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Important, even vital, articles from last week

5 April 2009

These articles are IMO among the most important from last week.  Excerpts are given below.  Note that Stiglitz and Krugman have the Nobel Prize in Economics.

  1. Why G20 leaders will fail to deal with the big challenge“, Martin Wolf, op-ed in the Financial Times, 31 March 2009
  2. Obama’s Ersatz Capitalism“, Joseph E. Stiglitz, op-ed in the New York Times, 31 March 2009
  3. China’s Dollar Trap“, Paul Krugman, op-ed in the New York Times, 3 April 2009 

No excerpt is given to the following short but pungent article.  The question it poses should be asked by every America of their Congressmen and Congresswomen.  If things like this no longer anger us, we’re probably finished as a great nation.

Excerpts

Red bold emphasis added to highlight the key passages.

Why G20 leaders will fail to deal with the big challenge“, Martin Wolf, op-ed in the Financial Times, 31 March 2009 — Excerpt:

So fiscal positions are deteriorating and current account surpluses and deficits are dwindling everywhere, as the private sectors of deficit countries cut back their spending dramatically. But the expected fiscal deterioration is bigger in the deficit countries than in the surplus ones. With the exception of Japan, the fiscal deficits will also be bigger in the deficit countries. The small size of the expected shift in China’s fiscal deficit, the modest level of its 2009 fiscal deficit and the persistence of the massive surpluses of its private and state-owned enterprise sector are striking. This is a country expecting (or at least hoping for) a recovery in external demand.

What this analysis is telling us is quite simple: next to no adjustment in underlying structural imbalances is occurring. In particular, the non-fiscal sectors of the three big surplus countries are expected to continue to run huge surpluses. The change – temporary, the surplus countries surely hope – is that domestic fiscal expansion is modestly offsetting the decline in demand coming from deficit countries with over-leveraged private sectors. But that decline in private demand is also offset by massive fiscal boosts in deficit countries.

This is not a path towards a durable exit from the crisis. It is a path on which the fiscal deficits needed to offset persistent current account deficits, and collapsing private spending in external deficit countries, continue indefinitely. Unless and until surplus countries recognise that this cannot continue, no durable escape from the crisis will be achieved. Understandably, but foolishly, they are unwilling to do so.

So what is to be done? That must be a central agenda item of the next G20 summit. The world economy cannot be safely balanced by encouraging a relatively small number of countries to spend themselves into bankruptcy. The answer lies partly in changing the policies of surplus countries. But it lies as much in rethinking the international monetary system. The case for sizeable and ongoing allocations of special drawing rights – the IMF’s reserve asset – is powerful, as, among others, Zhou Xiaochuan, governor of the People’s Bank of China, has argued in a fascinating recent paper (“Reform the International Monetary System“, a speech in March 2009).

I hope soon to return to this huge challenge and opportunity. In the meantime, the G20 summit is largely dealing with the immediate symptoms of the illness. Finding a longer-term cure for chronic global excess supply still lies ahead.

Obama’s Ersatz Capitalism“, Joseph E. Stiglitz, op-ed in the New York Times, 31 March 2009 — Excerpt:

The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win – and taxpayers lose.

… Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships – with the private sector in control – have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves – clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

China’s Dollar Trap“, Paul Krugman, op-ed in the New York Times, 3 April 2009 — Excerpt:

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen. And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone. Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen. The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans – and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news – the G-20 summit accomplished more than I thought it would – this crisis probably still has years to run.

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

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7 Comments leave one →
  1. 5 April 2009 4:08 am

    Martin Wolf: “Finding a longer-term cure for chronic global excess supply still lies ahead.”

    A major theme of William Greider’s 1997 book One World Ready or Not: The Manic Logic of Global Capitalism is how chronic oversupply drives globalization, to the stress and detriment of pretty much everyone except massive wealth-holders, or rentiers.

    While I’m not sold on his prescriptions, I think Greider has the diagnosis right. In my words, not his:

    Over-concentration of wealth relative to wages leaves inadequate demand for goods and services, with too much capital in search of too few good investment opportunities (since there is insufficient market to provide much profit). Capital turns to “inventive” financial devices, and to speculation (rather than “real” investment), seeking higher returns. When speculative capital dominates a market (as it did the housing market in the years leading up to the present debacle), that market becomes detached from reality and can no longer accurately value investments and assets.

    As increasing concentrations of capital seek increasing rates of return, the real economy cannot grow because demand is not growing; and the more income that is diverted into hands that seek mostly to invest that income, the greater the imbalance grows.

    Seen this way, consumer debt doesn’t represent profligate consumption; it’s (temporarily) propping up a system which diverts too much income to rentiers. The point is not some Marxist notion that the rentiers don’t deserve their income; the point is that it is not sustainable.

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  2. Duncan Kinder permalink
    5 April 2009 4:44 am

    FM note: Kinder’s comment provides another important article, as bad as the WSJ article in this post. Anger is needed, IMO.
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    Administration Seeks an Out On Bailout Rules for Firms“, Washington Post, 4 April 2009 — “Officials Worry Constraints Set by Congress Deter Participation” — Excerpt:

    The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

    Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

    The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

    The Administration’s enthusiasm for high executive pay seems above and beyond the call of duty.

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  3. pluto permalink
    5 April 2009 5:17 pm

    Good articles, FM. Keep them coming!

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  4. 5 April 2009 7:21 pm

    Ersatz capitalism is popular because it helps to avoid the accusation one’s policies are socialist. America is a nation where a substantial minority of the population simply refuses to let other people tell them what to do. For such people socialism is the worst possible kind of economic organization. Since socializing gains is obviously socialism it will be resisted. That the people who resist it would in many cases be better off doesn’t matter. Socialism is seen as a form of political and economic organization in which the government tells people what to do. And that is that.

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  5. anna nicholas permalink
    5 April 2009 10:14 pm

    Vecticks. I’m sure there is a real word for this but I cant think of it so I made this one up. It means that some vested interests are controlling a situation, and only pay lip service to you and your community.
    Can be global – the big corp that removes your car factory to a low wage country to make more profit. The bank that has to be rescued with your money. The foreign aid money that buys the foreign president, limousines. Can be national – the selected Russians who become oil barons , the company who claim Gaza’s offshore gas, the helpline that needs employ more and more people to explain its forms. Can be local – the mayors brother in law who gets permission to build on the town football field. Vecticks are protected by the Great God, Whose Name Is Growth. Why the heck should anyone or thing want to keep growing?
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    Fabius Maximus replies: I do not understand the basis of your objection. Are you enthnocentric, thinking your values are better than those of other people?

    Some people love to have more power and wealth (like mass and energy, each a manifestation of the other) than the rest of us. Modern western societies make use of that, as these people work to amass wealth that indirectly benefits the rest of us (e.g., grow more food, build factories, trade). Republican institutions limit that power. This system has the virtue that it seems to work better than other systems. That assumes that we make the effort to operate the system.

    Failure to make that effort is unlikely to result in an America looking like the Shire, happy hobbits singing kumbaya. If you wish to be sheep, you must accept your role as food for wolves. Wishing the world were otherwise is as meaningless as singing “If I were a rich man.”

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  6. 6 April 2009 2:32 am

    Regarding comment #2: words cannot suffice. See this cartoon.

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  7. anna nicholas permalink
    6 April 2009 10:57 pm

    FM: “these people amass wealth that indirectly benefit the rest of us (eg grow more food, build factories, trade) …

    There comes a size where ‘we’ mean so little to them that they outsource, import cheap labour, sell or destroy assets, lose all sense of history / loyalty , regard people only as disposable economic units , while hiding behind some ecstatic language for the public , about growth. The Wedgewood & Waterford Crystal story is a good example of vectick growth .
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    Fabius Maximus replies: That this describes our ruling elites is IMO impossible to deny (although many do). The reasons why are mysterious to me, however (“why” usually being the most difficult of questions to answer). Perhaps its just a matter of relative wealth, as you say. At some point our lives become disconnected from theirs, too different for them to relate to. And the distance to fall (becoming one of the little people) becomes too great for them to risk, hence their desperate efforts to retain their station.

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