How are They Facing the Global Financial Crisis?

With various industries across the globe resorting to massive retrenchments and countries elsewhere seriously considering various efforts to address the ensuing problems of insolvency of their financial institutions, job losses, etc., the pangs of the global financial quagmire induced by the sub-prime crisis of America are very much concretely felt. While much has been said and written about the origin of the problem, this piece would like to capture in compendium the solutions that are being proposed to lift the global economy from the long-term and very dreading consequences of the quandary.

Probably because political and financial leaders are thinking that today’s problems are very similar – if not completely identical – to the Great Depression of the US, so we are seeing them rehashing and concocting ripostes of every kind with elements taken particularly from the New Deal by Pres. Roosevelt. Under this design, governments are expected to bail out banks and big industry, make them solvent and then re-sell them to private business. Governments are also going to include higher spending on infrastructures such as roads and bridges and cut the interest rates.

Obviously, the interest rate cuts are meant to pacify people, for these are going to result to payment of lower mortgages. But, looking into the issue more deeply, we ask the question: do lower interest rates provide relief to the people who are jobless, without income or just scrapping by? Do lower interest rates provide help to companies with empty order books? Or will interest rate cut not have deflationary effects on circulating capital because so many consumers and companies that do not have money are already up to their neck in debts in all major industries? Easily understood, any money saved from interest rate cuts is going to debt reduction, and not result to more consumption or investment. Thus, only banks or financial institutions that operate on margin trading will gain. Then, if the money derived from interest rate cuts are not put to productive use, healthy recovery is not going to ensue; rather economic bubble will only be pumped up.

What’s going to happen when more spending is devoted to infrastructure? In surface level, it’s a good thing. Roosevelt did so to curb the very high unemployment rate in the US. From the streets, he gathered all the people who lost their jobs into make-shift barracks. The infrastructure workers, then, were housed, fed, and paid (although their salary was way below their former take home pay). Just as then, this modus can just “fake” economic growth and does not actually effectively address the problem. In fact, this modus can even spark inflation.

What about the planned rescue of the key players of various industries? It is expected to magnify further the problem, for it is in effect the putting into use of resources that have not been produced. For the real problem is the lack of real growth, untouched or distorted by high finance. It is not the solution!

Aside from the “Rooseveltian” New Deal, another plan consists of making the “Reaganomics” as its model. Reaganomics is supply-oriented that has as its upshot tax cuts and privatizations.

Will tax cuts have impact? Debatably, it will have. But taxes have already reached the point along the Laffer Curve where further cuts are no longer possible as these could already undermine shaky government balance sheets.

How about privatizations? Well, many privatizations have already been done – in most cases, recklessly – in developed countries.

Of course, the New Deal solution is expectedly not going to work now. If the Paulson’s rescue plan is any indicator, well – we have already seen how his $700 billion dollar plan has grown to an estimated $2,000 billions (and this without the authorization by the US Congress); while the Fed Reserve even refusing to provide details about who got what or how much (cf. “Worldwide Fed Defies Transparency Aim in Refusal to Disclose,” by M. Pittman, B. Ivry, and A. Fitzgerald, Bloomberg News, 11 November 2008).

We also need to remind ourselves of a historically verifiable fact: that it was not the New Deal that put an end to the Great Depression. It was the Second World War.

And, so, what else can work?

Let me propose one, and this is being expected to at least free resources particularly in the US. I train my eyes on the US defense spending. It’s verifiably the largest in the world, and an enormous waste it is aside from being unethically responsible as well.

But of course it’s neither part of the world leaders’ agenda nor conceived as a very probably point to explore. If I may muse, it is because it was when US was prepared for war (against the Axis Powers) that the Americans were effectively bailed out of the Great Depression.

History repeating itself?