An International Monetary Fund study of banking crises in history published this month was not well timed for US Treasury Secretary Henry Paulson.
The IMF studied 42 financial crises: 10 were resolved with no government intervention and for the rest the purchase of bad assets by governments were the exception rather than the rule, and have only been carried out by Mexico, Paraguay, Jamaica, Malaysia, Czech Republic and Japan. Not the best of company to be keeping.
The IMF concluded that the fiscal costs of banking crises “can be substantial and that output losses can be large”. It found that in dealing with credit crises “above all, speed is of the essence”, but that the liquidity and guarantee actions of the authorities are not always successful.
United States output is almost certainly in decline now. This morning the Commerce Department reported that consumer spending has fallen and most commentators now believe the economy is already in recession.
Consumer spending in Europe, Japan and Australia is also likely to collapse now and the economies are likely to go into reverse.
Australia’s terms of trade boom is over, whatever happens in China, and if China’s economy also slows significantly, then the Australian economy is in serious trouble.
The most important saving grace here — and it is a big one compared to the US — is that both the Reserve Bank and Treasury have plenty of firepower. Interest rates here are relatively high and can be cut a long way, while the Federal Budget is in substantial surplus and can be used to transfer plenty of money back to consumers.
The trouble is that if consumers are in a major funk, that won’t necessarily help.
At Business Spectator and Eureka Report we are increasingly being asked whether the big four banks are safe — not to invest money in their shares, but for deposits.
Our answer, of course, is that they are — they are four of only 18 AA-rated banks in the world — and will probably come out of this crisis stronger and with more market share than when the malaise started, but the question is being raised.
The fact is that this is a crisis not just in the United States, but in the western world.
Excessive consumption and debt in the west, basically riding the triumphalism that followed the fall of the Soviet Union in 1989 and Operation Desert Storm in 1990, has destroyed the equity of a financial system that knew no restraint in stoking that excess.
We were all, perhaps, uneasy at the time, as we watched the profits of banks and investment banks explode, along with the salaries of those who ran them, but we were along for the ride ourselves — enjoying the rise in superannuation wealth that came from investing in the banks.
And then the boom was super-charged by China’s emergence from the shadows and the deflation it exported to the rest of the world through low labour costs.
The low inflation, low interest rates and high commodity prices supported by China combined with a burst of consumerism and a housing bubble in the west to create an explosive mixture that has now gone off.
The consumers and home borrowers who fuelled the boom have now turned on their partners in excess — the bankers. It seems likely their anger will be formidable, made all the more so by a deep sense of shame.
The regulation that followed the collapse of Enron, focused mainly on the Sarbanes-Oxley Act, will come to look like a curtain-raiser.
Whether there is a Greater Depression or not, there is likely to be another New Deal imposing strict controls on the financial sector that will last a generation.
I’M GLAD !! My super may be shot to ribbons but I’m so VERY GLAD.
At least I will have the satisfaction of knowing that the person sitting next to me at the hobo camp eating mulligan stew out of a dog food can might have once been a stockbroker, economist or other financial “whizz kid”. And if the others around the campfire find out this joe WAS one of the above we can take them behind a bush and beat the crap out of them.
If people borrow money to gamble at the casino there is no way they should expect to be bailed out with government money. Especially when they’ve proved that in the gullibility stakes, they are God’s gift to a gold brick salesman with all the financial nous of a goldfish
The so called “free market” always was bullshit and this house of cards should have fallen years ago. If it had perhaps the small investors, who were suckered by all the self promotion of these terminal clowns, mightn’t have lost so much.
I have 100 Sydney Harbour Bridge shares for sale at only $50 each. Interested investors can contact me through “Crikey”
Is anyone else old enough to remember the Club of Rome report ‘Limits to Growth’ of the early 1970s? Altough it has been panned repeatedly in the past 30 years, the fundamental basis of its argument – that exponential growth cannot continue indefinitely on a finite planet – still holds true. Global warming is the best current demonstration of that, which is fueled by exponential growth in consumption, fueled in turn by the growth in cheap money etc. And the consequences predicted by LTG? ‘Overshoot and collapse’ – of which we now have a perfect copybook example in the current ‘financial crisis’. But it isn’t just financial – it’s a consequence of the whole ideology of growth, which will soon produce results that even Professor Garnaut annot imagine in his worst nightmares!
Overlaying the crisis of confidence in the credit markets is a crisis of confidence in America’s political leadership, a crisis that has intensified with Congress rejecting the bailout. That crisis cannot even start to be remedied until a new president is inaugurated in January. This leaves us with a very dangerous interregnum where the financial crisis will be inadequately managed and could create a severe recession in the US.
At times like this it is tempting to make incompetence a criminal offence. It seems grossly unfair that Bush should be able to waltz off the stage into affluent obscurity after wreaking such extraordinary damage around the world.
Dear Alan,
If sub-prime in June 2007 signalled longstanding flaws in the US banking structure and errors in monetary policy of the past decade, do we now have to endure years of falling assets and equities as the world suffers the consequences?
Alan, can you please explain why the US dollar rose and the Australian dollar keeps falling, when we are being told that the Australian market is more stable/secure and the US is crashing. It may sound like a silly question, but it is quite confusing to the average non-economist out there.