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BW Businessworld

Resorting To Public Debt

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Booms and busts in real estate is a story that has repeated itself throughout centuries. I have specified the usual suspects we have to blame for creating the recent, worst-ever financial breakdown in America, and beyond in (‘Cleaning up the US Mess, BW, 2 June 2008). Alas, now week after week the headlines shout out how serious the mess is those suspects have left behind.
Therefore, this time I can focus on how and why it will require heavy government rescue spending to restore stability to Main Street, Wall Street and markets abroad.
The losses of both lenders and borrowers are so vast that no private investment bank, no private commercial bank, no private venture group, and no super-rich Warren Buffett could ever be motivated to come to the rescue of the major losers. Yes, the public interest does require Fannie Mae and Freddie Mac to be saved. But only the naive can believe that when they are saved their governmental rescuers will escape heavy losses.

More columns from the author:

Countering Buffettonomics

Cleaning Up The US Mess

Our Financial Plague

Private capitalism can never save itself after it has generated widespread speculations. That’s why central banks like the Bank of England, the Bank of Sweden and the 1913 Federal Reserve system were founded. Every capitalist market system needs a ‘lender of last resort’. The business of government is to lose money — not to fat tycoons or purblind speculators, but to public-purpose agencies like the Reconstruction Finance Corp. or the national housing agencies.
President Franklin Roosevelt did not bankrupt America when he rescued capitalism from the Great Depression. Instead, by 1939, when Adolf Hitler threatened to conquer the whole world, Roosevelt’s America was economically so strong that it was able to defeat German aggressors for the second time, in 1945 as it had done in 1918.
Some may wonder whether the Federal Reserve and the US fiscal systems might end up bankrupt under its present load. An understanding of the macroeconomic resources of government suggests that between fiscal deficit spending by the US Treasury, and by the Federal Reserve System creating new money, even were the sub prime turmoil to be twice what it will be between now and 2010, all the dollar-denominated debts of the public could be honoured.
After you have understood this point, you still ought to ask: will successful support for Fannie Mae, FDIC and other new home-lending agencies convert America into a banana-republic, galloping-inflation economy like 1923 Germany or 2008 Zimbabwe?
My answer to that makes reference again to the economic history of the 1929-1939 Great Depression, and the 1940-1946 World War II macro stories. In the war period, almost of half our GDP got spent on war.
Next to that epoch and the Depression epoch, the future activities of Fed Chairman Ben Bernanke and US Secretary of Treasury Henry Paulson will loom small. Actually, so far, our present 5 per cent per year inflation traces to microeconomic supply shocks and not to currency expansion.
Money is now not at all ‘easy’. Credit is abnormally tight for any investments that involve risk. In times of bankruptcy and foreclosures, anything right now will be risky.
Too long were Wall Street pundits and White House economists counting on a modestly weak soft landing. They put into their standard ‘consensus’ forecasts a fall of, maybe, 1 per cent in GDP growth from lost jobs by homebuilders, and maybe an additional 1.5 per cent drop from homeowners’ loss of net worth. And, no one could fail to notice that high oil and Board of Trade commodity prices will affect 2008 consumer spending.
A financial meltdown is much like that. Support for a dying Bear Stearns firm can keep its shell barely alive. But within weeks, Merrill Lynch and Lehman Investment Bank will walk near the valley of death.
After George Bush is removed safely back to his Crawford, Texas ranch, a new Congress will recover for the American people their genuine tax base, which President Bush and Vice-President Dick Cheney have been giving away to the multimillionaire income classes.

Poet Robert Frost wrote: “Home is the place where, when you have to go there, they have to take you in.” Same with present-day voters. When things fall sufficiently apart, we have to begin rebuilding the place we live in.

© 2007 Tribune Media Services

(Businessworld Issue 5-11 Aug 2008)

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