Global Financial Crisis

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Global Financial CrisisAre We Still in Trouble?

• . a presentation
• R. Kuppanna
• GM, Kuwait India
  International Exchange Co.
• Diwaniya, AWARE Center .
  . May 31, 2011

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Synopsis

• The sub-prime crisis, of 2007/2008, has
  snowballed into a major financial and economic
  crisis impacting the entire world. The fragility
  of the economic system stands exposed and the
  underlying policy framework, governance standards
  and the active interventionist measures are
  proving to be futile. Prevailing economic
  orthodoxy has failed to address the problem.
• Blaming speculators as a response to financial
  crises go to back at least to the Greeks. Its
  almost always the wrong response
• 
  - - - - Larry
  Summers

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The Crises

• Severe global economic downturn
• Collapse of all markets
• Loss of confidence, risk aversion
• Declining output, high unemployment, stagnant
  incomes, low
• growth rates
• Corporate/Sovereign Failures
• Huge and growing sovereign debt
• High/Hyper Inflationary Potential Economic
  Depression

We have now sunk to a depth at which restatement
of the obvious is the first duty of intelligent
men. - - - - George Orwell
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The Mess We Are In

• Global Debt 222.5 trillion 362 of global GDP
• Sovereign Defaults (EuropePIIGS)
• US downgraded
• US Debt Limit reached
• Trouble in the US Municipal Bonds (48 States)
• China Collapse?
• Problems galore all over
• If pro is the opposite of con what is the
  opposite of progress? - - - - Paul Harvey

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Interactive Global Debt Chart
http//www.economist.com/blogs/buttonwood/2010/06/
indebtedness_after_financial_crisis
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Past Crises

• the recent housing bubble
• the stock market bubble of the late 1990s
• the earlier long series of other booms/busts
• The Great Depression of 1929
• The earlier stock market boom of the 1920s
• bubbles of the 19th the 18th centuries,
• all the way back to the Mississippi Bubble of
  1719
• Those who cannot learn from history are doomed
  to repeat it. - - - - George Santayana

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Those Who Do Not Know History . . .

• "The budget should be balanced, the Treasury
  should be refilled, public debt should be
  reduced, the arrogance of officialdom should be
  tempered and controlled, and the assistance to
  foreign lands should be curtailed lest Rome
  become bankrupt. People must again learn to work,
  instead of living on public assistance.
• 
  - - - -Cicero 55 BC

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Why ??

• What are the fundamental, causative factors?
• Why do crises occur so very frequently?
• Why have all previous attempts at tackling
  crises failed?
• Are we still in trouble?
• Is there a way out?
• Governments view of the economy could be
  summed up in a few short phrases. If it moves tax
  it. If it keeps moving regulate it. And, if it
  stops moving, subsidize it. - - - - Ronald
  Reagan
• 
  

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An Aside

• Cluster of Errors
• Analogies Robinson Crusoe Circus in Town Home
  Builder
• Broken Window Fallacy
• The key economic activity that causes growth is
  not consumer spending but production. - - - -
  Yaron Brook

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The Broken Window

• The art of economics consists in looking not
  merely at the immediate but at the long effects
  of any act or policy it consists in tracing the
  consequences of that policy not merely for one
  group but for all groups .
• 
  - - - - Henry Hazlitt

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Prime Cause

• Government Policies
• Moral hazard issues
• Central Bank Policies
• Monetary system fiat money and credit expansion
  ( and the
• consequent malinvestment it engenders)
• Credit Expansion underlay all crises (earlier
  ones and the current one)
• The road to hell is paved with good intentions.
  - - - - F.A.Hayek

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Markets Some Thoughts

• Market Corrections Are Not All Bad
• Panics Are All Bad
• Markets Dont Fail!
• The politico-economic system of the United States
  today is so far removed from laissez-faire
  capitalism that it is closer to the system of a
  police state than to laissez-faire capitalism.
  The ability of the media to ignore all of the
  massive government interference that exists today
  and to characterize our present economic system
  as one of laissez-faire and economic freedom
  marks it as, if not profoundly dishonest, then as
  nothing less than delusional. - - - - George
  Reisman.

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Road to Recovery

• Answer stems from
• Knowledge of credit expansion/consequences
• Problem not insufficient spending but
  insufficient capital (losses
• caused by malinvestment)
• Too little capital, too much debt, and not enough
  cash
• Ideas Matter. Ideas Have Consequences - - -
  -Richard Weaver

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Road to Recovery

• Establish 100 reserve system against checking
  deposits with
• gold
• Establish freedom of wage rates and prices to
  fallthis would
• eliminate mass unemployment
• No free lunches no bailouts no subsidies
• Restore discipline
• --Save more
• --Spend less
• Those who expect to reap the benefits of
  freedom, must like men, undergo the fatigue of
  supporting it.
• - - -
  -Thomas Paine (Crisis Number IV)

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Deepest Causes -- Philosophical

• Altruism
• Pragmatism
• Free Lunch Mentality
• Lack of Personal Responsibility
• Contradictions do not exist. Whenever you think
  that you are facing a contradiction, check your
  premises. You will find one of them is wrong. -
  - - - Ayn Rand

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Deepest Cure -- Philosophical

• Life, Liberty the Pursuit of Happiness
• Demands and Rewards rationality/self-discipline
• Pursuit of each individuals long term rational
  self-interest in the context of the Trader
  Principle creating win/win relationships
• The idea that political freedom can be preserved
  in the absence of economic freedom, and vice
  versa, is an illusion . Political freedom is the
  corollary of economic freedom - - - - Ludwig von
  Mises

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The Trader Principle

• There is no conflict of interests among men who
  do not desire the undeserved, who do not make
  sacrifices nor accept them, who deal with one
  another as traders, giving value for value.
• The principle of trade is the only rational
  ethical principle for all human relationships,
  personal and social, private and public,
  spiritual and material. It is the principle of
  justice.
• 
  - - - - Ayn
  Rand

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The Choice Is Yours

• From a state monopoly on money, to state
  guarantees of bank liabilities, to state
  sponsorship of mortgages, to state ownership of
  banks ---the progression in the past century has
  been to move away from free markets toward
  socialist banking.
• The welfare state and its main financier, the
  Federal Reserve, are ultimately justified on
  the grounds that the government has a moral duty
  to provide the needy with goods and services
  from education to health care/insurance to
  mortgages.
• Think!! The choice between the alternatives is
  yours. So are the consequences.

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Thank You
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