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.
- “Why G20 leaders will fail to deal with the big challenge“, Martin Wolf, op-ed in the Financial Times, 31 March 2009
- “Obama’s Ersatz Capitalism“, Joseph E. Stiglitz, op-ed in the New York Times, 31 March 2009
- “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.
- “Treasury’s Very Private Asset Fund“, Wall Street Journal, 1 April 2009 — “Why write the rules to favor only a handful of bidders?”
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).
For information about this site see the About page, at the top of the right-side menu bar.
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 are: