Home > Economics - General > Free-market responses to the crisis?

Free-market responses to the crisis?

November 8th, 2008

I’m working on questions of a new financial architecture in the wake of the financial crisis and the various bailouts, and I’m interested in whether there is a well-worked out free market alternative to the policies we’ve seen so far.

To be clear, I’m not interested, at this point, in arguments about whether free markets are to blame for the crisis. I’m also not interested in criticism of the bailout unless it’s presented as part of a reasonably detailed argument that doing nothing, or doing something different, would produce a better outcome. Finally, I’m not interested in responses based on fringe economic theories, for example, anything based on gold or the ideas of Ron Paul[1]. That is, I’m interested in work by mainstream economists putting forward a more free-market alternative to the policy of partial nationalisation adopted so far.

fn1. I’ll post on this later, but in this thread, I will terminate with prejudice anything of this kind, and similarly for meta-comments that Paul is not really a fringe figure or that someones right to free speech is being censored here.

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  1. MattYoung
    November 9th, 2008 at 00:35 | #1

    The proper free market response would be to take the currently strong dollar and invest overseas, at least until the bailout bubble calms down.

    One thing the free market should have leaned is to wait out the bubble, even when the bubble has reach the federal government.

  2. saint
    November 9th, 2008 at 01:22 | #2

    Are you talking Australian, U.S. or global context?

  3. November 9th, 2008 at 01:56 | #3

    http://www.reason.com/news/show/128972.html

    “All this begs the $700 billion question: Is a federal bailout of the financial services industry necessary? The Founding Fathers used the Constitution to purposefully create a slow moving Congress. They didn’t want it to make rash decisions. While the legislative branch is supposed to keep taxpayer interests first, they are also supposed to be a check on executive branch authority—not a rubber stamp on an imperial presidency.

    Several alternative actions could be taken to meet both immediate and secondary concerns raised by the current financial turmoil:”

    I actually favored this or a Swedish Type Plan, which was my first choice in this crisis.

  4. TerjeP
    November 9th, 2008 at 02:48 | #4

    Is Steve Hanke a mainstream economist?

    http://www.forbes.com/forbes/2008/1110/072.html

  5. November 9th, 2008 at 03:53 | #5

    First of all, Ron Paul has never had an original idea about economics. Indeed, he isn’t even an economist, he’s a politician. Perhaps you meant to criticize those who Dr Paul emulates: Ludwig von Mises, Friedrich Hayek and Murray Rothbard.

    Secondly, as far as the bailouts and nationalization go, both the neoclassicals and the Austrian economists are united in their opposition. So there is no harm in reading the Austrian economists’ alternative proposals (here and here) because they are likely to be similar. But if you want to read the same thing from a Friedmanite, then see here. Plus, a comprehensive policy report by Stan Liebowitz.

    Third, the gold standard (or alternatively, competing currencies, as Hayek wanted) is not something that is on the policy table, nor will it be for the foreseeable future. It’s not a realistic policy alternative, so even if certain economists favor the gold standard it doesn’t matter because the immediate focus is on stopping the socialization of financial markets. People don’t just randomly mention the gold standard when the impending crisis can be resolved with free-market solutions stopping short of gold.

    For brief insights, you could also try Anna Schwartz and David Friedman.

  6. jquiggin
    November 9th, 2008 at 05:25 | #6

    I’m looking primarily at a global context, but I’d be interested in anything Australian as well.

    Hanke is a mainstream economist, though his track record as an advocate for the disastrous Argentine currency board doesn’t inspire confidence. But he doesn’t offer an alternative, just bags out his usual target.

    The Reason piece does suggest some policies to which my immediate response is that most would have made the crisis worse, not better, and none come anywhere near representing an alternative to the bailout. I’ll write more on this later unless something better comes up.

    The Swedish plan is about right, and we will probably move further in that direction.

  7. observa
    November 9th, 2008 at 05:49 | #7

    I’m talking generally here about the danger to taxpayers from blanket deposit guarantees vs the sub-prime threat to solvency and the valid critique of irreedeemability of the banking fiat money system. ie if not bullion what then, given Steve Keen’s debt observations. The problem is that bad money is mixed with good and how to assess good money.

    I think the immediate and perhaps the long term answer lies in RE price backing, as well as that depositary institution snareholder equity. Most loans are RE backed whether they be to households or business. The cheapest loan SMEs obtain are largely via mortgages on the owners’ homes, business premises, farms etc. As well we have a large spectrum of household RE mortgages all borrowing long from a short term variable marketplace. A liquidity run needs backing but not a real underlying solvency crisis, albeit regulatory authorities constantly need to guard against FIs getting into that position.

    I think the sensible answer is to use the RE backing of loans as the true depositary base, assess it quickly and make that the deposit guarantee. We simply use the Valuer General’s valuations and order the mortgages into debt outstanding as a percentage of that, taking into account a reasonable assessment of long term RE prices to AWEs or the like. ie how many mortgages outstanding in the institution are below say 70% of the VGs valuation now? Clearly if I have a mortgage(or drawdown in abeyance which I do) of only 25% of VG valuation, that ‘money’ is nowhere near as hot as a new first home buyer with say 95% mortgage on valuation, probably because they just availed themselves of $21k of taxpayer clawback.

    The FIs can easily match and rank mortgage outstanding to valuation for this assessment and the percentage chosen is up to regulators and could be adjusted (called in)from time to time by the Reserve to rein in credit like an SRD, taking into account FI equity as well. A couple of points here is we need to get rid of any friction like SD on mortgages and using this safety margin would encourage FIs to seek more deposit on loans, or suffer a penalty re equity or an SRD call. If sub-prime mortgages caused the threat to fiat money then the answer lies in working out how much of our fiat money is really prime and that’s the level of taxpayer guarantee.

  8. observa
    November 9th, 2008 at 06:15 | #8

    As an aside here let me say that I don’t think we should have ANY consumer revolving credit. ie credit that’s not backed by a mortgage on the goods. That’s the way it used to be before we got into this mess and that’s the way I bring up my two kids. I drum into them that the only time they should borrow money is to back themselves in business or to save on rent. Now perhaps that might be relaxed for those starting out to borrow for a new car, instead of an old banger, where they have enough equity for repossession and sale should they fail to pay. I’m even skeptical of that as I never borrowed for that purpose being mechanically minded, but it may make sense for the girls. Revolving consumer credit is a one off consumer hit and then consumption must fall due to interest. It makes no sense and yet that’s what we do institutionally.

  9. bill broome
    November 9th, 2008 at 07:15 | #9

    Why search for a new way to turn lead into gold? Instead of wasting your life with financial alchemy, why not try to improve socialist planning? The fact is, when ‘free’ markets collapse as they so frequently do, the rescue package is socialism.

    This is mother nature’s way of hinting where human society should be going.

  10. November 9th, 2008 at 07:17 | #10

    I’d suggest focusing on information, in particular the anti-/mal-/non-information produced by rating agencies privately owned and run. (Who watches the watchers?). Too assymetrical I’d say, (when usual bubble behaviours are put aside) and it’s ‘all the way down’ to the fraudsters selling the houses on such hi-falutin’ cobbled together credit to people who cannot afford to buy houses in any case.

    Perhaps this area should be ‘web 2.0′ed and wikified or something (a constructive commercial wikileaks?). Barriers to this (if it were actually workable) would be legal considerations about libel/slander.

    But I guess that could be considered fringe. What’s the difference between fringe and novel?

    (Certainly if such a project were effected in Tasmania and real people in real positions were dutifully described and rated a social revolution might be effected and stagnant old money with no idea pushed aside.)

  11. observa
    November 9th, 2008 at 08:49 | #11

    Trust me Meika, we old fashioned bastards with our old stagnant money and no idea haven’t been pushed aside by this new social/financial revolution. On the contrary, we’re just coming back into fashion again as our kids are beginning to appreciate. I haven’t quite figured all that out just yet but it seems to be some strange correlation with me aging and my parents getting smarter, albeit one is dead now.

  12. November 9th, 2008 at 09:14 | #12

    I doubt I had you in mind. We’re talking Tasmania here. (And I don’t borrow).

  13. Damocles
    November 9th, 2008 at 10:32 | #13

    In the longer term, I think government’s response to the crisis should be to remove some of the distortions to the free market caused by the tax system.

    Specifically, preferential tax treatment of capital gains as compared to other forms of income could be assumed to contribute to asset bubbles by making investment in certain classes of assets more profitable than they woudl otherwise be.

    So I’m suggesting the full nominal value of capital gains be taxed at the same rate as other income.

    This would permit a substantial reduction in the top marginal income tax rate.

    I’d include the principal place of residence in this new tax regime but I’d also make mortgage interest tax-deductible (since it’s an expense incurred in earning taxable income).

    Some years ago someone in the AFR suggested all this and then went a step further and advocated doing away with depreciation in favor of allowing businesses to deduct the full value of capital expenditure in the year it was incurred.

    I’d also suggest that if speculation in stocks, currencies and commodities is regarded as a problem, then a small tax (say o.1%) on the value of all such transactions would make speculation less attractive without being an excessive burden on other market participants.

    Revenue raised from such a tax could be used to set up stability funds in each jurisdiction to deal with counter-party defaults and the like.

  14. Sinclair Davidson
    November 9th, 2008 at 10:36 | #14

    Walter Bagehot set out the appropriate free market response within a lender-of-last-resort framework. Stephen Kirchner set out the argument here.

  15. November 9th, 2008 at 11:21 | #15

    http://caseymulligan.blogspot.com/2008/10/what-should-be-done.html

    Here’s Casey Mulligan’s blog. Try it as well.

    But, if I can, I’d like to fudge and simplify a free market response to one problem, say AIG, which is basically an insurance company.

    AIG has two parts:
    1) AIG insurance, which is solvent and makes money
    2) AIG crap, which sells CDS’s. I’ll call it AIG 2 so as not to offend anyone.

    So, the following happens:
    1) A bunch of houses are foreclosed upon, forcing AIG 2 to pay out on CDS’s.
    2) Although AIG 2 is still solvent, because of how many CDS’s it has and how much it has already paid out, it’s credit rating is lowered, causing it to have to raise it’s capital/collateralization standard. This means that it must now immediately raise capital.

    A free market response could be:
    1) Cut taxes on the sales of AIG’s assets and allow AIG to raise the capital itself, or another company to sell assets and buy these assets from AIG
    2) Change the capital/ collateralization requirements, allowing AIG to keep going without having to raise more capital

    In other words, free market proposals usually:
    1) Reduce taxes ( say like capital gains )
    2) Ease regulations ( like mark-to-market )

    As opposed to government plans which usually:
    1) Spend money
    2) Toughen regulation

    In this crisis, with a large deficit and lack of regulation being blamed, the free market response had an uphill fight. Its benefit was leaving the taxpayers out, although, the loss in taxes in the free market proposal would be part of the trade-offs.

    If you believe in a type of Ricardian equivalence, you could also argue that all that the government does when it invests in banks or AIG is crowd out private capital. To that end, another free market idea would be to ease requirements for starting a bank, but that falls into easing regulations anyway.

    So, that’s my little argument. As for Bagehot, his plan ( our mine based on him ) included the following:

    1) Clear rules for intervention
    2) Quick moral hazard for everyday problems, so as not to allow a tripwire to be easily passed
    3) Extremely onerous conditions clearly spelled out prior to government intervention.

    I subscribe to what I call Bagehot’s Principle:

    If the B of E exists, it will be the lender of last resort, and that must be considered in the real world. In our world, that includes the Fed, B of E, and IMF.

    However, in this case, all 3 of my little list of Bagehot’s principles were ignored.

    I supported a quick imposition of a Swedish Type plan because, in my opinion, it came closest to satisfying Bagehot’s requirements.

  16. smiths
    November 9th, 2008 at 11:44 | #16

    i think that for any system to be effective it will need to take into consideration the problems and solutions offered by people like richard murphy on tax and secrecy rules, and the complete failure of accounting and auditing frameworks,

    also when a political administration is almost indistinguishable from the largest private investment bank how do you enact a free-market

  17. jquiggin
    November 9th, 2008 at 12:19 | #17

    I find arguments that blame “mark to market” accounting utterly unconvincing and AIG provides an excellent example. If the story being told here (solvent but needing to raise capital for confidence reasons) were correct, the announcement alone of the $85 billion investment would have been sufficient. In fact, all that money and more has been spent paying off bad investments.

    Not requiring mark to market would have allowed AIG a month or two more of insolvent trading, but would have made the final collapse even worse.

    And as regards confidence, who would deal with any financial institution, in the current crisis, if they were allowed to present their accounts in the kind of “hoping for the best” fashion precluded by mark to market.

  18. jquiggin
    November 9th, 2008 at 12:21 | #18

    Kirchner appears, correctly enough, to favour the actual bailout policy over the initial Paulson proposal.

  19. jquiggin
    November 9th, 2008 at 12:37 | #19

    The interview with Anna Schwartz, linked by Sukrit, comes closest so far to what I was looking for. She denies that systemic risk is a meaningful problem or that the current crisis resembles the leadup for the Depression and therefore favors letting failing institutions fail. I don’t agree, but it is a serious argument for an alternative approach, unlike fiddling with accounting regs.

  20. November 9th, 2008 at 15:46 | #20

    I hope you understand I wasn’t defending this proposal. I was trying to consider a free market proposal. Letting banks fail is a possibility. However, I thought that you didn’t want a plan that wasn’t a bailout at all, and letting banks just fail isn’t a bailout.

    I do agree with you that this seems foolish. She knows a hell of a lot more than me, but just read what happened from the FT when Lehman failed and try and tell me how simple it all would have been:

    http://www.ft.com/cms/s/0/e4223c20-aad1-11dd-897c-000077b07658.html

    “In the end, is Lomas surprised by the scale and complexity of what he is now dealing with? He thinks carefully. Not in terms of complexity, no. What did surprise him, though, was that Lehman’s collapse had been allowed to happen in the first place. “I was surprised that it had gone down and that authorities elsewhere in the world hadn’t found a way to avoid it going down – precisely because I could anticipate the complexity that there would be here.

    “Surely others had seen just how big and ugly this was going to be?�

  21. November 9th, 2008 at 16:33 | #21

    One other thing, I reread this:

    http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop

    “But “that’s not what’s going on in the market now,” Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

    “Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.” The only way to “get rid of them” is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson’s original proposal to buy these assets from the banks was “a step in the right direction.”

    So, she’s not saying do nothing. She’s saying that if you buy these toxic assets at a fair price for the government, some of the banks would still be insolvent, and would fail. She favors letting these banks fail. She’s claiming that Paulson saw that this would occur and so shifted to recapitalizing the banks, which would save some otherwise insolvent banks.

    “The problem with that idea was, and is, how to price “toxic” assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

    “Ms. Schwartz won’t say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he’s shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”

    But you then have to ask yourself why Paulson did this. Was it because he wanted to save insolvent banks, or did he have another reason?

    Her plan was for the government to buy these toxic assets, and presumably hold them to be resold or written off. Now you mentioned AIG, which keeps getting more and more money. Just one big problem with her plan would be that there is no way to know what this pool of toxic assets might eventually cost the government. They seem to be constantly becoming more and more expensive. There are other reasons as well. Also, the failing banks might well cost the FDIC quite a bit of money. Remember, AIG was loaned the money at 8 1/2 % interest I believe, or something like that. They’re supposed to pay us back with high interest. Now they’re borrowing cheaper money from the Fed and repaying some of the other money back, and asking for the interest rate to be lessened. So AIG wasn’t the best example for TARP, I was just trying to give a simple example.

    Anyway, go with the toxic asset plan if you think it’s more free market. One thing. Explain to me exactly how this reverse auction was going to work.

  22. Leon
    November 9th, 2008 at 17:06 | #22

    Have there been any anti-trust-ish, small-enough-to-fail, decentralist-type responses from mainstream economists? Perhaps they’re not part of typical “free market” thinking, but they’re not particularly pro-nationalization either.

  23. rabee
    November 9th, 2008 at 17:45 | #23

    The free market response that’s emerging is “securitization”. Have assets traded in a securities market and prices determined by that market rather than in-house and over the counter.

    The idea is that assets such as CDOs CDSs are very risky precisely because they are not traded in the securities market.

    I agree with this line of argument:

    http://knowledge.wharton.upenn.edu/article.cfm?articleid=1993

  24. rabee
    November 9th, 2008 at 18:02 | #24

    John,

    Here is the relevant quote of Susan Watcher that I agree with; which explains why there was an apparent failure of the efficient markets hypothesis–there was no market just models. Assets were priced to models and not to market.

    Susan Wachter: What’s new this time is that unlike the securitization of the past, the securitization is tranching of risk in very complicated CDO’s, CLO’s, SIV’s — instruments which do not trade.

    So we do not have market discipline. Although the price of the loan may be varied by risk, … the price of the mortgage instrument and the securitization of the mortgage instrument, these securities did not trade. Therefore, there wasn’t a market discipline to price the risk and give the signal that these were extraordinarily risky instruments.

    They were marked to model, not to market. There were lots of fees up front across the board. But the ultimate risk was unknown, because in fact they weren’t priced to the risk.

    In some sense, it’s a disaster when we have potentially the foreclosure rate that we have of 2-3%. It could bring down the economy with it if there’s a recession that’s serious. But on the other hand, if this is priced and if the rate of return on the instruments that Wall Street pays is high, at least we’re sending the right signal. That did not happen.

    In our research, what we’ve seen is that the standards eroded, but the rate did not go up. So this is a failure of pricing. It’s not surprising because these instruments did not trade.

  25. jrbarch
    November 9th, 2008 at 18:29 | #25

    The first responsibility of any physician (or any practitioner of any human skill) is to remember they are dealing with a human being.

    In this context, both free-market and nationalisation policies of any society can potentially serve – in some degree – the same purpose.

    Another way at looking at any particular ‘pool of thought’ precipitated from the ‘rain cloud of knowable things’ (Patanjali) is that some good may be drawn from each, and in fact a wider outlook can lead to a better design solution – if the purpose is held true.

    So, I would like to suggest that in the age of a deluge of concepts, any lasting solution needs a wider base to avoid the perfect financial storm (sorry about the wet metaphors)!

    I have made an attempt to describe a fundamental here : http://cpd.org.au/node/4568#comment-179

  26. Louis Hissink
    November 9th, 2008 at 19:56 | #26

    OT nonsense deleted

  27. November 10th, 2008 at 01:10 | #27

    I’ve deleted this response to an attempt at derailing the thread. Can I remind everyone, please don’t feed the trolls

  28. TerjeP (say tay-a)
    November 10th, 2008 at 07:03 | #28

    Hanke is a mainstream economist, though his track record as an advocate for the disastrous Argentine currency board doesn’t inspire confidence. But he doesn’t offer an alternative, just bags out his usual target.

    Hanke endorses a book I just finished reading called “Gold – The Once and Future Money” by Nathan Lewis. Not very mainstream I suppose but if you say he is mainstream I suppose I can continue to put such arguments around these parts. In any case if you genuinly want new ideas you should be prepared to look outside the mainstream.

    Hanke suggested that Argentina not pull the pin on their currency board. The currency board wasn’t perfect but it had elliminated the massive rate of inflation that Argentina had endured during the 1980s. They then pulled the pin and surprise, surprise, the peso plummeted in value, massive inflation returned and the economy tanked. Pulling the pin did not solve any problems but created a heap of new ones. To conclude from this that Hanke was wrong when he said don’t pull the pin is really quite twisted. If you merely think the currency board was imperfect then you’re not really disagreeing with Hanke.

    During the current financial “crisis” the US government and it’s agencies panicked and in their panick they spooked the markets# (I’d be spooked to if I was in a room with a panicked elephant).

    Hanke has argued (although not so well in the article I linked you to) in interviews that the bailouts were not necessary and that the market would have cleared up the mess itself. Given that the core problem was an issue of solvency, not liquidity, there is every reason to believe that he is correct. My own view is that the government takeovers are more forgivable than the government bailouts so long as the government operates as little more than a company receiver. Although why the normal course of bankruptcy and payout on deposit insurance wasn’t followed is somewhat lost on me. Why even have deposit guarantees if the government is going to take over insolvent banks in any case.

    In terms of bank guarantees in Australia I personally think a better response would have been an unlimited guarantee on 90% of all bank deposits with a later pull back to 75%. That would still leave 10% at risk (25% later on) which would ensure that risk takers in the banking sector were not rewarded with an equally low cost of funds. The current setup sows the seeds for future problems. A 90% guarantee would take most of the political heat out of a bank insolvency whilst not entirely displacing lenders responsibility for considering the risk associated with their chosen investment.

    # Yes Ernestine I know that markets are not people. It is just a turn of phrase.

  29. TerjeP (say tay-a)
    November 10th, 2008 at 07:07 | #29

    p.s. Better does not mean best. However I’m trying to placate your statist inclinations.

  30. Alanna
    November 10th, 2008 at 09:54 | #30

    Prior post says

    “The problem with that idea was, and is, how to price “toxic� assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

    Let them fail is a market solution. The numbers of financial institutions and the complexity of financial instruments they produce clearly needs rationalising and the market is attempting to clear. Toxic assets should be brought to account at toxic values to owners until they are cleared – that is the sad reality here. What point government purchasing toxic assets without any stake in the improved institution? That is asking the taxpayers to bear the burden of risk arising from risky behaviour by the few who often remain insulated from the downturn by their own wealth holdings (and it was ever thus).

    Taxpayers funds should be directed not at staving off an inevitable correction in the overblown financial sector, but in assisting the economy recover (main street). Its main street that runs Wall street in the end.

    Additionally let superannuation savings be determined by individuals, not funds. How many ordinary people might have been better off paying off their mortgage before having their super directed to superannuation funds.

    More power also needs to be given to shareholders to limit executive excess remuneration. Surpluses of this size cannot continue to be withdrawn from company funds without peril to the company itself (and this is not helped by short term fly in fly out executives). It is collusion between short term managers acting in their own interests, rather than the interests of the shareholders, if the majority of shareholders do not approve a remuneration deal. This is not a free market solution but I cant see one possible when the bargaining power of management to approve excess is not matched by the bargaining power of shareholders to restrict misuse of their equity.

  31. observa
    November 10th, 2008 at 13:09 | #31

    Personally I think Alanna, et al are right in that the market is trying to clear but there is counterproductive and institutionalised resistance to that. How long politicians can make good guys of themselves with future taxation is anyone’s guess but the simple answer to that may lie in the scope of the problem now and the length and nature of its buildup. It doesn’t look good with the benifit of hindsight.

    It might be useful to reflect on the really big picture here. In the absence of some Divine, all knowing, global central banker with Goldilock’s ‘just right’ amount of money that we could all use prudently and wisely, not least to represent real forgone consumption and hence real investment, we had to rely on a raft of weaker beings, their offerings and rates of exchange. In that sense these mortal imitators were all intent on creating their ideal slice of mannah to facilitate their own particulat version of Heaven on earth. Calls for another Bretton Woods seem to indicate they failed and Gawdelpus now or where are the real priests?

    In the absence of a hotline to the Divine our mortals only had MV=PQ and an eye on goods and services inflation as their Bibles, although many were comfortable like ours to deliberately target 2-3% annual reductions in the value of their particular mannah. They couldn’t know what God knew about that MV=PQ and that in reality it consisted of a balance of two velocitys of circulation, one for the day to day exchange of goods and services and one for assets. To rely on day to day prices alone was to ignore any structural disharmony occurring, should they perhaps fail to heed his words and go forth and multiply. And God smiled knowingly and thought to himself perhaps they will see the error ways with the odd asset crash or two and work it out. Instead he watched aghast at the Devil’s work and Sodom and Gomorrah unfolding. So that’s why God gave them free markets to wash it all away?

    Yeah well, perhaps not, but perhaps the length and depth of central bankers trying to play God, coupled with a fair bit of human frailty has got us right up manure creek without any means of propulsion now. Normally money creation and a worsening balance of trade would see inflation rise and currency devalue, which should have occurred in most developed countries. Creating money does that but this time round an aging demographic tried to save for their retirement and started bidding up assets. That shouldn’t have lasted except for Asian savers jumping on board due to a lack of security in lending and institutional structures in their own backyard (God likes irony). Basically a lot of broke baby boomers with a lot of their productive capacity in China and India now, hoping their offspring will be able to work hard and unwind it all gently and quickly for them. Now that will be some bloody geat miracle for mine and Gen X,Y and Zee should beware false Gods here I reckon.

  32. observa
    November 10th, 2008 at 13:33 | #32

    Nothing summed up the problem better for me than the front page picture in the Weekend Oz of boomer Sallyanne Atkinson(former ABC Chairwoman) leaning wistfully on the front fence of her leafy burb house under the article caption ‘Gillard throws ABC $22m lifeline’.

    “I never thought it would come to this” says our Sally but the mini cartoon below is the absolute corker. It shows a somewhat stunned looking mum with babe in arms looking at a mini shop front with the ABC blocks and ATM on the hoarding above while below it are the buttons and screen showing ‘Insert baby here’ and alongside it a woman behind a counter with outsretched arms saying- ‘The government made us upgrade to a bank’

  33. Michael of Summer Hill
    November 10th, 2008 at 13:53 | #33

    John, if we are to remain a step ahead of the world then the government should have an industry policy whereby businesses are encourage to invest in real economic activity and hire employees on a full-time basis in return for tax breakes. Maybe that will generate new wealth.

  34. observa
    November 10th, 2008 at 14:18 | #34

    With those balnket deposit guarantees and no apparent lack of liquidity in the marketplace, it looks like the Rudd Govt have an ‘Industry Policy’ right now Michael, by all reports-

    “NAB will place shares with institutions at $20 each, after its offer was oversubscribed following “overwhelming” demand, the head of the bank’s Australian operations Ahmed Fahour said.
    NAB announced the $2 billion share placement to institutions and sophisticated investors earlier today.
    It took just one hour to build the book from the fixed price offer of $20 per share, said Mr Fahour.
    The pricing is equivalent to a 9.7 per cent discount to NAB’s closing share price on Friday of $22.15.
    The books closed at 12.30pm (AEDT) after NAB received a very strong response to the placement, which would allow the bank to pursue organic growth opportunities, Mr Fahour said.”

  35. Michael of Summer Hill
    November 10th, 2008 at 15:38 | #35

    John, if I may reply to Observa by saying if we can agree that no nation has ever printed its way to prosperity then governments need to introduce innovative solutions to stimulate economic growth and create new wealth for the herd-like mentality that continues to plague markets is not a good sign.

  36. November 10th, 2008 at 15:51 | #36

    From that Reason article:
    “…cutting capital gains taxes would allow for firms not under pressure from subprime-related losses to grow larger, creating a more competitive market”.
    A smaller number of larger firms is a more competitive market, according to Reason.
    Are these people blithering, idiots, or blithering idiots?

  37. melanie
    November 10th, 2008 at 21:12 | #37

    This may be a little OT, but it responds to some of the comments above. The Chinese have announced a 586 billion dollar stimulus package of investment in projects to create jobs in production of goods. This will probably do more good for the global economy in the longer term than the US bailout.

  38. observa
    November 10th, 2008 at 23:42 | #38

    Perhaps melanie, the world’s biggest predatory lenders are getting a bit nervous about all those IOUs they have on their books and want to call them in for some real returns now. Whaddya reckon we all cry foul and take them to the Hague for some welcome relief from unfair lending practices? Poetic justice if we stack the Court with lefty judges I reckon.

  39. observa
    November 11th, 2008 at 00:17 | #39

    Just thinking of some of Michael’s ‘innovative solutions to stimulate economic growth and create new wealth’. Bit of a nuanced approach. Some surreptitious diplomacy with Obama and NATO to stack the Court, whilst taking the public high moral ground with China and our burnable dirt naturally. Don’t want them sending the kneecappers round here.

  40. November 11th, 2008 at 11:39 | #40

    This does not directly address the subject but provides some relevant background that may help in assessing proposals put forward under this heading.

  41. Alanna
    November 11th, 2008 at 21:28 | #41

    John says

    “John, if we are to remain a step ahead of the world then the government should have an industry policy whereby businesses are encourage to invest in real economic activity and hire employees on a full-time basis in return for tax breaks. Maybe that will generate new wealth.”

    Well actually I suspect all the tax breaks for superannuation and financial investments may have created all hell in terms of speculation in financial assets like shares and investment properties – thats the trouble. What sounds like a good worthwhile idea for government investment in the private sector rapidly becomes a market to see which group can clamour loudly for the most breaks (like ten kids at dinner time) and the ratchet effect dictates that once absorbed into government processes and administrative protocols – government policy rarely recognises when its time to switch the drip off which has tissued in the vein, created a nasty bruise and led to congestive cardiac failure.

    Personally Im a bit inclined to think that government should forget trying to chase and cajole or manipulate private markets towards what used to be a government responsibility – the construction of useful social capital and essential services.

    However I do agree re the this suggestion of Johns – underemployment trend worrying – it can only ultimately drain demand.

  42. Alanna
    November 11th, 2008 at 21:40 | #42

    From that Reason article:
    “…cutting capital gains taxes would allow for firms not under pressure from subprime-related losses to grow larger, creating a more competitive market�.
    A smaller number of larger firms is a more competitive market, according to Reason.
    Are these people blithering, idiots, or blithering idiots?

    They are definitely blithering idiots.

    And this
    “NAB will place shares with institutions at $20 each, after its offer was oversubscribed following “overwhelming� demand, the head of the bank’s Australian operations Ahmed Fahour said.
    NAB announced the $2 billion share placement to institutions and sophisticated investors earlier today.
    It took just one hour to build the book from the fixed price offer of $20 per share, said Mr Fahour.

    Great so the large banks do business with the large funds and the small shareholders dont even get offers. I met one of those today and he was mightly ticked off as he could have had chance ti redeem some of his losses.

    Tighten seatbelts while these groups have a private party to gamble again (with other people’s money) and then hype us up to the next crash. How could so many have thought pe ratios in the clouds were real? When we have no taxes left to bail any firm out and the government is stripped and we are all too broke to save maybe the humility will arrive.

    Something seriously needs changing in the corporations legislation and there is no free market solution to that except for ordinary shareholders being fleeced.

  43. observa
    November 12th, 2008 at 11:36 | #43

    No Alanna the truth that- it is monetary expansion that causes the business cycle but real factors that constitute it, is staring us all in the face now. It’s an eery feeling watching the real economy crash around our ears now, knowing that all the kings horses and all the kings men can’t put Humpty together again, no matter how much they run about looking important and concerned.

    The die was cast a long time ago with slow inflation of money and that first pleasurable fix. It’s a beguiling drug that will inevitably result in increasing dependency and with it the need for ever more doses to placate the victims. More drug and more dependency with the odd bender and comedown along the way but heading for the ultimate breakdown as it warps all sense and reason but the hunt for the next quick fix. We can see it all around us with our Govts of dependence on taxation by stealth reduced to printing money and flinging it from the Treasury balconies and the great names of industry like GM and GE reduced to selling their bodies on the streets with their GMAC and GE genie money. The horrors of going cold turkey are upon us now.

    Naturally there are those that want to trot out the methadone now but it’s time to be cruel to be kind. Enough is enough of pandering to the sensitivities and depradations of these drug addicts and it’s time for some tough love from those of us who know better. If the drug addicts among us have nicked the silver and flogged it along with anything else lying around then it’s tough tits, kick them out and time to move on. We need to concentrate on the functional members of the family, rather than continue the hand wringing.

    In that sense more neo-Keynesian procrastination and obfuscation is nonsense. It’s what unleashed these Louis Leeches and Gordon Geckos on us in the first place by believing that well administered Govt consumption will fix all things. It’s true that much consumption is what drives producers to produce each day, providing it’s real and not legalised theft, but these NKs have a fundamental flaw in their makeup. They want you to believe that Photography Phil can walk into the Kodak shop in their Kodak world and ask the salesman for all the benefits of a digital camera because, ‘well wouldn’t it be nice?’ Yes you and I both wish, thinks the salesman to himself and why do I always get these tossers around closing time. Therein lies the flaw in NK thinking, because we know what it really takes to solve Photography Phil’s problem so to speak. It has nothing to do with the value of Phil’s house, share portfolio or the inflated fiat money in his pocket right then and there.

    $2bill raised by the NAB within an hour shows there’s no shortage of idle balances looking for a home now. Not until those idle balances and the grossly distorted asset prices that support them fall to a level where what’s left can find a safe home in real savings and investment, reward for true entrepreneurship, risk and innovation, will things start moving again. That should be obvious to us all watching NK headless chooks run about in ever diminishing circles as the lineup for bailouts grows ever longer by the hour. Methadone from helicopters for the baby boomer addicts, with their offspring to pick up the tab presumably or therapy sessions where they bury money and hand out shovels to dig up the wealth. Good old fiscal stimulus to calm the convulsive tremors.

    Powerless to unwind history now and cognisant of the fact that the car factories, equipment, houses etc, won’t suddenly evaporate like funny money is fast doing, we need to turn to the aftermath and preventing it from happening again. That means anchoring the banking money supply in something of real value and I’ve mentioned historical RE as an option for collateral. Clearly revolving consumer credit is most at risk here in the banking system and it should be removed longer term. As my grandparents knew, consumer credit is a one fix hit before interest kicks in, so it has no place in sensible money supply. In fact bank money should only be lent on realisable collateral, should our children be asked to guarantee a short term run on deposits. That way they can relatively safely back the money supply, whilst leaving the more adventurous to risk their real savings with the GE money genies if they so desire. As I pointed out previously we have the valuer general and every property owner to keep RE values constantly honest and then the computing can do the sums on just how much collateral backing the banks’ loan books have. It’s not that hard, once market forces have sorted out the malinvestments.

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