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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

ever downwards into mythology « Previous | |Next »
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.

USbailout.jpg 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

| Posted by Gary Sauer-Thompson at 7:56 AM | | Comments (9)


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.

The US trade deficit continues to balloon out and with that goes any hope of America finding a way out of the present dilemma on its own, Manufacturing went to China and other emerging countries, and America was left with an empty shell in manufacturing and an investment strategy we now call the housing bubble.

China has a lot of assets tied up in the US and it must be worried about their safety. So it needs to become involved in stabilizing the financial turmoil.

if America has maxed out its credit card, then how is going to repay the debt it owes to foreign countries such as China?

The US is not well known for paying its debts, fees or anything else.

You say things must be serious in Australia. That seems to be the general response to this cut. Does that not increase uncertainty and undermine confidence even further? Or are we more worried about the confidence of banks than investors?

I've also seen several people saying investors are pulling out of the US and shifting their deposits to Ireland and other places that have guaranteed deposits. What does that do to nations like the US, which doesn't have the reserves to offer that protection?

Nan, Wages have been stangnant in the US since the 1970s. To make up the loss of growth people have accomodated by having a second person in a house work, and when that maxed out, then either cashed out on the bubble or equity in their house. We are pretty much at a limit. That is not unique to the US either, just that things tend to happen first in the US.

Peter, Because the US is the reserve currency it can print money without the same kind of effects that other money printing regimes (like Zimbabwe) feel almost immediately. Since the US's money printing is backed by the productivity of US business/workers it still remains a pretty safe bet and is why the US dollar is not completely worthless.

Greenspan's policy was basically 'no pain'. Which meant no pain politically and no pain financially. So he made money super-super cheap by historical standards and then to pay for the easy access and flow of money (including money printing) they adopted a policy of high inflation (gas, food, etc). White goods from China were about the only deflationary effect and all western economies would have serious inflation issues if China didnt deflate the cost of physical production for consumer goods.

In prior boom/bust cycles the US Fed would have dropped interest rates some more, all those in fiscal trouble (like the investment banks) would have just borrowed a tonne of money to cover up how much trouble they were in and we would all be happy.

But money has been so cheap for so long that it came to a proper bust. So the stupid Fed tries to keep money cheap as dirt by borrowing against the US taxpayer (who's productivity means they are a safe bet and can get cheap borrowed money whether it is borrowed or printed).

So we have the same goddamn policy of cheap money and pay for it with money printing and inflation.

America has the reserve currency they can pay off their debt by deflating their currency any time they dam well please. Expect negative real interest rates in a US near you soon.

It's pretty dam clear that after this is over most governments will own pretty much all the banks ( Australia looks like being the exception), they can sell them off when the capitalist get over themselves to balance their books and the whole cycle can start again.

Panic panic panic, boy it's fun to watch on a bright sunny morning.


I've also seen several people saying investors are pulling out of the US and shifting their deposits to Ireland and other places that have guaranteed deposits. What does that do to nations like the US, which doesn't have the reserves to offer that protection?

It is going to create havoc as there will be a flight to security by depositors. It is the rational action for depositors isn't it when they are scared.

It indicates that the central banks in the US and Europe are not acting together. They are acting in the national interest and so beggar one's neighbour. First Ireland then Germany, Denmark, Sweden, Iceland and Austria effectively guarantee their banks' deposits thereby creating pressure for other governments to do the same.

Stock markets continue to fall on Wall Street

The Federal Reserve is going to lend directly to US companies in an attempt to restore liquidity flows in the money markets and the escalating global credit crisis is forcing the UK to a partial nationalisation of its banking system.