The Stimulus Fix and the Global Ponzi Scheme

In terms of our current economic condition, we resemble a junkie going through withdrawal; “jonesing,” desperate for a money fix. Stimulus packages are thus globally popular to alleviate the symptoms of our addiction to easy money resulting from the recent unregulated issuing of debt.

By Roger Baker / The Rag Blog / February 14, 2009

See ‘IMF Says Advanced Economies Already in Depression‘ by Angus Whitley and Shamim Adam, Below.

What would a financial collapse look like?

For one, there would be a downward spiral of job losses feeding on other job losses.

For another thing, the banks would stop lending.

And for another thing, the IMF might start saying we’re in a world depression, and saying we have to restructure the broken world banking system to get out of the fix we’re in. Just like they are saying now, (see bottom of this post).

[The banking sector is the sector of society that risks or invests a society’s wealth in market goods, infrastructure or production, with the aim of protecting or expanding it. Even under socialism there needs to be some kind of a state bureaucracy to do the same things. Historically, you didn’t used to have to have banks at all because you had priests and potentates with kingly powers. In common doing what they thought was necessary to run the money affairs of the kingdom in such a way as to make it prosper over the lifetime of a king and his agents. A kingly system by its nature tends to encourage a fairly
long-range management perspective.]

Now we have a different perspective rooted in our political system and in the international needs of finance capital. Capital has assumed and demanded a system that assumes stable growth forever. This set the stage for a permanent bubble economy in which the US government has turned into a sort of publicly supported incubator to guarantee the success of deregulated banking and investment interests. Now globally expanding on the same bad habits that led to the great depression.

In effect the managers of US capitalism have forced the government to guarantee the unregulated issuing of bad paper like credit default swaps, based on infinite growth. To back up this bad paper, the future earnings of US taxpayers have been pledged as collateral for bank bailout debt. But about the only way for the taxpayers and economy to thrive is for the US to become competitive in world trade by producing goods that make sense when restructuring toward an energy limited economy.

We have investment banks trying to influence politics and reduce regulation alongside Fannie Mae and Freddie Mac. Washington is swarming with special interest lobbyists aiming to restrict, and sweeten for themselves, the political outcomes. On the whole, this is a system acting to impede reform and change.

The Federal Reserve, the ones who try to regulate our economy by setting the prime interest rate, are really a private outfit sponsored by the largest dozen or so banks. Alongside that kind of political clout, the US Treasury Dept., that prints up our money and sells US bonds, usually goes along with the Fed.

The chances for turning around what looks like a world depression seems to boil down to whether the current dysfunctional system, now hobbled by entrenched special interests, can actually be reformed and restructured into a sound global banking system. One that will take up the slack and stand on its own after the immediate effect of the stimulus funds wear off.

In terms of our current economic condition, we resemble a junkie going through withdrawal; “jonesing,” desperate for a money fix. Stimulus packages are thus globally popular to alleviate the symptoms of our addiction to easy money resulting from the recent unregulated issuing of debt. A fix of stimulus cash can help over the short run to get us back into a functioning state, but its not going to help very much and for very long — unless we deal with the underlying problem, which is the unregulated, dysfunctional banking system in search of rational managemnt on a global scale.

An unregulated global banking system really amounts to a giant global Ponzi scheme, one that bets on the infinite growth of future global market demand, even for discretionary spending on status items. The more risk, the higher the interest rates tend to be, and the more profitable for those involved in setting up and insuring the deals.

Obviously, the USA would have to be a key player in reforming the global banking system, but also China, Britain, Japan, Germany, etc. If one regional banking system looks sounder than the the others, the money will head there.

The odds for international cooperation are not so good for a global banking system used to calling the shots.

A new system with a matching political regulation system is needed to set up wise banking and investment rules, rules based on cooperation and long term thinking. A new regulated global system is needed, one that potential investors have confidence will really offer hope for long range growth and stability of their invested wealth.

It is a tall order given our current situation, but that is what the IMF seems to be saying we need as a basis to keep the banking problems from getting worse, and to serve as a necessary basis to turn around a world depression.

IMF Says Advanced Economies Already in Depression

By Angus Whitley and Shamim Adam / February 7, 2009

Advanced economies are already in a “depression” and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.

“All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector,” he said. “And today it’s not done.”

The U.S. economy has lost 3.57 million jobs since a recession started in December 2007, its biggest employment slump of any economic contraction in the postwar period as companies from Macy’s Inc. to Caterpillar Inc. cut costs. The U.K. economy will shrink this year by the most since 1946, the IMF forecasts.

“There is hope that the fiscal and monetary stimulus measures being implemented around the world can help turn things around,” said David Cohen, Singapore-based director of Asian economic forecasting at Action Economics. “But there is still the risk it can be short-circuited by further financial turmoil.”

$780 Billion Package

The U.S. Senate is due to vote early next week on an economic stimulus package totaling at least $780 billion that President Barack Obama said is needed to prevent the economy from sinking into a deeper recession. Asian nations from China to Singapore and India have pledged more than $685 billion on their own spending programs.

The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of a rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.

Governments should be ready for “full-fledged” intervention, acting quickly to sell or wind-up insolvent lenders, Strauss-Kahn said. While the European Central Bank, which left interest rates unchanged this week, may have more room to cut borrowing costs, such a policy may not be as important as restructuring the region’s banks, he said.

Borrowing Costs

“We’re probably not very far from the point where the question of interest rates is not the most important question,” Strauss-Kahn said. “Providing direct liquidity to the market, restructuring the banking sector, may have more influence on demand than interest rates.”

In Asia, “there’s still room for bigger stimulus packages,” the IMF official said. Malaysia, for example, may introduce a second stimulus package larger than November’s 7 billion-ringgit ($1.9 billion) plan, he said.

Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the IMF said in last month’s update of its World Economic Outlook report. The region may expand 6.9 percent next year, the fund forecasts.

Asian nations will need a recovery in the global economy before the region can exit a slowdown, the IMF said this month. Strauss-Kahn said today the fund’s forecast for a recovery to start in 2010 is “very uncertain.”

Demand for Loans

Demand for IMF loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence. The organization has so far agreed to lend $47.9 billion to countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Ukraine and Serbia.

Strauss-Kahn said he agreed with Poland that the eastern European nation isn’t in need of assistance from the fund now, but may require financial aid in the future.

The fund may collaborate with some countries to restore confidence, without necessarily providing immediate loans, the official said.

“Some need for precautionary arrangements may appear,” he said, without naming specific countries.

Critics of the fund say it’s failed to keep up with the pace of change as the worldwide recession deepens.

The IMF and similar institutions are “incapable” of coping with the global financial crisis, because their resources can’t keep up with demand, former World Bank President Paul Wolfowitz said on Feb. 4.

Russian Prime Minister Vladimir Putin has criticized the World Bank, IMF and World Trade Organization as anachronistic organizations that give no voice to emerging economies.

The IMF and the World Bank were set up at the 1944 Bretton Woods conference. The IMF was designed to prevent crises in the international monetary system and to provide financing to distressed countries.

Source / Bloomberg

The Rag Blog