In current phase of the GFC* we are witnessing extraordinary Government intervention in the financial markets, with a host of countries providing enormous guarantees of bank liabilities, purchasing distressed assets or directly investing in ailing banks. Switzerland is the most recent country to follow this route, injecting around 6 billion Swiss Francs (A$8 billion) into UBS, gving the Government an estimated 9% stake in the erstwhile investment banking giant.
While the immediate aim of these moves is to save a financial system that is on the verge of collapse, there is also increasing concern that the ructions in the financial sector are a precursor to an extended global recession. This is also generating responses by Governments around the world. Here in Australia, the Rudd Government has announced a A$10.4 billion stimulus package, shelling out money to low-to-middle income families, pensioners and home-buyers.
While free-marketeers may be shaking their heads in despair at these developments, John Maynard Keynes must be smiling in his grave. Keynes, one of the great economists of the 20th century, was a firm advocate of the role of Government in providing counter-cyclical support to the economy, spending during a downturn and accumulating surpluses in the good times. In his masterwork, “The General Theory of Employment, Interest and Money”, Keynes made the point in colourful terms:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. (p. 129)
Since Keynes appears to be back in favour all of a sudden, it may be worth exploring some of his other pearls of wisdom. For those banks who were convinced that the extremely depressed prices of mortgage-backed securities and CDOs of asset-backed securities had fallen well below “fair value” and would recover:
The market can stay irrational longer than you can stay solvent.
Those who think that share markets have been “oversold” may also consider heeding that advice. While on the subject of shares, many commentators have sought to sooth nervous investors with the tried and trusted assurance that in the long run shares out-perform other less risky investments such as cash and bonds. However, Keynes also made the following point:
The long run is a misleading guide to current affairs. In the long run we are all dead.
Finally, for those who are angry with the damage wrought on the world economy by the financial wizards of Wall Street, Keynes also offered the following assessment of capitalism:
Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.
* Global Financial Crisis
Possibly Related Posts (automatically generated):
- The oldest bank in the world (29 October 2011)
- US Treasury: Proud New Owner of America’s Banks (14 October 2008)
- Australian Banks Get A Government Guarantee (13 October 2008)
- Cypriot sovereignty surrendered (18 March 2013)
Great Blog post. I am going to bookmark and read more often. I love the Blog template
Pingback: Kwoff.com
Good post Sean. I think if you don’t scold the child for running across the road then the next car will kill them. Giving banks money doesn’t feel much like a scolding. The government has showed no discipline in asset inflation control or liquidity control. They let the kids play frogger on the freeway and the cost is now huge.
Sure, but Maynard Keynes is no Keenen Wayans. I haven’t studied the screenplay per se, but I’m sure there are some awesome aphorisms buried in the movie ‘Little Man’. It’s a man who’s little, for God’s sake – we can ALL learn from that story!
Excellent :-)
Can we use Sovereign Hill as the local site for Keynes ‘laissez-faire’ Coalmine initiative?
@Dan: Sounds like a good idea. Also, I think that you and I should get a head start on the digging…
For more on Keynes, check out Michael West’s typically acerbic column in yesterday’s Fairfax papers: “Keynes is dead, let’s bury him”.
http://business.theage.com.au/business/keynes-is-dead-lets-bury-him-20081016-5205.html
@Steve: Yes, I did see West’s piece. It struck me as little more than an ad hominem attack, lacking much in the way of economic substance.
The West article was really odd – so much so that I emailed asking if it was really him that wrote it, which received an interesting response.
The whole “liberal fascism” oxymoron is just a neoconservative way of trying to project their own faults onto their opponents if you ask me (which makes it all the odder that West and Fairfax would publish it).
@Big Gav: You’ll have to let us know if you get a response to your email. I’d be intrigued to hear what West had to say.
…..I’ve always wondered what ad hominem meant. Someome wanna save me the effort?
…..and if there’s a Damon Wayans screenplay out there, please let me know.
I grew up a Keynesian, so I’m biased in thinking it is an entirely pragmatic and sensible economic religion, and not extreme or fundamentalist in its policy prescriptions. From the benefit of weekend reading, I discovered that Keynes’ interventionist theories were on the basis of saving capitalism from itself! So the idea that free marketeers perpetuate about it being socialist, or in some other way evil, don’t really stand up to the evidence (which their theory never did anyway, as evidenced by boom and bust, and which is why the Nobel committee quite rightly overlooked Mt Fama for the economics prize). Unfettered free markets are undeniably good for those blessed with power and privelage, though we all know where free market-lite ends up….here. As a quick digression, it seems to me that pure and unfettered capitalism and communism are hardly distinguishable, the difference being whether it’s the government or an organised corporate sector that run the show.
And from one of the great conservatives, Reagan himself: Government exists to save us from each other, not to save us from ourselves. Whether he realised it or not, it seems to contradict the basis of the totally free, do-what-u-want market.
@AJ: ad hominem literally translates as “to the man” and, to use an alternative expression, means playing the man not the ball.
Of course, the frustrating thing is that as soon as we enter the upside of the boom/bust cycle, Keynes will again be relegated to the dustbin – the current events conveniently forgotten as once again laissez faire is embraced and governement interference condemened as “crippling the free markets”…
No one wants to pay insurance premiums while the going is good, but as soon as things go wrong, aid is demanded!!
Brendan: it has been pointed out that your comment here almost two years ago really was prophetic!