Thursday, March 26, 2009
Wednesday, March 25, 2009
Friday, March 20, 2009
In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war.
The New Deal rebuilt America physically, providing a foundation (the TVA’s power plants, for example) from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving. There were many, in the 1930s, who did not think so.
What did not recover, under Roosevelt, was the private banking system. ... If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended. It was the war, and only the war, that restored (or, more accurately, created for the first time) the financial wealth of the American middle class. ... But the relaunching of private finance took twenty years, and the war besides.
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
We have to realised that credit and banking feeds off global real economy. It is actually a cost, however small, for the real economy. So once jobs come back and incomes stabilize (at whatever levels), you will see credit coming back. Without certainity of earnings, the credit channel goes in self-preservation mode - waiting for certainity to return. Being global, the channel can absorb far more bailout/stimulus than any single nation can provide.
The problem of global income adjustment and therefore credit offtake ability will hit us next. This is the heart of the problem. Next: we will see how we can fix this!
Thursday, March 12, 2009
The global credit channel is a central sysmptoms and collateral damage of current crisis. The core of this is in US and therefore US government agencies are attempting bailout after bailout. The US government is not liable for rescuing an essentially global channel. It's first duty to clean the domestic channel. The two are cross connected to such a degree that they cant tell what they are fixing.
The solution, to my mind, is simple. Create an alternate credit channel - what I call "the modified good bank solution".
- Create a good bank - with regulatory charter that allows lower capital norms, higher government guarantees etc. so that it will have liquidity, capital and ability to acquire assets.
- Let it give credit to worthy borrowers who have the ability to repay.
- Create a mass loan transfer drive - where the borrowers to move their loans to this bank - rather than buying loan books from established banks.
- Accelerate the process by establishing uniform common minimum norms for acquiring loans. Start with lowest risk with highest documentary evidence.
- Augment the document checking using other government agencies workforce.
- Repeat the drives till you have covered big chunk of population. Government can take over some homes and convert them into temporary offices - establish geographically wide network - quickly.
- This bank should be broken up into managable units and privatised at a pre-committed date in 5/7 years time.
The global bailouts are more complex. This should be funded with pooled money. Using the IMF or world bank is a good starting point. More on that later.
Addendum: Why Us needs to fix domestic credit channel first?
US is biggest consumer of the world. The world needs able US consumers to continue to spend albeit to their comfort level (and definitely to lesser degree). The able and wanting consumers are currently being denied a chance to consume. This is dtrimental to everyone.
Wednesday, March 11, 2009
Seamless dispersion of production centers
The intersection of man-power and job profiles will mean a more seamless dispersion of production centers across the world. The first demonstration of this will come when some manufacturing jobs moving back to US.
Tuesday, March 10, 2009
Monday, March 09, 2009
Wednesday, March 04, 2009
Tuesday, March 03, 2009
The contextual relationship between balance sheet of citizens and their government, to my mind, holds the key to evaluating responses to current crisis. We see three main segregations:
- China and some developing countries – where both government and personal savings are high
- US and developed world – where both government and personal debts are high
- Countries like India – where personal savings are high but government is seriously indebted.
Keynes solution is meant for the Chinese situation. So Chinese are spot on with their solution. But it is still not clear if this will work in China. Keynes’ solution needs a robust wealth-distribution mechanism that China lacks. Therefore, we need to watch Chinese government actions keenly. Other countries with surplus will be better off if they have access to markets for their produce and Keynes-style stimulus will be the way to go.
For US and other developed countries, the same Keynesian solution will put their future in jeopardy. Beyond a certain tipping point, there will be a bigger crisis looming. It will start with Chinese stopping the US bail out. China is bailing out the US who is in turn bailing out most of the world. Surprising that Chinese want so less say in who gets their money. Possibly, they got a raw deal. Anyways, if China continues stimulating both US and domestic Chinese economy, it will end up like India! As the scale of stimulus or bailout increases, I get ever so more worried.
India is in further mess. It has the consumers who can spend but its government cannot do anything to stimulate the economy. So India will have to sit tight till domestic economy revives on its own. It won’t grow at a pace similar to past 2-3 years but it will still grow robustly. Indian slowdown is likely to be deep and short. After the initial bubble bursting, you will see Indian consumer wring his/her hand in despair and get about their normal trend-line consumption.
So in all, everyone has large problems.