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October 7, 2008
The credit crisis appears to have shifted from the US to Europe, where governments from Brussels to Copenhagen to Berlin hare rushed to shore up their faltering banks. Britain's Chancellor of the Exchequer, Alistair Darling, is reportedly considering giving banks billions of pounds in return for shares to shore them up in the face of the global credit crunch. Stock markets continue to tumble and the US, Europe and Japan are more or less in recession, thanks to the global credit crunch. The banks are still refusing to lend to each other and healthy companies cannot roll over their debts.
Moir
The global recession is being transmitted to Australia through the seizing-up of global credit markets, the sharp slide in commodity prices and the falling Australian dollar. The boom has busted. Australia looks vulnerable----the current account deficit is our biggest problem. We are borrowing $60 billion a year whilst enjoying the best terms of trade in history.
We can reject the view that the market is a "self-regulating" mechanism which can correct itself as Alan Greenspan maintained. He also maintained that the greatest danger facing the economy was that governments will endeavour to reassert their grip on, and intervene into, economic affairs. The events of the last couple of weeks show that is no "invisible hand" as the neo-liberals maintain, so there is nothing inevitable or "natural" about the way markets work. They are always shaped by political decisions.
Of late, Greenspan has been calling for governments to reassert their grip on the economy in the form of the bail-out.The inference? The neo-liberal talk of the invisible hand and self correcting markets since the 1970s is mythology. Greenspan, once the oracle of the mythology of the financial markets has been praying a lot to shore up his faith in the market as a self-regulating mechanism that is driven by “irrational exuberance”. The prayers aren't working as they should because the bailout hasn't given an immediate lift to restoring confidence in the US financial system. That is what it was designed to do --restore confidence so that the banks would start lending. Instead we have a global panic.
Update 1
Things must be serious in Australia. The Reserve Bank has reduced interested rates by 1%, twice as much as the market economists expected. This is the reasoning:
Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia’s trading partners in Asia. The expansionary effects of the recent surge in Australia’s terms of trade are still coming through, but some decline in the terms of trade now looks likely over the coming year, with many commodity prices having declined from their peaks. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate in 2009.
Thus far, the overall path of economic activity in Australia appears to have been close to what the Board had expected, with the needed moderation in demand occurring. The next CPI is likely to show an increase of around 5 per cent over the four quarters to September, but the Bank remains of the view that inflation will start to decline in 2009.
The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.
So the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy. That shift from inflation to slow global growth is some turn around.
Update 2
It looks as if the US financial system - including the system of financing of the corporate sector - is now at risk of a systemic financial meltdown. We're seeing a generalized liquidity run that expresses a situation of generalized panic and lack of trust in financial inst
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Greenspan pumped money galore after each bust by making the cost of money so cheap. We would not be where we are now if cheap credit, money printing and inflation where not the policies of the US Federal Reserve.
Greenspan should be ignored IMO. This happened at the end of his tenure for a reason.