Apr 16th 2009
From The Economist print edition
Financial crises can drag on because efficient remedies are politically unpalatable

The Curse of Politics,   Comment by Stephan Olajide

It is indeed appropriate to discuss the political process that seems to mangle all logic and sensibility nowadays. However, we have to go further than the Economist, as this is not merely an issue when a crisis hits and everybody scrambles for the exits. Everyone speaks of a crisis of confidence in our system when it really is a crisis of confidence in our political process that has failed us. In its ultimate analysis it is our political process, in which we have entrusted our lives and our taxes that has to take ultimate responsibility for the crisis we are facing.

How, for example is it possible that the Fed Chairman is left unquestioned for two decades on his proclamation of efficient and self-regulating markets?
How does a regulator allow an all- pervasive application of new theories and models in the system’s core, the financial industry without test-ground and thorough understanding?
How is it possible that politicians get away with paying lip-service to free and unfettered markets and completely neglect their responsibility as the manager and guardian of the system that was entrusted to their care?
How is the Fed Chairman allowed to guarantee the system (the infamous “Greenspan Put”) without a huge backlash from those who have learnt from history?
How has inflation come to be defined as the Core CPI?
How is it possible that politicians around the world were bombarded by warnings of many bright minds about the repercussions of the kind of system they are running without ever acting on any of it?

Yes, politics is the land of compromise amidst vastly differing views but some things are still governed by the laws of logic and sensible management.

Would you allow new theories to blanket and take over your system without testing, without questioning, without regulation and without oversight?
Would you proclaim the system’s efficiency while empirical data negates it?
Would you deregulate and feel happy about no regulation at all?

Would you not find it odd to have to guarantee a system that is supposed to be stable and efficient in itself?
As to our definition of inflation as the CPI, the consumer price index; Inflation is clearly the creation of credit, the increase of money in the system and not some hand-picked niche manifestation of it. The system of Bretton Woods, with its key characteristic being the U.S. dollar reserve currency, has been in force for more than 60 years and its dynamics are well known and discussed. The warning signs of the increasing imbalances brought about by this global system were well observed. Since the fall of the Goldstandard, we have run the longest global fiat money system that allowed (almost) unhindered credit expansion that was supercharged by Modern Finance and Reaganomics gone wrong and monetary policies that lack academic foundation.

Is this the leadership we deserve? Or is it the system that creates these more than mediocre results? Fact is that when reasonable, intelligent people congregate in Washington, the results have become too costly for society. The crisis moment merely highlights how broken our political process really is.

Current policy action in Washington and around the world does not recognise the extent of degeneration of our system, in particular our financial system and runs the risk of bankrupting the US dollar our global currency system. As a nasty side effect policies continue to expand the inequalities built during the boom years.