Global Financial Crisis—Are We Still in Trouble?

Global Financial Crisis—Are We Still in Trouble?

…. a presentation

R. Kuppanna GM, Kuwait India International Exchange Co. Diwaniya, AWARE Center . . May 31, 2011

Kuwait India Int’l Exchange Co.Kuwait India Int’l Exchange Co.W.L.LW.L.L

Synopsis

The sub-prime crisis, of 2007/2008, has snowballed into a major financial and economic crisis impacting the entire world. The fragility of the economic system stands exposed and the underlying policy framework, governance standards and the active interventionist measures are proving to be futile. Prevailing economic orthodoxy has failed to address the problem.

Blaming speculators as a response to financial crises go to back at least to the Greeks. It’s almost always the wrong response - - - - Larry Summers


The Crises

•Severe global economic downturn•Collapse of all markets•Loss of confidence, risk aversion•Declining output, high unemployment, stagnant incomes, low growth rates•Corporate/Sovereign Failures•Huge and growing sovereign debt• High/Hyper – Inflationary Potential; Economic Depression


“We have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.” - - - - George Orwell

The Mess We Are In

•Global Debt: $ 222.5 trillion; 362% of global GDP•Sovereign Defaults (Europe—PIIGS)•US downgraded•US Debt Limit reached•Trouble in the US Municipal Bonds (48 States)•China Collapse?•Problems galore all over

“If ‘pro’ is the opposite of ‘con’ what is the opposite of ‘progress’?” - - - - Paul Harvey


Interactive Global Debt Chart

http://www.economist.com/blogs/buttonwood/2010/06/indebtedness_after_financial_crisis





Past Crises

•the recent housing bubble•the stock market bubble of the late 1990s•the earlier long series of other booms/busts•The Great Depression of 1929•The earlier stock market boom of the 1920s•bubbles of the 19th & the 18th centuries, all the way back to the Mississippi Bubble of 1719

“Those who cannot learn from history are doomed to repeat it.” - - - - George Santayana


Those Who Do Not Know History . . .

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.“ - - - -Cicero: 55 BC


Why ??

•What are the fundamental, causative factors? •Why do crises occur so very frequently?• Why have all previous attempts at tackling crises failed? •Are we still in trouble?• Is there a way out?

“Government’s view of the economy could be summed up in a few short phrases. If it moves tax it. If it keeps moving regulate it. And, if it stops moving, subsidize it.” - - - - Ronald Reagan


An Aside

•Cluster of Errors

•Analogies— Robinson Crusoe; Circus in Town; Home Builder

•Broken Window Fallacy

“The key economic activity that causes growth is not consumer spending but production.” - - - - Yaron Brook


The Broken Window

The art of economics consists in looking not merely at the immediate but at the long effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups . - - - - Henry Hazlitt


Prime Cause

•Government Policies•Moral hazard issues•Central Bank Policies•Monetary system: fiat money and credit expansion ( and the consequent malinvestment it engenders)•Credit Expansion underlay all crises (earlier ones and the current one)

“The road to hell is paved with good intentions.” - - - - F.A.Hayek


Markets – Some Thoughts

• Market Corrections Are Not All Bad

• “Panics” Are All Bad

• Markets Don’t Fail!

The politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state than to laissez-faire capitalism. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez-faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional. - - - - George Reisman.


Road to Recovery

Answer stems from:

•Knowledge of credit expansion/consequences•Problem not insufficient spending but insufficient capital (losses caused by malinvestment)•Too little capital, too much debt, and not enough cash

“Ideas Matter. Ideas Have Consequences” - - - -Richard Weaver


Road to Recovery

•Establish 100% reserve system against checking deposits with gold•Establish freedom of wage rates and prices to fall…this would eliminate mass unemployment•No free lunches; no bailouts; no subsidies•Restore discipline --Save more --Spend less

“Those who expect to reap the benefits of freedom, must like men, undergo the fatigue of supporting it.” - - - -Thomas Paine (Crisis Number IV)


Deepest Causes -- Philosophical

•Altruism•Pragmatism•“Free Lunch” Mentality•Lack of Personal Responsibility

“Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find one of them is wrong.” - - - - Ayn Rand


Deepest Cure -- Philosophical

•Life, Liberty & the Pursuit of Happiness•Demands and Rewards rationality/self-discipline•Pursuit of each individual’s long term rational self-interest in the context of the “Trader Principle” – creating win/win relationships

“The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion . Political freedom is the corollary of economic freedom” - - - - Ludwig von Mises


The Trader Principle

There is no conflict of interests among men who do not desire the undeserved, who do not make sacrifices nor accept them, who deal with one another as traders, giving value for value.The principle of trade is the only rational ethical principle for all human relationships, personal and social, private and public, spiritual and material. It is the principle of justice. - - - - Ayn Rand


The Choice Is Yours

• From a state monopoly on money, to state guarantees of bank liabilities, to state sponsorship of mortgages, to state ownership of banks ---the progression in the past century has been to move away from free markets toward socialist banking.

• The welfare state and its main financier, the Federal Reserve, are ultimately “justified” on the grounds that the government has a moral duty to provide the needy with goods and services – from education to health care/insurance to mortgages.

• Think!! The choice between the alternatives is yours. So are the consequences.



Thank You


Documents

Global Financial Crisis—Are We Still in Trouble?