CHAPTER NINE
The Years of Delusion
The new hype
"A substantial decline in macroeconomic volatility" was "one of the most striking features of the economic landscape over the past 20 years or so", declared Ben Bernanke in 2004.1 Such had long been the view of most mainstream economists and politicians:
New Paradigm advocates received cautious support from the US Treasury Secretary Larry Summers and chairman of the Federal Reserve, Alan Greenspan . . . Mr Greenspan said the recent economic performance was "not ephemeral" <sub>.</sub>2
They spoke of the longest continuous period of American economic growth for four decades and the lowest level of unemployment for three. This was supposedly a new, unprecedented period of non-inflationary capitalist expansion, baptised "the great moderation" or "the new economic paradigm". Stagnation, unemployment and inflation had supposedly been left behind.
For Bernanke, the explanation lay in the greater capacity of the states and central banks to handle the money supply than in the 1 970s. For others it lay in the new technologies associated with the microprocessor:
A new economy has emerged from a spurt of invention and innovation, led by the microprocessor . . . opening all sectors of the economy to productivity gains . . . The new economic paradigm has brought us the best of all worlds-innovative products, new jobs, high profits, soaring stocks. And low inflation.3
The advances of what was called "Anglo-Saxon capitalism", supposedly based on unleashing "economic freedom" and "entrepreneurship", were contrasted with the laggardly rates of growth in Europe and the stagnation in Japan. In Britain New Labour boasted it was following the US example. "No return to boom and bust" was the refrain in every budget speech of chancellor of the exchequer (and future prime minister) Gordon Brown.
229