The G-20 Summit and the World Crisis
1 April 2009
Chair: David Held
Before I write about this lecture, I should probably tell you what I used to think about Jeffrey Sachs. I went around calling Sachs a bit of a dodo. Why? Well, his End of Poverty is a bit annoying. He blows his own trumpet quite a bit about what great work he has done in East Europe and South America and his noble, selfless trips to visit the poor Africans and Asians. His shock therapies came into criticism - I read that in Wikipedia. Then there is his love for Adam Smith the fellow he quotes every two seconds. He believes the free market, the 'invisible hand,' self interest, division of labour, diversity and all that wonderful stuff is going to lead to progress and wealth. At the time I was reading it I just found it pretty irritating that Adam Smith is his only guide in his plans to save the world. What does Adam Smith have to do with ending severe poverty, disease and inequality? Will Adam Smith as his guide address historical legacies of slavery and imperialism? I don't think Adam Smith will help get those unfortunate masses hop onto the friggin ladder that he is on and on about. *
To state the obvious, he is really speaking to a Western audience: how it is an outrage that a significant portion of the world's population lives in abject poverty while there there is so much plenty. He wants to wake up the conscience of the West.
I met him in Liberia - it was more of a bump, actually. This was sometime last year I think. There had been quite a buzz at UNDP about him coming to town to inaugurate the Millenium Village. I had not read his book at that book but was quite intrigued as I had heard his name quite a bit. A few of us planned to go next door in the HICS building during lunch time to hear him speak although I was a bit annoyed that the UN had not organised a bigger gathering for the benefit of the UN and Liberians to hear a famous intellectual. When we got there, we realised it was a $ 25 per head lunch organised by UNMIL (damn UNMIL). Two of us just left at that point and on our way out we met Sachs entering the building with our Country Director and some other biggies. We said hello to him and left. I also heard that he came to Liberia on a private jet. And, the entire Millennium Village that the Earth Institute has come up with was so odd in my head. I could not believe that projects were now going to be at a single village level, like a bizarre human experiment at a micro micro level. Ha, now that I am at SOAS, I understand this falls under decentralisation and de-politicisation of development.
After this lecture, I would hesitate to call him a dodo. I can see why he is so well respected and known especially among younger people. It boils down to his passion and sincerity. It was actually a pleasure to him speak. And he was not waxing lyrical about the greatness of the global capitalist system either.
For Samir Amin, this financial crisis was the first of the eventual meltdown of capitalism (yay!). He concluded his talk with probably the coolest line I have heard all year - 'Marx is back!'
Sachs did not make such a thunderous statement - nevertheless he still got me with his sincerity.
Prof Sachs was given a very distinguished introduction by David Held.
The financial crisis is being described as a 'bad business cycle,' the 'Great Depression,' a 'watershed'. The Prof said that we have to understand the deeper trends at work. The crisis is being hailed as a time for opportunities too but, he he said that we must not be too 'flippant' about it and recognise it is a crisis.
The Prof said he was going to diagnose this crisis as a 'drama in four acts:'
The roots of the financial crisis are monetary. Greenspan got quite the whiplash here. The man was in for too long. The 1990's? He was there. The dot com boom and burst? He was there. Post 9-11? He was there. The man did a hat trick in the bubbles he created: i) East Asia ii) Dot Com iii) Sub Prime.
-An expansionary monetary policy was followed and the economy was put on accelerator-This was the 'basic logic of the political terms' as well-Financial regulation was lax-There was heavy competition between New York and London-An unregulated banking system-Short-term borrowing for longer-term finance-Two-hundred years of lessons were ignored (e.g. lender of last resort)-Shadow banking
There's the "China made us do it" syndrome going around. They were saving so much that we had to borrow so much. This thinking is prevailing in the Fed even today. The Prof said that the 'China-glut' theory does not explain the US borrowing which was already a large borrower in the 1990s. Therefore, empirically this claim does not hold.
The sub prime is a narrow analysis, 'part of the mischief' but fails to explain the financial crisis on a global level.
Why did it happen sociologically? The US went through an 'unpleasant shift' over the past 25 years: Wall Street, oil and the the military. There was an 'imbalance in politics.' Wall Street and oil companies funded both political parties.
A 'boom' was created worldwide.
Rise of paper wealth 2000 - 2005. Capitalisation of $ 30 trillion of the stock market. Of which $ 10 - 15 is housing wealth. This increased to $ 40 - 50 trillion before the financial crisis.
Massive consumption boom which could not be just be the housing market. It also affected oil and food/grains. Oil went up to $ 147/barrel last year.
2006 onwards, prices peaked and then started to decline.
The stock market increases were wiped out in the last 24 months. $ 30 trillion and $ 10 trillion of housing was lost leading to a loss in aggregate demand. This had 'accelerator effects on investment.'
Reduction in bank lending. After Lehman went down there was 'pure financial panic.' Massive run on the money markets.
3) Short Term Policy
Liquidity, liquidity, liquidity
Obama has inherited a particularly dire situation - including a deficit of $ 1.2 trillion. It is quite significant given that the US economy is $ 14 trillion. Obama started with a big bang - announcements and fiscal overtures. However, we have gone into confusion.
The banking clean up - it was 'Wall Street for Wall Street.' Ethically, economically, emotionally the bail out of the bankers was wrong.
The emerging markets are squeezed. The g-20 is re-capitalising the IMF and this is not giving out any good signals. We will see if the IMF does any better.
It was at this point where Sachs really got me. He spoke very solemnly and with a lot of feeling. He said that until now there has been 'zero attention' to the 2 billion poor. Re-capitalising the IMF does not mean that is for the poor as the IMF gives out loans. I liked the way he spelled it out! We have heard nothing about the plight of the chronic poor. India is represented at the g-20 which has 250 million poor however what about the rest?
Sachs has been trying to raise some money. The word he used was 'salivating.' He was salivating at the $ 4.5 trillion committed to banks. He has not even got any crumbs.
This is especially painful considering that Merrill Lynch 'stole' $ 4 billion in bonuses which was not even noticed. AIG is being made to return a couple hundred million just now.
Sachs' indignation and anger was pretty impressive and very sincere. The entire hall went absolutely quiet and still. I was watching through the video link but even on 'our' side it went pretty quiet. 'Pin-drop silence.'
4) Long Term Policy
With reference to Keynesian economics, he said that given the decline in consumption demand had to be stimulated again.
However stimulation of demand could be done with investments in areas such as alternative energy, environment or infrastructure in Africa. China has massive savings.
There are 'wonderful investment opportunities.' Some of it has to be aid but the rest can be investment.
We also need monetary reform. The US cannot be the 'fulcrum anymore.' There has to be a fundamental re-think of global institutions.
By the way I did not get to see the lecture 'live' as I had not managed to get a ticket. I came early looking for a chance to get a seat nevertheless by joining the 'returns queue' however there were no empty seats. We in the returns queue got to see the lecture via a live video link in a theatre next to the one where Sachs was delivering his lecture. It was just like being there.
Sachs received a lot of questions and he had only 10 minutes or so to take them and answer them as he had gone way over his allotted time.
So all in all, I was very impressed by his sincerity and passion.
I met up with a SOAS friend, Umo, afterwards. She was in queue to get Sachs' new book signed. I joined her in the queue and took a picture for her with Sachs.
* I just went back to Wikipedia and I just picked this up: "Noam Chomsky has argued that several aspects of Smith's thought have been misrepresented and falsified by contemporary ideology, including Smith's reasons for supporting markets and Smith's views on corporations. Chomsky argues that Smith supported markets in the belief that they would lead to equality." Well, I can't disagree with the great Chomsky if that is indeed true.