[Financial Times] Gerard Baker: A gathering of incompetents By Gerry Baker Published: September 25 2002 20:03 | Last Updated: September 25 2002 20:03
There are many reasons to question the judgment of the protesters who will try to disrupt the International Monetary Fund/World Bank/Group of Seven meetings this weekend. But the most important is that they seem to be operating under the sorry delusion that the people gathering in Washington have the inclination, let alone the ability, to control global economic activity. The real reason concerned citizens should be taking to the streets this weekend is not that the world's leading economic policymakers have wicked designs on the globe. It is, rather, that with growth chugging to a halt, financial markets plumbing depths that have not been seen in six years and business and consumer confidence ebbing visibly, they are demonstrating that they do not really have much in the way of a design at all. Too much can be expected of policymakers, of course. In the end, the grand schemes of even the most powerful officials are rarely a match for the billions of individual market decisions made every day. But in times of trouble, good policy can help at the margin; bad policy can hurt more. And a brief tour of the policy performance and outlook in the G7 is dispiriting. If this is the committee to save the world, the world had better start clambering down the precipice. In descending order of incompetence, let us start with Japan. You have to hand it to the Japanese. Every time it seems that policy in that blighted country cannot get any worse, it promptly does so. Last week, the Bank of Japan announced its latest cunning plan to pull the economy out of a decade-long slump. It would buy equities off the balance sheets of banks faced with a dwindling capital base from the continuing agony in Japanese stock markets. The plan never looked likely to get off the ground; far from tackling the central problem of the banks' bad loans, it offered yet another way for banks to avoid dealing with the issue. And the damage it could do to the central bank's own balance sheet was eye-watering. Sure enough, as this paper reported yesterday, the BoJ is now suggesting that the plan was not really a serious proposal at all, merely a bit of shock therapy to force the government to take aggressive action on the bad loan problem. In other words, having spent 10 years rearranging the chairs on the deck of the Titanic, policymakers in the world's second largest economy are now reduced to bickering, as the iceberg heaves into view, about which direction the chairs should face and who should put them there. Then there is Europe. Gerhard Schröder certainly played the anti-American card to secure a come-from-behind win in the German elections and it is understandable that American officials are upset. But the Bush administration's angst over Mr Schröder's rhetoric misses the point. The real cause for concern is that the re-election of Mr Schröder almost certainly condemns Germany to yet more years of rigid labour markets, a stifling regulatory environment, long-term fiscal horrors and economic stagnation. This is not to say Edmund Stoiber would have represented a radical change; in most respects the Christian Democrats' policies offered no better fix for German ills than the Social Democrats. But the sobering point is that the vote represented a popular reaffirmation of the status quo in a country that is rapidly becoming the Japan of Europe. Costive conditions in Europe's largest economy might not matter too much to the world if European fiscal and monetary policy were providing some lubrication. But European Union's stability and growth pact, originally far too inflexible, is now breaking down in an inchoate way. Meanwhile the European Central Bank remains determined to fight the last war. As European growth spirals lower, the ECB continues to preoccupy itself with the risks of inflation (remember inflation? It was big in the 1970s and 1980s). That brings us to the US. To be fair, policymakers in Washington have been more aggressive in their use of policy to restart the stalled economy. That is especially true on the monetary front; the fiscal stimulus of last year was, at best, a happy accident. But the credibility of America's economic leaders is under challenge in a way we have not seen for years. Paul O'Neill's accident-prone journeys through the thickets of international markets have not helped build confidence in US policy. And at the Federal Reserve, the once-untarnished reputation of Alan Greenspan is starting to look a little frayed. His recent defensiveness about Fed policy during the late-1990s stock market excesses - and continuing uncertainty about whether even aggressive monetary stimulus can jump-start a post-bubble economy - have rendered judgments about his effectiveness necessarily conditional. Even if US credibility can be restored, the efforts of economic policymakers will be drowned out for some time by the drumbeat of war from other, more influential places in Washington. Deepening uncertainty in America, stubborn unresponsiveness at the ECB, chronic stagnation in Germany and bickering paralysis in Japan. There's a credible slogan for the demonstrators this weekend. This column appears weekly
