Weekend Reading … about the financial crisis

This was a big week for news and analysis about our financial crisis.  Here are some you may have missed.

1. “Stricter regulation of business sought, Americans say“, LA Times, 15 October 2008 — A survey finds that nearly 70% of Americans in each of a wide range of demographic categories say the lack of controls is responsible for the nation’s economic problems.
2. “Ship Rates Plunge as Credit Freeze Strands Cargo, Demand Slumps“, Bloomberg, 15 October 2008 — A possible “air bubble” in the global trade bloodstream.
3. “From Plan A to Plan G“, Brad Delong (Professor of Economics at Berkeley), Guardian, 16 October 2008 — “The US has tried to stave off depression in half a dozen ways. Will partially nationalising America’s banks do the trick?”
4. “Let’s Get Fiscal”, Paul Krugman, op-edin the NY Times, 17 October 2009 — It’s time for the government to spend lots and lots of money.
5. “We had to burn the village to save it“, posted at the blog London Banker, 17 October 2008 — “There is no free market when the government owns the actors and sets the terms of transactions. There is no village once it has been burned to the ground.”
6. “Amid Pressing Problems, Threat of Deflation Looms“, Wall Street Journal, 28 October 2008 — Suscription only; here is a open copy.

Quote of the day:  About taxes, by economist David Rosenberg:

Any politician that tells you we can afford to maintain taxation rates let alone cut them is, well, dreaming in technicolor. The taxpayer is obviously going to foot the bill to pay for the massive cost of saving the financial system, and it will most likely be, in this populist age, the high-income worker that is going to get dinged. Just remember, the top marginal personal tax rate went from 24% in 1929 to 79% by 1936.  Who else do you think paid for that FDR New Deal?

{FM note:  in 1932 President Hoover increased the maximus rate from 25% to 63%; In 1936 FDR increased it to 79%, and in 1941 to 81%}

Excerpts

1.  “Stricter regulation of business sought, Americans say“, LA Times, 15 October 2008 — A survey finds that nearly 70% of Americans in each of a wide range of demographic categories say the lack of controls is responsible for the nation’s economic problems.

A new Los Angeles Times/Bloomberg national poll shows Bagley is far from alone. The survey found that nearly three-quarters of respondents thought the lack of regulation was partly responsible for the current financial and housing crises. The need for stronger regulation of financial markets was cited most as the top issue for the presidential candidates to address in the remaining weeks of the campaign.  And nearly half of those surveyed now think there is too little regulation of business.

… This was not always the case. L.A. Times polls conducted in 1991 and 1981 — both times of economic unease — found that only 29% and 18%, respectively, thought there was too little regulation of business and industry.

… Asked if the government should provide assistance to homeowners facing foreclosure, 61% said they were in favor and 27% opposed such a measure.

2. “Ship Rates Plunge as Credit Freeze Strands Cargo, Demand Slumps“, Bloomberg, 15 October 2008 — Excerpt:

Commodity shipping rates plunged to the lowest in more than five years as a lack of trade finance left cargoes stranded and the global economic slowdown limited raw material demand.

Traders are finding it harder to get letters of credit that guarantee payments for goods, shipping executives said. Together with a slowdown in trade, that has contributed to this year’s 82 percent drop in shipping costs for grain, coal and other commodities. Rates are so low that Zodiac Maritime Agencies Ltd., the line managed by Israel’s billionaire Ofer family, announced today it may idle 20 of its largest ships.

“Letters of credit and the credit lines for trade currently are frozen,” Khalid Hashim, managing director of Precious Shipping Pcl, Thailand’s second-largest shipping company, said in Singapore yesterday.  “Nothing is moving because the trader doesn’t want to take the risk of putting cargo on the boat and finding that nobody can pay.”

The Baltic Dry Index fell 11% today to 1,615, the lowest since February 2003. Rates for larger ships of the type Zodiac intends to idle fell 17% today, taking this year’s plunge to 85%, according to the London-based Baltic Exchange.

3. “From Plan A to Plan G“, Brad Delong (Professor of Economics at Berkeley), Guardian, 16 October 2008 — Excerpt:

The Bush administration, having entered office as social conservatives, leaves office as conservative socialists, proprietors of the most sudden large expansion of the state’s role in the US economy since mobilisation for the second world war. Why did they decide to partially and quasi-nationalise America’s banks – to invest $250bn in preferred stock plus warrants and tell the banks that it wanted them to use the capital to expand their loan base rather than contract it via deleveraging? It is certainly not what Henry Paulson signed up as Treasury secretary to do.

… Now we get to see whether Plan F will work, and whether this recapitalisation of the global banking system with public money will stop the slide of the world economy, and keep us in mild recession rather than severe recession or even depression.

There is every reason to hope that it will. The liquidity-squeeze theory, the expected-deflation theory and the Bernanke banking-collapse theory were the only live theories of the Great Depression. The first two no longer seem viable. (The past year has been a big intellectual victory for Bernanke-as-academic.) So if we can counteract the chain of causation of the third – the only one left standing – we should be in no danger of even a not-so-great depression. But the theory that recapitalising the banking system will cure what ails the global economy is, at the moment, only a theory. It could be wrong.

If Plan F fails, we move to Plan G: we pull the Keynesian fire alarm and begin an enormous government infrastructure building programme in the whole North Atlantic to keep away depression.

But as of now there is every reason to hope that it will work – that this time, for sure, what our magicians pull out of the hat will be the desired rabbit.

4. “Let’s Get Fiscal”, Paul Krugman, op-ed in the NY Times, 17 October 2009 — Excerpt:

All signs point to an economic slump that will be nasty, brutish – and long. … And how long? It could be very long indeed.

… In other words, there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more – but nobody expects this to do more than provide a slight economic boost.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case.

… {the next President} will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable. He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.

5. “We had to burn the village to save it“, posted at the blog London Banker, 17 October 2008 — Excerpt:

There is no free market when the government owns the actors and sets the terms of transactions. There is no village once it has been burned to the ground.

The collapse of the financial sector is unacceptable. It is unacceptable to bankers who have vested careers, status and equity wealth in the disproportionate expansion of the financial sector. It is unacceptable to politicians who have risen to high office doing the bidding of the financial sector in ceding progressively more generous taxpayer subsidy and regulatory forbearance to its chieftains.

And so in the US, UK and EU we have politicians appropriating more petrol to hand to the arsonists who started the conflagration which is consuming our economic and political fabric. The regulators whose forbearance is a root cause of the current conflagration are handing the arsonists fresh zippo lighters. The policies adopted in these debtor nations will fail, must fail, because they destroy what remained of market economies.

In the meanwhile, however, the bankers and the politicians and the regulators cannot conceive of failure and so insist on more of the same – ordering hundreds of billions in more incendiaries to fuel the blaze. The same tax breaks. The same housing subsidies. The same regulatory forbearance. The same ill-transparent, off balance sheet, accounting sleight of hand. The same eradication of market incentives to productive, disciplined saving, investment and labour.

Those who would prudently save will be punished with negative real interest rates and asset deflation. Those who would prudently invest in productive industry will be starved of scarce capital and forced into liquidation. Those who would prudently labour for a decent wage will be slowly robbed by inflation and kept docile by the threat of unemployment.

6. “Amid Pressing Problems, Threat of Deflation Looms“, Wall Street Journal, 28 October 2008 — Suscription only; here is a open copy.  Excerpt:

Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.  The risk of deflation — generally falling prices across the economy, beyond volatile energy and food costs — remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should “push inflation down to, and possibly even below, rates that I consider consistent with price stability.”

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  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).

For more information from the FM site

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

• about the Financial crisis – what’s happening? how will this end?.
• about The End of the Post-WWII Geopolitical Regime.
• A solution to our financial crisis
• An updated list of Damage Reports from home and abroad

Key posts about the financial crisis

1. A solution to our financial crisis, 25 September 2008
2. A picture of the post-WWII debt supercycle, 26 September 2008
3. America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
4. A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
5. The new President will need new solutions for the economic crisis, 9 October 2008
6. Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
7. Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008