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no worries mate « Previous | |Next »
April 2, 2008

The economic pundits at the New Agenda for Prosperity were saying that Australia's economy is booming, will continue to boom, and that China and India's demand for minerals will see Australia through the recession in the US and the downturn in the global economy. This is the decoupling thesis and it is strongly held amongst Australian economists.

Australia's problems are held to be primarily inflationary ones. The short-term policy agenda is dampening demand, whilst the long-term policy agenda is Treasury's scenario of addressing of productivity, participation and population growth to make the economy more productive, efficient and internationally competitive.

This national discourse does not address the way the most severe and still ongoing –financial crisis in the U.S. since the Great Depression highlights the need to reform the financial architecture of the global economy. The U.S. Treasury Secretary Paulson's proposals for the reform of the financial system compare with the principles and ideas for optimal financial regulation and supervision represent a step forward.

However, they overemphasize the role of self-regulation, market discipline and reliance on principles rather than rules that have miserably failed to deliver an appropriate regulation and supervision of the financial system.

We have the biggest financial crisis in the U.S. since the Great Depression and the US Treasury is talking in terms of Wall Street self-regulating. Wall Street claims that too-harsh regulation would leave them hamstrung against countries with lighter-touch regulatory regimes. So the US Treasury protects Wall Street from ia reinvigorated London market and the emerging centres of financial power in Asia. The ancien regime re-emerges more or less intact.Great.

What the decoupling thesis ignores is that a recession in the US with its waves of firms collapsing, declining corporate profits, redunancies, and spillovers into consumer markets is less demand for Chinese exports amongst US consumers shopping at Wal-Mart That means closed production lines in China, despite the growing internal demand. That means less demand for Australia's raw resources.

| Posted by Gary Sauer-Thompson at 7:11 AM | | Comments (6)
Comments

Comments

Gary,
I see that the Reserve Bank is patting itself on the back. It's monetary policy appears to have dampened demand and eased price pressures. There is growing evidence of domestic demand moderating and signs of lower economic growth etc etc.

So it is a 'no worries' scenario. The global economy economy is "slowing down" and global financial markets are" fragile" but commodity exports to China will boom with increased prices. It implies that East Asia's growth will would only suffer a slight slowdown as a result of recession in the US.

Peter
US Treasury Secretary Paulson may describe his "Blueprint for Regulatory Reform" as the biggest overhaul of the US regulatory system since the Great Depression, but it has little chance of getting up. Paulson is still out there defending market mechanisms against criticisms of failure. Amazing.

The Democrats have blasted the plan as inadequate in regulating a dysfunctional system and the Republicans will lose the White House to the Democrats. Financial deregulation and the magical belief in the power of the market will be challenged by the Democrats.They are less easily fooled by Wall Street spin that covers over the systemic problems.

As Paul Krugman points out in the New York Times Paulson is giving the appearance of responding to the current crisis. He's not going to do anything substantive about governance of financial markets.

Gary
I know nothing about global financial markets. It's another language to me. I find it very hard going especially the op-eds by the finance crowd in the Financial Times you link to. I read Krugman's Dilbert Strategy article. I was suprised how clear he was:

The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators.

To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake.

Krugman understands economics and politics.

Nan,
yes Krugman has transfomed into a political economist.They were supposed to have died out with the mathematical turn in economics. This paragraph is interesting in its evaluation of Paulson's Blueprint for Regulatory Reform:

So, will the administration’s plan succeed? I’m not asking whether it will succeed in preventing future financial crises — that’s not its purpose. The question, instead, is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform.

He understands the Republicans all too well.

Gary

I see the recent troubles as the first real post-cold war sign of the fragility of the unfettered mrkets and laissez-faire economic doctrine. It would seem that the invisible hand is a much more blunt instrument than the neo-liberal acolytes would have us believe.

To me the central flaw is neatly illustrated by the this: a major factor in the sub-prime crisis that has recipitated this was that agents selling these home-loans were working on strong financial incentives without any responsibiity for future repercussions. Getting the deal was all they cared about; what happened to the mortgage down the track was someone else'sproblem. this is orthodox neo-classical economic theory in a nutshell: Rational actors motivated by personal reward (some may say greed), unconstrained by 'externalities' or future events. Look how it ends.

Like most sensible, non-ideologically driven people, I have always argued that the 'right' model lies somewhere in between the two extremes. Time and time again we are proven right. I would advise reading the work of economist Vicente Navarro for some hard data spporting this.

regards, Luke

Luke,
I agree with you that the credit squeeze arising from the subprime crisis first real post-cold war sign of the fragility of the unfettered mrkets and laissez-faire economic doctrine.

I don't know the work of a href="http://books.google.com.au/books?as_auth=Vicente+Navarro&sa=X&oi=print&ct=title&cad=author-navigational&hl=en">Vicente Navarro. The books look interesting ---the way he addresses the place of medicine in the overall relations of
production, including the political and the ideological in Crisis, Health and Medicine: A Social Critique Medicine needs to b e seen within the structure of class relations and the ideology which supports them. So we view medicine not as a product, but rather as a set of social relations.