Saturday, October 25, 2008

More on the economic crisis

I have been heavily involved in other things and too busy to make a comprehensive update on the crisis. My last long post on it took a lot of time to write - I presented some of the material at a La Trobe University seminar organised by the SRC and the radical group Socialist Alternative.

But a few stand out references on the crisis are beginning to appear.  The Economist last week  had excellent discussions. Their leader - Capitalism at bay -  makes many points I made in the long post.  The extent to which government becomes more important in the future depends on how the blame for the current crisis is attributed.  Even with respect to financial reregulation The Economist points out that severe financial crises occurred recently in highly regulated systems of Korea and Japan. 'What's needed is not more government but better government'. 

The Economist has organised a fascinating online discussion between Joseph Stiglitz (favouring increased financial regulation) and Myron Scholes (not favouring it).  An excellent debate which Stiglitz wins but where Scholes is by no means disgraced.  Both agree on the need for strengthened capital requirements but disagree about the value of 'financial innovations' and the need to manage them.  Really good!

The Economist reports on impacts in Asia that should concern Australia.   They mention former Malaysian PM Mahathir Mohamad's blog and it is worth looking at. Referring to the Asian Crisis and current events:

'When as a result of the so-called trade in currencies the companies in the poor countries faced bankruptcy, the Governments were told not to bail out any company or bank which was in deep trouble. The Americans claimed that these companies or banks were inefficient and they should be allowed to go bankrupt and perish. Better still they should be sold at fire-sale price to American investors.

....Yet today we see the US Government readying US700 billion to brazenly bail out banks, mortgage companies and insurance companies'. (Outch!).

They also discuss China at length which is a topic of key interest to Australia which has also taken a dig at US hypocrisy.  I liked this paper from the Wall Street Journal (HT Rabee) which argued that the 8% growth forecasts the world is relying on to restore our fortunes depend on the Chinese property market not collapsing.   Chinese investments in housing are about 10% of the economy and there are evident weaknesses in this market despite the fact that 15-20 million Chinese head off to live in cities every year.  Buyers are spooked by a weakening economy and weakening prices.  Reduced demands for construction will bite into demands for deal and, of course, iron ore exports from countries such as Australia. SteelGuru (again, HT Rabee)  observes that dramatic reductions in Chinese steel demand are already occurring.  It is interesting stuff and much more substantive than Kevin Rudd's assurances that China will save Australia's bacon. The Economist makes its own observations with particular reference to Australia - prices of various types of steel have fallen 20-70% and iron ore stockpiles are claimed to be accumulating in China.

The financial turmoil seen in recent weeks are starting to have the real effects that lead industries to cut back on investment plands and jobs.  The extent to which this will now happen is the substantive global economic issue.  The Economist coverage of such issues this week is absolutely outstanding.


rabee said...

I think that it is prudent at this time for the government not to play up the prospect of continuing growth in China.

The fear is that Australia could be seen as entirely dependent on the China housing bubble not bursting, which may or may not happen.

The message at this point should be that Australia is sufficiently diverse (which it is) to withstand a downturn in China. And that the government is aware and prepared for the consequences (at least start preparing for the consequences).

sir henry casingbroke said...

Mahathir reckons: "Only the military power of the US is forcing the world to give value to the US Dollar." This is silly. China, Japan and the MEOPECs are supporting the greenback because it is in their interest to do so, their livelihood depends on it.

rabee said...

PS. Mahathir is an irrelevant fool and a racist.

hc said...

On race and other issues Mahatir may be extreme but Malaysia did recover promptly from the Asian crisis by imposing short-term capital controls. Mahatir's opposition to free markets during times of crisis was endorsed by Joe Stiglitz and others.

jc said...


Malaysia recovered quickly because they set the exchange rate much higher (weaker) when it was fixed after the crash. They also allowed wage rates to contract and high priced assets to liquidate. They were able to get away with imposing heavy duty exchange controls because they could self finance as they ran a current account surplus.

Stigliz says idiotic things and makes the Nobel basically worthless.

jc said...


We can live with a slower china but at a much lower exchange rate which means our living standards will be reduced to the rest of the world in relative terms. This is a good thing by any stretch of the imagination. Just hope it doesn't remain so for long.

jc said...


this ISN'T