Some Thoughts on the Recession

Much ink has been spilt on the current global economic crisis. I am no economist, so my contribution to the debate will depend largely on the thinking of others who are in fact trained economists and/or expert policy makers. While many differing opinions exist on this issue, I will here try to bring together some themes which a number of economists and analysts are running with.

The causes

The left is quite happy to claim this is the clear failure of capitalism, and that new government regulation is needed instantly. Kevin Rudd wrote a major article attacking the demon of neoliberalism, urging us to return to Keynes to make things right.

And American Republicans are constantly cited as the main culprits here. Never mind that the actual policies that have led to this financial meltdown in fact were initiated by Democratic administrations. As Australian economist Steven Kates explains,

“The major distortions in the American financial system, and the single most significant distortion in bank regulation in causing the boom to finally descend into bust, were the directions given by Congress to the American finance industry, and particularly to its federally legislated arms, Fannie Mae and Freddie Mac, to provide housing loans to those who would not normally qualify.

“This is government failure of the highest order. A banking institution needs to be prudent in its lending practices. For a government to insist that banks and other lenders ignore what their balance sheets tell them is to create the conditions for just the kind of downturn we find ourselves in the midst of. A bubble is in essence activity financed by rising asset prices. The moment prices of such assets stop rising, an actual collapse in prices looms into view. The more that prices have been bid up by considerations of speculative future gains, the greater the subsequent fall. It was the flooding of money into the housing industry under government directive that caused this problem and has directly led to the painful readjustments which must now take place.”

And writing in today’s Australian, Giles Auty makes similar claims. He is worth quoting at length: “Outside proponents of big and interfering government and whatever else social democracy could be held to stand for, it is widely accepted that the real cause of the present world economic crisis was due to an excess of American government interference with the normal workings of the marketplace rather than the reverse.

“The clearest and most complete exposition on this subject I have encountered thus far is provided by Claudio Veliz and graces the April edition of Quadrant. This article should be made available to every household in Australia so that a gross distortion of history is prevented from forming.

“I cannot aspire to paraphrase such an elegant writer as Veliz but what his basic thesis does more than suggest is that the true genesis of the present crisis is the powerful pressures placed by successive American governments on financial institutions to provide housing loans to the sort of people least able to service or repay them. Banks unwilling to succumb to such sanctimonious pressures were then subjected to damaging sanctions in the event of non-compliance.

“In Veliz’s own elegant prose: ‘It was mainly with this anomaly in mind that the 1977 Community Reinvestment Act was passed, specifically to require “depository institutions to meet the credit needs of lower-income neighbourhoods” in the districts in which they operated and from which they derived most of their deposits. This act was then joyfully signed into law by president Jimmy Carter on October 12, 1977, but as banks tended to remain unmoved by politically inspired exhortations to make their clients’ money available in the form of mortgages unlikely ever to be repaid, a number of revisions subsequently were aimed at strengthening the enforcement authority of the state regulators.

“‘It then became possible formally to deny a bank’s application to expand operations, consolidate branches or merge with other financial entities unless it fully complied with the requirements of the act. Under president Bill Clinton, in 1999, this assessment became simply numerical, based strictly on the total number and amount of mortgages extended to applicants rated according to race, income level and neighbourhood; the bigger the amount mortgaged to the least creditworthy applicants, the better for the bank’s prospects of being favourably viewed by the state financial regulators.’

“Despite the claims of Gordon Brown, Barack Obama and Rudd that they are contributing to the foundation of a new and fairer world order, it was, in fact, misplaced and financially irresponsible attempts at egalitarianism that hurled the world into its present crisis.”

The solutions

The current wisdom seems to be that we can simply spend our way out of recession. This is the Keynesian solution. Even the old ploy of printing more money has been occurring in some nations. Around the Western world government bailouts (with taxpayer’s money) are the order of the day. Thus the Australian Prime Minister has gone on a spending spree with his various stimulus packages. This mainly is taking the form of cheques delivered to many Australian households, along with various infrastructure projects.

Several questions arise as to how much good all this will do. Three issues come to mind. One has to do with how we spend the money we get from the government (which was given to the government by us taxpayers in the first place!). Here is how one wit looked at the issue:

“Below is some helpful advice on how to best help the Australian economy by spending your stimulus cheque wisely:
If you spend that money at Kmart, all the money will go to China .
If you spend it on petrol it will go to the Arabs.
If you purchase a computer it will go to India.
If you buy a car it will go to Japan.
If you purchase useless crap it will go to Taiwan.
And none of it will help the Australian economy.
We need to keep that money here in Australia. You can keep the money in Australia by spending it at garage sales, going to a cricket match or footy game, or spend it on prostitutes, beer and wine (domestic ONLY), or tattoos, since those are the only businesses that may still be owned by Aussies.”

Second, as an article in yesterday’s press noted, this will put the country into big debt. It will take 20 years to pay back the debt resulting from this spending spree. The article says “An analysis shows converting a $22 billion surplus into a likely budget deficit of between $35 and $50 billion will leave Australia deeply in debt.” The “Rudd Government has signed off on another $1.5 billion of infrastructure projects in a bid to keep the economy afloat. Cabinet sources yesterday confirmed 137 projects across the country had now been approved for immediate roll out.”

Third, as Kates argues, this policy has historically been shown to be a loser. It will do little to restore productivity. He is also worth quoting at length: “And with this $42 billion package we are heading deep into deficit. We are racking up massive levels of debt in a previously debt-free economy. And for what? To insulate our houses and build new libraries for our schools.

“The stunning lack of imagination is possibly the most astonishing part about the stimulus. Even if I thought it would do some overall economic good, which I don’t, are these really the priority issues for the country? Is there really nothing better we can throw $42 billion at? For all the Prime Minister’s criticisms of neo-liberal economists, is this really the best we can do?

“The idea that building better schools will add to Australian productivity in anything other than the longest of runs is one of those nonsensical ideas that have been bequeathed to us by Keynesian economics. According to Keynesian theory, it is the spending itself that supposedly causes growth, not the value created by the outputs of the economic activity. We will chew up many billions of dollars of existing value to improve our schools, but when will we get the payoff? Even if we ultimately make every one of our sixteen-year-olds 20 per cent more productive because of all this expenditure, when is the soonest we can get the productive dividend? In twenty years, perhaps, but no sooner than ten.

“In the meantime it is money spent that adds nothing to our productive capacity while adding huge amounts to our national level of debt. Not till those sixteen-year-olds are out there in the workforce and pulling their economic weight will we have the additional wherewithal to pay off the debts we are accumulating now. Until then, we pay the billions of dollars of interest. And that, of course, assumes we actually do end up making our workforce more productive because of these outlays today.

“It is pointless to go on. If you are of the opinion that we can make ourselves richer by having each of us write ourselves a cheque, then there is nothing more to be said. Perhaps we have become so wealthy that we can take a huge proportion of our annual output and sink it into the sea without serious misadventure. But however you look at it, that is what is happening. We are taking our productive capabilities and directing them into dead ends and dark corners. It is a terrible waste. If you really were worried about the poor and the disadvantaged, the low-paid and the unemployed, this is not how you should go about giving them jobs, adding to their wealth and improving their lives.”

All in all, economists will have different understandings of what are the causes of the financial mess and how to get out of it, but one can ask whether simply throwing money at the problem is really the way to fix it. At least in the eyes of some authorities, this will in fact simply make things worse. But the debate will likely continue.

www.quadrant.org.au/magazine/issue/2009/4/reflections-of-a-neo-liberal www.theaustralian.news.com.au/story/0,25197,25389256-7583,00.html
www.news.com.au/heraldsun/story/0,21985,25385829-662,00.html
www.quadrant.org.au/magazine/issue/2009/4/george-bush-and-history-s-croakers

[1674 words]

23 Replies to “Some Thoughts on the Recession”

  1. Perhaps I can be the first off the mark here. In addition to the many complex economic questions, one can also ask whether Mr Rudd personally is doing much to help during the crisis. Recent media reports have documented how he is fussing about what meals he is getting on planes, demanding full service meals even on half hour flights. And it was revealed that he has very lavish tastes elsewhere: he demands expensive gourmet foods while at The Lodge, including such delicacies as fancy French cheese at $128 a kilo. And in today’s news it is reported that he will not block a $90-a-week pay rise for politicians. He lectures the nation about tightening the belt in times of economic hardship, yet his personal life seems to provide a somewhat different story.

    Bill Muehlenberg, CultureWatch

  2. Well put Bill, thank you.

    My question is this: If this is a global economic crisis, who exactly are we borrowing this money from? If everyone is doing economic stimulus from debt, how is this different from printing money, but on a global scale?

    God Bless,
    Michael Hutton, Ariah Park

  3. My favourite banner from the recent TEA (taxed enough already) parties in the USA (scurrilously covered or ignored by the mainstream media) was this:

    You can’t borrow yourself rich.

    If it doesn’t apply to individuals, it won’t apply to the government. I’m no economist either Bill, but I think by now I’ve figured out that if you borrow money, you have to be able to pay it back.

    Can I ask a stupid question here? What happens to a country if a government goes bankrupt?

    Mark Rabich

  4. Thanks Michael and Mark

    Part of the answer to your questions is to simply look at what is happening in Zimbabwe. I was recently shown a bank note from there. Because of hyper-inflation there was almost not enough room on the note to place all the zeros. If I recall it was $100 trillion note!

    A Wikipedia article says this: “Figures from November 2008 estimated Zimbabwe’s annual inflation rate at 89.7 sextillion (10 to the 21st) percent (i.e. prices double every 24.7 hours). In April 2009, Zimbabwe abandoned printing of the Zimbabwean dollar, and the South African rand and US dollar became the standard currencies for exchange.”

    Bill Muehlenberg, CultureWatch

  5. But Bill, what else is news? Lefties are generous only with other people’s money. The ones in power live in luxury while the masses live in “equality” — of poverty as Churchill put it. Think of all the global warm-mongers who fly in CO2-spewing private jets and live in energy-guzzling mansions.
    Jonathan Sarfati, Brisbane

  6. I know one is not suppose to do this, but I cannot help comparing KRudd with John Curtin,our wartime PM. He was awake at nights when Australian divisions were returning from Africa to be sent into PNG. He and Ben Chifley and Menzies never lived it up such as Gough or Rudd have done.

    What did they get for their service to this country? Curtin died two months after Roosevelt, from heart failure. Chifley lived in a hotel when in Canberra and died of a heart attack whilst Opposition Leader and Menzies spent the bulk of his retirement in an aged care hospital due to suffering a stroke. Yet one wonders if Rudd the “Christian” really appreciates the blood, sweat and tears of these his predecessors, and the sacrifices they made.

    Wayne Pelling

  7. Michael Hutton asks: “My question is this: If this is a global economic crisis, who exactly are we borrowing this money from? If everyone is doing economic stimulus from debt, how is this different from printing money, but on a global scale?”

    This article explains from where Rudd is borrowing the money and the likely ramifications: http://www.newsweekly.com.au/articles/2009apr18_cover2.html

    It begins, “Australia is currently borrowing $500 million per week from Beijing. If the worsening economic crisis causes Australia to become dependent on China for the refinancing of our nation’s $658 billion net foreign debt (about 60 per cent of our GDP), then Beijing may well demand a controlling interest in Rio Tinto in exchange.”

    John McMahon, Qld

  8. Here’s another aspect:

    The stimulus packages are being pushed to stimulate cashflow, spending, right? We *want* people to spend money, for money to be circulating rather than stagnating, so…

    Can the media STOP harping on about the ‘global financial crisis’? I am not opting for censorship, but a little less sensationalization/whatever could do a lot of good if ‘getting people to spend’ is the solution we’re aiming at.

    I think this is actually a case where ‘closing our eyes’ may help a tad (economists feel free to reveal holes in this assumption).

    Tristan Ingle, Sydney

  9. Quite correct, Tristan.

    All that the “global financial crisis” news does is persuade people to fear for their futures, and contract their spending to the bare essentials.

    John Angelico

  10. Bill,
    Thank you for posting on this issue. Let me offer some observations:
    1. you omitted the nefarious role of an organisation like ACORN in the whole lending/borrowing mess. This reprehensible crowd, who incidentally organised massive voter fraud in last year’s election, would invade boardrooms and executive offices, and use many other rabble-rousing stratagems to intimidate banks and lending institutions into giving out shonky loans.- all on the pretext of making loans available to “the poor” whose cause the left professes to champion.
    2. The revealed fact is that on Sept.18th last, when the crisis first broke, Federal Reserve officials noticed at about 11am that morning local time that money in prodigious quantities was being steadily emptied out of the U.S. banks and financial institutions such that if allowed to continue at the same rate the entire country would have been bankrupt by between 4 and 5 pm! Hence the Federal Reserve quickly stepped in to freeze the flow, so to speak. Already, however, considerable damage had been done. This was confirmed by Henry Paulson and other top level officials in the Federal Reserve, but only revealed by a Senator on a local television station in Pennsylvania, as I recall. I think Fox News ran with it, but otherwise only the conservative blogs have carried the story. Again, a massive media cover-up to protect their endorsed candidate, Obama. The question is, Who was behind this? There are various theories, but the finger points to George Soros and his acolytes in my view.
    3. You have discussed the Keynes theory. His ideas are behind this economic madness: the idea that somehow a nation can spend itself rich! I am glad to say that at least many Americans see this “stimulus package” for the lunacy that it is, and came out in droves to the tea parties on April 15th. However, Australians are more eager to accept this sort of thing, not thinking about where this money is coming from. Would that there were tea party rallies here too, but this has not eventuated.
    Where is the money coming from? In short, China. Apart from that source, the good old Labor resort, the printing press. Just a reminder, folks; neither paper nor plastic is worth a cracker!!
    Rudd and Co. seem to believe that they can repeal the laws of economics at a stroke! If your household is short of cash, do you go out and borrow massively, then splash the money around? Of course not! Why then does Rudd believe the government can? Because somehow he has got it into his noggin that what is true on a small scale is not true on a large scale, contrary to basic economic axioms.
    Our children and grandchildren will have to pay for this lunacy. That’s why Sen. John McCain called the American equivalent “generational theft”.
    Murray Adamthwaite

  11. You are selling yourself short here Bill. One does not have to be a ‘trained economist’ but simply be in possession of a minimum of common sense to recognise the reckless absurdity of the Rudd spending spree. Has there been even one Rudd government policy initiative that has been for the betterment of the common good? I think not, and yet I remember a great many Christians helped vote him into office.

    Ewan McDonald.

  12. Bill I wish you could be heard from the treetops.

    I have always believed that Labor makes every one the lowest common denominator, and we are certainly heading that way. The lunacy of the left. I cannot understand why Australians don’t rise up and protect themselves. We could loose our soverntry over all this debt and borrowing. Its insane. I cannot believe the waste of money that is going out at this time if 60% of the work force is employed by small business why arn’t they being helped with loans – sensible loans – and those who have lost their jobs should have some mortgage relief for a while. Are we becoming so selfish that we don’t want to support each other in crisis? As for education, the billions that will go into making nicer schools when we can’t afford it is crazy. When all is said and done it is the influence of the teacher that makes all the difference.

    Rhonda Jaunitis

  13. Bill

    From what I remember about that Quadrant edition there were quotes from Keynes where even he disowned the gov’t spending deficit methods to revive the economy.

    Australia ought to take its lessons from Japan. During the 90’s the Japanese tried to spend Billions on infrastructure to get out of recession to no effect;

    http://www.heritage.org/Research/Economy/bg2222.cfm

    It seems to me that the new NZ prime minister is more restrained than ours.

    Damien Spillane

  14. I think giving money to people is a completely nuts idea.

    The problem is people lose their jobs, so the government supports them.

    Then the companies don’t get any support and run out of money, so more people lose their jobs, the government supports these people.

    Then more companies run out of money caus they aren’t getting any support etc etc.

    It’s a vicious cycle and if the government doesn’t wake up soon half of Australia is going to be unemployed. They should be helping companies in Australia who can then support the people themselves and everyone wins, people keep their jobs and companies keep on trucking.

    Of course if a company is losing money hand over fist and hasn’t done anything about it they shouldn’t get a bailout, sometimes some companies are just supposed to die because the market can’t support them.

    Tim Robinson

  15. Peter Costello, who is actually opposing, warns Enjoy Mr Rudd’s largesse now — it’ll hurt later

    A typical family of mum, dad and two children would by now have received two $1000 bonuses — one for each of the children — and $900 if dad’s income was below $80,000. That’s $2900 since October last year: enough to get a pretty nice home entertainment system.

    And there’s no repayment? Well, actually, the Government borrowed this money so it will have to make the interest payments to the lenders. And since it gets all its money from taxpayers, it’s the taxpayers who will foot the interest bill. In the next two years the Government will increase net debt from zero (the position it inherited in 2007) to about $200 billion. In round figures, that’s $10,000 for each of our citizens and $40,000 for our family of four. At today’s low interest rates, that’s a bill of about $2000 a year for our typical family…

    Today’s one-off payments of $2900 are going to look feeble compensation against an interest bill that could last for 10 or 20 years.

    Jonathan Sarfati, Brisbane

  16. One of my jobs is in debt collection at a large, well known financial institution (not Australian owned). I call anywhere between 15-20 clients within one hour. Many dont pick up the phone because they are so far behind they cant pay and cant bear to face the fact that they cant pay their debts. The ones who answer are the ones that have made me realise what “economic crisis” means for us lay people. Hearing the farmers who cant pay for their tractors due to the drought is heart-breaking enough… but most calls are people like you and I who have been made redundant in this so-called “crisis”. So many people have lost their jobs and comment how hard it is out there at the moment to find any work. Centrelink doesnt cover rent, food and debts people. Furthermore, with the last stimulus package, as well as this current one, I hear the same story – “As soon as I get the government package I’ll put it on my account” I dont know much about the economy, or politics… But I do know that Aussies arent stupid. Many Aussies will use the money to pay off their debts so they dont get burnt in a recession. Its common sense really. Dont pay, you lose your car, your house, whatever your loan was for – and without a job, how do you replace these things and support your family? Then on top when you dont pay your debts you could wind up with a default and then what? No more loans for you – and the government expects people to go out and buy a new TV instead?
    Catherine Pym

  17. Howard blasts Rudd’s spending
    Andrew Bolt, 1 May 2009

    John Howard says Kevin Rudd is spending too much, and on giveaways that will not work. Singling out Australia, as well as Britain, he tells NRO television:

    I worry about any government which goes too heavily into debt… They are spending too much… You are putting a burden on future generations…I’m unconvinced that a lot of this fiscal stimulus is going to add to economic activity.

    And spending on cash giveaways — $23 billion worth, in Rudd’s case — is dumb:

    I, for example, have real reservations about just sending cheques through the mail to each and everyone.

    To start with, if I got a cheque from the government at the present time and I had a lot of debt, I wouldn’t spend it. I’d use it to pay down the debt. And that’s what we were taught by our parents. I mean, so much of what is being exhorted to people at the moment by governments all around the word is counter intuitive. When things are difficult, you conserve, you don’t go out and splash.

    Howard’s alternative is what I’ve long argued here — some deficit spending, but smaller; more investment in infrastructure that makes us more productive; and deregulation. Payroll tax, anti-employment regulation, “stupid unfair dismissal laws” — “they’re the sort of things you should get rid of’’, Howard says.

    Jonathan Sarfati, Brisbane

  18. From Congressman Jack Kemp (1935–2009), one of the major architects of the Reagan revolution that rescued America from the 1970s stagflation and its exploding crime, welfare rolls, and lines around the block for petrol:

    “As the GOP stumbles around Washington trying to be the party of Herbert Hoover, it’s sad to see so many Republicans drifting so far and so fast from the Reagan model that helped pave the way for the great, non-inflationary economic and jobs expansion of the past 25 years.”

    “Democrats are quick to draw parallels with the stock-market crash of 1929. The irony is that it’s mostly the Democrats who want to repeat the mistakes that turned the Crash of ‘29 into the Great Depression.”

    “The first order of business must be debunking the Democrats’ notion that higher taxes will lead to a more prosperous America.”

    “When you tax something you get less of it, and when you reward something you get more of it.”

    “Our friends in the other party say the economy is moving forward, and it is. But it is moving like a ship dragging an anchor, the anchor of high taxes, excessive regulation and big government.”

    Jonathan Sarfati, Brisbane

  19. What a terrible” worry” for our children! Kevin “747” is only interested in one person, “himself!” How stupid! Obama & Rudd (I believe!) will be remembered as two of the “most incompetent” leaders of our time!
    Jane Byrne

  20. The Financial Crisis, Free Markets, and the Nirvana Fallacy
    David Bernstein, 27 May 2009

    I’m sure everyone has seen various op-eds, blog posts, and so forth proclaiming that the financial crisis shows that capitalism can’t be left “unregulated”, and that the end of “free market ideology” is nigh.

    It seems obvious to me, though, that critics are comparing markets (which were far from unregulated) to a hypothetical, rational, efficient, regulatory system, which is a classic nirvana fallacy.

    I won’t dispute that many market actors–banks, bond rating agencies, mortgage companies, etc.–hardly acquitted themselves well during the housing bubble and resulting financial crash. But exactly which government actors acquitted themselves well? The public-private Fannie and Freddie Frankensteins, which helped inflate the bubble and whose bailouts will cost taxpayers tens of billions of dollars? The Treasury Department, which failed to do anything proactive to prevent the crisis, and ultimate whose reaction to it under Paulsen ranged from subdued panic to hyperactive panic? The Federal Reserve, whose monetary policies were probably the biggest villain in the whole fiasco, and whose chairman famously argued, absurdly, that housing prices nationwide could not go down because they never had before (and even more absurdly based his policies on such nonsense)? Congress, which pushed Fannie and Freddie to make ever more risky loans, berated (and regulated) financial companies for not generously lending to subprime borrowers, and not only prevented the Bush Administration from reforming Fannie and Freddie but gave them even more lending authority just as the crisis was emerging? And which then passed a “stimulus” bill full of longstanding Democratic priorities but rather short on actual stimulus? State and local governments, which spent lavishly when bubble-related tax revenues were way up, and almost none of which prudently planned for the bubble’s bursting? And which bought into the “everyone should own a house mentality” to the extent that they were disinclined to use their existing regulatory powers to rein in crazy mortgage practices (like 0 down, option arms to insolvent borrowers) and indeed barely prosecuted rampant bubble-time mortgage fraud?

    Sure, if you compare actual market actors to imaginary perfect government officials, government is going to come out looking like a mighty good alternative. But if you compare actual market actors to actual government actors, it hardly seems that the financial crisis shows the latter’s superiority to the former, nor does it support the idea that turning over more and more of the economy to the tender mercies of government regulation is likely to benefit the public.

    Jonathan Sarfati, Brisbane

  21. A lot of the spending has proven fruitless because both sides of politics have gone along with liberalism in economics over the past 40 years. It is not only the Left but also liberalism whic is used also by the Right.
    Privatisations throughout the Western world and industries going to the third world have drained our currencies, and caused enemployment outside of major cities. In a downturn or full blown recession ( or coming Depression) unemployment and poverty in the first world nations like the USA, Australia etc will be worsened.
    I not only blame the Left and socialism but also I blame liberals ( whom many forget have given us the economics of privatisations, offshoring etc these past 40 years).
    Employment boom years and good times for my parents and for myself up until the mid 1980s was due to the pre liberal economic policy years when we still had the Commonwealth Bank, electricity and many other goodies either in govt hands on our behalf but also good regualtions with real teeth against the speculators and shylocks who now control our workplaces.
    Michael Webb

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