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Coffee House

Nigel Lawson versus Mervyn King

19 November 2011

1:41 PM

19 November 2011

1:41 PM

In this week’s Spectator we have a piece from one of our former editors, Nigel
Lawson, where he confronts this idea that the West’s woes can be blamed on a new bogeyman called ‘global imbalances’. This is fast becoming the received wisdom, something that
even the bankers can point to and blame. It gets everyone off the hook, and takes attention away from the basic failure to regulate the supply of money and quality of investments. CoffeeHousers may
be familiar with the argument by now. Time and time again, we hear central bankers shrug their shoulders and say something like:

‘Don’t blame us central bankers and financial policymakers for the debt crisis. Yes, our job is to regulate the supply of debt — and yes, it may have been dangerously cheap
during the last decade. But that wasn’t our fault! It was those bloody Chinese! The scoundrels keep on working and saving — can you imagine?! And look what they’ve gone and done: a $3
trillion cash pile they’ve got in Beijing alone, before you count Korea and Indonesia. It would have been rude for us Westerners not to borrow it, and go fill our houses with
electronic gadgets bought on the never-never. The Eastern cash was just there: we had to take it. Didn’t we? So don’t blame us  central bankers for keeping rates too low for too long.
Blame those irresponsibly thrifty Asians! They are still now saving like lunatics and until they stop it there’s nothing we can do.’

Well, that’s my take. Lord Lawson phrases it rather differently. He says that these ‘imbalances’ have been with us through most of modern economic history, and a
properly-run country learns to deal with them. An extract from his piece:

‘I have the highest regard for Sir Mervyn, whom I have known well for many years, and who has proved an excellent governor during the most testing time within living memory. But on this
issue I believe him to be mistaken. As he put it: ‘What were the causes of the unsustainable build-up of debt in Europe and elsewhere? They lay in the continuing imbalance between those
economies running large current account surpluses and those running large current account deficits… Surplus countries, a group which includes three of the world’s largest four
economies [Japan, Germany and China], share a responsibility to respond to our present dilemma by expanding domestic demand.
 
This preoccupation with current account imbalances is hardly new. I remember similar fears about Japan during my time as Chancellor in the 1980s. But is this really an economic defect? For these
imbalances to be eliminated, capital inflows and capital outflows would need to be precisely the same — an implausible scenario. We are living now in what might be termed the second coming
of globalisation, the creation to a considerable extent of a single world economy, the first coming having been the remarkably successful half-century between the end of the American Civil War
and the outbreak of the first world war, a period justly dubbed la belle époque.
 
Nobody then lost any sleep over the current account of the balance of payments. Not least because the figures did not exist. But it is clear from the huge amount of overseas investment that
occurred, notably from the UK and other European countries into both North and South America, that the imbalances must have been substantial and persistent. There is nothing perverse about
it.
 
Perhaps a domestic example might help. In the old days when house purchase in the UK was financed by building societies, far and away the largest building society in the country was based not in
London but in Halifax — now alas simply the ‘H’ in the failed Lloyds HBOS banking group. This was not because the people of Yorkshire were richer than the people of London and
the south: quite the reverse. But Yorkshire people saved, while southerners spent. So the Halifax Building Society came to dominate the UK housing finance market by channelling savings from the
poorer north to the richer south.
 
The Chinese savings surplus has clearly been exacerbated by what we would consider an inadequate social safety net. This obliges the Chinese people to save for their own protection: they will
have no welfare state to fund their retirement or help them if they fall sick. This will change in time, if only because the Chinese authorities are increasingly fearful of social unrest. But it
would be surprising if substantial imbalances did not persist. There is no use wishing them away, or blaming the Chinese for saving so much. The ready availability of cheap money is no excuse for
unwise borrowing or foolish lending decisions. And this is the heart of the problem.’

Lord Lawson is, as so often, on the money. Blaming the ‘global imbalances’ is very convenient for everyone — but, as they’re not going away any time soon, it is
not very constructive. Far better that we learn to deal with them, and ask why this global crisis didn’t fell any banks in Sweden, Canada or Australia. The answer is that they had a
properly-regulated banking system, and central banks which knew that there’s more to economic stability than a slavish devotion to an inflation target.

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