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August 10, 2007
I just love classical liberals. They construct their elegant theorems from human nature to show that the good government depends on the functions of government being minimal---strictly confined to ensuring security of life, liberty and property--and that other functions, such as the redistribution of wealth, are morally impermissible. So is the welfare state as it represents gargantuan government.
So how are global markets to be governed? We have a global market turmoil turning ugly today forcing the ECB and the Fed and central banks in Japan and Australia to inject liquidity--$100's of billions--- in the financial system. The concerns about subprime mortgages, credit and debt have turned into a full blown liquidity run and crisis. Liquidity is drying up and cash rates are soaring. So the central banks are pumping in lots of cash .
In my understanding that kind of intervention into free markets to address toxic debt---is not warranted by classical liberalism. So how would classical liberalism deal with this kind of turmoil? Talk in terms of market corrections? Market corrections of a high base. They ---Peter Costello--is referring to the falls in the stock markets, and he says that the sub-prime market does not affect Australia. What we have is just normal central bank operations.
On that scale? Give me a break. This global market turmoil is more than a liquidity crisis. It looks as if classical liberalism is going to be mugged by economic reality.
Is the global market turmoil a situation where the risks of a systemic crisis continue to rise. Presumably, the liquidity injections and lender of last resort are designed to bail out insolvent borrowers - however necessary and unavoidable during a liquidity panic. Will they work? Or will they only postpone and exacerbate the eventual and unavoidable insolvencies?
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Gary
Chris Aylmer, the deputy head of the Reserve Bank's financial stability department, told a House of Representatives Economics Committee that the growth in Australia's debt was unsustainable as the share slide was happening. He that at some point the growth in debt levels would have to stop and banks would restrict lending. "It can't continue to grow the way it has," he said.
Earlier, University of Western Sydney economist Steve Keen told the House of Representatives Economics Committee, which is enquiring into loan lending practices and processes that if the ratio of debt to gross domestic product kept rising at current rates, by 2040 the interest bill would swallow up our entire GDP.
In the year to June alone, Australians went another $215 billion into debt. Household debt has soared from 45 per cent of disposable income in 1987 to 75 per cent in 1997 to 160 per cent now.
Professor Keen said Australia was heading towards a crisis. "It is an unsustainable trend," he said, warning that Australia could go into recession.