Why G20 leaders should leave well alone

In a provocative opinion piece, Anthony J. Evans, assistant professor of economics at ESCP-EAP European School of Management outlines his views on why policies designed to stimulate the global economy may actually have the opposite effect.

Key points

Much of the global economy is in the recovery phase of a credit fuelled investment boom.
Once the bubble burst, economists expected markets to undergo a belated correction.
Unfortunately, G20 leaders were incapable of realising this and continue to pursue policies that could actually resuscitate the very activities that created the crisis.

It is somewhat comical to witness juvenile demonstrators smashing windows of empty banks in the city. As Jake DeSantis’ poignant resignation letter [1] to AIG shows, few people are suffering more from the fall out of the financial crisis than bank employees. We can assign retrospective anger at the conduct of their bosses, but Fred Goodwin (the symbol of the protestors’ ire) had long left the building. Sadly the futility of yesterday’s demonstration is mirrored by the follies of today’s G20 summit.

Much of the global economy is in the recovery phase of a credit fuelled investment boom. Recent economic growth has turned out to be an illusion because instead of creating sustainable prosperity, spending was funded through debt. The credit crunch was the moment that the unsustainable expansion snapped and we began to realise the extent of the capital misallocations that had occurred.

The economists who had been warning that the bubble would burst now felt that the economy would undergo its belated correction. Far from welcoming a recession, at least the inevitable and necessary adjustment would begin.

However, most of the G20 leaders seem incapable of realising this. They view rising GDP (regardless of its sources) as being a good thing. They view increasing unemployment (regardless of the courses) as being a bad thing. The policies that are thus pursued including fiscal stimuli, quantitative easing, and pleas to restore confidence, all intend to resuscitate the very activities that created the crisis.

Persecution of financial institutions (the credit channel of the economy) will only impinge on growth. Every bailout, subsidy or tariff keeps the economy in stasis. As odd as it sounds, the economy is healthier now than it was two years ago. It is imperative that politicians allow markets to flourish.