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 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 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.