EDITORIAL: by Peter WestmoreNews Weekly
Recession: end of the beginning ... or beginning of the end?
, June 13, 2009
Do the much-vaunted "green shoots of recovery" point to a sustainable economic recovery?It is now almost two years since the American real estate market was shaken to its foundations by the sub-prime mortgage collapse, and less than a year since the collapse of Lehman Brothers, one of the largest merchant bankers in the United States, which triggered the deepest financial crisis since the Great Depression in the 1930s.
Since then, governments have pumped trillions of dollars into national and international economies, in a desperate attempt to avert a collapse of the financial system and to prop up key industries, like the US auto industry.
The bankruptcy of General Motors, the largest car-maker in the United States, shows that the crisis which began nearly two years ago is still unfolding. The projections in the May Budget that Australia's unemployment will reach 6 per cent in June, and next year will accelerate to 8.25 per cent, show that even in Australia the economic contraction is still deepening."Green shoots"?
In spite of this, we are hearing signs that the "green shoots of recovery" are beginning to emerge. As evidence of a gradual recovery, economists have pointed to stable retail sales and an increase in the number of new homes being built, no doubt stimulated by the Federal Government's first-home owner's grant.
The National Retailers Association welcomed the figures, saying that "the retail trade data suggests that consumer confidence remains reasonably positive and that the economic downturn has not yet significantly negatively impacted the retail sector in aggregate terms. This is good news for the Australian economy and good news for employment."
However, both of these reflect the very substantial government hand-outs since November last year which have pushed the last Budget from a projected surplus of $21 billion to an actual deficit of over $30 billion. With further announced spending on education, housing, roads and other community facilities, the Federal Government has projected a deficit for the current year of $58 billion.
The size of the government spending package virtually precludes new spending programs as the Federal Government goes further into the red.
Whether the staggeringly large government deficit will be sufficient to stave off further economic decline or merely cushion the blow, and whether the current decline will sink into a depression will become clearer with the passage of time. Undoubtedly, global economic factors will play a role.
In the meantime, the need for a restructuring of the global financial system is pressingly obvious; but there is little sign of it happening.
Robert Skidelsky, one of Britain's foremost economic commentators, recently referred to the problem in an article entitled, "The treason of the economists" (Project Syndicate
, April 2009), in which he argues that economists must bear the blame for the recession.
At different times in his career, Lord Skidelsky has been an adviser to the British Labour, Conservative and Social Democratic parties, and a historian of the Great Depression.
He says that the housing and stock market bubbles which collapsed in 2007-8 were the result not merely of new financial instruments such as credit default swaps (CDSs) and collateralised debt obligations (CDOs), but of the mountain of money floating around the financial system at the time, much of it from China which has been running huge trade surpluses, as well as from the oil-producing countries.
Skidelsky argues that it was the massive amount of money in the financial system which pushed interest rates lower and "made possible America's credit expansion between 2003 and 2005. Ultra-cheap money produced a surge in subprime mortgage lending and that market collapsed when interest rates increased steadily after 2005".
If this is true, the massive amounts of money injected into the global financial system over the past two years will ultimately create a similar crisis, however necessary government spending may have been to stave off an immediate collapse.
If nothing is done to deal with this, the current crisis will mark the beginning of a deeper economic disorder which historians will judge to have begun in 2007.
A starting point must be to recognise that the real economy is where people are involved in productive processes: and the financial system is merely its servant, not its master. For Australia, this means that our economy will need to be re-established on the basis of viable manufacturing, agricultural and mining industries, but not on financial services.
Support for local manufacturers and primary producers, such as that given by both the Americans and Europeans, including value-added processing of minerals and agricultural production, construction of new coal-fired power stations and reservoirs, improved ports (away from the centre of the capital cities), and effective quarantine laws, will be part of the solution.
At present, the Federal Government is doing almost nothing about it.- Peter Westmore is national president of the National Civic Council.