FINANCIAL CRISIS: by Patrick J. ByrneNews Weekly
World economy is still 'anaemic'
, September 5, 2009
The consensus among many economists is that the "green shoots" of recovery signal the end of the recession, but some warn that there is a risk of a relapse.
Nouriel Roubini - chairman of Roubini Global Economics and professor at the Stern School of Business at New York University - says that that the US economy is some distance off a rapid return to economic growth.
Roubini recently warned, "Data from the US - rising unemployment, falling household consumption, still declining industrial production, and a weak housing market - suggest that America's recession is not over yet.
"A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential."
The advanced economies are likely to remain "anaemic" for some years. (Project Syndicate
, August 2009).
Over-indebted US household will be paying off mortgages, credit cards and other debt for some years, at the expense of consumption.
With consumption falling, industry is suffering from excess capacity and won't be investing as much in new plant and equipment.
President Obama's stimulus package will fizzle out early next year, and consumer demand is unlikely to pick up enough to stop the economy from stagnating or falling again.
While China and the emerging economies are still growing, their consumer demand can't match the fall in demand from US households.
The US government now walks a tightrope. If it stops spending and raises taxes to pay its debts, it will cut demand and undermine the recovery.
On the other hand, if it keeps spending money to stimulate the economy, it will have to borrow more and more on the bond market, which will force up interest rates and choke off any recovery.
Simon Johnson, former chief economist at the International Monetary Fund, has warned that without a major reform of the financial system, a further financial collapse is on the cards.
Writing in The Atlantic Monthly
(May), Johnson said that over the past decade there flowed "a river of deregulatory policies" that were, "in hindsight, astonishing". These policies, he said, included:
"• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a Congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible
?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation."
Johnson set out a difficult prescription. He said that the US government must force the banks to acknowledge the scale of their losses.
Then "the government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government.
"The government would write down the toxic assets of banks taken into receivership - recognising reality - and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks - cleansed and able to lend safely, and hence trusted again by other lenders and investors - could then be sold off."
The bank clean-up could cost US$1.5 trillion.
The far more difficult job will involve breaking up the financial oligarchy, the powerful elite running over-sized banks that can no longer be managed, who have used their wealth to finance the US political system, to create a network of Washington policy-makers who have been mesmerised by Wall Street's wealth and its associated ideology.Another crisis?
Johnson warned that unless the banks were broken up and re-regulated, another financial collapse could precipitate an even deeper world economic crisis.
He said: "The conventional wisdom among the elite is still that the current slump 'cannot be as bad as the Great Depression'. This view is wrong. What we face now could, in fact, be worse than the Great Depression - because the world is now so much more interconnected and because the banking sector is now so big.
"We face a synchronised downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite.
"Let us hope it is not then too late."Patrick J. Byrne is national vice-president of the National Civic Council.
Simon Johnson, "The quiet coup", The Atlantic Online
, May 2009.
Nouriel Roubini, "A phantom recovery?", Project Syndicate
(Prague), August 2009.