Posts Tagged ‘IMF’

How Do You Make Governments Behave?

May 19, 2010 1 comment

Business vs. Government

Just like there are diseases of the rich, there are economic malaises peculiar to wealthy countries. One of these is a high level of government involvement in the economy. In the UK for example, government spending is set to become half of GDP. Similar numbers characterize much of Europe and the OECD.

The implications of this are interesting. It means that our notion of how economies work- firms produce goods and services, consumers buy them, and efficiency is guaranteed by the forces of competition- is only 50% of how rich countries’ capital stock is being deployed.

The biggest player in the economy is a gigantic monolith with the power to tax. It has no incentive to be efficient, because it cannot go bankrupt. It has no competition. When it spends too much, it can simply raise taxes. When these built-in incentives to fiscal profligacy result in massive government debt and deficits, it simply waits for its neighbours to bail it out.

The frightening reality is, there is no-one to regulate the regulator, to watch the watcher and prevent him from dragging the whole economy down in a sea of red ink. This is why the IMF is now plaintively begging the world’s governments to behave.

Of course, we need more than begging. Rich countries have got used to gigantic governments and high taxes. This is unlikely to reverse. The next best thing is to devise rigid mechanisms for regulating the fiscal behavior of governments. Elections clearly don’t work. The answer to this mighty challenge will be the big economic question of our time.


Holy Fiscal Terror

June 11, 2009 3 comments
Recovery, did you say?

Recovery, did you say?

The economies of the West will never regain their old prosperity.

This statement is neither alarmist nor exaggerated. As we are assaulted with all manner of contradictory economic data, a cloud of confusion has gripped the usual prognosticators. Like ancient prophets scanning the skies for a sign, gurus and magi desperately seek to divine positive portents in the skies.

There are none. There is a bias in the prophesies in that they reflect our desperation for hope. In the US, $1.3 trillion in wealth has been obliterated by the crisis. The World Bank sees the global economy shrinking 3% this year. Individually, we have been buffeted by mortgage foreclosures, disappearing nest-eggs, unemployment, and crushing consumer debt.

Amid this carnage, we need to believe, and asset prices are straining upwards, buoyed by the sheer force of our desperate optimism. Oil prices have surged in a mini-bubble sure to collapse soon. Stock markets are swelling with the hopes of the desperate. In the UK, as interest rates start to climb, recalibrating to reflect the grim reality of our collective indebtedness, the prophets still try, vainly, to spin these signs as positive.

It is futile. Here at Amusis, we stood alone like voices in the wilderness during the massive mania of the bailouts, when our governments mortgaged our futures by plunging us into deficits so large, it is unlikely any of us alive today will see them paid off. The idea that there is a cost-free way to bail an economy out of recession was a fallacy, we said. There’s no free lunch in economics or anywhere else, we said. We should have left the market alone, we said.

Now, the sheep at The Economist, after cheering on the fiscal responsibility of the US and UK governments, are finally coming to their senses and agreeing to what we said all along about the foolishness that will forever live in infamy as The Great Bailout.

This article says it better than we can: the public debt that has resulted from the worst misallocation of capital in history will ensure that for another generation, the only recourse is high taxes and high interest rates. Neither is a formula for growth.

The irresponsible slush fund promised to the IMF at the G7 summit was something we decried in April. Now, The Economist belatedly agrees with us. Even when the worst of the recession is past, the US and UK consumer will remain burdened by consumer debt fuelled by Alan Greenspan’s low interest rates. With governments and consumers over their heads in debt, where will the engine for growth come from?

Certainly not the West. The portents are grim. Recommendation? Pack your bags and relocate to Asia, Eastern Europe or Africa, where the future growth is. Marry a tribesman or woman with a herd of plump goats. Save yourself while you still can.

Obama in the enterprise?

April 27, 2009 1 comment
Former Merill Lynch CEO, Stanley O' Neil. When will more CEOs look like this?

Former Merill Lynch CEO, Stanley O' Neil. When will more CEOs look like this?

Do markets self-correct for ethnic and gender employment discrimination?

In more naive days, we believed so. It is theoretically inefficient for any company to discriminate against employees based on ethnicity, gender, age, sexual orientation, or other non-performance related criteria. Not putting the most productive person in any job incurs an opportunity cost: the productivity lost by employing the second-best person.

In theory therefore, since talent is equally distributed in the population, the market should naturally result in executive ranks that reflect the diversity of the general population.  The cream should naturally rise to the top.

If only it were so simple. A brief gander at real life shows that we prefer to work with people we like, and are like ourselves (however we define ‘like ourselves’). Unfortunately, this often means consciously or unconsciously de-selecting people based on their names, religion, ethnicity, gender, age, or taste in ties (Henry Ford once fired an executive because his trousers were too tight).

Discrimination in the workplace is still a sad and shameful reality.  In the US, blacks and hispanics are still underpaid relative to their white counterparts. So what to do? Sit back and wait for the market to self-correct, or advocate more vigorous government intervention to ensure equality in the workplace. The meddlesome UK government, quite predictably, is opting for the latter approach. However, for once, we cannot say with certainly that this interference is not the right approach. We just don’t know. Do you?

In ‘harder’ news, now that the blind panic and herding that drove the largest market interventions in history have begun to abate, we’re beginning to count the cost of the exorbitant bailouts. A sense of having gone too far is slowly pervading the halls of power.  Britain’s wealthiest and most productive citizens are being forced to finance the deficits that financed the bailouts. Sick of being forced to pay for the bloated carcass that is government bureaucracy, they are threatening to quit the country in protest.

Rational analysts within central banks themselves are suggesting that current interest rates are too low, and that they should be at circa 5% (it was always ludicrous that a crisis caused by low interest rates could be solved by more low interest rates). And banks, their risk management practices restored to sanity, are now charging appropriately for risk. The EU is sternly admonishing its members to cut their deficits (sadly, the UK is outside the ambit of this injunction).

Best of all, business is beginning to push back against the control freakery turning the UK into a morass of official red tape.

How are the Masters Fallen

April 21, 2009 Leave a comment

professorThis is a humbling time for erstwhile Masters of the Universe. Former investment bankers who once controlled vast sums of luscious loot are now unemployed in droves, bearing the multiple ignominies of joblessness, girlfriend desertion and public excoriation.

Now these former doyens of debt and derivative are flocking to the campus, not to induct fresh MBAs into their cloisters, or to acquire further degrees in the arcane mysteries of high finance, but to presumably teach children to count money. Hopefully, after the soul-sapping, high-adrenalin crucible of capitalism that was their former jobs, they might find some spiritual fulfilment in the humble vocation of grooming tomorrow’s greedy capitalists.

And while bankers seek redemption, the bloodbath continues. The IMF, that black hole where public money goes to die, is announcing that total global bank losses are at the unimaginable sum of $4,100bn. And naturally, its prescription is for the government to throw more good money after bad. And since the UK government loves nothing more than doing this very thing, Alistair Darling announces a £1bn cash bonfire to provide housing the market has not demanded.

We would appreciate if someone explained to us why the government is in the real estate business in the first place. Or why the solution to unhappy children is to spend heavily on a ‘Children’s Plan’. Seriously, a Children’s Plan. There is actually a Ministry of Children in the UK that has a ‘Children’s Plan’. Thus implying that parents had better pack up and resign their duties, because they aren’t needed anymore: gov’ment has a PLAN.

In further economic misery, it is Q1 earnings season, and predictably, the results are not good. With unemployment high, consumer spending is low, so profits are abysmal. The stock market, after a short rally of hope, has fallen again into despondency as reporters like Merck severely disappoint.

Interestingly though, UK retailer Tesco reported a big year. Yes, people may decide that drugs and medicine are an unaffordable luxury, but they still need their groceries. Food is always the last thing you cut from your budget. After all, if you’re going to be selling blood at a blood bank to pay the rent, you need to eat to get your vitamins.

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Breathes a life of gathering gloom…

April 16, 2009 3 comments

blackjesusThe Easter season just passed was about Death and Resurrection. The idea was, though terrible things happen, Hope conquers all.

Except, perhaps, in the realm of Economics. We’ve optimistically commented on the ‘green shooots’ of recovery sprouting tentatively beneath the malodorous mountain of debt we accumulated in the mania of our borrowing binge. However, we can’t wish away the terrible truth: the exuberance of our past overindulgence is directly proportional to the agony ahead.

The IMF is one of the chief beneficiaries of the unparallelled fiscal irresponsibility global governments displayed as their ‘response’ to the crisis. It is now predicting a long, severe recession. We agree- a slow recovery may indeed have begun, but it will be a protracted and shallow one. What we do NOT agree with is the IMF’s predictable prescription: that governments should spend even more (among Economic wags, ‘IMF’ is said to stand for “It Must be Fiscal’).

But then, the IMF has an incentive to encourage government profligacy. It is after all the beneficiary of the G-20 trillion dollar slush fund comprising the world’s largest ever transfer payment. A trillion dollars. That, dear readers, is a lot of money.

You see, we’re already in a deep hole, and in such circumstances, it is advisable to stop digging. The UK’s public debt is set to balloon  gigantically, with the result that government spending will become 48% of GDP. This means, half the UK economy comprises government spending- wasteful civil servants spending tax money frantically because they have to spend this year’s budget so as not to have it reduced next year.

With numbers like this, it is more appropriate to talk of the UK bureaucracy than the UK economy. Thank you, Komrads Brown and Darling. Keep it up, why don’t you: take money from Peter and give it to Paul to buy a fashionably green car, because presumably, he doesn’t have enough sense to do so without your subsidies.

The UK government’s addiction to tax revenue and social meddling (as evinced by this latest bout of self-righteous intervention) is an expensive indulgence we simply cannot afford. As the UK population ages, the dependency ratio will worsen: this means, fewer working people supporting more pensioners. Which means of course, higher taxes on those who earn- even before they have to pay back the Cyclopean deficits being passed down unto the next generation.

You’d think the folks at The Economist would see the terrible ramifications of encouraging more government borrow-and-spend. But they don’t. Rather, like the IMF, they blithely argue that there’s something wrong with exercising a little economic restraint  when crisis looms. With economists like these, who needs enemies?

The slow, cold creep of remorse

April 3, 2009 2 comments

bureaucratThe biggest problem with politicians and bureaucrats everywhere is that they feel they must do something.

Having been elevated to whatever quango of a sinecure they inhabit, civil service officials the world over then have to fill the time between breakfast and closing time with some sort of activity. As a result, they dutifully formulate plenty of superfluous regulation, which we generally endure with long-suffering equanimity in normal times.

In a crisis however, the real danger of these people becomes apparent. They feel the need to demonstrate a ‘bias for action’. When George W. Bush indicated that the best thing to do as the financial crisis gathered was…well, nothing, he was pilloried as a tardy layabout. What the voters wanted was action! And the G20 leaders have now given it to them.

Having run up trillion dollar deficits too large to even comprehend in the form of bailouts and ‘stimuli packages’ that were completely unnecessary (seeing as the recession happened anyway, and that economies always recover by themselves), the cold creep of remorse is beginning to be felt.

Ben Bernanke apparently awoke at midnight in a cold, terrified sweat, having been tormented by nightmares about the gargantuan misallocation of capital he championed. In the stark sobriety of daylight, he is now admitting that perhaps the bailouts were a mistake. He will not be the last. As mass hysteria subsides as the first faint signs of recovery are seen, we will begin to ask ourselves: ‘what have we done’?

The turncoat capitalists at The Economist however, are yet to awaken to the bailout version of buyer’s remorse. Having recently lapsed into convenient socialism, they now laud the G20 trillion dollar IMF slush fund, and dare to opine that this generational theft went ‘not far enough’.

Fortunately, there are saner heads. This deliciously contrarian UCLA Professor correctly (in our not-so-humble opinion) opines that the only proper response to the crisis should have been tax cuts, not bigger government- and that Ben Bernanke should resign.

Personally, we feel the real culprit was Alan Greenspan himself, and that he should be facing the same consequences as the Madoff clan. He got off lightly, that one.

Lastly, where is the outrage? When AIG paid out a mere $165m in bonuses to retain the highly-skilled staff required to keep its complex portfolio in order, politicians pandered by feigning indignation, and the envious masses booed. Now, the bureaucrats at Freddie Mac and Fannie Mae, the government-owned behemoths responsible for the bulk of the very subprime mortgages that caused this crisis, are collecting $210m in bonuses. The sounds of protest are deafening only in their silence….