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	The Triumphant Return of John Maynard Keynes by Joseph E. Stiglitz Columbia University USA   Dec 2008   We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.   For those of us who claimed some connection to the Keynesian tradition, this is a moment of triumph, after having been left in the wilderness, almost shunned, for more than three decades. At one level, what is happening now is a triumph of reason and evidence over ideology and interests.   Economic theory had long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy. But many, especially people working in the financial markets, pushed a type of “market fundamentalism.” The misguided policies that resulted – pushed by, among others, some members of US President-elect Barack Obama’s economic team – had earlier inflicted enormous costs on developing countries. The moment of enlightenment came only when those policies also began inflicting costs on the US and other advanced industrial countries.   Keynes argued not only that markets are not self-correcting, but that in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required. But not all fiscal policies are equivalent. In America today, with an overhang of household debt and high uncertainty, tax cuts are likely to be ineffective (as they were in Japan in the 1990’s). Much, if not most, of last February’s US tax cut went into savings.   With the huge debt left behind by the Bush administration, the US should be especially motivated to get the largest possible stimulation from each dollar spent. The legacy of underinvestment in technology and infrastructure, especially of the green kind, and the growing divide between the rich and the poor, requires congruence between short-run spending and a long-term vision.   That necessitates restructuring both tax and expenditure programs. Lowering taxes on the poor and raising unemployment benefits while simultaneously increasing taxes on the rich can stimulate the economy, reduce the deficit, and reduce inequality. Cutting expenditures on the Iraq war and increasing expenditures on education can simultaneously increase output in the short and long run and reduce the deficit.   Keynes was worried about a liquidity trap – the inability of monetary authorities to induce an increase in the supply of credit in order to raise the level of economic activity. US Federal Reserve Chairman Ben Bernanke has tried hard to avoid having the blame fall on the Fed for deepening this downturn in the way that it is blamed for the Great Depression, famously associated with a contraction of the money supply and the collapse of banks.   And yet one should read history and theory carefully: preserving financial institutions is not an end in itself, but a means to an end. It is the flow of credit that is important, and the reason that the failure of banks during the Great Depression was important is that they were involved in determining creditworthiness; they were the repositories of information necessary for the maintenance of the flow of credit.   But America’s financial system has changed dramatically since the 1930’s. Many of America’s big banks moved out of the “lending” business and into the “moving business.” They focused on buying assets, repackaging them, and selling them, while establishing a record of incompetence in assessing risk and screening for creditworthiness. Hundreds of billions have been spent to preserve these dysfunctional institutions.   Nothing has been done even to address their perverse incentive structures, which encourage short-sighted behavior and excessive risk taking. With private rewards so markedly different from social returns, it is no surprise that the pursuit of self-interest (greed) led to such socially destructive consequences. Not even the interests of their own shareholders have been served well.   Meanwhile, too little is being done to help banks that actually do what banks are supposed to do – lend money and assess creditworthiness.   The Federal government has assumed trillions of dollars of liabilities and risks. In rescuing the financial system, no less than in fiscal policy, we need to worry about the “bang for the buck.” Otherwise, the deficit – which has doubled in eight years – will soar even more.   In September, there was talk that the government would get back its money, with interest. As the bailout has ballooned, it is increasingly clear that this was merely another example of financial markets mis appraising risk – just as they have done consistently in recent years. The terms of the Bernanke-Paulson bailouts were disadvantageous to taxpayers, and yet remarkably, despite their size, have done little to rekindle lending.   The neo-liberal push for deregulation served some interests well. Financial markets did well through capital market liberalization. Enabling America to sell its risky financial products and engage in speculation all over the world may have served its firms well, even if they imposed large costs on others.   Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests. Have those who pushed deregulation ten years ago learned their lesson? Or will they simply push for cosmetic reforms – the minimum required to justify the mega-trillion dollar bailouts? Has there been a change of heart, or only a change in strategy? After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!   Ten years ago, at the time of the Asian financial crisis, there was much discussion of the need to reform the global financial architecture. Little was done. It is imperative that we not just respond adequately to the current crisis, but that we undertake the long-run reforms that will be necessary if we are to create a more stable, more prosperous, and equitable global economy.   * Joseph E. Stiglitz, professor of economics at Columbia University, and recipient of the 2001 Nobel Prize in Economics.
	The post-war political economy, is well and truly bust by Simon Zadek AccountAbility USA   Dec 2008   The events of the last twelve months have made 2008 the most important year for decades, certainly since the collapse of the Berlin Wall. Indeed, it is possible that history will place it in even higher esteem than that dramatic, fracturing moment.   2008 was the year when China’s Olympics dazzled the world, when Obama became the President Elect of the United States of America, and when emerging economies, notably China and India, were acknowledged as the inheriting leaders of our global political economy.   It was also the year when an exhausted, over-stimulated global economy finally got crabs and retired to bed, and when we discovered that the theory of ‘decoupling’ was little more than wishful thinking as our new global titans’ supersonic economies stalled and came crashing to the ground. It was the year that container traffic passing through Portland on the US’s West Coast, a reasonable proxy for globalisation itself, was rumoured to be down by 60%.   And it was the year when the growth of public ownership of economic assets, although perhaps not exactly fashionable, progressed more quickly in liberal economies than at any time since the creation of the Soviet Union.   2008 was the Year of Corporate Responsibility. After this year, no one in their right minds will ever again question the negative impact of irresponsible business practices, the source of the world’s first global recession along with its consequences of millions upon millions of jobs lost, houses repossessed, families broken, and economies shattered. Never again will anyone be able to look smug in demanding advocates of corporate responsibility to ‘prove it’. The financial community, at enormous cost to us all, has done what no one else has quite managed: to put Corporate Responsibility at the top of the agenda.   Madoff will go into the Guinness Book of Records as the architect of the world’s most expensive scam. He has achieved what no one would have thought possible, making Siemens, Parmalat, BAE Systems and the earlier generation of businesses such as Enron and WorldCom destroyed by white collar thieves seem like blips. In fact, Madoff’s stolen billions has hardly raised an eyebrow (save of those directly impacted), because it is little more than the cherry on the cake of the US$1.5 trillion or so burned in saving the very financial community that has been our undoing, the additional US$2 trillion that will be used of taxpayers money to kick-start our failed economies, and the US$15 trillion or so lost to today’s and tomorrow’s pensioners. Our children and grandchildren will long rue the longest binge-party on earth that brought us to our knees in 2008.   2008 was the year when those progressing a global climate change deal applauded the unilateral commitments made by Obama-in-waiting to establish a federal cap and trade system, many praying for this to be a taster of more progressive moves to come. November"s high was quickly followed by the dismal experience of the UN-sponsored, annual climate change jamboree in Poznan. This, combined with the order of priorities facing the new US Administration, buried the Danish Prime Minister’s aspiration of the next climate change deal carrying the ‘Copenhagen’ tag. In fact, Europe’s carbon credentials have become jaded over the course of this year. Only a global recession has enabled European leaders to claim some success at reaching their carbon targets. Europe agreed to the single largest ever windfall profit to its dirty industries in paradoxical pursuit of binding carbon reduction commitments.   The year 2008 was the last failing moment of credibility in our inter-governmental approach to global governance, stitched together in the ruins of post-war Europe and the emergence of an Anglo, global political economy. The World Bank, despite its noble attempts to reinvent itself, has arrived at its current destination, symbolising not the power of a modern global consciousness, but rather a failed, international development model. The World Trade Organisation, despite Mr Lamy’s stamina, ultimately fell, perhaps fatally, to the ground. The IMF, facing its most glorious potential, the world’s most striking financial disaster since its inception, has proved unable with its accumulated treasure of brains and money to predict or help avoid the crisis, or play any meaningful role in alleviating its worst consequences.   2008 is the first year in my adult, professional life that a deep and widespread acknowledgement has emerged that the ways in which we organise our affairs is really not working. It is the first time that I hear the oft-spoken, but to-date marginalised words of radical activists on the lips of our most powerful political and business leaders – that we have to be effective stewards of our natural environment, that our global governance framework requires more than a make-over, and that the basis on which we allocate capital does not deliver the goods.   In this past year, 2008, our image of the omnipotent old has made way for a new conventional wisdom of the need for renewal. For it is in such collapsing credibility, such an extraordinarily, self-evident display of failure, that radical change becomes possible. It is after this year that we can confidently predict that there will be a new multilateral system, a new governance era for the financial community, a reassessment of the role of the state, and a stepwise shift in the tone and content of the climate change negotiations.   2008 has set the stage for long-overdue change. Change, yes, but what kind, for whom and how quickly. Dying institutions representing failing ideologies and practices are always stubborn and often violent contestants. In the end, it all comes down to the need to reinvent accountability. Each and every change so desperately needed involves a shift in the basis on which powerful forces are held to account. Back in 2005, AccountAbility’s pamphlet, ‘Reinventing Accountability for the 21st Century’, started with the following words:   There is a lot of it about, in fact more than ever before. Everyone talks about it, complaining of its lack or claiming legitimacy because they are, supposedly, subject to it. But there is widespread consensus that the way we do it today is failing us, and that addressing our biggest challenges, from endemic poverty to ageing societies to climate change, depends on us doing it a whole lot better.   Yet the language of ‘accountability’ is paradoxically the preferred currency of those who resist change as well as those who demand it. And this should come as no surprise. We are in many instances not blighted by ‘too little’ accountability, but by way too much of the wrong kind, often protecting the wrong people and promoting the wrong actions and rewarding perverse consequences. The financial community will resist change more than most, citing in its defence of the status quo, with more than a little historical irony, their fiduciary responsibilities.   Sovereign states will resist change to their approach to climate change, citing their responsibilities to their citizens. Beyond and on occasion underlying these unhelpful forms of resistance will be a host of other factors, xenophobia and racism, nationalisms and religious fundamentalisms, underpinned by the basic fear and realities of unemployment and lost livelihoods.   Toxic accountability is the single greatest constraint to progressing much-needed innovations in pursuit of, yes, better accountability and its consequences.   Of the many items on our common agendas for action, two radical needs stand out that our current situation would allow us to make huge progress on.   First, is to change the basis on which the financial community allocates our capital to more closely align investment consequences to our real needs. It is not enough to re-regulate to prevent another meltdown, or to take our rightful revenge on the individual architects of our collective downfall. Capital allocation must be aligned to the needs of sustainable development, internalising social and environmental consequences into the equation. Central in progressing this agenda is an overhaul of the governance of our assets, especially pension fund governance, and the basis on which the investment community rewards itself for handling our assets, notably fund management incentives.   Second, is to advance the climate change negotiations to a successful conclusion, laying the basis for an accelerated pathway towards low carbon prosperity for all. This concerns, centrally although not exclusively, the unlocking of adequate finance for mitigation and adaptation. And here the two-fold agenda collapses effectively into a one liner. For it is unlikely that ‘carbon’ finance can be unlocked in anything like the volumes that are needed. What is required is that the reforms to the investment community, at this historic moment, embed a longer term investment philosophy and practice such that carbon, amongst other things, becomes far more material to investment decisions.   It is only in this way that we can resolve the financing needs of effective carbon management. Failure on either of these related fronts will not only mean an opportunity lost, but predicate a disaster in the making of monumental proportions. Humpty Dumpty, the post-war political economy, is well and truly bust. It is time to head for the design studio and not the repair shop.   * Dr Simon Zadek is Chief Executive of AccountAbility, and a Senior Fellow at the Centre for Government and Business at the Harvard University’s Kennedy School.
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