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Old 24th March 2008, 05:59 PM
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In Search of a Modern New Deal

http://newsweek.washingtonpost.com/p..._new_deal.html



The Current Discussion:The global economy is quaking. Are we heading toward a global recession? Who's to blame?

The chain reaction in progress can be best described as a “deleveraging” of American finances. It is a uniquely Anglo-American development, not a global problem, and is likely to continue for two or three years before fundamental stability and realistic valuations fall in place. Alas, recession is a rusty description, originally coined for industrial economies. It is a misnomer for today’s American finances and post-industrial economy, isolated into a unique set of presumptions: rampant consumerism, service-based revenues, presumed constants in long-term forecasts (say, price of commodities or consumer demand), and herd behavior (mislabeled as competition); all glued together with liberal amounts of debt and stitched up with hype.

The current setting is a test of Greenspanism and an autopsy of lax attitudes towards regulatory oversight. The Greenspan era absurdly allowed markets to define their own regulatory limits. Somehow the duty of care for an equilibrium of all components was deemed as an obstruction to economic growth. Historic bankruptcies of Enron, Worldcom and Global Crossings were summarily rebuffed as one-off fraudulent conduct, or bad bookkeeping. Import therapy kept inflation, pegged to an old formula, at unrealistic low levels and let asset inflation rip to dizzying heights. Government spending pumped in trillions in fresh cash that fueled the asset inflation process, which in turn delayed a fair revisit of structural issues.

That doctrine is now turned on its head by the Federal Reserve as it hurries to rescue market functions, Bear Stearns, and the recipe used for valuations. (Can this government complement, the Treasury Secretary of Wall Street pedigree, be helpful as a regulator?) With an emergency guaranty of bad mortgages made by the private sector, the Fed affirmed its choice to rescue Wall Street, and not Main Street. It is a concealed nationalization as the Fed will absorb losses incurred by market players.


I believe it is “déjà vu all over again”-- the end of Thirty Glorious Years after WWII in France, the banking scene in late 1970s with two economist superstars, President Giscard d’Estaing and his prime minister Raymond Barre and their famous economic visions. America is following that script with rising unemployment, a heap of bad bank loans and the ensuing nationalizations by the succeeding president, Mr. Mitterrand. The plot thickens when the Napoleonic attitude of the American president and his costly war in Iraq reminds us of how the Russian War depleted the French treasury.

In hindsight, the overdue modernization of American regulatory systems (a common definition of risk and cross-spills), strategic assessment of global supply-demand and demographic changes were not prime concerns for Mr. Greenspan, the de facto chief economist and fiscal master of the U.S. markets. The result is the current scene on Wall Street: the average debt-to-capital ratio of investment banks, for example, is 30:1, so professional investment bankers owe 29 dollars for every 1 dollar owned, all on presumed and rosy valuations of assets with no buyers (sub-prime mortgages, glorified share prices, etc.). Thus the ownership society has transformed itself into a transactional, debtor nation.

It is time for America to reinvent its finances and craft a new American reality, as the American Dream is merely a home with negative equity value. This is not a passing, short-term problem that will go away with denial and talk therapy. The deep economic regress of America is not, and will not be, globalized even though a few foreign participants have lost money and reputation (the German IKB bank and the Swiss UBS). Foreign investors will continue to support in the background and buy American government debt. Nevertheless, they will shy away from transactions in the private sector of America until real valuations emerge. I don’t blame them: Bear Stearns assured the markets that it has plenty of cash on Monday. Its $70 shares on a Friday were worth $2 on the following Monday after a fire sale over the weekend after a realistic assessment and true weight of regulations were applied. The Fed had to throw in a $30 billion guaranty inducement.

As such, it is time for American people to accept the pain of responsibility and realistic valuations that will come along. In a realistic forecast, a modern New Deal will be necessary--higher taxes (a national sales tax or a wealth tax?), smart productivity (new energy industries?), a massive rescheduling of domestic debt (akin to Turkey in the 1990s) or conversion of debt to equity (Brazil circa 1980s) and a streamlined, transparent financial regulator (Department of Homeland Finance?). The dodge-and-blame from one bureaucracy to another will not buoy the sagging dollar, rebuild infrastructure or repay debt even at much lower interest rates. If needed, just go boldly ahead with “very un-American” nationalizations, debt-for-equity or recapitalization of the financial system by the public sector and cut through the taboo without posturing and wasting time. Blaming China, al-Qaeda, a dead Iraqi dictator or fabricated “enemies”, demands for cheap oil or talk about gay marriages will not replace the estimated $2 trillion froth on American asset values. Promises of dreams are no longer marketable commodities or securities that find takers with hyper-spinning. All dreams end as one wakes up to reality.
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Old 24th March 2008, 10:32 PM
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Re: In Search of a Modern New Deal

i noticed a lot of shops being shut up in Japan in the last 6 months - many many high street retail stores are being closed down. That's the first time I've seen it in 4 years of being here.


http://mdn.mainichi.jp/business/news...bu030000c.html


Senior central banker in Japan warns that economy is slowing sharply

TOKYO (AP) -- Japan's interim central bank chief vowed Friday not to let the absence of a governor hamper the country's economic and financial activities while another central bank official said the economy is slowing down "sharply."

The Bank of Japan has no governor after the opposition controlled upper house of the Diet rejected two government nominations in a row, saying they were too politically connected as former Ministry of Finance bureaucrats to uphold the central bank's independence.

The five-year term of former Gov. Toshihiko Fukui ended Wednesday.

A new central bank deputy head, Masaaki Shirakawa, whose nomination was approved last week, was named acting governor this week.

"We are in an unusual situation without a governor," Shirakawa said at a press conference Friday. "But we cannot let the bank's operations stall. I will fulfill my duties until a governor is appointed."

Kiyohiko Nishimura, the bank's other deputy governor, said Japan's economic slowdown is getting worse.

"The economy is slowing quite sharply, even though it is on a mild expansionary trend," he told the same press conference. "We need to manage policy extremely carefully."

The political deadlock is being viewed as a major fumble in a nation preoccupied with appearances, especially on the international stage, amid global financial market turmoil that could require cooperation among central banks.

The political confrontation has brewed for weeks, although the world's second-largest economy faces risks of slipping into recession, as a plunging dollar batters exports and soaring oil prices erode corporate profits.

Meanwhile, Economy Minister Hiroko Ota expressed hopes a new governor would be named soon while brushing off worries about any possible impact on the economy.

"In the current subprime credit crisis, it is important to be able to react to risks quickly," she told reporters.

Japanese media reports said the selection of a new governor could drag into April, as some ruling party politicians are hopeful time may calm the outrage in the opposition.

Opposition lawmakers are angry the ruling coalition rammed through legislation that require approval from only the lower house. The nomination of Bank of Japan governor needs approval from both houses.

Last week, the opposition rejected the first candidate for central bank chief, former deputy central bank governor Toshiro Muto, and then voted down Koji Tanami earlier this week.
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Old 24th March 2008, 11:03 PM
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Re: In Search of a Modern New Deal

Ironically, I think things may be set to improve in Japan. Because it has been the Carry Trade capital of the World, it has been starved of investment capital. Now at least much of the money that was flowing into the US housing market has stopped. It may be that modest increases in interest rates in Japan coupled with a strengthening Yen could return Japan to vibrant growth.
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