Thursday, 27 November 2008

Knob’s jolt [update 2]

Thomas Sowell has a message that could be directly addressed to Billy Bob English, who as we speak is warming up his printing presses to “stimulate” the local economy by debasing the local currency (Story here). Says Sowell,

“The economy today has some serious problems but things are not desperate, though they can be made desperate by politicians.”  

Too true.  But when has that ever stopped a politician?  They act when they shouldn’t, and don’t act when they should -- and the answer to “why the hell they do that?” is impossible to unravel.

Read Sowell’s ‘"Jolting" the Economy’ while you ponder the question.

UPDATE 1: Danyl at the Dim Post comments on the knob’s “brilliant plan.”  The title gives you the clue: Then Lancelot, Galahad and I jump out of the rabbit . . ..

UPDATE 2Libertarianz deputy Dr Richard McGrath says “Butt Out Bill!”

    Libertarianz deputy leader Richard McGrath said today the $7 billion spend-up announced by Finance Minister Bill English was both detrimental to the prospects of economic recovery, and damaging to the moral fibre of New Zealanders.
    "This golden shower of handouts will be funded by churning out yet more worthless paper notes – debasing the currency, and punishing those who try to put New Zealand dollars aside for a rainy day – or by borrowing, so that future generations of Kiwis are burdened with debt."
"These 'rescue' packages undermine the lessons taught by the free market," said Dr McGrath. "If you lend money to high-risk customers such as sub-prime mortgage holders, or sink money into dodgy investments, there is a significant chance of losing some or all of it."
"Forcing the taxpayer to rescue incompetent banks and investors stops the latter from learning from their mistakes and encourages more of the same foolhardy speculative behaviour," McGrath added.
"The best thing the government could do is step aside and let the banks and businesses that have failed their customers - and the investors and entrepreneurs that have failed themselves - quietly close down, so that valuable time and resources can be allocated into more productive activities."
"Rewarding failure is irrational; stealing from taxpayers to reward failure is unjust. Libertarianz calls for an end to this Keynesian madness." 

UPDATE 3: Cox and Forkum encapsulate the response:

         RoadToRecovery-X

4 comments:

Anonymous said...

""The best thing the government could do is step aside and let the banks and businesses that have failed their customers... quietly close down..."

That's really funny. As someone who knows a lot about wholesale banking and bank funding I think you don't understand that it's not that one of our banks is a bit tottery. They all are. Now I'm trying to imagine one of our banks closing down. Everyone in the country with a mortgage with that bank would be required to pay up, right then. (You didn't know that? Didn't read the fine print on your mortgage, did you?).

Of course, it wouldn't go there. The govt would... - oh yeah, you started by saying you didn't want govt intervention.

That would cause the property market to collapse - really, tens of thousands of households trying to sell at once, it'd be like nothing this nation has every seen. I'd figure a 30% to 40% drop in house prices, in a month.

Of course, it wouldn't go there. The govt would... - oh yeah, you started by saying you didn't want govt intervention.

Credit spreads to the other 3 banks (yes, we only have 4 banks) would go nuts, their mortgage books would be worthless - at which point they'd all collapse.

Of course, it wouldn't go there. The govt would... - oh yeah, you started by saying you didn't want govt intervention.

And every damn person in the country who had a mortgage would be being told to pay up, right now.

No modern economy anywhere, ever, has been dumb enough to let that sort of market collapse happen.

Anonymous said...

Yeah - nothing like clients in a panic (for whatever reason) to line the consultant's wallet with green, eh Anon.

Anonymous said...

Actually, Anon, yes I did read the fine print on the first mortgage I took out, in 1987. It made me very nervous. That's one of the reasons why neither my partner nor I have a mortgage between us now.

I'm not saying foreclosures by banks would be painless. But why the hell should my taxes be used to prop up banks that have lent unwisely, and people that have borrowed unwisely? It's their problem, not mine. As you say, Anon, it was all there in the fine print.

If property prices collapsed, I would be out there looking at what was available, and so would a lot of other people. It would help first home buyers, without the govt having to intervene!

And if it was only buyers with cash that could purchase property, then that would be incentive for people to save, and wait until they had enough money before they signed a contract to purchase real estate.

As I said earlier, the adjustment wouldn't be painless, but what lessons will be learnt, and what perverse incentives created, if the government bails out individuals and businesses who have shown themselves up as failures?

Anonymous said...

I've been discussing this scenario (failed banks) with a lawyer who gets involved with receiverships, liquidations and the like. His take was that it would not be likely that the receiver would immediately call in all the mortgages, as has been suggested on this thread. It is well understood that were that to occur those financial instruments would lose nearly all value immediately. More likey is that they'd be sold as is (as cash generating instruments). Perhaps the face value would be considerably less and perhaps many of them would need to be renegotiated, but the market would clear the lot. After a period of readjustment things would settle.

Now that's not to say that people wouldn't be hurt. It's not to say that the ideal situation would be arrived at for all parties. The only conclusions to make are:

People, if allowed, will adapt. Hence the market (which is really nothing more than people acting on their decisions and trading) will adapt.

It is very dangerous to allow government to control aspects of the economy, particularly the money supply. Now people are beginning to see why.


LGM