The past 10 years have been eventful, both in terms of political events and economic ones, but it is not yet clear how historians will classify this decade.
Will it be deemed the first decade of the 21st century in political, economic or cultural senses as well as chronologically? Or will it be seen as the last decade of the 20th century, a continuation of a preceding age that happened to spill across an arbitrary millennium date?
That happened a century ago. The pre-World War I period from 1900 through 1914 is better seen as part of the era that began in 1815 with the final defeat of Napoleon rather than the 75 years that followed it.
These years, encompassing two wars and the “hard and bitter peace” noted in JFK’s inaugural address, ended with the fall of the Berlin Wall in 1989. The collapse of communism ended not only a key political alternative to democracy but the primary alternative to the mixed-market economies of the wealthy industrialized countries long known as “the west.”
History may not have ended in 1989, but except for a few die-hard Marxists, largely Latin American or European academics, and for naïve Libertarians who dream of an Ayn Rand-ish economy that prospers without public goods, no one now thinks there is a viable alternative to mixed markets where the private sector and government each play indispensable roles. There is much argument about which functions are best carried out by which sector, but agreement on the basic model prevails across political parties and countries.
But where does the past decade fall in all of this? It continued an evolution of new technology over the past quarter-millennium, from water-powered textile mills through the age of steel and steam to electricity and electronics. The integration of computers and electronic communications at the level of households and businesses over the past two decades, together with molecular biology replacing physics as the primary science over the past 20 years, wrought changes as profound as anything in the preceding 200.
But just as in the 1920s, where a decade of technological change — electric motors and automobiles — was followed by economic hardship, so the information technology revolution spawned an orgy of financial risk-taking that culminated in a collapsing economic bubble.
Throughout the past decade, no group was cockier than economists. Margaret Thatcher had proved them right. Returning key economic functions to the private sector could spur economic growth. The heads of central banks appointed by Thatcher and Jimmy Carter proved inflation could be conquered. Freer international trade also spurred growth of output and consumption.
And the application of new theories in finance fostered the development of financial instruments like “collateralized mortgage obligations,” “credit-default swaps” and “structured investment vehicles.” These promised to allocate capital and risk more productively. All of society would benefit.
Indeed, in 2004, Business Week rated Lewis Ranieri, the Salomon Brothers trader who pioneered the securitization of mortgages, as one of the most important innovators of the prior 75 years, right along with the developers of penicillin, the transistor and recombinant DNA.
Why does it now seem that has all turned to ash in our mouths? Were all of these innovations folly? Are we doomed to a prolonged period without prosperity?
Oscar Wilde’s quip that “nothing succeeds like excess” does not apply in economic policy. Yes, Carter administration deregulation of airline fares and routes and railroad rates fostered efficiency. So did privatization of steel, chemical and other industries in the United Kingdom and in many developing countries.
But Alan Greenspan’s religious belief that financial markets largely could regulate themselves flew in the face of centuries of experience. Ignoring century-old warnings that letting a nation’s money supply grow faster than real output for an extended period proved the worst error. Ben Bernanke boasted of the Fed’s role in a perceived “great moderation” of inflation and business cycle fluctuations even as a historic asset price bubble neared the bursting point.
So will we see the past decade as the terminus of a 20th-century economic model that ended in disaster, both nationally and for millions of individual households? Or, with some minor policy tinkering, will the events of the past two years be seen as a minor hiccup in a new era of growth? That depends on the next few years.
No one knows what the next year or decade will bring. Optimists, or stock touts, already see the Dow hitting 15,000. Others see green shoots extending themselves and flowering in 2010, with broad prosperity soon to follow.
Some pessimists, spinning scenarios of defaults by profligate countries or still-hidden time bombs within our own financial institutions, warn that an early-1930s-style financial collapse still is possible. Many others think we are through that woods; that the danger is rather of a decade or more of near zero growth, similar to what Japan experienced after its real estate and stock market bubble burst in 1989.
I tend toward the pessimistic end of the scale myself but I respect smart colleagues who are optimists. Whichever way things play out, however, many Americans are sadder but wiser investors and consumers. The naïve ebullience of 2006 won’t return in this generation.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.