Ah the mea culpa. “If only they would let capitalism function,” says Nuriel Roubini. These pure market theorists are really a downer: as if an agentless capitalist system could exist; as if capitalism does not generate vast concentrations of capital which are too large to fail; and as if those who control such massive chunks of financial claims will not leverage that to their political and economic benefit.

Nuriel has it wrong: it is not socialism for the rich, it is the political economy of capitalism. Workers lose their pensions and health care benefits and investors get a bailout. The iron boot and the velvet glove: same as it ever was.

The Stealth Public Bailout of Reckless “Countrywide”:

 

….As the Schumer letter correctly points out the collateral against this $51 billion loan is mostly toxic waste subprime garbage whose market value is now much lower than the face value of such mortgages; so $51 billion dollar of taxpayers’ money has been put at risk with garbage as collateral for it.

 

…..The lesson of this sad and sleazy episode is that when profits are privatized and losses are socialized we get sleaze capitalism and corporate welfare that becomes public bailout of reckless lenders. All this from a US administration that hypocritically praises every other day the virtues of private markets capitalism. For all of us who do truly believe in free market economies where a variety of public goods are provided by governments and the financial sector is properly supervised and regulated this is not a capitalist system but rather socialism for the rich.

 

Travis Fast 

There is an engineered recession in the offing with the US first place in the queue.  They (everyone from the FED to the editors at the FT)  are trying to sell it as a short six month respite. But though they may be masters of the universe it is going to take longer than that to coerce adjustment and work-off the overhang.  

First housing (durables), now autos (semi durables) and eventually terminating in non-durables: this is the familiar pattern. And that cannot be achieved in 6 months.  Given the new rules on bankruptcy in the US are matched with record levels of consumer credit and rising defaults it is going to take longer for the consumer to recover. Now add to that the eventuality of rising employment and stagnating wages as the recession sets in, and 6 months looks fanciful indeed.  

The good news in all this is that it is the markets and those who operate them who are to blame.  Unlike the last recession which was blamed on the fat welfare state and welfare queens that political dog is not going to hunt this time around.  What about Globalization? They can’t blame free trade because there is an easy solution to that: managed trade.  Well actually we have a managed trade regime right now but the question that dare not speak its name is “for whom is it managed?”  

The bad news is that people rarely blame abstractions like the markets .  Populist politics is most usually fought on the terrain of identifiable groups (minorities , immigrants) and institutions  (Unions , the welfare state). 

If I were part of the populist left my political holy  trinity would be Financial institutions such as, central banks and consumer credit agencies, a delinquent regulatory state, and mainstream economists (mostly because people need more than institutions to blame and after all economists have been the central cheerleaders in all of this).    

Joe is slowly figuring it out. The last rumour I heard was that Joe, Jeff Sachs and Bono were in Ethiopia. I think Delong is headed there soon too. But let us not take our eyes off the prize. Here some of the latest copy from Joe:

This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world.

This year marks the tenth anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to Korea in December. Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted as among its victims.

There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the worst-affected countries.

Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.

As the World Bank’s chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses. This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia. It is heartwarming to see their recovery. These countries are now growing at 5% or 6% or more – not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible in the aftermath of the crisis.

Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged. The poor were among those who bore the biggest burden of the crisis, as wages plummeted and unemployment soared. As countries emerged, many placed a new emphasis on “harmony,” in an effort to redress the growing divide between rich and poor, urban and rural.

They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency.

In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains. In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.

Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.

But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what.

And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed.

But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.

By Travis Fast

It would be fun watching the Tories engage in populist public policy-making and crass electoral triangulation if it did not make for such a mash of incoherent fiscal policy. Where is the evidence that Canada needs a macroeconomic boost from cutting consumption, income and corporate taxes? And where is the proof that the boom will last forever?

Designing tax policy as a broader part of economic policy should always be guided by what problems you face now and potential problems you face in the future. In the short term Canada is growing at a solid pace with unemployment in many jurisdictions at or under full employment. Hence there is no need for a massive bout of pro-cyclical tax cuts.

At the same time the high dollar which is causing problems in the manufacturing sector and some commodity sectors (forestry for example) was nonetheless potentially set to do the dirty work of cooling some parts of the economy to free up resources for the booming parts of the economy. Whatever the long-run wisdom of this process of adjustment may be (i.e., moving resources and capacity from dynamic manufacturing and renewable resource sectors to non-renewable and highly cyclical sectors like oil, gas and construction) it nonetheless had a certain short-term logic to it. Yet this is now off the table as the government has introduced a highly simulative tax package that will surely blunt whatever depressive effects the high dollar might have had for the overall economy and will do nothing to target those areas where the high dollar is wreaking havoc.

A more nuanced tax package would have been to provide tax relief and incentives for those sectors and segments of society who need it. Why do the top 25% of households need both an income and consumption tax reduction? Why do energy companies need a reduction in their corporate tax rates? Why do financial companies need any more liquidity than they have been given since the unwinding of the silly season? And if they do, surely it need not come in the form of reduced corporate taxes which will simply be passed on as higher shareholder dividend payments and CEO compensation.

This budget is born of ideological idiocy, as much from anti-state populism as liberal economic folk wisdom (which itself has a good dose of anti-state populism). It is not as if, as some would have it, that there is a firm link between, for example, high consumption taxes and savings or between reduced corporate taxes and investment or vice-a-versa (praises be, because that kind of general stimulus heads in the direction of the redline).

Right now the Canadian economy needs a particular kind of stimulus both in the short and long term: productivity enhancing investment with a green tinge. And here there is plenty of heavy lifting for both the public and private sector. The private sector needs to, nay must, in the case of manufacturing raise their productivity to counteract the rise of the dollar. Surely high write-off schedules for targeted sectors, say at 150% of denominated value, for new more efficient means of production would make more sense than a general corporate tax reduction. Surely high write-off schedules for investment in new green technologies would be smarter than general corporate tax reductions which do nothing to direct the pace or direction of investment in such areas.

On the public side: from Halifax to Vancouver there are any number of public investments that need to made: from decaying physical infrastructure to near bankrupt municipalities, through to health care and education. Highly subsidised, efficient and greener forms of public transit could be built over the next ten years enhancing the flow of goods, services and people.

But let me now come to the last point: nothing lasts forever and this now 10-13 year long boom may well have reach its zenith. What is the evidence that the planned reduction in overall taxes will be sufficient to fund existing programs and obligations should the economy start a downturn? Whoever inherits the prime ministers chair in the context of a recession will be forced to choose between two cycle depressing alternatives: cut programs or raise taxes or both. Well there is a third option, a return to the days of massive deficits and a growing national debt.

But none of this seems very fiscally prudent; but then again this budget was not born of even a hint of sober capitalist planning; but rather, political expediency and dismal science. Indeed, it may be the case that Harpers budget is a perfect blend of economic irrationality and irresponsibility both in the short and long term: the road to perdition.