Rabobank Group

1-2-2010 | Economic news

I was recently asked to speak at a large investment seminar. The audience was filled with investment advisers from virtually all the major banks in the Netherlands. Before the break an analyst passionately presented the outlook for the coming period. While he did include the usual fervent call for investors to include more shares in their portfolios, the presentation was relatively balanced on the whole. He envisioned a moderate economic recovery and a slightly optimistic stock exchange climate. So there was nothing very shocking up to that point. Chief Economist Dr Wim Boonstra in his column recalls.

Until, that is, the panel chairman drew the conclusion from the presentation that we are ‘consequently’ out of the crisis. This question was subsequently put to the audience. It turned out that a striking majority of the audience agreed with the panel chairman. The prevailing opinion was that we have emerged from the crisis and that it now lies behind us.

Optimistic by nature
Even though I am an optimist by nature, this was going a bit too far for me. In order to raise the celebratory mood to the next level, I began my contribution to the discussion by commenting that I am certain we are already busy creating the next bubble. So what makes us think we are out of the crisis? I look around and see the disastrous state of government finances. Massive government deficits, hugely increased government debts, and rises in the tax and premium burden and spending cuts on the horizon. It has only just begun. Or will the powers that be decide, after all, to inflate away government debt? While this will naturally not be done explicitly because policymakers are far too proper for that, could this decision still be made somewhat surreptitiously?

Role of the business community
And what about the business community? It has been complaining vehemently about the shortage of credit, even now that lending has grown at a good pace. It is going to take some getting used to when the inevitable process of deleveraging really gets underway in the near future. As far as I can tell, the realisation that economic growth based on overly abundant and cheap credit is not ultimately tenable has either not or not fully sunk in yet. Also not among the policymakers at the Dutch Ministry of Economic Affairs because why else would they be placing all this pressure on banks to further increase their lending?

It is a bit like asking the barkeeper to by all means keep the drinks coming because the alcoholic is in danger of starting to feel uncomfortable.

Wake up everyone
And has the banking industry already been reformed? As far as I am aware, not even the most elementary aspects of the future financial system have been established. We are also a long way off from a full answer on how the regulation of the financial system should be organised in the years ahead. It’s time for everyone to wake up. It can still go either way.

Let’s start by examining the global imbalances. Has the core underlying cause of the financial credit crisis been solved? Have the balances been restored, have the debts been restructured? Have the exchange rates been brought back to realistic levels? I don’t think they have. I even detect signs that we have once again ended up in an atmosphere of dollar optimism, so be prepared. The countdown to the next blow has begun. In the meantime Greece has once again pointed out the weaknesses of the EMU. European monetary integration is not finished yet. There is consequently still a lot of work to be done.

And I can go on and on. But let me reiterate that I am not pessimistic and am convinced that things are slowly moving in the right direction, with slowly being the key word. It will take us years to work through the after-effects of this crisis.

Korsakoff’s syndrome or post-traumatic stress?
My contribution to the discussion could not incidentally put a damper on the jubilation. It all reminds me of an alcoholic who goes back on the booze after a fleeting period of sobriety and has consequently already forgotten the hangover after the last knees-up. You could say it is the financial version of Korsakoff’s syndrome: permanent loss of memory due to long-term and excessive use of credit. Or could it be post-traumatic stress?

Dr. Wim Boonstra, Chief Economist Rabobank Group
Dr. Boonstra has published numerous articles on banking, financial markets, international economics and business cycles.