The author of F.I.A.S.C.O. is Frank Partnoy. It must be on the
best seller list, cause B&N had it on their front display. I read
more than my share of financial best sellers. I like to read just
about all non-fiction. Found my copy of Batra's Depression
of 1990, which was obviously at least 8 years early on
the date. :) I'm going to reread (skim) it and see what his charts
have to say about the SEAsian situation.
The banking problems worry me. The governments are acting
like all they have to do is to close the bankrupt banks, and pay
off the depositors with newly printed money. Then they think
they will magically return the economy to its condition before
the bankruptcies. I don't think it's so easy.
Problem #1: The loans that the banks made that went bankrupt
are a problem. Either the companies that borrowed the money
will have to be declared bankrupt, or the government will have
to take over as the creditor, or the loan will have to be forgiven.
The first solution means that the bankruptcies are only beginning.
The second solution (like Chrysler) keeps inefficient businesses
in business, with long term repercussions. Though the C solution
worked for the US, that was just one company, not a large percent
of the economy. The figures I was reading was that something
like 20% of all loans in S. Korea are currently non-performing.
The third solution has the same problems as the second, but with
worse ramifications for the future.
Problem #2: My latest issue (11/15-11/21) of The Economist,
has the front page headline: Will the world slump?. Inside,
they answer no. To quote page 15:
And, to repeat, if deflation should loom in America or elsewhere,
the remedy is to boost demand with more expansionary monetary
or fiscal policy. Deflation, when it happens, exposes not the flaw
in capitalism but the incompetence of central banks and
governments.
The Japanese government since 1990, and the US government
during the 30s both used massive amounts of loose monetary
policy without improving the economy. The problem with lowering
interest rates, is that no matter how low you get them, you cannot
force a banker to lend to someone he thinks won't pay back the
loan, and you can't force someone to ask for a loan when he
thinks it against his best interest to borrow money. (Unless he
does something really "safe" with it like the yen carry trade,
which doesn't exactly help your economy.) In other words, it
is always possible to raise interest rates enough to slow down
the economy, it might take Brazil rates, but it can be done. But
it is sometimes not possible to stimulate economic activity with
low interest rates.
This leaves fiscal policy, which typically has distorting influences
on the economy, and is something that the IMF more or less
expressly forbids when it loans money. We have returned to
the moral position of the late 19th century (US) where it was
considered immoral to pay back those greenback dollars with
anything less than gold. This way of looking at fiscal policy from
a moral standpoint has influenced Japanese policy, as well as
US policy. So I see political problems with trying to fiscal out
of a deflation.
Problem #3 Deflation is a mind-set. Cash is King. You have
to wait until either the government or the people decide to break
the deflation by spending their way out of it. The problem is
that as the economy continues to contract, people get more
and more afraid of spending money. The worst thing is when
you have a lot of people earning a lot more money than they
really need, cause people like that (as opposed to people who
are on the edge of starvation) can reduce their spending by
large enough amounts to really tank the economy. In other
words, if the boomers decide to start saving money instead
of shopping till dropping, then we are doomed, because they
are wasting huge amounts of money right now. That wasted
money is necessary to keep people employed.
-- Carl
P.S. I did enjoy the AG comments on the Fed. My favorite:
fame.org
And thanks for the attaboy. I post to this thread cause I think
the smartest people in SI post here. I've learned a lot. |
