Revisiting Western Intellectual Thought and Policy Formulation

For most of us who are trained in or by the West, we used to think that our icons of best practice are the wonderful theories, science, technology and institutions that the West has brought to the rest of the world. But the current global crisis has shocked us to the core. That the best of the West, such as the Wall Street iconic firm of Goldman Sachs, could be charged by the SEC of fraud, is stunning to those who look to them for standards of professionalism, innovation, intellectual brilliance and moral integrity. When our teachers are no better than us, then we would really have to think for ourselves. There are signs now that the rest of the world is beginning to do so. In a new book published by the Institute of South East Asian Studies, Singapore, “Nowhere to Hide: The Great Financial Crisis and Challenges for Asia”, the authors argue that the current global financial crisis should be examined from three different levels: theory and ideology; financial industry practices and structural imbalances in the international economy. Written from a multi-disciplinary point of view, the book examines the crisis not only from a review of how the Efficient Market Hypothesis took hold of Wall Street, but also transformed its business practices and flourished on the penchant for consumption and debt arising from the U.S. balance of payments deficits. Just as Asians suffered from the hubris in the years of the Asian Miracle, so did the gods of Western economics and finance. Nobel Laureate economist Robert Lucas, in his address to the American Economic Association in 2003 proclaimed that “the central problem of depression-prevention has been solved for all practical purposes.” Current Fed Chairman, Ben Bernanke, lauded for his rescue of financial markets with “whatever it takes”, stated in his famous 2004 speech on the Great Moderation (years of low volatility growth and low inflation) that, “improved monetary policy, made an important contribution not only to the reduced volatility of inflation, but to the reduced volatility of output as well.“ Central bankers patting themselves on the back made no mention of the contribution to low inflation from the cheap goods and services provided largely from Asia. On the contrary, in his equally famous speech in 2005, he argued that the “significant increase in the global supply of saving - a global saving glut - helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.” I am always puzzled by the logic of this argument, because this is like a banker blaming his problems on his depositors because they save too much. The question is where did their high savings come from? The answer is because the depositors earn their income from the high-spending banker. And why is the banker spending so much? Because the long-term real interest rates are too low! If you listen to Alan Greenspan, in his April 2010 FCIC testimonial defence of low interest rate policies, “by 2002 and 2003 it had become apparent that, as a consequence of global arbitrage, individual country long term interest rates were, in effect, delinked from their historical tie to central bank overnight rates.” In other words, central banks have little impact on low long-term interest rates and therefore by extension of this logic, no one is responsible for the asset bubbles. This is exactly the theoretical failure and dilemma of Western policy making that is pointed out by the above mentioned book. If Western intellectual thought and policy formulation appears to be incomplete or flawed, what are the challenges for the rest of the world? From an African standpoint, if the continent is to take its rightful place a longside the West and the rest of the world, there will have to be much more original African thinking, not about parochial African values, but about values and practices that apply universally. liban.mugabo@gmail.com