A longer mindset for a short crisis

by on Thursday, 02 October 2008 Comments

I just finished watching the CNN report on how the stock markets went after the rejection of the US plan to save the “world from an economic crisis”. Let’s say that I do not blame either Mr. Bernanke (head of the Federal Reserve or central bank of the US) or Mr. Paulson (treasury secretary) for their failure in achieving a consensus over the plan, but there has been a problem to communicate what the real consequences of the crisis are and how does the plan really work as well.

I mention the note in CNN, as the journalist talking about India used a sentence which tries to disguise her lack of knowledge on the topic: “It’s like every day there was a death person in the family” she said, with regards to the last couple of daily results in the Indian stock markets. To be true, this sort of sentence might scare the incautious people but in other people open distrust and curiosity.

As this is an electoral year in the US, some of the politicians are trying to take advantage of the situation blaming each other. The facts are: Bush and McCain supported the plan, and blame democrats for its failure. Democrats want more debate and are calling for calm. On the other hand, votes were 205 pros and 228 against, but the supporting republicans were only 133 and 193 were against; by contrast, democrats supported the plan with 140 votes against 90 who rejected it. From the voting, it is clear that democrats supported the plan more than republicans did, but probably they did not want to be committed with a plan that is regarded with distrust by an increasing amount of people. However, both parties find on their lines explosive rhetoric of the sort that the CNN Indian journalist used.

They are not the only people using that kind of language about the apocalyptical consequences of the rejection of the plan, but there is something beyond it. Also because most of the people I see, demonizing the objectors to the plan, have a stake on the crisis whether political or economical. To some analysts, it seems that the financial institutions have taken too much risk during the last years, they have collected all the gains that were available and they now want to collectivize the losses of the crisis generated by the risk taking. This distrust is shared by others, and it is the main reason to believe that the plan mainly helps the badly behaving guys on Wall Street.

Some people compare the actual crisis with what happened in 1929 but the comparison seems rather exaggerated. They share in common the broad lack of confidence among investors that are not willing to make more transactions (and move all the economy) even if credit is cheap, as it was in 1929, and as it is being offered by the Federal Reserve nowadays. With the expectation that most of the goods and assets available of the economy are going to lose their value, nobody wants to take any debt or go for any investment. But the magnitudes are completely disproportionate: the Great Depression lasted almost four years and unemployment in the US reached 25% before some great interventions were executed, exports value in USD fell to a fifth which was equal to half of the original quantity; also, household income and prices fell between 20% and 50%. By contrast, the levels of any of these variables are in better shape now than they were at the time of the last mild recession of a couple of years ago.

There is no doubt that the problem exists, that there is an economical crisis and nobody would like to try to wait and see if what happened in 1929 can happen again. But that does not exactly mean that a prize should be awarded to the world financial system for taking more risk than the one they were supposed to. The media, instead of using metaphorical and apocalyptical phrases should be trying to explain how confidence is going to be restored by the plan or plans and, more important, how the plan or other options work in the best interest of the tax payers. Of course, this applies to the US as the main market, but it applies as well to individual economies that want to encourage their economies too. The media should make more references to how the plan’s package is to be spent, how the package should create an antecedent and punish financial institutions with lax risk management; how it will address social issues on the defaulted mortgages, how it affects the walking citizens, and so on.

Up to now, we have mainly heard the scandalizing amount of money required by the plan, USD700billion or two times Taiwan GDP in 2007, and the strong responsibility that the Secretary of the Treasury (Mr. Paulson) is supposed to have on it. Although there are provisions for reporting, there is no clear reference to how the money will be spent or who is subject to receive aid from the Treasury. People should not be frightened by the rejection of the plan; instead, US citizens should be proud of their democratic system as it will request more debate on the salvation plan.

Financial institutions, along with free marketers have insisted on the ease of regulations for a long time. Now there is a common voice among politicians in North America, Europe and the Far East Asia: regulation is indispensable to support confidence, especially in the development of the new financial markets of securitized assets where the crisis finds its origin. Securitized assets imply a level of abstraction between the investor and its actual investment, thus it will be easier for a regulatory agency than for a pension saver to check what the embedded risks of the investment are.

Governmental intervention is going to be required and probably beyond the US National borders. In fact, any measure taken from Taiwan to Argentina to boost the economy helps to avoid the deepening of the recession. But, there will still be an issue of how much of the tax-payers money should be spent to heal each economy. I invite all those who are interested on the development and economical justice, to follow the process in their own countries and, of course, the process in the US.

For a draft on the plan you can look at:
http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=1

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