What’s normal for the economy?

April 27, 2009

I’m at the Milken Global Conference for the next couple of days, where Pimco’s Mohamed El-Erian kicked off the first morning’s big breakfast session with the blunt statement that the assorted plutocrats have to stop hoping that things are going to get “back to normal” — ever.

The problem, he said, quite rightly, is that the crisis is “morphing” — a financial crisis became an economic crisis and is now becoming a socio-political crisis. It’s silly to hope that any government can get ahead of a morphing crisis, especially when government response is certain to be rife with unintended consequences — if you do what makes sense economically, you end up with a political backlash which creates a whole new set of possibly even more intractable issues.

As with all these panels, the panelists tended to talk their book: El-Erian was pushing the PPIP plan, Ken Griffin was asking the government to socialize housing-market losses, and John Micklethwait was literally talking about this week’s Economist covers.

But the point which resonated more than any other was El-Erian’s home truth: there’s going to be “a new normal, not an old normal” if and when we finally emerge from the current recession. Ken Griffin might hate the stealth nationalization going on at places like AIG, GM, and Citigroup, but we simply are entering what El-Erian calls “a period of deglobalization”, which is going to affect different sectors of the economy in very different ways.

To that point, there probably won’t be such a thing as “the recovery” — certain parts of the old economy simply might not recover at all. Any financial and economic crisis of this magnitude will have permanent victims. In sunny California, it’s easy to forget that things really can go to zero, especially when you are personally highly invested in them. John Micklethwait talked darkly about how a political hurricane ripped through Europe, in the form of World War I, just when many people in 1913 thought that things would only ever get steadily better. Or, to put it another way, if we are reverting to mean, which mean are we reverting to?


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