To talk about economics requires more and more, that one write about politics.
Paul Krugman "The Great Unravelling" 2003.
It can fairly be said that the chain of catastrophic bets made over the past decade by a few hundred bankers may well turn out to be the greatest non-violent crime against humanity in history. They’ve brought the world’s economy to its knees, lost tens of millions of people their jobs and homes, and trashed the retirement plans of a generation, and they could drive an estimated 200 million people worldwide into dire poverty. In other words, never before have so few done so much to so many. And has there been even one major, voluntary resignation by an American financial executive? One sincere apology? One jail sentence? Why the American public hasn’t taken to the streets in revolt is a mystery that can be linked to our inherent belief in the virtues of capitalism.
Graydon Carter Editor Vanity Fair, June 2009 issue. The magazine is an excellent source of economic and political material.
Firm predictions are out of the question. The future depends on the policy responses the financial crisis will provoke. But we can identify the problems and analyse the policy options. We can also make some firm predictions about what the next era will NOT look like. The post-World War ll period of credit expansion will not be followed by an equally long period of credit contraction. Boom-bust processes are asymmetric (not identical) in shape: a long, gradually accelerating boom is followed by a short and sharp bust. Consequently, most of the credit contraction can be expected to occur in the near term.
The Bush administration shows no understanding of the predicament in which it finds itself. Eventually, the US government will have to use taxpayer’s money to arrest the decline in house prices. Until it does, the decline will be self-reinforcing, with people walking away from homes in which they have negative equity and more and more financial institutions becoming insolvent. The Bush administration resists using taxpayer’s money because of its market fundamentalist ideology and its reluctance to yield power to Congress. It has left the conduct of policy largely to the Federal Reserve. This has put too much of a burden on an institution designed to deal with liquidity, not solvency, problems.
George Soros "The New Paradigm for Financial Markets. The Credit Crisis of 2008 and what it means." Reproduced from Ecinya’s first new web-site issue of 28 July 2009. Please note we have been publishing now for 10 years.
In just that week, the Party of No’s intransigent campaign of obstruction and obfuscation went belly up. The Obama White House moved to get its act together with an alacrity lacking in its health care campaign, abruptly adding Thursday’s New York speech to the president’s schedule. The bipartisan Financial Crisis Inquiry Commission at last issued it first supoena — to Moody’s, one of the rating agencies that for a fat fee slapped triple AAA ratings on the toxic garbage Goldman packaged and sold to benighted suckers on the other end of a huge bet placed by a favored client, the hedge fund player John Paulson.
Salutary as this rush of events is, it still adds up so far to just one small step for mankind. We don’t yet know how many loopholes lobbyists will slip into the bill-in-progress. We don’t yet know the outcome of the S.E.C. case, let alone what other much-needed legal pursuit of Wall Street may follow it. And we still don’t know what, if any, true correction lies ahead for the financial sector’s runaway casino culture — much of it legal — that turned a subprime-mortgage bubble in a handful of overheated American states into an international economic meltdown.
Frank Rich, The New York Times, 25 April, 2010. ‘The Party of No’ is the Republicans.
The US mortgage bond market was huge, bigger than the market for US Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on housing prices continuing to rise. "It is ludicrous to believe that asset bubbles can only be recognized in hindsight" Michael Burry wrote. "There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud…. The FBI reports mortgage-related fraud is up fivefold since 2000." Bad behaviour was no longer on the fringes of an otherwise sound economy; it was its central feature. "The salient point about the modern vintage of housing-related fraud is its integral place within our nation’s institutions," he added.
From page 55 Michael Lewis’s book "The Big Short, 2010. Michael Burry was a hedge fund manager exploiting the chasm that mortgage bonds was to become.
Success breeds excess: America has come to believe that its profligate behaviour in relation to energy consumption, poor wages in many areas of its economy, unfunded pension liabilities, a second class education system for many of its residents, the same in health, corporate welfare, tax shelters for those who can afford them, and excess of legal mantra over common sense and good sense, rampant debt creation largely involving other people’s savings, excessive speculation via derivatives and other exotic financial instruments, poor public and private accounting, has led to a country seemingly out of control and exposed to regular crises, few of which are anticipated and after the event, the response is shambolic.
The Ecinya pages 13 January, 2006.
Lawrence J Kotlikoff
Mr Kotlikoff is professor of Economics at Boston University and his Curriculum Vitae can be found via Google.com.
Last week (21/4/2010) Charles Babington, Associated Press Writer, reported as follows: "President Obama suggested Wednesday that a new value-added tax on Americans is still on the table, seeming to show more openness to the idea than his aides have expressed in recent days. before deciding what revenue options are best for dealing with the deficit and the economy, Obama said in an interview with CNBC, "I want a better picture of what our options are."
This report brings into focus the essay from Lawrence Kotlikoff which appeared in The Federal Reserve Bank of St Louis Review July/ August edition 2006. The essay was titled " Is the United States Bankrupt?"
His paper concluded that countries can go broke, that the United States was going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of US financial institutions was essential to securing the nation’s economic future. The paper offered three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy:
- A national retail Sales Tax
- Personalized Social Security
- A globally budgeted universal healthcare system.
It is interesting to Ecinya that Australia has all three of Kotlikoff’s measures in place today, not necessarily operating with a sustainable degree of perfection, but close enough. They are called:
- The goods and services tax
- The superannuation guarantee levy
- A universal healthcare system run by the state governments.
It is interesting to note that America has just one leg in place of the Kotlikoff three-legged stool and even that leg was constructed against a background of extreme angst and controversy, and has not yet begun.
WHY CONTINUE TO FOCUS ON AMERICA??
US gross domestic product is about US$14.8 trillion and this translates into GDP per capita of US$43,180. China’s GDP is about US$9.8 trillion and this equates to $7,350 of GDP per capita. Let us assume for the sake of argument that the USA’s GDP does not change over the next 8 years and China’s GDP continues to expand at 9% per annum. Let us further assume that China’s population stays at its current figure of 1,339 million. On these bizarre assumptions China’s GDP would rise to US$19.7 trillion and per capita GDP would rise to $US14,705, equivalent to 34% of America’s current per capita GDP per capita. It does not take much imagination to see that the world wants and needs a robust and efficient and growing United States of America.
BACK TO KOTLIKOFF
The GST (the national sales tax) came about in Australia because it was first proposed by the Labor Party under Paul Keating, Bob Hawke and Peter Walsh, acting on advice received from Treasury. But Hawkie decided he could not sell it to a sufficient mass of voters that would get him re-elected so he abandoned it. Mr Keating as the appointed chief salesman (later fall-guy) said he was not at all miffed, but subsequently went to the backbench and from that vantage point rolled good old Bob and became Prime Minister. The Liberal Party could see an opening during all of this so they elected John Hewson as leader who tried to sell the concept of a GST, but failed miserably, and Keating was elected Prime Minister in his own right (‘The sweetest victory of all’). Along came John Howard, sold the GST to the electorate, and the defeated Paul Keating moved to the Eastern suburbs of Sydney to join Mr Hewson in sniping at Mr Howard for the next 11 years.
What is the message? The GST saved Australia because it was sensible policy and facilitated better spending decisions, lower company and personal tax rates, fostered lower interest rates, and about 11 years of further economic expansion was added to the Hawke- Keating years, assisted,of course, by the rise of China and other emerging nations. As Keynes said: "Fundamental change does not occur quickly."
President Obama is coming to town. It will be interesting to see whether, or not, and presuming the Banking and Financial sector reforms currently going through Congress are passed, that towards the end of the year and going into next year the next major reform in America is a national sales tax. Let us hope he gets to meet John Howard to discuss the matter. Let us hope that some of his economic advisers know what is going on in Australia that might be relevant to their own country. One can only hope.
THE PHILADELPHIA FED APPEARS TO HAVE JOINED THE KOTLIKOFF CHORUS
Even with a GST Mr Rudd has dug a great big hole which we are in the process of falling into by declaring "We are all Keynesians now" and spending vast amounts of money on over-funded projects which either have failed or are in the process of failing, or are doomed to failure beyond the next election. These of course are the emissions trading scheme debate, the $900 hand-outs and the national home insulation roll-out, the Building Education revolution, and last week the "new" health system. In relation to the latter many health professionals don’t appear to know how it will work, how it is supposed to work, who will be responsible for it working, and what it might cost. The same questions appear to apply to the proposed $43 billion national broad band network concept (is it a plan?)
We have found an edited transcription of remarks given at the Philadelphia Fed’s policy forum "Policy lessons from the Economic and Financial Crisis of December 4, 2009 by N Gregory Mankiw (an Harvard Professor) titled "Questions about Fiscal Policy: Implications from the Financial Crisis 2008-2009". It appears that the St Louis Fed is also involved in this paper’s creation.
Mankiw believes in Keynesian theory but not without reservations and suggests that enhanced government spending can inadvertently drive up interest rates and taxes. He poses a number of questions:
- Can governments spend large amounts of money quickly and wisely?
- Are the relevant multipliers that are applied to Keynesian spending correct as opposed to the multipliers that pertain to lowering tax rates? He says the Keynesian conclusions are questionable.
- Do tax rates influence work and savings incentives?
- Will healthcare legislation reduce healthcare spending?
- Is the VAT coming?
SHORT TERM FEARS AND RIDDLES (with Postscript updates where relevant)
- The IMF has said global growth has returned to circa 4%. They didn’t know about the GFC until it slapped the entire world in the wallet. Thus we should treat their pronouncements and actions with some scepticism. Currently, their Greece solution seems to be fluid in context of rubbery Greek numbers on the depth of the ‘crisis’ and the political reality of potential solutions. (Postscript: Global GDP forecasts now being revised down)
- What has emerged with Goldman Sachs thus far looks like the the first cockroach, meaning that more are sure to exist. (Michael Lewis’s book throws up a lot of questions)
- The new GDP numbers for most of the developed world have been achieved via massive fiscal and monetary stimulation so that unqualified comparisons seem misleading. Australia has moved pre-emptively on interest rates and that seems good policy in context of sub-optimal fiscal policy outcome. (Postscript: TARP was designed to save a host of "too big to fail organisations" and rightly so, but let us now get real and save mainstreet)
- US housing is still cum the housing credit and better weather for construction. (Postscript: Foreclosures on the rise again and Fannie and Freddie look sick)
- Can the US continue to borrow abroad at current interest rate levels? Watch 10 year bond yields. (Postscript: Another bubble)
- The Henry tax review is likely to be substantial nonsense. (Postscript: The parts adopted by the governemnt were nonsense and the super profits mining tax was nonsense)
- The All Ordinaries index looks weak vis the SP500. (Postscript: Markets rolling over, fear returning, early days but ominous)
- The SP500 looks stretched and vulnerable. (Postscript: Markets rolling over, fear returning, early days but ominous)
- The Shanghai index looks to be rolling over.(Postscript: Markets rolling over, fear returning, early days but ominous)
- The copper price looks like the Shanghai index. (Postcript: Copper not looking too bad)
- British politics looks to be complicated leading into the election. ( ps: Election over… a good result)
- America believes it is a capitalist country and wants to debate socialism under Obama and capitalism under anyone else. Congress seems to be fighting old wars on dogma and confusing and disappointing main-street. (Postscript: American politics looking dysfunctional)