The Road to Prosperity and Sound Markets

BERLIN – The near global financial meltdown and ensuing downturns left the Anglo-Saxon nations pondering what they should do both to set their economies on a path toward recovery and to avoid a similar crisis in the future. Some recommendations by members of Columbia University’s Center on Capitalism and Society were sent to last April’s G20 meeting. To create more jobs in the economy, I proposed that governments establish a class of banks that would acquire the lost art of financing investment projects in the business sector – the type of financing the old “merchant” banks did so well a century ago. I also renewed my support for a subsidy to companies for their ongoing employment of low-wage workers. (Singapore adopted this idea with enviable results.)

To protect commercial banks from risking their own solvency (and the whole country’s solvency besides) once again, Richard Robb suggested that a small tax on banks’ short-term debts be imposed in order to deter banks from over-borrowing. Amar Bhide suggested that commercial banks return to “narrow banking.” If they did that, they could not borrow at all.

But despite all the policy action and talk since then, none of these suggestions has been adopted by G20 countries. Their emphasis has been on countercyclical measures intended to moderate the downturn rather than on restructuring. Such moderation, taken alone, is welcome, of course. But the measures taken may be delaying recovery.

Much of the fiscal “stimulus” to consumers causes companies to hang onto employees a little longer rather than to release them to export and import-competing industries that are expanding. Much of the stimulus to homeowners is propping up housing prices at unsustainable levels. This is slowing the absorption into the economy of the excess resources in the construction industry. Another round of global stimulus after the downturn is over or nearly so would push world interest rates up and drive investment activity down.