Jan

19

The financial crisis has a number of causes including weaknesses and gaps in regulation and supervision. However, the idea of a growing government as a solution to problems created by greedy capitalists and bankers around the world looks too simplistic and has a bit of populism in it. There may be results in the short term, but in the longer term the issues will likely be more than the benefits with an expensive bill for the next generation of taxpayers and citizens. I am not referring specifically to the US, but also to Europe to some extent.

Real change would be first to understand weaknesses and challenges of our industrial, financial and social systems. The world is changing. There are new players in the game. And the relative importance and power of countries is changing with time, and accelerating. We should recognize this fact. This has consequences on our present and future ability to be innovative and competitive, on the possibility to maintain the same lifestyle in the future, the same welfare. This crisis has shown that the US is still vital and fundamental for the good of the world's economy, but it has also dramatically shown the increasing difficulties of the US in maintaining this leadership, which is not only economic, but also intellectual and political. After this crisis we cannot go back to business as usual and our countries will end up with more debt on their shoulders. We cannot solve the crisis just pumping government money in a model that is not working without doing anything to change it. We will only have crisis after crisis if we do not eliminate the roots of the problem. And the problem is that new players in the global economy produce goods cheaper than we do, that they are learning fast how to make high tech products and services, that they sell more than they buy. This is causing a fundamental imbalance in the global system that market forces should solve within a proper framework and set of rules provided by governments. Also we should probably all realize that may be we are living a standard that we cannot afford any more.

From a WSJ article:

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today: Galt: "You want me to be Economic Dictator?" Mr. Thompson: "Yes!" "And you'll obey any order I give?" "Implicitly!" "Then start by abolishing all income taxes." "Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?" "Fire your government employees." "Oh, no!" Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

Riz Din writes:

Not so long ago, I heard a pundit commenting on recent economic policy responses saying something along the lines of when the fires are raging, the first priority is to put them out, and to deal with the longer term implications later. Personally, I think it is better to sometimes let things burn and let nature take its course.

I agree that we are living a standard we cannot afford any more, but only in the sense that we may have 'brought forward' living standards by a few years and that we may have to contend with tougher times before the wheels of progress start spinning again. Indeed, while a part of me worries that all this policy meddling risks damaging the natural checks and balances of a free system, I am reminded of the old adage 'necessity is the mother of invention', and look forward to new discoveries being born from a period of relative hardship.

Duncan Coker adds:

Looking to history, in the 1930s all the programs rolled out by FDR did little to solve the Depression. There was even a mini Roosevelt depression within a Depression in 1937-38, four years after all the government action. What did get people back to work was arming for potential conflict, which added three million jobs in 1939-40 and continued through the horrible conflict to follow. All the FDR structural reforms played a bigger role a decade later, after the war, when security and arguably a more transparent system allowed for exponential growth for middle class incomes, housing and standards of living. I believe it will be the small businessman and entrepreneur that paves the way this time, really the only ones that can "create" jobs.


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7 Comments so far

  1. Dan Costin on January 19, 2009 6:04 pm

    If we let things burn and let nature take its course, we destroy civilization. We are where we are because we harnessed nature, not let it have its way. Nature gives us weeds, we pull them up. Nature gives us wolves, we shoot them down. Nature gives us floods, we dam her up. Nature gives us droughts, we make her clouds cry. Whatever the obstacle, we let our inventions loose on her. So here, too, we’ll do our best to fix things, not let our hard-earned billions go up in smoke. Otherwise what’s the point?

    If we’re living the standard, we can afford it. Maybe we’re borrowing against future progress, but we always have, and always will. Because we can think ahead, and that’s what makes us human. Living like we did 100 years ago, 1,000 years ago, 10,000 years ago? Maybe we can afford that. But if that’s all we wanted, we wouldn’t be here.

    All we can ask is that you let the ones who want to move ahead do so. Worry if you must.

  2. Gary Rogan on January 20, 2009 12:02 am

    As I have stated here before in the last few weeks, a complete worldwide economic collapse has become unavoidable. There is no way out, there are no realistic scenarios that avoid this outcome. The sooner there is a consensus that playing with shifting debt around is not going to solve the problem, the less dramatic this collapse will be.

  3. Craig Bowles on January 20, 2009 9:33 am

    Everyone is good natured when doing well but we really see our true character in the face of adversity. (Truely happy people are good natured whether in prison or on Park Ave.) Maybe that’s why golf is so popular as you get to know somebody more in 9 holes than in a hundred cocktail parties. Even communist China or Russia are excited about capitalism during good times but when it comes time for capitalism to work it’s true magic, everyone is bailing except for the true believers. It’s amazing that the U.S. is giving up on this core belief. At least one country should be a home for those who don’t want to live under socialism.

  4. Gary Rogan on January 20, 2009 3:14 pm

    There may not always be an England:

    http://www.telegraph.co.uk/comment/columnists/iainmartin/4295219/Gordon-Brown-brings-Britain-to-the-edge-of-bankruptcy.html

    The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

    The political impact will be seismic; anger will rage. The haunted looks on the faces of those in supporting roles, such as the Chancellor, suggest they have worked out that a tragedy is unfolding here. Gordon Brown is engaged no longer in a standard battle for re-election; instead he is fighting to avoid going down in history disgraced completely.

    This catastrophe happened on his watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections. Throughout, Brown boasted of the beauty of his regulatory structure, when those in charge of it were failing to ask the most basic questions of financial institutions. The same bankers Brown now claims to be angry with, he once wooed, traveling to the City to give speeches praising their "financial innovation".

  5. Gary Rogan on January 20, 2009 10:29 pm

    Palindrome is mostly right, but mostly too optimistic, or at least allows for a solution — but it's kinda like saying "if everyone had at least a million dollars we wouldn't have poverty": nice but deficient in real world applicability.

  6. George Parkanyi on January 21, 2009 11:01 pm

    Many people misunderstand capital. Even if all our dollars are rendered worthless, that does not change the fact that land, buildings, roads, the tools of our trades and above all, human ingenuity is still all there. (True capital) Dollars have no tangible value. (Zimbabwe dollars have even less). The Emperor never HAD any clothes - we just all mutually agree to see clothes where there actually are none. Money is just a scoring system to determine how much of my efforts and the fruits of my efforts I will trade for your efforts and the fruits of your efforts. People who think they have value in cash, CDs or bonds, or to a large extent stocks, and park all their lifetime accumulated efforts there would be big losers if that particular scoring system fails. (Unfortunately, as traders in electronic blips, it would also probably suck to be us in this scenario.) People who retain control of physical assets through simple possession or specialized knowledge would end up the winners. (Look at who’s rich today in the pieces of the old Soviet Union and its satellites. Typically, yesterday’s communists are today’s big capitalists.)

    If our currencies became worthless we would simply have to invent other media of exchange and new ways for re-mobilizing all the physical and intellectual capital that would still be there and at our disposal.

    The concept of the potlatch is actually quite interesting. ( http://en.wikipedia.org/wiki/Potlatch ) Purposeful wealth destruction had the social preventative/regenarative effect similar to say, fires deliberately set to prevent larger fires and/or regenerate land. The end of money, or the current form of it, is not necessarily the end of us.

    Cheers,
    George

  7. Gary Rogan on January 22, 2009 5:26 pm

    The problem with destroying scoring systems, or at least something that invariably happens along with such episodes, is that that the societal order crashes and burns. It pretty much has to, both as a cause and a consequence of something so serious. Usually there is a lot of shooting, fires, homelessness, and hunger that results. It becomes pretty much impossible for a large percentage of people to retain control of physical assets. The oligarchs or Russia simply outsmarted everyone else, and in many cases out-shot them too. They were not always yesterday's communists and to the extent that they are, which is more common now than in the early years, that was because as the ruling party communists were associated with armed elements, some of whom have managed to survive, and in one case even rise to the very top.

    We are facing a worldwide calamity unprecedented in peace time. Just as financial manias happen in good time, what I call "bad meme bubbles" happen to prosperous societies during long periods of relative calm: wrong ideas become accepted because applying them doesn't hurt enough to figure out they'r bad. During the rising tide even the overloaded boats stop scraping the bottom. Today really, really bad, long discredited and some brand new ideas are all the rage. Costly and massive cures to difficult problems are accepted simply because some guy says that's the way to do it. The "bad meme panic" will start when the destructive power of bad solutions as well the true extent of the problems become apparent. Through globalization the world has become a much tighter coupled, as well as a more complex, system than it used to. Local positive feedback loops are starting to shake the system, and the resonances in more distant parts from the points of origin are starting to appear. Like the doctors from the Middle Ages, the current shamans will apply more bleeding to the patient shaking uncontrollably after a little bleeding only makes him weaker, which they will explain as the consequence of the underlying disease. They will not stop until the patient dies either from the disease or their "cures".

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