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October 21, 2008
Optimism returns. O happy days. The governments (the G7, the EU and others) have rightly committed to do whatever is necessary to do the right thing for the financial markets. They have done the right thing and a total systemic financial meltdown has been avoided. The stock market has reached the bottom and now surges upwards; interbank markets and credit markets are mending; and the the stomach-churning market gyrations of the last six weeks are now economic history. To be haunted by the past is for sickly weaklings. The future beckons.
Australia can avoid the looming economic crisis. Three cheers for Keynes. There won't be another Great Depression, just a bit of belt tightening. Nothing really serious. The fundamentals are solid. China's growth is slowing.
If the optimists are back in town and busy sending out their Panglossian press releases, then they have forgotten that this financial meltdown is the latest in a succession of financial crises that have struck periodically over the last 30 years; and that this crisis has its roots in the way the global economy has worked in the era of financial deregulation. So the crisis is systematic. That does no look good for the US.
Any developed country that receives a huge and sustained inflow of foreign lending from the surpluses of emerging economies (China, Saudi Arabia etc) runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. The consequence of being in this situation is that United States is heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system. Will China continue to do so? The power is shifting to the East.
The United States is economically vulnerable since spending on America's crumbling infrastructure, its inefficient health care system, and environmental programs will be limited by the Everest-sized public debt that now stands at more than $10 trillion. That debt is not going to go away. Are they going to use debt to pay for a Congress Democrat fiscal stimulus package that would direct government money to consumers to lift a sagging economy?
The bell is tolling quietly on a nihilistic US casino capitalism, and few realize that it is tolling the end of a mode of life based on irrational exuberance. Twilight is falling. The highest values have been devalued.
Will the return of the Panglossian optimism mean that the critical reflection on the way that the standard economic commentary has been dominated by the cheerleaders for the policies which have led to this crisis be forgotten? Will there be critical reflection on the way that while the authorities themselves and the academic profession of economics itself have turned a blind eye to any arguments that questioned the mantra in favour of deregulated finance capital?
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