New Policies

John Quiggin is looking for a new financial structure, and I would comment on his blog, but he would probably boot me for being critical of both the current structure and the bailout measures. Governments cannot inject liquidity into any economy, at best they can fuel Inflation; the criteria being that all Participants utilize said funds to either make up previous losses, or cover the Cost of future commitments. The current financial structure is actually not a structure, but a House of Card based upon leverage–how often must you pass $100 around at 2% Interest, for it to be equal to $1 million? Actual disposable assets able to settle Obligations against it was probably less than 20% of the stated Obligations in most Cases. The Run-up of Real Estate values past 2002 was undoubtedly due to such leverage, and any attempt to maintain those Values are doomed to failure.

Economists have always advocated some measures to alter economic performance, universally resulting in failure except through use of the Government’s power as a Consumer. The only two capacities which the Government possesses is the power to Tax, and the power to Spend. All other activities carry little weight in the economy, thought Regulation has great ability to impede economic activities, especially Growth. One has to recognize the limitation of Government economic action, before any economic policy can be designed, as John asked in his Post. Any Government promotion of the economy must be founded on Government’s strengths, not its weaknesses. Government cannot directly impel Consumers to Spend, or Bankers to Lend, in an adverse economic environment; any Stimulus package based on a Tax Giveaway, Tax Rate Cut, or Tax Credits will not work in any adverse economic scenario. Such measures can only be considered a waste of Money, when the Government needs to do what it really needs to do.

Governments must assume the role of direct Employer, and primary Contractor. This is the basic Infrastructure which Economists always proclaim in such Times. Government will have to directly or indirectly employ at least 2 million additional Employees over the next Two years, simply to generate sufficient Consumer Demand to achieve Recovery. This program will do was other Stimulus policies will not, and is the only sure way to produce the Business Profits necessary for the Private Sector to thrive.

The real Problem will be to set Regulatory policies so that the destructive components which led to current Crisis are not replicated, but still leave ample room for development of Profit options. The next Two years will either be eventful, or a Repeat of the Great Depression; all of it focused on the response of Government to the Crisis. lgl