Former prime minister and treasurer Paul Keating says fiscal stimulus is reaching its limits and even advanced nations are at risk of debt default if they continue to amass huge budget deficits and borrowings to rescue their economies.
"There is a limit to what fiscal policy can do simply because there is a limit to fiscal policy," Mr Keating told a Lowy Institute gathering in Sydney on Thursday. "Is this sustainable? Who is going to buy the bonds?" He cited in particular the huge bill the United States was running up in an effort to counter the recession and to bail out its banking system and strategic companies such as the insurer AIG.
"Is America going to default on its debt or be able to issue bonds?" he asked. Governments across the globe will seek to borrow between $US3 trillion and $US4 trillion on bond markets in the coming year to fund stimulus packages and rescue packages for ailing banks and other financial institutions.
Friday, March 06, 2009
Has the Fiscal Stimulus Reached Its Limits?
ABC in Australia has an interesting report about the views of former Australian premier Paul Keating about the current economic crisis. His career mirrored that of Gordon Brown in that he played second fiddle to Bob Hawke as Chancellor (or Treasurer as they call it in Australia) for many years (1983-91) and then edged Hawke out so he could take over the top job himself. He was PM from 1991-96, when John Howard beat him in a general election.
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I am not convinced by the Government's economic rescue packages in the slightest.
The Conservative's can probably be accused of 'playing too safe' for electoral reasons. They haven't opposed the Labour party nearly hard enough or fought some of the more stupid government proposals.
That said - John Redwood speaks his 'economic' mind on his blog - I'd like to have seen the media pit him against government ministers in debates (rather than just trotting out Vince Cable to comment each time something major happens).
Redwood may have good point so make or may not - but it will be easy to traduce him.
Andrew Lillico on ConHome basically supports 'QE' but points pout the dangers, eg that we will almost inevitably come out of this with high inflation.
This QE is not a magic bullet, a painless way to 'solve' the depression. It may be a necessary evil with the price being that we will all be poorer at its end. This is the point, Brown is not 'saving' us, 'getting us through it'. He is milking us dry to save his skin.
Visit Richard Jones at my place for some brilliant history.
Iain - I know you are a clever man with good contacts and your readers likewise.
So can someone tell me just what the "shadow banking" system is.
And more importantly just where did it keep itself hidden from Gordon Bown for the last 10 years?
Oh err ... in the shadows you say? Well does Brown not have a torch, of sorts?
No. Bitter, twisted, loser, has been. Singing for his supper to bunch of die hards. It's a question alright. It might even be a good question. But the answer is NO Iain. NOT NO NO. Not close. And btw do be careful what you wish for.
'No. Bitter, twisted, loser, has been. Singing for his supper to bunch of die hards.'
Who are you on about there? Paul Keating or Gordon Brown
I don't blame the Conservatives for not attacking the Government on the economy.
If they really did let rip it would seem very negative and defeatist.
I simply don't think that the general public are ready or able to face up to the true situation.
The Bank of England decision to print more money will probably be copied around the world. Can anyone explain why this will simply not lead to high inflation or maybe even hyper-inflation?
I recommend Prof Willem Buiter [LSE] as a guide through this maze: http://blogs.ft.com/maverecon/
'Shadow banks' are institutions which behave like banks [borrow short, lend long'] but which, for various reasons, have not not been regulated as banks are. The term is in general use but I can find no web page clearly explaining it.
Latest news is amazing - and nobody mentioned or predicted it at the time.
Namely its wiped 100 billion of company private pensions !
http://www.telegraph.co.uk/finance/personalfinance/pensions/4950466/Retirement-plans-of-millions-of-Britons-at-risk-after-Bank-of-England-prints-money.html
"In a mere 24 hours the size of the pension deficits facing some of Britain’s biggest companies has jumped by around £100 billion to a record £390 billion - the equivalent of over £150,000 for every member of a final salary scheme.
The increase is a direct result of the Bank’s announcement this week to create £150 billion and pour it directly into the financial system, experts said. "
This may be scaremongering, but if taken at face value its shocking and disgraceful. Shouldn't there be some compensation? It all adds to my point that this 'QE' may be the right thing to try but its not painless there are consequences and costs.
Trevorsden, where would the finance for this "compensation" come from? The Govt have no money, they'd have to print some more - and make an even bigger deficit.
You are quite right titus - to a point.
But 'QE' is not govt spending. Its the BoE printing money.
We taxpayers are on the hook of govt and govt agency competence. So its we the taxpayer that would have to ultimately fund govt incompetence - either directly through higher taxes or indirectly through higher borrowing and interest rates.
Peter - Andrew Lillico at ConHome has an analysis; he supports the idea but predicts it will end up with significant inflation.
Seems to me no-one really knows what to expect. But as we are seeing 'success' will still have a price. Brown will of course not remind us of that - and inflation is an insidious and, typically for him, stealthy destroyer of our wealth.
What is clear though is that the completely innocent parties here are the people contributing to pensions. Again I am taking the story at its face value.
You can always rely on the Australians for expressing things wth brutal simplicity, and often they are right. They are more likely to be in financial matters than we are, because they are more open about what goes on.
QE won't work for the reason that it is based on misguided economic theory. It is not an increase in demand we want but an increase in savings to provide a pool of funding with which investors can go forth and invest.
It is not bank bailouts we need but for rotten banks to go to the wall so those banks that have been careful this last decade can take over their assets and help grow the economy again. Bailouts simply delay this process and engender uncertainty which inturn destabilises the Banking Industry.
It is not subsidies to industries we need but the free reign of market forces so that industry and companies can restructure itself/themselves in line with the genuine demands of consumers for products, goods and services.
It is not the perpetuation of loss making dinosairs we want but the reallocation of resources to new, profit making industries that reflect consumer preferences. To deprive those potential growth companies and industries of funds - be it thru raising taxes or a massive expansion of Govt Debt - is a mistake.
Brown's policies resign us to a foreseeable future of slow (if not negative) economic growth, prolonged unemployment, double digit inflation, currency collapse and potential social discontent. There may be a temporary spike in the economy - monetary expansion on this scale makes it likely - but it will be short lived and merely delay the much needed changes in our economy.
But even if we take their policies on face value and accept that QE could (hypothetically) work: The idea that the current monetary and Govt authorities will be able to fine tune this situation - i.e., time the expansion of the money supply for the correct moment when it is needed and then cut it back at the correct moment in the future to avoid runaway inflation - is laughable at best. Remember: It is Brown, Darling and King who helped get us into this mess. They - with their judgement calls - screwed up macroeconomic policy over the last 12 years. What exactly has so changed about these same people that I should now look to them to be able to manage the economy thru what are repeatedly being called "new and uncharted waters"? Which one of them is actually going to make the judgement call to cut back the money supply at the "correct moment"? I suggest that the more likely scenario is one where not one of them will be prepared to say "Stop" until it is too late. Just as they failed to say "Stop" to the monetary expansion between 1997 and 2007. To do so would put themselves in danger of being cited as the person who stalled the recovery and not one of them will want that.
The shadow banking system is securitisation. It's when the mortgages and credit card loans and student loans and other forms of credit are bundled up and sold as a set of bonds to investors. This is where the sub-prime mortgages went. It's a "shadow" banking systems because the bonds should be sold to investors who then take the credit risk unlike the past when this risk sat on the bank's balance sheet. The irony of the "shadow" banking system is that some banks who were in the process of bundling up these risks actually held on to and others even bought these bonds and so did end up holding these risks. Note that about 30% of all credit in the US has been securitised. Now thanks to sub-prime this market is dead and it's not clear who is going to fill the credit gap created. Gordon Brown knew about this market. The FSA knew all about it. No one quite expected the level of fraud and delusion in the sub-prime arena that killed this market by creating so much uncertainty that no-one will touch securitised assets for years to come.
"are bundled up and sold as a set of bonds to investors"
Leaving aside just what 'bonds' are ... why the hell should anyone buy these 'assets'?
Is the phrase 'pig in a poke' not used by economists and bankers?
And why does Brown not use the phrase "securitisation .... mortgages and credit card loans and student loans .... bundled up and sold as a set of bonds"
From what you say Brown does not need to abolish shadow banking - it is already dead. But being realistic how do you stop the lunatics but still allow (presumably) legitimate and worthwhile 'securitisation'?
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