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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Thu Nov 20, 2008 2:51 pm Post subject: It's Not a Crisis of Confidence |
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Related to something I touched on with Kuros.
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Is the market and economic turmoil nothing more than a crisis of confidence? To listen to Ben Bernanke and Hank Paulson, you might think so. "At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets," Bernanke told the Economic Club of New York on Oct. 15.
On Oct. 20, Paulson went further, explaining the bank recapitalization program this way: "Our purpose is to increase confidence in our banks and increase the confidence of our banks so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending."
The implication of the Bernanke-Paulson view is that the underlying economic system is fundamentally sound, so that restoring trust in the financial system will put us back on a growth course. From that perspective, the infusion of massive amounts of capital into banks, which replaces the money lost in bad mortgages, will enable lending to begin again. Once investors see that all is well, then they will cease their irrational behavior, and start putting money back into stock markets and companies around the world.
Treating the Wrong Problem?
But what if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause?
What if we face a wrenching readjustment of the global real economy rather than a crisis of confidence rooted in the financial system? What if Bernanke and Paulson are treating the wrong problem? What if investors, realizing that their long held assumptions about the global economy are wrong, are rationally bailing out of stock markets in almost every country, at least for now?
In fact, there's good reason to believe that the current crisis reflects a growing realization: Long accepted patterns of cross-border technological transfer, foreign trade, and global finance are simply not sustainable.
Three Big Flows
For the past 10 years, global growth has been driven by three big flows. The first flow was the transmission of knowledge, technology, and business know-how from the U.S. and other industrialized countries to low-wage emerging economies such as China and India. Under the neutral name of "supply chain management," multinationals taught local suppliers to make shirts, laptop computers, and airplane rudders that could be sold around the world. Moreover, U.S. and European companies gave suppliers access to enough information that they could develop their own cell phones, software, and other tech products. The result: a massive improvement in productivity and living standards in emerging economies.
The second flow was the movement of goods and services from China and other emerging economies to the U.S. Massive amounts of production capacity was built around the world, assuming that the U.S. was always going to be the consumer of last resort. Indeed, the value of U.S. imports�over $2.3 trillion in 2007�was larger than the entire output of Britain, the sixth-largest economy in the world. The result: Rising living standards in the U.S., rising employment, and production around the world.
The final flow, of course, was financial. The rest of the world lent U.S. consumers trillions of dollars to finance the trade deficit. The money flowed into the country in all sorts of ways, including cheap mortgages and cheap credit for cars and televisions that were made overseas. At the same time, companies in emerging markets were borrowing heavily to build the factories that were going to supply the developed world.
Something Had to Give
This tri-flow worked as long as everyone believed that American consumers could finance their debt. But here's the problem: At the same time Americans were borrowing, their real wages were falling�and not just for the least educated. By BusinessWeek's calculations, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.
You can't pay back rising debt with falling wages; something had to give.
The first thing that broke were subprime mortgages, given to less creditworthy borrowers. But once investors started to look, they realized that the entire global edifice was built on an impossibility. The tri-flow that had built global prosperity could not be sustained.
Good News and Bad News
That's why the financial crisis has spread across the globe. Investors are peering at every country, from Kuwait to Korea, asking the question: Is it sound enough to survive if American demand for imports falls? The problem is in the structure of the global real economy, not the financial system.
This is both bad news and good news. The bad news is that government injections of capital into banks around the world can slow the damage, but they cannot fix the basic problem. The global economy has to go through a readjustment process that will be difficult even if policymakers can restore confidence in the financial system.
The good news is twofold. First, the productivity gains in the emerging economies are real. Sooner rather than later, their growth will resume. Second, we do have a tool for easing the adjustment, and that's fiscal stimulus. With private demand for credit weak, governments can judiciously borrow and spend to help pump up growth and employment.
The final implication: Policymakers should stop talking about investor confidence as if it exists in a vacuum. Instead, they should focus on the real goal of stimulating the creation of innovative new goods and services that the U.S. can produce and sell on global markets. That would reduce the amount of borrowing the country has to do, and help create a sustainable global economy. This crisis is not any fun. But if it shakes up companies and government, and forces them to focus on innovation, the end result will be stronger, more solid economic growth. |
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081027_860032.htm
I largely agree with this article. The whole global system was based upon unsustainable patterns, and we can't just 'blame' the US for the whole system being dysfunctional. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Thu Nov 20, 2008 2:59 pm Post subject: |
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| The silver lining, hopefully. I'm counting on Obama to lead the country back towards the route of innovation (although it will likely take years to accomplish, perhaps longer than his term(s?) of office). |
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Kuros
Joined: 27 Apr 2004
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| Posted: Thu Nov 20, 2008 3:10 pm Post subject: |
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| mises in the other thread he referred to wrote: |
Why do you think the US is to blame? I think one thing we have learned in the past few months is that the US is in significantly better shape than European or Asian economies.
Actually, this is a big topic. I started a new thread. |
I think the US is more to blame than Japan or Taiwan, let me put it that way. I don't believe in a results-oriented analysis, i.e., the US is less to blame b/c its less sensitive to the crisis. But even accepting that results may hint at causation (and surely it may), definitely East Asia's suffering caused by demand for American exports is more to blame on America (altho their reliance on such exports is also blameworthy, if any of this is even blameworthy instead of merely unfortunate) than American borrowing is to blame on East Asian lenders (hrmmm, or maybe not?).
I guess what I'm saying is, if China can lessen internal crisis by blaming the U.S., it should go right ahead. Zhou Zhongguo in the inner provinces is not going to understand the analysis you've given in this thread. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Thu Nov 20, 2008 3:17 pm Post subject: |
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Oh, yeah. Uncle Sam can handle the criticism and I reckon such blame could even exist without harming bilateral ties.
My point was more that the US was part of a terrible system. The system was to a good extent designed by (to the extent it was designed) the US but nations like China (and the ROK etc) benefited handsomely from it. There was seldom a word from either side (producer or consumer) about how it might blow up. Now, it has.
I am more and more surprised every day about how significantly western analysts/academics etc over valued the safety and durability of Eastern (and South American) markets. |
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caniff
Joined: 03 Feb 2004
Location: All over the map
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| Posted: Thu Nov 20, 2008 3:29 pm Post subject: |
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| mises wrote: |
Oh, yeah. Uncle Sam can handle the criticism and I reckon such blame could even exist without harming bilateral ties.
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The U.S. is always the scapegoat of last resort, and I'm sure this is factored in as a diplomatic cost. Nothing new there. |
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canuckistan
Mod Team
Joined: 17 Jun 2003
Location: Training future GS competitors.....
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| Posted: Thu Nov 20, 2008 3:33 pm Post subject: |
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Overconsumption. Developed countries have the market cornered on it.
Pun intended. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Thu Nov 20, 2008 3:57 pm Post subject: |
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| canuckistan wrote: |
Overconsumption. Developed countries have the market cornered on it.
Pun intended. |
As I alluded to before, if developed countries consumed too much, then Asia is a pretty dreadful enabler. |
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Gopher
Joined: 04 Jun 2005
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| Posted: Thu Nov 20, 2008 4:15 pm Post subject: |
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Separating confidence and perceptions from allegedly tangible "readjustments of the global economy" represents bad thinking.
Also, there is a lot of psych warfare going on as well. People looking to influence public opinion in order to push this or that agenda.
In any case, there remains many things to take into consideration re: such discussions as these. |
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canuckistan
Mod Team
Joined: 17 Jun 2003
Location: Training future GS competitors.....
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| Posted: Thu Nov 20, 2008 5:15 pm Post subject: |
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| Kuros wrote: |
| canuckistan wrote: |
Overconsumption. Developed countries have the market cornered on it.
Pun intended. |
As I alluded to before, if developed countries consumed too much, then Asia is a pretty dreadful enabler. |
Certainly is.
But the news isn't all that bad--some good things to look forward to in Asia--Peter Schiff in very interesting 2-parter:
http://jp.youtube.com/watch?v=TP_aJ7LcAAA
http://jp.youtube.com/watch?v=coaI3d89kuA
Hope ya'll are short on the market and the US$ |
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Joo Rip Gwa Rhhee
Joined: 25 May 2003
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| Posted: Sat Nov 22, 2008 10:25 am Post subject: |
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| Energy , nano and bio technology is what can bail out the US. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Sat Nov 22, 2008 3:10 pm Post subject: |
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| Is the market and economic turmoil nothing more than a crisis of confidence? |
Is it only confidence? Well no, but it is partly an issue of confidence. It is 'relatively' easy for the gov't to put money back into the financial system but how do you put confidence back into people? Until consumers feel a certain level of confidence, they aren't going to spend and that's a problem in a system based on consumption.
Once again, government has an important role to play. I like what Congress did with the Big 3. I just hope there is someone left in Detroit that can come up with a realistic plan by Dec 2 that justifies $25 billion. It's a long shot, I'll admit. Detroit has known for 30 years they had to do this and I'm not sure they can do in 2 weeks what they refused to consider doing in 3 decades. Tough love can be a good thing and if Congress can keep it up, it will go some distance in restoring confidence in the public.
Barney Frank made a good point on the Charley Rose Show the other day. He said there is some unfairness in demanding the UAW renegotiate their contracts when the same demand was not made of the AIG employees. I'd say this is the time for some ex post facto revision of the $700 billion bailout terms. That kind of thing would probably have a positive effect on public sentiment as well. |
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ovrproof
Joined: 23 Nov 2008
Location: St. Lucia
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| Posted: Tue Nov 25, 2008 6:34 pm Post subject: |
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The system overextended itself. Having a debt based society to such a massive degree as has occured in Western society is never going to end well. It calls itself an ownership society, but who really owns anything? Your house - mortgage, car - financed, clothes on your back - paid on credit... i understand credit has helped to develop societies and enable business - but this is out of hand.
It's simply greed collapsing in on itself. The logic of capitalism whereby a $2 billion profit is considered underachieving if it was forecasted to ear 2.4 billion? Come on!!! This is disgusting. I just hope the capital doesnt concentrate itself into fewer and fewer hands - which looks like is what is happening. |
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bacasper
Joined: 26 Mar 2007
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| Posted: Thu Nov 27, 2008 10:03 pm Post subject: |
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| Ya-ta Boy wrote: |
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| Is the market and economic turmoil nothing more than a crisis of confidence? |
Is it only confidence? Well no, but it is partly an issue of confidence. It is 'relatively' easy for the gov't to put money back into the financial system but how do you put confidence back into people? Until consumers feel a certain level of confidence, they aren't going to spend and that's a problem in a system based on consumption. |
Confidence is certainly a part of fixing the economy. But how is one supposed to have confidence when all the dealings with public money are being shrouded in secrecy?
�That�s Counterproductive�
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�Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,� Bernanke said Nov. 18 to the House Financial Services Committee. �We think that�s counterproductive.�
The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.
�There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,� Kasriel said. |
http://www.thenation.com/doc/20081201/howl
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In the past couple of months Bernanke has loaned out $2 trillion to unnamed companies under eleven different programs, all but three of which have been slapped together in the past fifteen months of financial crisis. To repeat, we do not know who got this money or what collateral was put up in return for the loans or what conditions were attached to them.
The sums involved are almost three times as large as Paulson's $700 billion muddled bailout efforts that Congress voted for last month. Bernanke does have the legal authority to pass out these trillions without Congressional authorization and without explanation, but secrecy breeds suspicion and loss of confidence.
These officials preface every speech by talking about "transparency," their favorite word, at the same time they are handing off $2 trillion and they won't say to whom, leading Bloomberg News to file suit under the Freedom of Information Act. |
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