Tuesday, January 20, 2009

The Light At The End Of The Economic Tunnel

There are two things that I keep hearing about the Global Financial Crisis. One is that “Things will get worse before they get better.” The other is “Nobody saw this coming.” While the first observation would appear to be reasonable, the second is simply not true. The problem is that the people who did see it coming had been treated as crackpots accused of “crying wolf”, and subsequently ignored. Now that those “crackpots” have been proven to be right, they continue to be ignored as an inconvenient reminder that the mainstream experts were wrong.

Now it seems that everybody is convinced that things really are bleak, with Prime Minister Kevin Rudd this week observing that “the magnitude of the Global Financial Crisis almost beggars belief.” Mr. Rudd has foreshadowed further efforts by the government to stimulate the economy which can be expected to include tax cuts, infrastructure spending and increases to welfare. This can only add up to a budget deficit, but deficit is no longer a dirty word as even hard case economic rationalists are falling to their knees to worship once again at the alter of John Maynard Keynes. The near death experience has led them to see the light and reach for their rosaries.

While it is absolutely vital that the Government continues on its path to stimulate the economy and protect the disadvantaged, the problem is the sheer scale of the global crisis. The fact is that no matter what measures Australia implements, the international financial storm is beyond our control. To some extent that is why the Australian Government must continue to pursue its course. The crisis will continue to happen whether we like it or not. What matters is how we deal with it.

So here are the crucial points. First, jobs will be lost. That means it is essential that a financial safety net continues to provide support for workers who will be needed when the recovery does begin. Second, capital values will fall. Yes, the sharemarket has already dropped about 40% last year, but it’s not over yet. Housing prices are still too high when considered as a multiple of average income, and regardless of the supply and demand conundrum, people cannot buy what the cannot afford. Thirdly, consumer prices will fall. This is already happening, and although it will provide some relief for consumers, it will also sharpen the slowdown in the economy.

Access Economics has warned that Australia’s economic prosperity will unwind “scarily fast”. In some ways however it might be better to suffer a rapid readjustment rather than a protracted period of decline or stagnation. The most important point however is not how we respond to the crisis now, but how we rebuild our economy afterwards and in the years ahead. This massive readjustment is also a huge opportunity to reconsider how the global economy functions, how business is done, and how governments around the world protect the interests of their citizens.

If there is a light at the end of the economic tunnel it should be this. It is an opportunity to put an end to the hollow practices of financial engineers and corporate privateers who have essentially raided the financial system, depleting it of value and leaving it to collapse. It is an opportunity to return to the idea that corporations actually make something other than just money, and that the system should exist to serve the people, and not the other way around.

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