As the recessions all over the world grow progressively worse, the cry for bailouts grow ever louder as the realisation that a worldwide depression is imminent yet the proposed solutions are becoming more and more Marxist.It's a beauty and worth a full read.
Throughout the world, Marxist bailouts are being pushed forward without a single thought given to the possibility that it has been ever increasing Marxist Economics that has brought the world to the brink of economic collapse, exactly as happened in the 30's. Capitalism is and will get the blame for the disaster that is about to befall us all. But it shouldn't.
We are rapidly advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on permanent Boom Times to mask a lack of democratic legitimacy are now trying to gain time by the usual Marxist methods: Trade barriers, saber-rattling, barbed wire, Marshall Law and probably War.
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost of at least 2% of world's GDP to "prevent global depression". "If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear."
Has anybody bothered to stop and think long enough to ask the question: How did we get here? There seems to be consensus that our problems were caused by a combination of seemingly unrelated factors such as: (1) the FED flooding the economy with too much money and too low interest rates, leading to, (2) Too lax lending requirements as well as a complete lack of risk assessment. What else can we expect when you flood the banks and quasi bank lending institutions, whose job is to lend, with oodles of excess reserves? (3) Then we had the unintended consequences of government interference in the financial structure of the economy such as the (a) Deregulation by the elimination of Glass-Steagle, (b) the Community Reinvestment Act and (c) the moral suasion to give no money down, interest rate only liar loans in the government's attempt to spread home ownership to the lower classes. (d) Ever increasing government rules and regulations and (e) an ever increasingly complex tax system, some of which expires by the end of the year, so that entrepreneurs and businesses are not sure where they stand. Last but far from least, (e) limiting executive compensation: the salary cap of $1 million on Corporate tax deductions, led to the reliance on options as the preferred means of compensation and the associated stock manipulation and deal making instead of internal growth that followed (like buying back stock and using borrowed money at the all time high so they could show increased earnings per share and drive the stock price higher).
The second can be found here. Again some snippets:
On several occasions of late, I have read or heard the phrase, "We are all Keynesians now," an erudite way of expressing the idea that the free market is dead. And that the fate of the global economy now relies almost entirely on pragmatic measures yet to be taken by governments, most notably that of the United States.
Given that the word "pragmatic" is often used to describe President Obama, it appears that the man of the hour has arrived just in the nick of time. Not to be a spoilsport, but there is much wrong with this latest entry in the thick and well-worn journal labeled "Popular Delusions."
First and foremost, the idea that the world's largest debtor nation should be stood up as role model is laughable. That is like hiring the town's serial bankrupt to run the bank. Putting aside the irony, the inherent conflict of interest destroys any U.S. credibility as an honest broker in the current scenario.
Secondly, while the incoming team has done a superior job of spinning pragmatism into the Obama brand, it is another thing altogether to actually demonstrate the quality when the shoe leather hits the fast-moving pavement.
And, if you think about it, even the word defies definition. I have heard Obama supporters comment lately that "if the private sector won't spend money, then the government has to." Like beauty, pragmatism, it seems, is in the eye of the beholder. In the current context, what Team Obama might consider pragmatic - soaking the successful, slapping on an energy tax, revving up the money engines ever higher - might be considered by others to be very un-pragmatic.
Even so, adopting the optimistic spirit of America's new era, we'll credit the incoming president and all those who surround him as pragmatics, in the sense that they are the best sort of men and women who can be counted on to make intelligent and, well, pragmatic choices in the face of a rapidly eroding global economy.
Unfortunately, no sooner do we hand Team Obama a laurel than we have to point out a rather large and ugly fly in the otherwise nicely scented ointment. It is this: if the word pragmatic isn't used as an adjective in direct association with the word "dictator," then it becomes all but meaningless.
That's because even if Mr. Obama is a pragmatic, the same can hardly be said of the American public, which, according to the law of the land, are the purported owners and - through the ballot - operators of the economy.
To use one easily understood example, a pragmatic president might look at the insurmountable obligations hanging over the Social Security program and decide that, at the least, some form of means testing might be applied to recipients. But the voting bloc of American elderly, readily ginned up into an elevated emotional state by the AARP and other special-interest groups, assures that anyone proposing even modest modifications to the program will be loudly shouted down and find themselves in heavy waters come the next election.
And I'm not referring just to the next presidential election cycle, which won't kick off for another two years… but to the next congressional election of November 2010, less than two years hence. In that election, 1/3 of the Senate and 100% of the House of Representatives will be up for grabs.
What can Key and Co. learn from this? First, let the market fail. It needs to fail and resurrect itself. Bailouts are simply a bandaid solution for a broken bone problem. Second, Bollard should raise the OCR by 200 basis points on each of the next two occasions. Cutting the OCR may be a common solution but we are not facing a common problem. If Bollard raised the OCR to 8% we would see massive overseas funds into NZ allowing our banks to lend again. Dropping the OCR is doing nothing because the consumers who wish to borrow cheap money are not able to as their is no money to lend as the banks aren't lending to each other: there is no money. Raising the OCR would allow lending as overseas investors flood our economy with money. Unusual? Yes. But so is the problem. Third, our politicians should remove the politics from the current crisis. By politicising economics perfectly legitimate solutions may be ignored.
I laugh out loud when I hear there will be an export led recovery in 2010 due to our low dollar. That won't happen. I repeat. That won't happen. Firstly, protectionism will become more common - we are already seeing it in Europe. Secondly, no country in the World will be buying our goods as no country has an economy that can afford to.
Every forecast Key et al has received has been progressively worse. First, the PREFU was shocking. Then the minister's incoming briefing was worse than that. And just last week the latest business confidence survey was even worse again with GDP next year predicted to be zero.
Extraordinary times call for extraordinary measures. Bill English, John Key, Mark Weldon et al must throw the text book out the door on this economy and do some extremely bold and unusual things.
For starters they should all read Gold-Eagle daily. These guys have been predicting a meltdown for five years (as long as I have been reading the site) and they have been spot on so far. There is no reason to doubt them going forward and their commentary should be taken heed of.