Global financial crisis – Asian view
[Andrew Sheng, former chair of the Hong Kong Securities and Futures Commission,] sees the present crisis as a product of “four historical mega-trends”. The first was the post-Cold War (and post-trade liberalization) integration of the Asian labour forces into the world economy, which flooded Western markets with cheap goods and kept inflation low. The second was Japan’s 1990s’ monetary policy loosening in response to its prolonged asset bubble deflation, which took yen interest rates near zero and spawned the famous “carry trade”, a key element of subsequent bubbles elsewhere, including the mid-1990s’ East Asian financial crisis. Third was the flood of physicists and engineers (a flood swelled by the collapse of the Soviet empire) who propagated quantitative models across the West’s financial industry to assess returns, create complex derivatives and manage risk. Of course, most of these models, based on typical, bell-shaped “normal” distributions for random variables, failed to account for the “long tail, black swan risk” that destroyed Western finance. The last was the mega-trend of global deregulation, of trade, capital controls and financial regulation, which swept across Western finance and paved the way for subsequent excesses.
In essence, as Sheng puts it, “these mega-trends were four arbitrages that created converging globalization — wage arbitrage, financial arbitrage, knowledge arbitrage and regulatory arbitrage”. The mega-trends welded national markets into a networked, global financial market, but without the steadying influence of any global regulator. The “four arbitrages also led to four excesses that were the hallmark of the present crisis — excess liquidity, excess leverage, excess complexity and excess greed.” [continued…]
From Asian to global financial crisis [PDF], Andrew Sheng, Indian Council for Research on International Economic Relations, New Delhi, February 7, 2009
The surge in asset values had been an illusion — but the surge in debt had been all too real.
So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.
For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.
And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.
Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.
In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured. [continued…]
Nationalize the banks! We’re all Swedes now
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late. [continued…]
Radical surgery is required to save this patient
Maybe the only way to avoid a truly catastrophic global depression and trade war is to nationalise every significant bank in America, Britain and the eurozone – since none could survive without government guarantees.
Many economists now take this view. The bitter disappointment over Mr Geithner’s announcement, which sent share prices on Wall Street crashing back towards the lows they hit just before Barack Obama’s election, now threatens to turn this desperation into a majority view.
I am not yet quite ready to join this growing consensus. For me, dismantling global financial capitalism and replacing it with a neo-Marxist system of capital allocation by the State is too big a mental leap. But the way things are moving, even I will soon capitulate to the inevitability of universal bank nationalisation. The reason is simple.
As the Governor of the Bank of England explained yesterday, neither zero interest rates nor tax cuts can revive economic activity if the credit system remains paralysed. Our politicians and bankers face a simple choice: either normal private banking services are restored quickly or governments take direct control. [continued…]
Editor’s Comment — New York Senator Charles Schumer said yesterday: “I would not be for nationalizing. I think government’s not good at making these decisions as to who gets loans and how this happens.” By implication, he’s suggesting — as no doubt his most generous constituents would wish — the task of running the banks should be left in the talented hands of the very same individuals who helped steer us into this global economic crisis. Are we supposed to think that the bankers are simply the victims of rotten luck?
Embedded in the to-nationalize-or-not-to-nationalize ideological debate is the widely unquestioned assumption that opportunities for fabulous personal enrichment necessarily serve as lures for talent. Continue reading
