Economic Disruption and the State

I want to separate one specific theme out from the current debate about "global economic meltdown" and get the economics brains in here to discuss it.

It's a simple question: will continued failures of major companies lead to increased governmental takeover of said companies, leading to increased state ownership of the - to borrow Lenin's phrase - "commanding heights" of the contemporary economy?

In other words, is all this failure a good thing?

No, such intervention is temporary.

If its a financial institution in trouble, it will be a central bank which places it under statutory management while it performs an audit and evaluates whether they should lend emergency funds, place it into liquidation or sell it to a new buyer et al.

Remember while government grants central banks a mandate, they are sometimes autonomous or semi-autonomous institutions, acting without consent and simply following the powers granted to them under some kind of act. So sometimes these actions do not have to involve government at all.

When Government does step in however, its not often it will lead to the nationalization of a company.

darn
typed a really long reply and Biggie ate it. This sux Andrew get your fuckin shit together on this website!!!!

Can you post it again when your feeling up to it Peat? Would be interested to see what you have to say. On topic I was just reading about the Neo Keynesian economist, Joseph Stiglitz theory on information asymmetry.

Here is an excerpt:

i think this article says a few things I agree with

http://www.nzherald.co.nz/business/news/article.cfm?c_id=1501241&objectid=10533184

In essence yes Vadz the govt grows and therefore by definition the nation becomes more socialist. Does it change the political direction of the country. Well it would seem not - as with most financial crises we've seen it all before, read about The Resolution Trust corp which was a govt backed organisation to buy up the Savings and Loan (mortgage institutions) bankrupts in the 80's
http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf
I've heard various conflicting things re the outcome of that , one that it made a small profit selling all the assets acquired, and another saying that it cost the taxpayer 160 billion.
But the point is the USA has been here before and remained capitalist enough for the same excesses to recur again. So maybe they will again. Maybe. But its called inflation in my book and will affect the currency and the longer term economy badly if not catastrophically
China is already very nervous about holding its funds in USD
http://www.reuters.com/article/usDollarRpt/idUSPEK2402720080917?sp=true
"BEIJING, Sept 17 (Reuters) - Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.
"The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun."The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."




Theres some interesting legislation going to Congress now associated with this $700 billion request
http://money.cnn.com/2008/09/20/news/economy/bailout_proposal/index.htm?postversion=2008092014
While you might think that this limits the buyout to $700 billion it doesnt actually it only limits the amount outstanding at any one time to that much
see this
Sec. 6. Maximum Amount of Authorized Purchases.

The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

text of proposed legislation here
http://www.foxnews.com/story/0,2933,425672,00.html

So they can buy and sell (at a loss??) many times over with that as the o'd limit if you like

The US simply cant afford to buy out all these banks so it IS printing money. $40 billion this weekend I read. But the US needs the world to buy US debt every single day just to survive. Who will buy this debt if they are outrightly hyperinflating away the value of the USD.

Perhaps this graph of the almight yankee dollar against the Yen and the Swiss france since the mid 80'sshows how the world reacts to these type of moves.





So it depends on what you mean by good Vadz. Perhaps you think the fall of the US nation , the impoverishment of all its people is a good thing?
Historically no other nation has politically survived the bastardisation of its currency. Think Weimar, think Argentina , think Zimbabwe.

ABN Amros comments this morning


Finally, the Treasury and Fed have scaled up their response as the crisis has deepened. If things continue to deteriorate, there should be little doubt policymakers will ultimately reach for the big red button. As Rob noted last week, this ultimate
solution could take several forms. One of these would be to nationalize the entire banking industry, as happened in Sweden, Finland and Norway in the early 1990s.
Whichever form it takes, the premise is fairly straightforward. If all parts of the
private sector - households, non-financial and financial firms - attempt to cut back
simultaneously, this can tip the economy into a vicious spiral of weak demand and falling asset values (this is sometimes referred to as the 'paradox of thrift' or 'paradox of deleveraging').
But the government can short-circuit this process. It can borrow and spend to offset the shortfall in private sector demand. In effect, this is classic Keynesian demand management. A weaker dollar can also help, crowding in exports to further plug the
gap in domestic demand. But of course, it comes with a cost. Resolving the Savings and Loan crisis cost about 2¾% of GDP. Some estimates have put the cost of the Scandinavian banking crises as high as 20% of GDP. Yet, the government cannot sustain this cost indefinitely. Ultimately, it will face a choice. It could raise taxes and cut spending, forcing the American public to bear the cost. Alternatively, it could aim to generate unanticipated inflation, transferring part of that cost to the rest of the
world through a weaker dollar. My bet is on the latter

Magnificent quote Rival - my thoughts on neo-classical economics summed up a thousand times better than I could have...


On the OP, I really don't see the US going as far as nationalisation - it would be from one extreme to the other.
Hopefully they begin to realise that a sector that can't nationally be allowed to fail has significant moral hazard concerns and as such should face greater regulation - not less as has been the nature of the last few years. When you HAVE to socialise the losses, the privatisation of the profits should be very carefully judged...

the failure of the first finance company that is guaranteed by the NZ government prompted me to dig up this thread

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10559552

imo this is a scary development - only 70 mill this time, and of course it could be a lot less ultimately, but woooah hang on a minute thats our money! who the fuck would invest in Mascot Finance ??
oh yeh about 2558 people

Pretty much an example of the worst attributes of the retail guarantee - NOBODY invested in the business after the guarantee was put in place so it didn't get capital flowing, and then the existing loan book that was there when the guarantee was put in place proved to be of substandard condition.

at least its being acknowledged but how many guarantees have already been made?

"Those in the scheme would continue to be covered."


http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10560008

But doesn't the government just end up purchasing a bunch of crapped out companies (and getting itself into even more debt in the process), while the truly profitable businesses remain in private hands? The bail out process looks like a sign of desperation to me.

The Government can make them profitable by imposing crippling taxes on the privately-owned businesses

and so the private (potentially profitable ) businesses go under or decide theres a better place for their risk capital and what happens then vadz? geez thats a ridiculous comment.

Well-run public businesses usher in a new era of peace, fairness and prosperity, mainly.