Article appearing in today's Irish News Business Insight.
As we indulged in a dose of much-needed Olympics feel-good therapy earlier this month, the fifth anniversary of the start of the credit crunch came and went. As we watched Usain Bolt snap his countrymen’s celebrations with a borrowed camera after a Jamaican one-two-three in the 200metres final, we nearly forgot that the same day marked five years since the words ‘sub-prime’, ‘Fannie Mae’ and ‘credit default swaps’ began to become as familiar to us as ‘Peloton’ and ‘Repechage’ are today. Confidence, then, as now, also become a much used noun.
Back in 2007, the lack of confidence was confined to financial products, before spreading to financial institutions. A year later, in September 2008, the collapse of Lehman Brothers provided a watershed moment as the crisis in confidence morphed from financial markets to the economic world. Fast forward five years and (despite our dose of Olympics magic) there is still a widespread crisis of confidence. Though, the source of the confidence deficit has shifted to areas that weren’t even on the radar in 2007/08 – Greece and the eurozone.
Indeed in February 2009, the European Union’s economics commissioner Joaquin Almunia noted that ‘The Greek economy is in better condition compared with the average condition in the eurozone, which is currently in recession.’ Jason Manolopoulos uses this line to launch his book “Greece’s ‘Odious’ Debt: The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community”.
Manolopoulos makes the point that the crisis of confidence we see today is a product of the (crisis) of over-confidence during the last decade and before. This featured in the way the Eurozone was set up and its membership composition, which was largely a triumph of politics over economics.
‘Lack of confidence’ is a phrase we frequently hear today. For some, a lack of confidence is the single biggest factor limiting a sustained economic recovery. Confidence is critical but perhaps not always in the way that everyone thinks. Confidence without substance is dangerous, as Manolopolous’s point so clearly illustrates. Creating a false sense of confidence can be more damaging than a lack of confidence. Should firms be encouraged to invest for demand that isn’t there, or consumers to spend money on goods that they neither need nor can afford? Such a well-intentioned ‘confidence boost’ could actually lead to worse outcomes than if no encouragement was provided at all.
For some people, confidence simply reflects the reality of economic conditions. Whilst for others it is something that can be manufactured and managed. Confidence, however, is a two-way street and closely linked to credibility. Jason Manolopoulos sums it up well: ‘The narrative of a politician or other leader can have a positive impact on confidence among consumers and the markets. But there has to be a positive trend to nurture……positive rhetoric cannot fabricate a recovery; it can only encourage whatever positive developments there might be. Thunderous, positive declarations that are in denial of the reality on the ground serve only to weaken the credibility of the spokespeople involved, and distract attention from the necessary remedial action.”
Within an economy, there is the added complication of different players with potentially conflicting agendas. Indeed, ‘telling it as it isn’t’ or stifling those who seek to ‘tell it as it is’ can be more profitable for some at the expense of others and the wider economy. This feature has been evident in financial crises throughout history, from the Great Depression in the US to the debt crisis in the eurozone today.
As with most crises, individuals warning of impending doom are rarely welcome. When herd behaviour takes over within a speculative bubble, alternative views are ruthlessly dismissed. This has been evident in the US, the eurozone and Ireland.
After a crash, invariably those who failed to speak out and apply the brakes to the over-confidence during the boom are the first to lobby for a dose of post-crash confidence. One example of this concerned J.P. Morgan. The legendary banker called on New York clergymen to preach sermons of confidence and encouragement to bring the 1907 crash to an end.
Overconfidence and a lack of tolerance of dissent has also been a feature in Europe. According to the Nobel Prize winning economist, Paul Krugman, Europe was caught up in ‘a mood of almost giddy optimism’ or ‘Europhoria’. “Political leaders throughout Europe were caught up in the romance of the project, to such an extent that anyone who expressed scepticism was considered outside the mainstream”. Scepticism was not welcome but nevertheless American economists dutifully contested the optimistic view presented and raised the fundamental economic problems that are all too evident today.
The balance between nurturing confidence when there are genuine reasons to do so and not creating false confidence has to be found. Realism must not be sacrificed just because we don’t want to hear it. The economy and its various actors will not be thankful in the longer-run; not least because under-stating the problem underestimates the need for reform. What the economy needs to know is more important than what the economy, or sections within it, want to hear.
Usain Bolt’s starting and finishing line capers are expressions of confidence that are backed by genuine talent, and are in contrast to the antics of some other competitors whose starting line routines are not matched by their performances. Likewise, bold pronouncements of economic confidence must have substance – otherwise they are in danger of being more Comical Ali than Muhammad Ali. I think we all know what happened to the former.
Post by Richard Ramsey, Chief Economist, Northern Ireland, Ulster Bank Group Communications.