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A different take on the current financial crisis

01 Oct

I am, like everyone, watching the strange fruit ripening in the USA, and hence the world, at the moment, but am in no position to add anything really intelligent. Sure, I have opinions, but in this they are hardly worth the effort I would expend on the keyboard or your effort in reading them. So I defer to others.

You will find some views I find interesting over there in the side bar.

I also commend, without being able to evaluate it one way or the other, the post Jim Belshaw alludes to this morning in his personal blog: Why the US financial package should be rejected – and why Australia will ride out the storm.

This post deals with two issues, one macro, one local.

Listening to the debate on the proposed US financial rescue package, I have slowly come to the conclusion that it should (at least from a US perspective) be rejected. I say this for one core reason.

The package mixes together two very different things. The first is the maintenance of liquidity so that financial institutions can lend to each other. This is a good thing. The second appears to be the maintenance of US property values. This is plain silly.

What will happen if the package is rejected? The worst case is that the US economy will slip deeper into recession as necessary corrections for past excesses work their way through. We have seen this before. The right economic answer would be to use monetary and fiscal policy to then expand the real economy.

What will happen if the policy is accepted? At best, it may ease the immediate pain, while leaving the US economy (and Government) saddled with still over-valued assets. The outcome will be slower longer term US economic growth…

Jim does have considerable experience in public service and business.

For other views, see the mainstream Australian media, for example Global Financial Crisis on ABC.

One take on all this I did give some credence to is in today’s Sydney Morning Herald, whose general coverage is here. One particular note that attracted my attention is by Ian Verrender:

UNCHARTED waters, dangerous territory, storm clouds. Whatever your choice of metaphor, there is no understating the seriousness of the situation in which we now find ourselves.

For many, watching the super-rich squirm after a lengthy period of conspicuous excess can be enormously satisfying. A well-deserved come-uppance. Justice long overdue. But the firestorm engulfing Wall Street threatens to scorch us all…

How did it ever come to this? In hindsight, it seems like madness. And it was. Debt was being raised to invest in debt that had a loose connection – via debt instruments in heavily mortgaged properties – to US real estate. Debt overpowered equity and swamped savings. The $US12 trillion in mortgages extended to American homeowners far outweighs the value of the real estate.

Even more worrying, that same cavalier approach was repeated with personal debt, via credit cards, and at a corporate level as corporations across the globe fell prey to a swarm of private equity locusts who borrowed to the hilt as they cut a swathe through the business world. So far we’ve only seen the fallout from the property market collapse…

Australia’s financial system is in rude good health. Despite the problems of the past year, our big banks look to be on track to earn record profits. But our financial system will not be immune to the sort of pressure being brought to bear from the contagion sweeping the world.

The Reserve Bank of Australia is likely to lower interest rates, possibly by as much as 0.5 percentage points, next Tuesday in an effort to keep our economy from tipping into recession. Banks are likely to absorb much of that and pass on only half. And our central bank may well be thankful for it.

In his lead story Peter Hartcher notes some differences between the Westminster parliamentary system and the US system:

…The most fragile and fickle commodity in the economic armoury is confidence, which is essential to consumer spending, to bank lending and to business investment. Australian authorities will emphasise the strengths of the domestic situation.

This is exactly what Kevin Rudd did yesterday when he called a press conference to say: “The bottom line is this. Strong regulation, the best regulatory system in the world, strong balance sheets on the part of our banks, as well as a strong budget situation on the part of the Australian Government means that Australia’s situation in this period of global financial turbulence is the best that you could have.”

The party discipline in a Westminster system is often criticised for being repressive, but today, by contrast with the chaos in Washington, it looks pretty good. Political parties in Westminster democracies put members “under such a discipline in carrying on the common cause, as leaves no liberty of private opinion”, according to Britain’s Lord Halifax in 1750.

Yet in the US system, where there is plenty of scope for private opinion, the President, the leaders of both parties, and both presidential candidates combined were unable to marshal enough votes to pass the proposed $US700 billion ($850 billion) rescue bill.

As the Washington Post’s Ben Pershing said: “It wasn’t a party-loyalty vote; lawmakers were asked to vote yes, but they weren’t threatened. They (probably) weren’t bribed. Add all that up, and you had a power vacuum.”

More discipline will be required of both Australian parties. The Opposition Leader, Malcolm Turnbull, privately pledges not to criticise the Government on economic policy during a crisis…

And that’s where, perplexed as I am, I will leave it.

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Posted by on October 1, 2008 in America, Australia, Australia and Australian, current affairs, globalisation/corporations, Jim Belshaw, Kevin Rudd, Malcolm Turnbull, USA

 

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