Edward Hadas

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.

The bad news is on the other end of the income spectrum. There has been an increase in top-inequality – a widening gap between the elite and the rest – in the United States, the UK and a few other countries. The bottom 90 percent in the United States are not exactly suffering; they have been getting richer on average for the last few decades. But the rich, especially the very rich, have been getting richer much faster. The top 10 percent of earners took in 32 percent of the nation’s total income three decades ago. That has risen to 46 percent. The share taken by the top 1 percent has more than doubled, from 8 to 18 percent, according to the World Top Incomes Database. In the UK, the newly published report from the High Pay Commission points out that the top 0.1 percent’s portion has multiplied from 1.3 to 6.5 percent.

The increase in top-inequality is bad in principle. People are not different enough in their abilities or in their dedication to work to justify the recent increases in the gap between rich and relatively poor. The damage can be seen in practice. The commission makes a good case that top-inequality reduces social solidarity, making companies less efficient and slowing GDP growth. It also points out, along with the book The Spirit Level, that greater top-inequality is associated with societies which have more health and behavior problems.

Still, there are four mitigating factors:

First, the allocation of wealth within a society is usually best left to the collective judgement of that society. The people have not, not yet at least, definitively rejected the widening gap between rich and poor. That suggests the problem is not widely perceived as grave.

Second, the elite just might be able to do some good with their extra resources. The ancient Romans offered bread and circuses and renaissance princes sponsored artists. In modern industrial societies, the financially secure elite could be a helpful alternative to governments for cultural, social and economic initiatives.

Third, whatever the evil caused by top-inequality in rich societies, it is much less significant than the good news on bottom-equality. As the American and British masses get richer, it becomes harder to argue that they lose out in a morally significant way when the elite gain. Even the poverty which causes the social problems identified by The Spirit Level is arguably more spiritual and social than strictly material.

Finally, if the people do decide that the recent increase in top-inequality is unjust, the trend can be reversed with much less trouble than bottom-inequality. Major social changes are required to increase crop yields or trade in the remaining deprived parts of the world, but the rich can be curbed fairly easily in developed economies. Choose from the following list: shame, taxes, limits on the range of pay inside companies or income caps in the particularly lucrative financial sector. Even for the very rich, the sacrifices needed to reduce inequality would be mild. As Bill Gates pointed out, more money stops meaning much after the first few millions. In his words, “it’s the same hamburger”.

“The Owl of Minerva takes flight only as the dusk begins to fall.” Or, to speak more directly than G W F Hegel, we can only become wise about the direction of history late in the day. The aphorism is pertinent to the euro crisis. Is this the twilight hour for the single currency or are the clouds over the euro no more than an early morning mist in pan-European history? The euro’s fate will look inevitable in retrospect (that is Hegel’s point), but for now the balance of historical forces is far from clear.

The technicalities of the euro crisis are bewildering, even to financial professionals. There are rescue funds constructed with baroque techniques of financial engineering, arcane details of labor market reforms and political feuds that have festered for decades. But something much bigger is at stake – whether or not there should be, in the words of Angela Merkel, “more Europe.” If so, the crisis can be resolved relatively simply: lenders would accept the losses caused by their past mistakes and errant governments would promise to play by the fiscal rules henceforth.

But should there be more Europe? Most British politicians think not and most mainstream continental politicians are in favor, if only warily. The reasons on both sides are fundamentally Hegelian. It is a question of which historical forces should prevail.

The anti-euro case is based on one of the strongest forces of the last few centuries – nationalism. The sentiment is sometimes expressed in economic terms, as when the previous British government rejected membership of the monetary union. A multinational currency always goes directly against the nationalist flow, even where the economic case for it is strong. In order for the euro to succeed, Germans must abandon hopes of duplicating their super-strong national currency and Greeks and Italians must either abandon longstanding traditions of loose fiscal behavior or learn to tolerate interference from EU authorities.

On the pro-euro side, two grand historical forces have provided most of the support for both the European Union and its currency. Both are faltering.

The first is a peculiarly modern force, the fear of war (Hegel thought war was a major spur of historical progress). While Europeans still dread another conflagration, nearly seven decades of peace, including the non-violent fall of the Communist bloc, have been enough to render the threat of war largely theoretical, and irrelevant to the European monetary system.

The second force is the desire for ever greater prosperity. This force, which has come into prominence during the last two centuries, influenced the European leaders who wanted to bring Europe together after the Second World War. They thought the economy was the most promising domain for cooperation, and they were right. European politicians and voters alike have proved willing to sacrifice national traditions and rivalries for the sake of European prosperity. The EU now has free trade, standardized regulation and almost unconstrained mobility across borders. The single currency was supposed to be the culmination of economic integration.

The bitterness surrounding the euro crisis shows that the lure of prosperity is now, at best, barely enough to inspire European governments to change their ways. While most politicians still believe that the euro will eventually bring their nations more wealth and economic stability, they and their voters are seriously in doubt whether those goods are worth more than national self-determination.

Philosophers of history might speculate that the desire for prosperity is a waning force today because it no longer has the same power to inspire the comfortable citizens of the EU as it once inspired the impoverished men and women scraping a living amidst the rubble of post-war Europe. Whatever the reason, the euro will not survive the next crisis (even if it scrapes though this one) unless European leaders make a stronger effort to identify their project with historical forces more politically compelling than ever more material gain.

The stakes are high. If the member nations retreat on the euro, further disintegration is likely. That owl of wisdom will probably look down on the movement towards European unity as no more than a wrong turn on history’s path.

But the euro and indeed the entire European project could draw on stronger forces. You don’t have to be a Hegelian to see that Europe as a whole, rather than individual jurisdictions, has been shaped and guided by such great ideas as Christianity and the philosophies of Greece and the Enlightenment. More recently, the entire region has striven to realise the dreams of democracy, honest government, economic security and educational opportunity.

Supporters of the euro and of “more Europe” might look to the French revolutionary call for liberty, equality and fraternity. These are ideals which erase neither national borders nor local customs, and so they can co-exist peacefully, if somewhat delicately, with nationalism. But the euro does indeed have the power to enhance the liberty that comes with effective economic management: the equality of citizens protected by fiscally sound governments and the fraternity that binds the strong and weak.

PHOTO: German Chancellor and leader of Germany’s conservative Christian Democratic Union (CDU), Angela Merkel gives her closing speech of the party convention at the fairground in Leipzig, November 15, 2011. REUTERS/Tobias Schwarz

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.” The words are from a recent speech by Bob Diamond, chief executive of British bank Barclays. In a way, this is just the usual corporate guff. No boss will tell the world about untrustworthy workers who try to harm customers. But Diamond’s aspirations are a particular challenge for the financial industry.

Not that finance itself is an ignoble activity like drug dealing or contract killing. On the contrary, finance has a noble goal, the support of a just and effective economic community. Banks, fund managers and the like collect funds that is surplus to the owners’ current requirements. The funds are then made available to organizations and individuals which can make good use of them. The gains from that good use are justly shared between provider and user, with the intermediary taking a small fee for its valuable services.

That is a pretty picture, but in the pre-crisis finance world, the intermediaries often lost sight of their economic purpose. Customers came third, after employees and shareholders. Bankers, banks and other institutions were misled by a particular form of greed, the belief that finance is more about gaining than sharing.

These days bankers are often called greedy. The opprobrium is basically merited, but financiers are not that different from other players in the financial game. Investors are greedy whenever they try too hard to outperform the economy, especially when they don’t invest in new projects but only trade financial instruments. Homeowners are greedy when they expect to become richer by doing nothing more useful than borrowing money. Governments, and the voters they try to please, are greedy when they borrow to offer more services than taxpayers are willing to pay for. And shareholders are greedy when they ask for profits which cannot be earned without taking advantage of customers.

Financial greed permeated the economy before the crisis – and it has hardly diminished since. Of course, like lust or pride, greed lurks wherever people are found. But in most parts of the economy, higher aims keep greed in check. Yes, airlines are run to maximize profits and passengers try to minimize fares, but the planes would not stay in the air if safety were not everyone’s first priority. Yes, workers rarely say, “I don’t deserve or need that raise,” but the economy would grind to a halt if workers did not mostly try to do a good job, whatever the level of pay.

Finance really is different. Financial greed is not merely tolerated; it is lauded. Star investors are treated as heroes. Politicians, fund managers and homeowners all welcome sharp increases in the prices of stocks or houses, even though the gains are unearned and asset price inflation benefits the rich and leaves the poor behind. Financial regulation provides little help. It generally aims at making the game fair, not encouraging moderation among the players.

Barclays’ Diamond is on the right track; financial institutions should promote a new attitude. But bank employees do not work in a vacuum. Unless most of their clients also accept that greed is really not good – and regulators stand ready to take a firm moral stance – memories of the last debacle will fade and regulations will be circumvented. The lure of excessive financial gain will soon lead to excess in the markets – followed by collapse and new calls for moral introspection.

There is a better way, and it does not require the exercise of superhuman virtues. Ethical finance demands no more trust, integrity or respect for clients than is already found among airlines. What it does require is a clear understanding of the purpose of the trade: the mutual benefit of all.

That understanding is hardly new. It was accepted by most local banks (think of the community support offered by Bailey Savings and Loan in It’s a Wonderful Life) and it inspired mutually owned financial institutions, which were common – and mostly successful – until a generation or two ago. The mutual structure (banks owned by their customers) makes economic sense, since bank depositors and borrowers are basically the same people and institutions, just in different phases of their economic life.

Demutualization, which turned careful depositors into greedy shareholders, was a theme during the decades of financial excess. A return to the practice and culture of mutuality should be at the top of an anti-greed financial agenda. The rest of the agenda is a topic for future columns, but Diamond does not go far enough. Nothing will work unless all of us – not just bankers – are committed to trust and integrity. In the words of George Bailey: “We can get through this thing all right. We’ve got to stick together, though.”

By Edward Hadas The opinions expressed are his own.

A child is born. For almost every parent, everywhere and always, the entry of a new person into the world is a welcome wonder. But economists generally have a different outlook on births. They prefer hard numbers to hope. And this week they have a big demographic number to discuss: the world’s population has just reached 7 billion.

When economists talk about demographics, Thomas Malthus usually comes up. The early 19^th century British thinker decided (without providing any reasons) that people would always have more children than the physical world could possibly support. Population growth would always be restrained by death from want. At the time he wrote, the world’s population was about 1 billion. By the 1960s, the population had increased to about 3 billion people, and Malthus’s gloom was often cited. Some ecologists then claimed that the combination of industrial production and overpopulation would inevitably lead to environmental catastrophes – and many deaths from want.

And yet up to now, Malthus has been wrong, in two basic ways. First, human resourcefulness has proved much greater than he imagined. The economic story of the last two centuries has been one of increase – of people and production. The most recent years have been particularly impressive. The 135 million births this year will be almost 30 percent more than 50 years ago, according to UN data. Those lives will be longer; this year’s children can look forward to an average 68 years of life, 18 more than newborns a half-century ago. And the current crop will receive much more of the goods of industrial prosperity, from clean water and adequate food to free education and mobile phones.

Second, Malthus was wrong to assume that women would always bear just about as many children as physically possible. In the last 40 years, the total fertility rate, the number of children the average woman could be expected to bear, has declined from five to 2.5. The fertility reversal has reduced the annual rate of global population increase from 2 to 1.3 per cent since 1980. The UN expects that to fall to 0.1 per cent by 2085. An absolute population decline is quite possible. It is happening already in Japan and Russia.

Still, it cannot be proven that Malthus was wrong, that the world will never run out of stuff or that humanity’s resourcefulness will always rise to environmental, economic and social challenges. And yet – even though there is no way to persuade fervent Malthusians – after two centuries of steady progress the dire predictions look unduly pessimistic. The demographic slowdown reduces the danger of exhausting the earth’s physical resources. And while grim environmental forecasts are still easy to find, demographers these days talk more about the stresses that come with ageing and declining populations.

There will be shrinking pains, of course, and the economic and political standing of low fertility nations is likely to fall. Still, the practical challenges can be met easily. Prosperity has freed up so much labor that unemployment is now a more serious problem than poverty in most of the world. Some of those searching for work can find it caring for the old and weak. Pension promises made when populations were increasing quickly will have to be reduced, but that requires little toil; financial arrangements can be changed with a stroke of the pen.

Instead of worrying, economists should take the latest demographic milestone as an opportunity to stop thinking like Malthus – that when it comes to people, more is generally worse than less.

A good starting point would be to stop relying on GDP per capita when comparing the wealth of nations. In this calculation of average income, population is the denominator. If that increases, the per capita GDP will fall, unless the numerator – production – increases commensurately. In effect, this measure makes each new person an economic drag.

That is unfair. A new person is indeed a consumer who will need to work to avoid being a net drain on the world’s resources. But he or she is also a wonder worth celebrating. Parents know it, and economists should recognize that reproduction is a sort of production – brought forth through maternal labor and parental care. Economic activity should aim at the promotion of life, not merely at the production of stuff.  John Ruskin, a fierce 19^th century critic of Malthusian thinking, declared, “There is no wealth but life… That country is the richest which nourishes the greatest number of noble and happy human beings”. The parents of Danica May Camacho, the Philippine infant identified by the UN as the 7 billionth, would surely agree.

PHOTO: Thomas Malthus. Wikimedia Commons.

Debt is a moral matter. While most economic activity is concerned with the “is” of how things are (investment, consumption and so forth), debts are always entwined with an “ought” – to repay. In discussing controversial debts–for example government borrowing in the euro zone and the U.S.–the moral question should be addressed directly: should these debts be paid off in full, or is some forgiveness justified?

Aristotle can help frame the argument. The philosopher condemned all lending at interest because money cannot create wealth by itself; a loan is just a way for the lender to take advantage of the borrower. Some proponents of Islamic finance make a similar argument, but it is not quite right. Capitalism has shown that loans can indeed produce wealth. If the lent funds are invested well, enabling the borrower to improve his lot and the world’s, then interest payments are the lender’s just reward for providing the fruitful funds.

But Aristotle’s moral logic remains relevant; his condemnation is appropriate for loans which do not share wealth justly between borrower and lender. Unfair loans should not be made, and where they have been, full repayment only compounds the original injustice.

Libertarians, believers in the right of individual to make their own decisions, have another contribution to the moral discussion. They point out that loans are freely agreed contracts which should be honoured. Both sides should understand the possible consequences of their free choices. Borrowers should repay, even if that requires making sacrifices, and creditors who make bad lending decisions should suffer losses.

In the euro zone, some libertarians (and most Germans) consider the borrowers’ obligations to be paramount. The governments of Greece and the other over-extended nations can and should repay all their agreed debts. The citizens just have to work harder and pay more taxes.

Other libertarians take the opposite moral line. Losses are the just punishment for the foolish creditors. And the Aristotelian logic may justify forgiveness. The lent money has mostly been spent unproductively, so the borrowers now have few gains to share with the lenders. The original loans turned out to be unjustly generous to the debtors, but the terms have become unjustly harsh.

Which side has the stronger moral logic? Forgiveness looks right for Greece, where the debts are particularly high and the government and economy are particularly inept. For the rest, it is a closer call.

Turn to the U.S. government, which is building up its own substantial debt pile. The American moral debate on the practice is as old as George Washington, who warned that such debts “ungenerously throw upon posterity the burden which we ourselves ought to bear.” Today, the National Research Council writes of “an unfair and crushing burden on future generations.”

Foreign debts are particularly crushing. Citizens get to spend now on consumption and investment but are obliged to repay foreigners later, with interest. This deferment has produced $4.5 trillion of foreign debt in the U.S., 30 percent of one year’s GDP. That is far less than Greece’s full year of GDP, but enough to worry about.

If the U.S. authorities were committed to full repayment of thee foreign debts, they would strive to keep the dollar’s value constant and to avoid inflation. That way, the foreigners would receive not just the contracted dollars but the full agreed economic value. While American authorities may care in theory, they are not concerned enough to refrain from loose monetary policy, which pushes the dollar down.

In this case, pro-repayment libertarians have right on their side. The largest and one of the richest economies in the world – and the issuer of the global reserve currency – is honor-bound to make good on its debts. While the creditors should have noticed that the country was becoming less responsible, their neglect does not excuse American indifference.

For purely domestic U.S. government borrowing, Aristotelian scrutiny is more appropriate. Do the ultimate borrowers, the mostly poor beneficiaries of federal programs, gain enough from these loans to justify the higher taxes that will be needed later to repay the mostly rich lenders? There is no obvious answer to that question, but it is well worth asking.

More generally, philosophical arguments ratify what practical experience teaches. Lenders should be wary about lending to governments. The choice to borrow rather than to raise funds through taxes is usually a sign of political weakness. When the time comes to repay, governments may be unable or unwilling to persuade the people that the sanctity of contracts is a principle worth protecting.

Also, the proceeds of loans to such governments are likely to be spent foolishly. Then full repayment will fail the Aristotelian test of justice. The rioters in Athens may know little about the Ancient Greek philosopher’s doctrine on lending, but they could be protesting in his name.

By Edward Hadas
The views expressed are his own.

Occupy Wall Street can claim a tremendous heritage. In almost every generation – from the French Revolution of 1789 to the student revolts of the 1960s – popular movements have rejected a society which, they say, denies some sort of basic freedom. But for a protest to leave a lasting impression, it has to start or mark a significant cultural change. What could OWS signify?

The Occupy movement certainly expresses popular fury at high finance. But that sentiment is far from revolutionary. President Obama and many business dignitaries have expressed sympathy. There also seems to be anger at inequality created by unjust practices. In the words of an October 14 blog entry on Occupywallst.org, the “99 percent” of the population will “no longer tolerate the greed and corruption of the one percent.” Such righteous indignation could perhaps spawn a revolution, but only if it came with a more positive agenda. As it stands, though, the manifestos and soundbites coming out of the leaderless groups are long on complaints and short on both intellectual coherence and suggestions for new arrangements.

Still, this movement must have something going for it. It has spread around the world and attracts much friendly attention from the mainstream media. I see three forces at work.

First, economic confusion. Occupiers see the economy as a disaster. They blame the triumph of “neoliberals” who put their trust in small government and big companies. Many of the hand-lettered signs at Occupy protests go further; they suggest the enemy is not an erroneous ideology but a huge economic conspiracy of the elite against the people.

Such claims are not justified. The global economy is certainly not in bad shape. The big news these days is the increasing prosperity and influence of China, India and other countries which used to be too poor to matter. The U.S. economy does have problems, especially in the job market, but the country remains prosperous. Occupy is certainly right that the elite are still powerful; that is what elites do. New laws and regulations would be enough to temper corporate power; a brand new economic order is not required.

As for the dangers of neoliberalism, faulty ideology did indeed lead to inept deregulation of the financial sector, but the political tide is already flowing in the opposite direction. In other parts of the economy, there is no need for reversal. During the years leading up to the crisis, the U.S. government increased its sway over healthcare, education and mortgage finance – three of the four domains citied in the Occupy Wall Street blog as under neoliberal control.

Second, utopianism. The spirit of Woodstock lives in OWS. There are tents, talk of peace and love and hope for improvement in human nature. “We must change, we must evolve” is a typical slogan. Utopianism, though, was not invented in 1968. The belief that society can be made perfect through radical democracy has long been part of the Left’s revolutionary ideology. More than two centuries of history show how easily the failures of past experiments in radical social engineering are forgotten. The enthusiasts at Occupy have duly forgotten.

Third, the decline of the Left. If the moderate left had a distinctive agenda for reform, Occupy’s wrongheaded and unrealistic musings would look like a dangerous distraction. But there is nothing to be distracted from. Even a crisis in speculative financial capitalism has not spawned substantial left-wing proposals for reform.

The Democrats in the U.S. make a partisan show while the European center-left parties mostly feud among themselves. As bearers of anything like an ideology, though, the Left is a spent force everywhere. The decline is easy to explain. The Left’s basic economic demands have largely been met: the proletariat has mostly become middle class and the government mostly protects the weak. That leaves the Left without an obvious agenda. In practice, it must choose between fine-tuning and revolution. The politicians go for incremental policy initiatives. The timidity leaves room for extremists to flourish.

Occupy’s participants might want to be revolutionaries, but they are a pale imitation of the idealists of the 1960s. While the new movement is undoubtedly counter-cultural, corporate leaders and politicians have learned how to co-opt such incoherent anti-establishment sentiments. Apple, for example, has done brilliantly by combining high tech, high prices and a veneer of counter-culture. Occupy participants use more than their share of Apple products.

Indeed, the grief over the death of Apple’s founder, Steve Jobs, gives a more accurate cultural reading than Occupy. The college dropout who wandered to Asia looking for enlightenment became a hero for many of the 99 percent. They may feel oppressed by the state of the economy, but they sense they have more to lose than to gain from any substantial change in the system that has provided iPhones and iPads. So what does OWS signify? The shallowness of our discontent.

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the U.S. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades’ old pattern.

The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after the First World War. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-War experience spurred on the potent official response to the 2008 financial crisis.

That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.

What causes the wide gap between perception and reality? I have two suggestions.

First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.

Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.

That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.

It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.

The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Edward Hadas

LONDON (Reuters Breakingviews) – What turns a financial mess into a deep recession? The answer to that question is crucial right now. There is a mess in the euro zone and signs that GDP has stopped increasing in much of the world, but neither the markets nor any large economies have fallen off a 2008-style cliff. Not yet, anyway.

Most observers were astounded by the speed and scale of the last collapse — in just a year industrial production in developed economies fell 17 percent and global trade fell by 20 percent, according to Dutch consultants CPB. The shock of the September 2008 failure of Lehman Brothers massively amplified the fear and credit tightening which were already slowing the global economy. The authorities responded with strong enough countermeasures to prevent a great global depression, but they were not fast enough to stop the economic decline.

The experience has made everyone jitterier. As European politicians bumble and investors’ confidence crumbles, talk of a Lehman moment in the euro zone gets louder. At some volume, the worries can become severe enough to be self-fulfilling, precipitating a crisis.

But there are good reasons to hope that the global economic fabric will not be torn. To start, the euro zone as a whole has nothing like the U.S. housing credit bubble and the profligate governments in the currency bloc are all moving in the right direction. Also, some lessons have been learned — the financial world has been preparing for substantial writedowns on Greek debts for more than a year.

But these bulwarks might not be strong enough to resist a Lehman-like unexpected calamity. The most obvious risk is that euro zone politicians live down to their worst instincts, but there are many financial imbalances around the world. If something explodes, panic could spread to businesses and ordinary people.

Everyone should hope that does not happen. After Lehman, the world’s authorities could offer effective relief. But now policy rates can no longer be cut and more stimulus, either monetary or fiscal, would be as likely to increase panic as to calm nerves.

CONTEXT NEWS

— The European Commission index of economic sentiment in the euro zone fell from August to September from 98.4 to 95, the lowest level since late 2009. The indicator is only above its long term average in one country, Germany.

(Editing by Hugo Dixon and David Evans)

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Financial markets are tiring of the Federal Reserve’s love offerings. The U.S. central bank has long been able to soothe nervous investors with rate cuts or newly-printed money. But markets spurned Wednesday’s announcement of the Twist, an operation to lengthen the maturity of $400 billion of the Fed’s $1.7 trillion U.S. Treasury.

Stock markets fell sharply and the price of bonds from governments still considered safe rose. Investors were right not to be impressed. The Twist is aimed primarily at the U.S. housing market. But even if the Fed’s rearrangement lowers mortgages costs, house prices will be held back by a weak economy and the massive oversupply left over from the bubble years.

Tight monetary policy has long ceased to stand in the way of economic growth. Official real interest rates are solidly negative almost everywhere. The Twist could even impede lending –- and growth –- by narrowing the gap between short and long term rates. Banks, after all, gain from a steep yield curve.

Central banks could try to regain investors’ favour with yet more monetary love. The Bank of England dropped some not so subtle hints on Sept. 21 about another round of quantitative easing. There are calls in the United States for QE3. But no amount of money –- whether it comes from fiscal transfers, QE3 or QE33 -– can force banks to lend or consumers to borrow and spend.

More money will not push up the prices of financial assets which investors deem too risky. The Asian market rout is caused in part by fund managers trying to get ahead of an expected wave of redemptions from cross-border investors. But while the gains from monetary stimulus are small, the potential harm is significant. The Fed and its peers are creating piles of money which would be put in and taken out of different assets in disruptive quantities and dizzying speeds.

In the current economic environment, the twists and turns of monetary policy will not reduce unemployment or rebalance trade. It would be better for the world if central banks stopped trying.

It’s the beginning of a strong economic recovery. Just ask the folks at Intel. The chip producer is smiling because companies “have some breathing room in the economy and their budgets”, as chief executive Paul Otellini put it on Tuesday. Or maybe it’s the end of a weak recovery. Tom Albanese, the boss of miner Rio Tinto, subsequently noted “fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth”.

Both chiefs are optimistic for the long term. Why not? The enriching of most of the world’s five billion or so relatively poor people will be great news for suppliers, whether of the most basic raw materials or of the most sophisticated electronic components.

But for the next few quarters, investors have a lot to worry about. Tech companies may be doing better — Dutch chip equipment maker ASML increased its 2010 forecasts on Wednesday — but the macroeconomic data from the United States and much of Europe remains largely mediocre. Euro zone industrial production in May, released on Wednesday, grew less than expected.

Investors are torn. They’ve been optimistic for almost two weeks, but that hardly makes a trend. The mood improvement came after a pretty bad second quarter. Indeed, since last September stocks have been up and down, but have generally made little progress while credit spreads have widened.

Financial markets look more fragile than markets for goods, despite near maximal fiscal and monetary support from governments and central banks. Or maybe because that support could end. Modest tightening in China is probably hurting asset prices there and in commodity markets. The fear of similar policy moves elsewhere, especially if they come before economic growth is well established, is restraining investors’ exuberance.

It would not take much to darken the mood in the market — a misstep from a central bank here, a bit too much deflation there or an unexpected bank problem somewhere else. But for now, liquidity is still ample and there are just enough signs of growth to keep up investors’ spirits.