What prospect is there for national forms of economic prudence when we're drowning in a giant global liquid pool of finance capital of which only a tiny fraction derives from the production of real goods and services? [1]
Doug Nolan this week:
"....Think in terms of the surge of inflation that forced thoughtful policymakers in economies such as Australia, New Zealand and elsewhere to significantly tighten monetary policy. Rising rates, however, only enticed more disruptive speculative finance flowing loosely from (low-yielding) Credit systems including the U.S., Japan, and Switzerland. Speculation could have been as simple as shorting a low-yielding security anyplace to finance a higher-returning asset anywhere. Or, why not structure a complex leveraged derivative transaction that, say, borrowed in a cheap currency (i.e. yen or swissy), played the upside of rising emerging equities markets, and at the same time had triggers to hedge underlying currency and/or market exposure. And the counterparty exposure for a lot hedges could be wrapped up in collateralized debt obligations (CDOs). And the more loose global finance inflated the world, the more the leveraged speculating community inundated “commodity” economies such as Australia, Canada, Brazil, South Africa and Russia. Of course, speculative inflows ignited domestic asset market and Credit systems, in the process fostering dangerous Bubbles...." [2]
And some comments from Naked Capitalism in the last few days:
"a lot of the depression we're all going to get now is because Japan expanded its money supply but held interest rates low for those 15 years in a attempt to duck recession. With low domestic rates, there was no place for the money domestically so it went abroad via the carry trade and blew bubbles all over the planet...
"...I never saw [Japan's] zero [interest rate] policy as anything but a long-term disaster; one can't get any kind of velocity or domestic economy at long term zero or neg rates, it's madness. The destabilizing impact of dollar debt expansion has mattered far more in this global bubble than the cheap yen, but the irrationality of the Japanese yen bloat backstoped their standard of living for fifteen years at the coast of their _next_ fifteen years, yes, and they have their share of irresponsibility in the global bust. Why didn't Japan, really, take a knock and move on? Hard times would have socially knocked their crony capitalist one-party regime out of authority for something rather more leftish. This wasn't so much about saving the banks but about saving the 'Power System.' Which is why US public authorities are trying the same bad approach: it's all about saving the One Party Capitalist system... [3]
[1] The title is a quote from Dr Martin Luther King.
[2] History's Biggest Margin Call
by Doug Noland October 23, 2008
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10142
[3] Richard Kline.
2 comments:
I just read an interview of Richard Duncan in 2005, author of the Dollar Crisis, that said much the same.
"Economic bubbles and systemic banking crises can be expected to reoccur and deflationary pressure can be expected to persist so long as the US Current Account deficits continue to flood the world with dollar liquidity." Page 168, "If banks fail and the government does not bail out the depositors, then the money supply will collapse, credit will contract, and prices will fall. On the other hand, if banks fail and the government does bail out the depositors, then the excessive supply of credit in the economy will persist and result in a liquidity trap that ensures that rates of return remain negative even though interest rates have fallen to zero. In that case, supply will continue to exceed demand and product prices will continue to fall."
Duncan proposes some cures. What are your cures?
"What are your cures?
Cures after the horse has bolted...hmmm:
I would not be 'bailing out financial institutions without some significant degree of financial regulatory reform in the first instance.
Institute immediate fiscal policies to increase employment in sustainable forms of industy and to address the even more URGENT global environmental crisis.
Price the natural environment.
Pull out of Iraq and Afghanistan.
Limit the size and scope of the military.
Reform corporate law immediately. No personhood. No immortality. No privileges.
the true market value of financial 'assets' would be ascertained by some sort of unrestricted auction.
Determine which institutions are truly insolvent and which are going under due to unusual financial volatility. [The history of dubious practices by large Wall Street banks is, afterall, well known].
Let the insolvent corporations go under and then, as a government, take them over.
Compensate victims of known fraud. (compensation is not a 'bailout')
Shorten working hours broadly.
Limit executive pay to no more than 5 times average earnings.
Clean out corruption by clearly delineating private areas of the economy and governance from public forms.
Immediately protect common property (air, water, soil fertility, knowledge, sustainable cultural values).
Reform the electoral system. Breakup the mainstream media monopoly.
What are your cures?
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