Saturday, 11 October 2008

the belated economic mess...

Well this was meant to happen last week, but it didn’t as I explained in my last entry. It may be a week late, but to be honest it doesn’t matter; the situation has not exactly changed! Anyway, enjoy.

Unless you have been living under a rock for the last year or so you will know that the world economy is not doing so well at the moment, in fact it would probably not be a bad description to say that the economy’s tits are moving firmly in the skyward direction (i.e ‘tits up’ for all the slow ones). It may have also come to your attention last week that the Americans were trying and failing to pass a bill to help bail out the failing banks on Wall’s Street. Fortunately congress came to their senses and passed the bill at the end of the week, although it doesn’t seem to have helped because the world economy is still in freefall.

You have probably guessed that I am for the bail out. The reasons for this are not as clear as one might think, I do not, in principle agree with government control over the economy; because in my experience no government can organise a piss up in a brewery, and if they can the end result is normally an awful lot of corruption. I am in favour of governments stepping in this time because it is a mess that they have created and so they have a moral obligation to try and fix what they have broken.

My limited understanding of the economy tells me that, if the government is going to tell a bank that it is ‘too big to fail’ (in essence giving it a blank cheque), it has to regulate the bank to stop them from taking to many risks. After all it is not the bank taking on the risk; it is the government. In this case the government is giving the ‘blank cheque’ to the banks, but not regulating them enough.

In my opinion giving the banks a black cheque cannot be a good thing; it can result in one of two things, one the situation we land ourselves up in now, which is a load of failing banks who have taken on too much risk and now are relying on the government to help them out when the going gets tough and those risks do not pay off. Or we end up with over-regulated banks that are, in effect, nationalised and, because the government is so incompetent, they will inevitably be poorly run and overly bureaucratic.

The alternative is no ‘blank cheque’ and therefore a high risk that if one big bank fails the entire economy will fall flat on its face. Apparently. Although this line of reasoning seems to ignore the fact that other banks will suffer greatly if one bank collapses and confidence is shattered, so they will try to support a failing bank in order to save their own skins. The government simply does not trust the banks enough to act in their own interests and keep the economy as strong as possible. Maybe it’s time the government realise that the economy will actually regulate itself in order to keep itself strong, everyone gains from a strong economy so it is in his or her interests to keep it strong. Government intervention just distorts the issue by not allowing the economy the freedom to self-regulate.

Another interesting little titbit however is that many of the banks should not even be in any trouble at all. House prices will naturally rise faster than other goods prices (in line with earnings), so they are a very secure investment in the long run. House prices may take a short term hit, but they will recover, so it makes sense to keep money in housing, which is why it is odd that so many banks and building societies that deal mainly with property should be failing. This can be attributed to a change in the way in which banks assets were valued a few years ago. This new way in effect undervalues assets by focusing too much on short-term prospects rather than the long-term value of an asset, which in the case of property is very secure.

This obsession with short-term gains is damaging, not just to the economy, but also to society. Our consumerist society is obsessed with short-term gains and does not plan for the long run enough. Obviously we should not concentrate on long-term issues so much that we loose sight of the here and know, but we surely must be rather more long-sighted than we currently are.

So once again, while also planting considerable blame on the government and some on the economy, I have to conclude that human nature and human stupidity is the greatest danger facing our society. If only we could all smarten up realise that the long-term is just as important as the short-term, then I’m pretty sure that the world would be a more secure and well off place. But I suspect that we’ll be seeing whole squadrons of pigs to aerobatics before that happens.

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