Wednesday, February 11, 2009

Bailout, confidence building,...

We have the American, British and French lawmakers talking about “protectionism”, the Chinese and Russian leaders in Davos talking about “free-trade”. These developments left me wondering if I was dreaming. Maybe next we will hear from Mugabe of Zimbabwe talk about good governance! The world is changing at a breathtaking pace.

These confusing times though seem to strengthen many state sponsored economists’ to expound their beliefs that their largely Keynesian route of tremendous government spending is the only way to steer the economy out of a possible depression. Saying now that the financial bubble was obvious is not particularly helpful, but understanding the bad decisions of the past decade is helpful.

Some of the bad decisions that we are currently making include;
Asymmetric bailout; Bailing out banks using stock buys, guarantees etc, has helped the banks reduce their balance sheets, and has not helped individuals and small businesses reduce their balance sheets. So there should be no surprise in the lack of confidence when this in-equilibrium persists. The bail out of the banks “that are too big to fail” led to a lot of tax dollars being channelled into bonuses, buyout of small profitable banks etc. but did not necessarily increase confidence in the banking system.

• Drowning in more debt to get out of debt: Apart from a few countries that have surpluses many of the countries are on the road to increased national indebtedness. This new debt is created due to excessive current debt in the first place! The net effect could well be that the US and the UK and many of the other countries will be printing currency notes with no real value to back the currencies except the “confidence” of the market.

• Bailing out unsuccessful companies: Will you the consumer buy a product you do not need or value? Then why bail out automotive companies that have not been able to compete effectively even in good times? Will bailing out unsuccessful companies increase your confidence?
Prolonging the economic pain can lead to a depression. This in turn can have serious economic and military implications. Now the question is will the current bailout prolong the pain. Not being in a position to crystal gaze, and having very little faith in government sponsored intellectuals and experts; I conclude that we can choose to minimize the pain at micro level. We can choose to build confidence, find opportunity and commit ourselves to success. Though success will now be measured using a different, more pragmatic yard stick than in the past. The most important choice that we can make (where you have a choice) is to ensure that tremendous increase in defence spending is not the “plan” to steer us out of a recession.