Did the System Work?

What went wrong? As Western nations are rejecting what seem to be liberal democratic institutions in favor of populism, more than a few people are asking what went wrong?

Of course, the analysis assumes that the peasants with pitchforks are rebelling against democracies. It might well be, as Bret Stephens suggests this morning, that they are rebelling against the elites who have been running the international banking systems. That is, against those who supposedly saved us from disaster after 2008.

According to Stephens, the system did not work.  In the aftermath of the 2008 financial crisis institutions of “economic global governance” took over from the markets. They narcotized the problem… disguising, but not solving it. It’s like maxing out your credit card and then taking out a few more credit cards to pay off the first one. Ad infinitum.

Would the market have done better? We do not know. Many serious thinkers—James Grant comes to mind—suggested that we would have done better to let the market deal with the problem. It would have produced some considerable short term pain, but it would have set the world banking system on firmer ground.

Populism, by Stephens’ reading, is a reaction to rule by certain elites, by a guardian class that believes it knows better than the markets. The economic recovery engineered by the guardians looks good on paper but does not feel so good for those who have been left behind. One understands that the profligate Obama administration could not have borrowed all the money it did if the Federal Reserve and other banking institutions did not conspire to keep interest rates artificially low.

In Stephens’ words:

What happened? In 2014, Daniel Drezner, a professor at Tufts, published a book extolling the International Monetary Fund and other institutions of “economic global governance” for putting out the fires of the 2008 financial crisis. The global economy had been teetering on the brink of another Great Depression, but it didn’t fall in. Ergo, success.

The book was called “The System Worked.” Except it didn’t.  The system did more to mask problems than it did to solve them.

Government statistics can show a drop in the unemployment rate, but they give scant indication of whether the jobs available now have the status or pay of the jobs available previously. Giving unlimited credit to a panicked patient will always have a narcotic effect; it can also have an addictive one. Near-zero (or sub-zero) interest rates will goose stock markets to the delight of sophisticated investors—and the dismay of savers. Bank bailouts may make “systemic” sense. But they divorce behavior from consequence. Pushing economic management from elected officials into the hands of unelected central bankers and regulators flatters the vanity of the intelligentsia while offending the normal person’s sense that his vote should count toward his own livelihood.

What does Stephens mean when he suggests that the bankers helped divorce behavior from consequence? I understand him to be saying that when you borrow too much you ought to suffer the consequences. Profligacy should not be rewarded. Yet, the guardian class printed so much money that people got the sense that they could spend what they wanted and that the day of reckoning could be put off forever. In their hearts they know that something was wrong. But they do not know what and do not know how to fix it.