And now for something completely different…
A correspondent has just passed this beautiful piece of wit along to me: a song about the financial crisis to the tune of the old “Monster Mash” song from the 50s (you know, back when they had banks).
The Parliamentary Library arranged a debate between myself and Rory Robertson of the Macquarie Group on the financial crisis today. We had a good audience of about 70 Parliament House denizens. You can download the Powerpoint Slides slides for my presentation, and the Vissim model of Minsky’s Financial Instability Hypothesis which was part of the presentation ( Right click and choose “Save As” since this is a text file; then install the viewer, which can load the file and let you run it (I’ve also loaded the EXE file of the viewer onto my site as another way of getting the program). You can make changes too, but they can’t be saved).
Today’s CPI data from the US Bureau of Labor Statistics reveals that consumer prices fell by 1 percent in the month of September. This is the steepest monthly fall in the index since January 1938, and comes after two previous monthly falls (of 0.4 and 0.14 percent). It is therefore possible that a debt-deflationary process is underway.
Monthly Change in US CPI since 1924
There is no doubt that we are in a debt-induced economic crisis; America may now have entered a deflationary crisis as well. The combination of the two is the motive force that sets in train a Depression, as Irving Fisher explained in 1933, in his academic paper “The Debt-Deflation Theory of Great Depressions” (Econometrica, 1933, Volume 1, pp. 337–357).
If things are really grim, it helps to have an indefatigable nature, and there’s no doubt that RBA Deputy Governor Ric Battellino has that in spades—at least in the speeches he makes at public conferences. Were I being crucified, I’d like to have Ric up there with me, singing “Cheer up Brian!…”, to take my mind off the nails.
But were I still in the Garden of Gethsemane, and actually trying to avoid the Romans (and an extended Pilates session the next day), I think I’d want someone else on lookout duty.
Yesterday the RBA (Australia’s Central Bank) cut its reserve rate by three quarters of a percent, to 5.25 percent. This is the third cut in 3 months, bringing the cumulative reduction since September to 2 percent
This is a far cry from the RBA’s expectations in 2007, that in 2008 it would be raising rates to constrain a booming economy and bring inflation back down to its target range.
Inflation is still above its target, but clearly that’s a bulls eye the RBA is no longer aiming for. What on earth went wrong with the RBA’s predictions for 2008?
2nd Anniversary Issue…
The financial crisis is widely accepted as having started in August 9 2007, with the BNP’s announcement that it was suspending redemptions from three of its funds that were heavily exposed to the US securitisation market (click here for the BNP August 9 2007 press release).
Just three months beforehand, the OECD released its 2007 World Economic Outlook, in which it commented that:
The suggestion that the Federal Government might extend its guarantee to managed funds in return for the funds becoming banks is, as Glenn Dyer has observed for Crikey, sheer bunkum.
On the lender side, this sector of the finance industry largely arose to make money out of lending practices or financial products that were too adventurous for banks themselves.
On the “depositor” side, investors in these companies knew full well that they weren’t making deposits that can be withdrawn at call—as with a bank—but investments.
There’s an excellent article in The Age today on the mad methods of neoclassical economists. The author is Martin Feil, who was once a director of the Industries Assistance Commission–a previous incarnation of what is now called the Productivity Commission:
The article is entitled We can’t live on moonbeams and air.
I plan to tackle similar issues in my next two Debtwatch Reports. November’s (the 28th, which is also the second anniversary issue–I started the report in November 2006) focuses on the data that neoclassical theory directs the attention of economists to, and the data that the theory causes them to ignore. Crucially, the latter includes private debt–and Feil makes a similar set of observations. On the data that the RBA’s neoclassical economists consider important:
The import of Gerard Henderson’s diatribe in today’s SMH is that the media has done a “soft” job on my views, which have only gained notoriety because of the extreme prediction I have made—about the forthcoming economic downturn qualifying as not merely a recession, but a Depression. It seems I’ve only got attention because of my extreme views, while the media has let the side down by doing a “tabloid” job only and not subjecting my views to scrutiny.
Many elements of the recently announced package are justified. When the economy is about to go into a debt-induced recession, government spending both boosts demand, and provides the private sector with cash flow needed to meet its debt repayment commitments.
Equally vital was the guarantee of all bank deposits. A run on the banks would be disastrous, and this guarantee ensures that this will not happen.
