Stock markets' remarkable recovery around the world and the return to economic growth - albeit moderate growth - in Israel and Europe surprised many observers. Only six months ago experts jockeyed over who could make the most dire prediction. Yet the world rose to its feet, shook off the dust and returned to life. How did this happen?
It happened thanks to the doctrine of economics. While it's not an exact science, it's still a science. Economic theory and empirical trials have proved themselves over the past year. We emerged from the crisis in keeping with the old Keynesian model that was developed after the Great Depression of 1929. This theory holds that in times of crisis, people panic, limit consumption, invest less and withdraw money from banks, which is likely to result in bank collapses given the waning economic activity. So this is the time government needs to step in and intervene vigorously in the market. It must aid banks, instruct its central bank to lower interest rates, and not be averse to increasing the budget deficit, though not by too much.
This theory also teaches us that a big budget deficit is not feasible in the long term. It will cause another crisis. Thus, when the economy begins to recover from a recession, which is happening right now, the government must slash spending, eliminate the deficit and amass a surplus so the private sector can recover and regenerate growth. But slashing spending is much more difficult than increasing it.
Another conclusion is that we must not interfere with global trade. Tariff and customs must not be raised, nor should protectionist policies be implemented to benefit local products. It is impossible to spur growth artificially, as the Bank of Israel is trying to do. It is expensive and will end badly.
But this time countries did not make the mistake they made in the 1930s, when every country imposed more tariffs. This froze global trade, which exacerbated the depression. This time, the United States was at the forefront of Western leaders' determination that there would be no repeat of protectionism and global trade would not be halted.
A third conclusion is that we need strong regulation. It appears we cannot completely trust market forces. We cannot leave the financial markets to their own devices because no forces can prevent risky adventures. It is clear today that deregulation in the United States was a mistake, and that regulation in Israel must be tightened. But the new rules must be enacted in moderation so as not to stifle entrepreneurship and innovation.
A fourth conclusion is that when people live beyond their means, they will eventually have to pay compound interest. It is impossible to continue with expenses that outweigh income. This is impossible for both a household and a country.
The Americans exemplified this lifestyle, and they paid the heaviest price when the crisis hit. They sanctified the deity of private consumption, going so far as to tailor their gluttony to a flawed economic theory - that consumption is the engine of economic growth. This is simply not so. The engines of growth are savings, exports and investments.
But the Americans reduced their savings to zero and fell into a pathetic state of household debt equal to 130 percent of disposable income. Even the government joined in the bonanza. Former Federal Reserve chairman Alan Greenspan lowered interest rates to a historic low, George W. Bush increased spending and plunged the economy into massive debt until the inevitable big bang came along.
A fifth conclusion: The desire for easy money without having to work for it is driving mankind mad. The option of pouring money into the stock market and watching it grow without lifting a finger is a dream for many. Thus the depth of the crisis and the seriousness of the blow are immaterial. People will invariably continue putting their money in dangerous stock-market schemes in the hope of getting rich overnight. They will always forget to be cautious and will ignore every attempt at regulation and every past economic downturn.
The final conclusion: Every economic downturn will be followed by another. The public will return to the stock market and will once again enjoy huge gains, forming a bubble big enough to make a loud pop when it bursts. When it does, it will bring down everyone driven by greed. In other words, it will bring down us all.
This time, it happened at warp speed. Just six months ago, we were in the middle of a serious crisis. Now we are in a stock-market euphoria, because no vice is stronger than avarice.
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