dimecres, 27 d’octubre de 2010

Crises are not the end of the world

Kenneth Rogoff, who lives in Boston, is extremely near-sighted. With his bald head and wire-rimmed glasses, he bears a passing resemblance to a character in a Woody Allen film. He has the biography of a misfit -- a chess genius who lost himself in the game. Rogoff won the New York State Open at 14, and at 15 he played simultaneously against 26 opponents with his eyes blindfolded. He won the title of a grand master at 25, but then he stopped playing chess, like an alcoholic going cold turkey. He hasn't touched a chess piece in 30 years. It's "too dangerous," he says.

Instead, he threw himself into a much bigger game: the global economy. How can the complexity of the world be mastered? How effective are models, and on what basis do institutions like the IMF make their decisions?

In his book, Rogoff suggests that many of the theories currently in circulation cannot be correct. "Wall Street," says Rogoff, by which he means all stock markets, "ultimately believes in a simple calculation: If prices fall by 4 percent today, they will eventually rise by 8 percent. We have demonstrated that this isn't true. It's more complicated than that. And much of this we don't understand."

Rogoff and Reinhart show that the Lehman case was a symptom for the biggest recession since the 1930s, which was fed by many factors. Most of all, the two authors show that financial crises like the current crisis always lead to national debt crises, no matter what remedies governments take. Unemployment and bailouts cause public deficits to explode, leading to panicked cost-cutting programs, which in turn lead to new recessions. This vicious cycle is what is happening today, a cycle Rogoff and Reinhart described before Greece's troubles began. Anyone who reads their book can discover what is likely to happen next.

Sitting in his bare office at Harvard University with the shades drawn, Rogoff says, coolly and soberly: "A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt." The worst of it is that it sounds as if he were expressing unavoidable facts.

"What we need is radical change," Rogoff says, but he doesn't seem to believe that it's possible. Not too long ago, he says, the US government asked him to comment on a draft bill on the regulation of the financial sector. "The draft had 2,000 pages," says Rogoff. "I don't know what to say to that. I suspect that those 2,000 pages are filled with enough loopholes that Wall Street will discover and exploit to come up with new business models."

Is he implying that there is no way out? "There are many ways to skin this cat," he says. A real reform of the banking and finance sector would have to drastically shrink the system to a business volume that existed 30 years ago. Rogoff says: "The financial market, with all of its products, adds up to $200 trillion, $120 trillion of which represents trading in debt securities. I remember a speech given by Angela Merkel. She said that the Americans make the profits while distributing the risks, with all those debt securities, worldwide. That's true. This could be curbed."

Rogoff says that he never understood why banks are allowed to inflate their capital with loans. Why can they do business with many times more capital than is available to them? "I don't know," says Rogoff. "There's no reasonable explanation." According to Rogoff, new regulatory institutions would have to be created that were on a par with the financial industry and that had drastic sanctioning powers.

He can't understand why the IMF and many governments are patting themselves on the back for their crisis management efforts. "We are fundamentally too quick with bailout packages and too hesitant with default," he says. Rogoff believes that the G-20 and the IMF, with their protective mechanisms, have already pre-programmed future misconduct. Experts call this a "moral hazard," the notion that bailout packages, instead of preventing crises, simply create new ones. "It boils down to the banks ultimately speculating with taxpayer money," says Rogoff.

But that's human nature, which Rogoff has studied in various ways: on the chessboard, in life and on the basis of the numbers he is constantly producing. He has concluded that the notion of "normalcy" constantly reinvents itself. France has been bankrupt before, Greece has been bankrupt five times in 200 years, and the German Reich was both insolvent and bankrupt. Crises, says Rogoff, are crises, not the end of the world.

Klaus Brinkbäumer, Ullrich Ficthner. Der Spiegel. An inside view of the IMF's massive global influence.