Public ignores warnings from 'worrywart' leaders
- By Raghuram Rajan
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E-mail Shanghai Daily, March 1, 2012
Inaction takes a toll
Calamity can still be averted if the costs of inaction escalate steadily. The worst problems, however, are those with "inaction costs" that remain invisible for a long time, but increase suddenly and explosively. By the time the leader has the mandate to act, it may be too late.
A classic example was Winston Churchill's warnings against Adolf Hitler's ambitions. Hitler's plans were outlined in Mein Kampf for all to read. Yet few in Britain wanted to give them credence, and many thought that Communism was the greater threat, especially in the bleak years of the Great Depression.
The Nazis' dismembering of Czechoslovakia in 1938 made the sincerity of Hitler's ambitions all too clear. But it was only after the invasion of Poland the following year that Churchill was appointed First Lord of the Admiralty, and he became Prime Minister only after the invasion of France in 1940, when Britain stood alone.
Britain might well have been better off had Churchill held power earlier, but that would have meant costly rearmament, which was unacceptable so long as there was a chance that Hitler proved to be a paper tiger. And, of course, it would also have meant entrusting Britain's fate to a politician who, though now regarded as an indomitable leader, was widely distrusted at the time.
Non-linear costs of inaction are most obvious in the financial sector. At the same time, financial-sector problems may be particularly difficult to address: if politicians emphasize the need for action too strongly in order to get a mandate, they might precipitate the very turmoil that they seek to contain.
Between the Bear Stearns crisis and the failure of Lehman Brothers, the US government could do little to get ahead of the growing problem. It took the post-Lehman panic for Congress to authorize the Troubled Asset Relief Program, which threw a financial lifeline to banks and the auto industry, among others.
And only frenetic action by the Federal Reserve and Treasury (with authorities around the world joining) prevented a systemic meltdown.
A subprime-mortgage problem that was initially estimated to imply losses of a few hundred billion dollars imposed far higher costs on the entire world.
Similarly, eurozone politicians have obtained a mandate to take bolder action only as the markets have made the costs of inaction more salient.
Even setting aside Germany's understandable attempt to limit how much it would have to pay, it is difficult to see how politicians could have gotten ahead of the problem.
While the ECB has bought the eurozone some time, the calming effect on markets may be a mixed blessing.
Have Europeans seen enough of the abyss to tolerate stronger action by their leaders? If not, markets might have to deteriorate further to make possible a comprehensive resolution to the eurozone crisis.
Don't blame the leaders for appearing short-sighted and indecisive; the fault may lie with us, the public, for not listening to the worrywarts.
Raghuram Rajan is professor of finance at the Booth School of Business, University of Chicago. Copyright: Project Syndicate, 2012. www.project-syndicate.org. Shanghai Daily condensed the article.
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