Folks; A great interview with Galbraith ;
Note his remarks on Tony Blair and Margaret Thatcher and his remark about China. I have emboldened both.
Best,
Stitch
Galbraith on crashes, Japan and walking sticks
John Kenneth Galbraith is approaching his 90th birthday. He carries a stick now - "to
enhance my dignity, not for necessity," he insists. And he happily boasts that The Great
Crash, the book Galbraith wrote 40 years ago about the stock market slump of 1929,
has never been out of print. "Whenever it seemed in danger of being relegated to the
back shelf, there was another episode which fostered a new edition," he says.
Galbraith was in London last week. He pointed out that a key theme of the book, that
euphoria begets disaster, is as relevant now as ever. "This is a time when banks, other
financial institutions and corporations get caught up in euphoria, go beyond the law or
common sense," he said.
Last Wednesday, two days after fears about Japan had sent stock markets tumbling,
but before central banks stepped in to support the international value of the yen, JK
Galbraith spoke to Ben Laurance and William Keegan.
Sunday June 21, 1998
The Observer: Let's start with Japan. What do you see as the medium and long-term
game?
Galbraith: Japan is still in the aftermath of one of the great speculative episodes of our
time - both in securities and, especially, in real estate. There was a time - and this is one
of the most remarkable statistics of all time - when the total real estate value of the city
of Tokyo was in excess of the total in the United States. There was both a stock market
bubble and a financial bubble that had to burst.
Japan has suffered the characteristic consequences of optimism in the good time.
Management has become careless, the banking system over-optimistic, and both the
economic and business structure unduly bureaucratic: indeed, the association between
the two, which was once very productive, has now become stale.
The Observer: And the policy response to Japan's problems?
Galbraith: How interesting to compare last year's decision to raise taxes with the advice
Japan is now getting from Washington to use macroeconomic measures to encourage
expansion. The wonderful thing about financial advice is that it can deal in direct
opposites without anybody being surprised!
A situation had developed both in Japan and in the US which will be ended only by a
Schumpeter-type cleansing. [Economist Joseph Schumpeter described the aftermath of
booms as 'creative destruction'.]
In the case of the US, we are seeing stock market speculation, some real estate
speculation and a terrific boom in mergers and acquisitions not benefiting efficiency but
benefiting those bringing it off - plus there's an explosion of subsidiary financial
operations, including in particular junk bonds.
When the market fell on Monday, it was blamed on South Asia; any future problem will
be so blamed. But no one should doubt that there are grave flaws in the Wall Street
financial structure.
The Observer: The fall on Monday wasn't huge, though.
Galbraith: But it was an indication of the depth of the uncertainty. I wouldn't make any
predictions as to when there might be a crash. One's wrong predictions are always
marvellously remembered; one's right predictions always get forgotten.
The Observer: If we assume there is going to be a crash on the stock market, what do
you see as the macroeconomic picture in the West over the next two or three years?
Galbraith: I, of course, don't use the word crash; I repair to financial language and talk
not about a major correction but a major adjustment. (I am considering retitling my
book on the 1929 crash The Major Adjustment.)
One of the undoubted effects of a correction will be on the macroeconomic condition of
the economy, because we have a very large percentage of the population of the US now
holding stock market securities in mutual funds [the US equivalent of unit trusts].
When the correction comes, there will be a slump in consumer buying and some slump
in public investment - in other words a recession. One cannot separate what happens in
the securities markets from what will happen to the flow of aggregate demand in the
economy, to use that old Keynesian word. And this will call for government
macroeconomic action; they are already calling for it in Japan. Keynes is out of fashion
in the US - except when talking about Japan.
The Observer: But do you believe there will be a Keynesian response in the States?
Galbraith: Inevitable. It's not because people are starting to read the general theory
again; it's because there's no ready alternative. Low interest rates and government
support of employment - there isn't anything else.
What is certain is that some new name will be invented for Keynesianism. This was the
genius of my old friend Ronald Reagan. He inaugurated the most strongly Keynesian
policy since Keynes himself - large-scale government borrowing, large-scale publicly
supported employment, all justified by the fact that it was for defence we didn't need.
The Observer: How do you think Greenspan has been handling things?
Galbraith: Greenspan has been doing admirably what the Federal Reserve has always
done - which is nothing. He was very clever the other day when he said deflationary
influences would come from South Asia, restraining American speculation: toning down
American speculation, rather than emphasising the speculation itself.
The Observer: Would you generally approve of the way he has conducted monetary
policy at the Fed?
Galbraith: Absolutely not. There should have been far more warning about the
speculative splurge on Wall Street and the extent of citizen participation. That was the
mistake that the Federal Reserve made in the Twenties, and the mistake that it has made
again now.
And the reason for it is simple: you cannot warn against a speculative splurge without
taking responsibility for what happens thereafter; no head of the Federal Reserve wants
to be held responsible for a dip in the stock market. Once or twice he has got close to
saying that, and he certainly knows it. But nothing appeals so much to a central banker
as personal caution.
One thing is wonderfully clear - when trouble comes on Wall Street, the blame will all
be passed to Indonesia, Malaysia and maybe Japan. Wall Street insanity - let me use a
slightly milder expression, Wall Street 'speculative error' - now has a perfect cover.
The Observer: If you look at the return on capital in the G11 countries, it has been rising
pretty consistently since 1982. But clearly the graph can't continue up forever. Do you
think we might be at a turning point now?
Galbraith: Profits have been very high and growing. But returns from owning common
stock, particularly in the major companies, have actually gone down to nominal levels.
Dividend income of major stocks is almost insignificant. To own common stock that has
a wonderful capital value and no income is a slight anomaly that only the better financial
minds can explain.
The Observer: With reference to Schumpeter and the Schumpeterian correction, to
what extent do you think that we just have to go through the inferno?
Galbraith: We could move much more aggressively than we are doing to clean up the
situation, to make sure that we have common honesty in the operation of all these mutual
funds, for example. One always worries that there may be some relationship between
what a mutual fund is doing with its investors' money and what the participants in the
fund are doing with their personal funds.
There have been some cases of that in the newspapers recently. In the US we now have
far more mutual funds than there is intelligence, perhaps integrity, to handle them. They
are the bridge between the innocent and the eventual loss.
This is a time when we should tighten, and be very certain about, the quality of our bank
regulation. There should be strong warnings against investment in high-interest bonds.
Nothing calls for more concern than the revival of the junk bond; while the problem of
regulation is a bit difficult, we should look with some concern on this whole mergers and
acquisitions binge.
But having said all that, I would emphasise again that the sequence of speculative boom
and its result is part of the market system (one cannot now use the word capitalism) and
has been for hundreds of years. The market system has its considerable
accomplishments, but one should never ignore its downside.
The Observer: Do you think we are going to come back to a point when some kind of
Bretton Woods system is needed, and some control of capital?
Galbraith: One of our stronger points is that in consequence of the existing Bretton
Woods system - if properly financed - we have a structure for easing what the financial
community loves to call a correction.
We should always bear in mind that, as is happening now in East Asia, the peculiar
genius of the IMF is to bail out those most responsible, and extend the greatest hardship
to the workers, who are not responsible, who are innocent participants.
The Observer: Do you believe, and have you ever believed, there is any truth in the 'new
paradigm' idea?
Galbraith: When you see reference to a new paradigm, you should always, under all
circumstances, take cover. Because ever since the great tulip mania in 1637 [when
'investors' bid up the price of bulbs to astronomical levels, even devising a system of call
options on tulips they didn't actually own], speculation has always been covered by a
new paradigm. There was never a paradigm so new and so wonderful as the one that
covered John Law and the South Sea Bubble - until the day of disaster.
The Observer: Would you agree that we should be worrying less about inflation now
than we should have worried 10 or 20 years ago?
Galbraith: You have to divide the situation in the US from that in the United Kingdom. In
the US, we've managed to combine very high employment (or very low unemployment),
with relatively stable prices. On the other hand, here in the UK, inflation has been a
somewhat more pressing problem. We Americans have managed to put aside Phillips
[the economist famous for the Phillips curve, describing the trade-off between inflation
and unemployment]; but he's still relevant here. When all is said and done, the labour
movement and the problem of the wage-price spiral is still stronger in the UK than it is in
the US.
The Observer: Do you understand those who are hesitant about putting Britain into
Emu, where their inflation problem is much less than ours?
Galbraith: I have always regarded the European Union as more a political problem than
an economic problem. The greatest disasters of this century, nearly all of which I have
experienced, were the two great wars here in Europe. I happen to be one of the few
who remember both. I see closer association between the European countries as the
very welcome answer to those two disasters.
The Observer: But economic and monetary union across Europe is surely a very
different question.
Galbraith: I completely agree. The idea of one money, one unit of currency for the whole
European system probably got ahead of the requisite political and social welfare
association. There was a magic about having one unit of currency and that was
emphasised - rather than the prior questions of closer political, cultural and even welfare
association, although the latter is much more widely recognised than before. But one
cannot doubt that the government/economic structure of Britain is somewhat different to
that of Greece, for example.
The Observer: Given that most European countries have decided to go ahead with Emu
- and good luck to them - do you nevertheless understand Britain's hesitation?
Galbraith: I understand Britain's hesitation, but I would go ahead anyway.
The Observer: Is there not a risk that if you have a single currency, the stresses would
provoke exactly the sort of xenophobia and nationalism you were trying to avoid?
Galbraith: I don't think so. I would go ahead with it.
The Observer: Any thoughts on the new Labour Party and the new Labour
Government?
Galbraith: This takes one rather far afield, but I would have no hesitation - were I so
fortunate as to be a British voter - in supporting Tony Blair and the new Labour Party. I
would do so on economic grounds, I would do so on political grounds. But what is
much more important I would support it on aesthetic grounds. I prefer Tony Blair to Margaret Thatcher. <G>
The Observer: Any thoughts on Russia? You were one of the few Western members of
the Soviet Academy of Sciences, and you've studied Russia for a long time. What do
you make of how the situation has been handled?
Galbraith: No economist ever confesses ignorance, but I have not been in Russia since
the great transition and I don't feel wholly confident. But I continue to believe this
transition to capitalism should have been much more gradual, characterised by much
more thought.
One of the disasters of our time was the notion that there could be a 'sudden death'
system for communism.
One notices, for example, subject to some serious civil rights problems, how much more
intelligently the Chinese have made their transition.
The Observer: You recoil from the use of the world globalisation, but can we look at
one of its consequences? Is there any way that the divergences in wealth and income
around the world can be redressed?
Galbraith: No, we have to live with it. But I depart from some of my liberal friends -
liberal in the American sense - and support an international trade system. I think it
reduces tensions between countries, which is something I put a high value on. And while
international trade can have some adverse effect on the American wage structure, we
should never forget that it has a positive effect on employment in countries that are even
more desperately in need of it. And we are all, after all, human beings. So, except for
the word itself, I accept globalisation.
The Observer: Do you feel optimistic about the next 10 or 50 years?
Galbraith: The answer is very simple. On 15 October this year I will celebrate my 90th
birthday. At that age the matter of optimism and pessimism as a purely personal matter
becomes slightly irrelevant. |
