Photo / ATL
The 1984 election, 40 years ago this month, marked a momentous shift in direction for a country on the brink of bankruptcy. In the second of two articles, Danyl McLauchlan considers the sharemarket crash, the beginning of the end for the Lange-Douglas government but not the neoliberal economic path that would forever change New Zealand. (To read part I, go here.)
Most of the world knew it as Black Monday: the sharemarket crash that hit global financial markets on October 19, 1987. In Europe, the US and Asia, it came to be seen as a correction: American shares were overvalued, early versions of automated trading algorithms triggered rapid sell-offs. Central banks in those economies acted quickly, stabilising markets and shoring up their finance sectors.
In New Zealand, Black Monday was on Tuesday and it plunged the economy into a five-year recession. It came nine weeks after David Lange’s Labour government was re-elected for a second term.
During the campaign, Lange indicated that the economic turbulence and political chaos of the previous three years was over; now, it was time to enjoy the benefits of those reforms. Finance minister Roger Douglas and associate ministers Richard Prebble and David Caygill – the Troika – thought differently. Their work was not yet done; it had barely begun.
War on intervention
Of the many right-wing finance ministers deregulating their economies in the 1980s, Douglas was the most radical, the most ambitious, the least inclined towards moderation. In his first term, he went to war on government intervention in the finance sector, and after the crash, the suddenly impoverished nation discovered that the shady trading practices that most developed economies ban as a matter of routine – insider trading, pump-and-dump schemes (boosting the price of stocks through misleading statements), brokers taking positions against their own clients – were possible. There were no restrictions on the amount of leverage investors could take on, no interest rate caps or credit restrictions, no capital requirements.
The Douglas-era sharemarket became a gigantic, fraudulent, speculative bubble, and when the international markets fell, New Zealand’s collapsed. Share values halved over the subsequent months; tens of billions of dollars were wiped out. The nation’s capital markets took decades to recover. Most New Zealanders looking to invest shifted their money to residential property, permanently traumatised by the sheer scale of the wealth destruction and the lawlessness that enabled it.
For Douglas and his allies, the crash provided further proof of the underlying fragility of the economy and the urgent need to move even faster with their reform programme. But for many of the Troika’s caucus colleagues, it was hard to accept that the recession was somehow the fault of ex-prime minister Sir Robert Muldoon’s protectionism. This seemed to be an avoidable catastrophe of Douglas’s own making. They’d long suspected him of holding radical ideological beliefs, and he was obviously too close to big business – but now, a new suspicion entered their minds: that even accounting for ideology and patronage he didn’t seem to know what he was doing.
Keynesian economics
On the ground floor of the Reserve Bank, directly across the road from Parliament, there’s a machine called the Moniac. Built in 1949 to a design by the New Zealand economist Bill Phillips, the Moniac looks like a large Perspex wardrobe full of columns, pumps and tanks filled with water, identified with labels like “Consumption Expenditure” and “Investment Funds”. It’s a computer that uses fluidic logic instead of digital electronics and, when you switch it on, the water flows around the system solving macroeconomic equations.
The Moniac took its name from “money” and an early digital computer, Eniac. It embodied a central assumption of mainstream economics in the mid-20th century: that a nation’s economy was like a complex machine. Just as machines were built and fixed by engineers, economies would be operated by economists. They would design them, fine-tune them and fix them when they broke, all according to the scientific principles laid out in John Maynard Keynes’ magisterial General Theory of Employment, Interest and Money, the 1936 text that invented modern macroeconomics.
The Keynesian framework became the standard for advanced economies in the post-war era, leading to three decades of widespread prosperity and growth. Muldoon had taken this engineering approach to its most radical conclusion, tinkering with everything and screaming at anyone who questioned him that he was the only person who understood our economy.