience had a chance to top up, the second part was on the current state of .The New Zealand Economy. (www.eastonbh.ac.nz/?p=940)
(One of the problems I am having is that every presentation has a time limit. Given my propensity to explain to the audience rather than tell them ‘the truth’, I am always short of time for a complete account. My longest account is at .)
 Listener columns tried to be topical without being repetitive. Bernard Madoff’s $US50b fraud led to a column on Ponzi schemes .Robbing Peter: Is the entire financial system just one big pyramid scheme? (www.eastonbh.ac.nz/?p=936, 21 February 2009) But as the subtitle indicates, it was also concerned with in what sense the entire financial system is, or is not, fraudulent.
(A July 2002 column had drawn attention to Enron (www.eastonbh.ac.nz/?p=89) as a Ponzi scheme.)
 I dont usually give investment advice, but such was the irresponsibility of some media comment I felt it appropriate to explain the general issues in .Spend or Save?:The paradox of thrift: what is good for you may not be good for your country. (www.eastonbh.ac.nz/?p=949, 7 March 2009)
 Observe the Global Financial Crisis columns were coming thick and fast early in 2009. The next issue was the coming fiscal crisis covered in .The Treasury Nightmare: The Government’s accounts are heading into dangerous territory. (www.eastonbh.ac.nz/?p=950, 21 March 2009)
 Despite the description of the medium term fiscal outline set out in the Listener column of 21 March ( above) being alarming, it over-simplified. I gave a more detailed account in a longer format to the Policy Evolution conference on 16 March: .The Macroeconomic Crisis: Policy Implications. (www.eastonbh.ac.nz/?p=946)
 The Wairarapa Branch of the New Zealand Institute of International Affairs gave me the space for a 50 minute coverage of .The Age of Financial Turmoil: Prospects for New Zealand. (www.eastonbh.ac.nz/?p=947) Despite the length of the presentation I found myself drawing on other material from this list when I was responding to questions. A feature of the paper is that I began to move into the area of identifying policy responses. (I slightly reduced version of this paper was presented to the Wellington Branch of the WEA on 23 March 2009.)
That’s it up to the time of writing this (end March 2009). Among the things I have yet to write about are
– the run up to the 2009 Budget (23 May 2009);
– the foreign debt (net overseas liabilities) situation (I have a longish research paper on this; the next major task is to revise it);
– the terms of trade (relative prices for exports). I know the theory but I dont know the future path. All the previous major downswings have been accompanied by a deterioration in the terms of trade. If that happens the New Zealand economy will be truly hammered.
– and no doubt a whole lot more, including what happens in the world economy;
plus, of course,
– the impact of the crisis on political ideologies and perceptions.
An earlier review – The Millennium Depression – which presages the Crisis will be found at www.eastonbh.ac.nz/?p=174.