Hedge Funds, Historians Are Winners of Recession: Matthew Lynn

Sept. 22 (Bloomberg) -- That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.

Answering questions last week, the world’s most powerful central banker said the U.S. recession was “very likely over at this point.” Much the same story is being played out in the rest of the world, with the German, French and even U.K. economies gradually recovering from their own slumps.

And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation. Over time, we will see that the credit crunch caused shifts of power and influence between industries, professions and countries.

So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.

One: Historians won out over economists. No single group of professionals took a worse battering during the economic slump than economists. Not even bankers. A science that has disappeared up a mathematical dead end couldn’t see the crisis coming, couldn’t explain it to anyone once it broke, and couldn’t come up with a way forward after it happened.

Lessons of History

Instead, people turned to lessons of history to make sense of it all. Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts, is now listened to on economic issues. Likewise Nassim Taleb, a professor of risk engineering whose book “The Black Swan” dipped into the history of rare, high-impact events to describe how we didn’t see this storm brewing. At this rate, investment banks will be building small, dusty libraries in the basement, and filling them with in-house historians. It will be a long time before economists are listened to again.

Two: Hedge funds over bankers. If Lehman Brothers Holdings Inc. had a dollar for every time someone warned that hedge funds would bring the financial system to its knees, the bank wouldn’t have gone bust. While hedge funds took plenty of criticism, and are still facing calls or more regulation, the simple fact remains that they didn’t blow up the way many predicted. It was the mainstream banks that caused the crisis. That will influence regulators and investors for many years. Whatever people say now, it’s the banks that will face more scrutiny, not hedge funds. The result? The lightly regulated, cash-rich hedge funds will grow in importance, while the tightly controlled, capital- constrained banks stagnate.

Baseless Fears

Three: Germany over Britain. For much of the past decade, the fast-growing U.K. was gaining on Germany for the role of Europe’s most influential nation. Almost 20 years after reunification, fears of a resurgent Germany turned out to be baseless. It was Britain, with its financial center, that was emerging as the leading European nation. The credit crunch will throw that into reverse. The U.K. is condemned to a decade of struggling with a fiscal mess, while Germany should bounce back quickly from the recession with an export-led recovery.

Four: The right over the left. The credit crunch was probably the perfect moment for left-wing, anti-capitalist and anti-globalization movements to make their mark. After all, if this wasn’t a failure of capitalism, it is hard to imagine what might be. Vladimir Lenin would have led the overthrow of a dozen governments presented with an opportunity like this. But his heirs on the left failed to advance any cogent arguments. Nor did they develop any alternatives to free-market, finance-led capitalism. The plate was empty, but the anti-globalization movement failed to step up to it.

Running on Empty

The result? The left looks like it is running on empty tanks. Center-right parties will remain in power, as in Germany or France, or recapture it, as in Britain. And it will stay that way for a long time.

Five: Frugality over extravagance: The nub of the credit crunch was an attempt to load more and more debt onto people -- mainly in the U.S. and U.K. -- whose real wages were stagnant or growing very modestly. That will be thrown into reverse, and for the next decade, people will be paying down debt rather than accumulating it. House prices will be subdued as finance remains scarce, and household budgets will be tight. The result will be that companies will thrive if they offer value, drive down costs, and make themselves the lowest-cost supplier. Anything that smacks of luxury will suffer. Think about McDonald’s Corp. triumphing over Starbucks Corp. -- and then multiply that effect a thousand times over.

The Great Depression of the 1930s dominated the way people thought about the economy for the next 50 years. The great recession of 2008 and 2009 may not have such a long-lasting impact. But in those five ways, it will dominate policy for at least a decade.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)