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Canada's Place in the Global Economy

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Government-owned banks are also apt to make decisions based on the short term political factors of the time, and not on sound business practice. Okay, so a lot of the bankers seemed to have been off sick the day the part about sound business practice was taught in banker school. That doesn't mean it isn't a good principle to follow. Much of the cause of the fiscal perfect storm was the rush by many of the left to 'make' the banks and the duo of Fanny and Freddy to give mortgages to the unqualified. Given a boom in housing starts, a sharp climb in house prices and some creative financial instruments that would make the proverbial Nigerian widow blush, the whole thing was inevitable.

To the credit of the Canadian financial class, and our stodgy old hard-nosed Scottish banking tradition, we were prevented from following our baser instincts. If anyone is looking for a primer on this sort of thing, look for a book called something like Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay LLD. It was published in 1841 and recounts some of the boom and busts involved with the mercantile class and the everybody is going to get rich syndrome, along with discussions of 'fads' such as alchemy, witchcraft trials, haunted houses and the popular admiration of criminals like Robin Hood and Dick Turpin.

Back to government ownership of banks, would you want the folks that brought you the gun registry handling your finances?
 
I found this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, a good read:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wrcover11/BNStory/Business/
The Depression's history lessons

DEREK DeCLOET

From Saturday's Globe and Mail
October 10, 2008 at 9:41 PM EDT

Move quickly, be decisive

The early response by the politicians to the onset of the Depression was denial. "In the 1930s, there was a reluctance to intervene … the thought that this was a temporary adjustment," said Bill Waiser, a professor of history at the University of Saskatchewan. The two prime ministers who governed during the Depression era, Mackenzie King and R.B. Bennett, at times used the constitution to argue that unemployment and relief were provincial matters — there was no national unemployment insurance scheme — and Ottawa initially threw only meagre, "temporary" support to them, Prof. Waiser said.

In the United States, there was a similar lack of urgency. Far from the hustling fix-it man that is Henry Paulson, the Treasury Secretary at the time, Andre Mellon, was "a passionate advocate of inaction" on most matters of economic policy, John Kenneth Galbraith wrote in The Great Crash, 1929. Meanwhile, President Herbert Hoover was caught between those who wanted action, and those who held tight to the traditional conservative view that the government should always balance its budget (or at least try) and let economic nature take its course.

And where was the U.S. Federal Reserve during this? It "sat on its hands," said David Laidler, an economic historian from the University of Western Ontario. Nominal interest rates dropped as the contraction took hold, but because of massive deflation — prices dropped 24 per cent between 1929 and 1933 — real interest rates were far too high. Unlike today, the Fed of the 1930s wasn't nearly as aggressive in buying securities in order to get cash into bankers' hands — "pushing liquidity into the system," in central bank jargon. Interest rate policy was wobbly. In 1931, with the economy still in a deep funk, the Reserve Bank of New York raised interest rates twice in the space of a week, to stem an outflow of gold and protect the dollar amid fears the U.S. would drop the gold standard (as the U.K. had just done).

A number of academics who've studied the era — including Ben Bernanke, the world's most important central banker — have said the severity of the downturn was made worse by the Fed's foot-dragging and its blunders. Certainly, the lesson has stuck with Mr. Bernanke. In 2002, at economist Milton Friedman's 90th birthday, he gave a speech in which he joked: "I would like to say to Milton … regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"The speed of the response today is infinitely faster than it was in the Great Depression," Prof. Laidler said.

Don't demonize government deficits

Jeff Rubin, the chief economist of CIBC World Markets, thinks Canadian politicians have forgotten what governments are meant to do in a recession. The nation was so scarred by the monster deficits of the 1980s and early '90s that neither Liberals nor Conservatives want to add a dime of red ink. "The problem is we've lost sight of the role of fiscal policy over the cycle," Mr. Rubin complained on the same day Finance Minister Jim Flaherty unveiled his budget and pledged, yet again, not to break Ottawa's decade-long streak of surpluses.

Eight months later, the world is in a financial panic and the economic outlook is far worse. Yet Prime Minister Stephen Harper and Liberal leader Stéphane Dion have each stuck to the no-deficit line, with Mr. Dion even saying the Liberals would "never" cause a deficit. As a campaign strategy, it makes sense. No one wants to be attacked as a profligate.

But to stick to that pledge in a deep recession would not only be folly, as Mr. Rubin suggested; it would repeat what was arguably one of the biggest errors of Depression. In both Canada and the U.S., governments were hesitant to try to spend their way out of the problem. It wasn't until 1935 that the Bennett government proposed a Canadian version of the "New Deal" that included unemployment insurance, farm support and a pension scheme.

He was swept aside in the election of that year, but even Mackenzie King took a cautious fiscal approach. The next year, economist John Maynard Keynes published The General Theory of Employment, Interest and Money — which argued for active government intervention to stimulate investment and jobs — and Keynsian economics was born. Still, Ottawa didn't run a deficit that it planned for until 1938.

Mr. Hoover also could not shake the balanced budget orthodoxy. Remarkably, his administration ran a surplus in fiscal 1930, ran a small deficit in 1931 and raised taxes in 1932. Even Franklin Roosevelt wasn't as big a spender as he's often made out to be. "Roosevelt, unlike Hoover, wasn't absolutely wedded to balanced budgets. But he pretty much was," said Robert McElvaine, author of The Great Depression: America, 1929-1941 and a historian at Mississippi's Millsaps College. Before the war, he never ran a deficit larger than $5-billion (U.S.). Pearl Harbor, not the Depression, is what caused radical change in fiscal policy. By 1943, the deficit topped $50-billion. The worrying thing is that the U.S. enters this downturn already in poor fiscal shape, unlike in the 1930s. The public debt has increased from $5.7-trillion to $10.2-trillion during George W. Bush's time in the White House.

Bailouts may be only the beginning

This is a lesson that we're learning in real time. Remember how the Paulson plan was supposed to bring some relief? The financial world stayed glued to its screens as it came to a key vote in the U.S. House of Representatives. Once passed, it would give hope — that a $700-billion surgery would cut the cancer of subprime mortgages and toxic debt securities from the banking system, allow credit to flow again, and maybe even put some life into stocks.

President Bush signed the bill into law on Oct. 3. Since then, central banks around the world cut interest rates simultaneously; the Federal Reserve has offered to buy companies' short-term debt; banks have been nationalized, in whole or in part, in the United Kingdom and across Europe and the United States is considering a similar idea; and country after country has moved to stem a run on the banks by guaranteeing deposits or even other bank liabilities. None of it has had much impact so far.

Herbert Hoover, despite his fiscal conservatism, wound up trying all manner of different schemes to revive growth. A federal farm board (established before the market crash, actually) bought up unwanted or surplus production from farmers, in the hope of stabilizing prices, just as Mr. Paulson's new asset management firm seeks to buy unwanted investments from banks.

It didn't work. The National Credit Corp. attempted to bring some large banks together to get them to lend to other banks. It didn't work. The Resolution Finance Corp., created by Mr. Hoover in 1932 and expanded by Mr. Roosevelt, was created to directly lend government money to banks, railways and other businesses, and ultimately ended up as financier to state public works projects. It may have saved the banking system temporarily, Prof. McElvaine believes, but it still didn't prevent the misery of 1933, the Depression's worst year.

In modern-day banking crises, such as those of Finland, Sweden and Norway in the late '80s and early '90s, the experience was much the same. Their governments had to take control of, or inject capital into, large parts of the banking system, but it still took years before the crisis passed and those institutions were healthy enough that blanket government guarantees could be removed.

Don't fall for protectionism

The biggest mistake of Depression-era policy makers wasn't what they did inside their own economies; it was the way they tried to shut other countries out, said Joseph Martin, director of Canadian business history at the Rotman School of Management in Toronto. On this, the politicians acted quickly — and foolishly. The Smoot-Hawley Tariff Act, which raised import tariffs in the U.S. to historically high levels, was passed by the summer of 1930, over the objections of more than 1,000 economists who'd urged Mr. Hoover to veto it. The same summer, Mr. Bennett swept to power in the Canadian election on a now-infamous promise to use tariffs to blast his way into the world's export markets.

The folly of this is now universally acknowledged; world trade declined by two-thirds between 1929 and 1934, and the trade barriers surely made that worse. But will we repeat the mistakes of the past? Recall Senator Barack Obama's earlier rhetoric about the North American free-trade agreement being "a big mistake".

The Democratic candidate has backed down from that remark. But playing to the protectionist crowd is a time-honoured tradition during recessions. And that crowd is growing. Two years ago, 44 per cent of Americans said free-trade agreements were good for their country in a poll by the Pew Research Centre, while 35 per cent said they were bad. Now those numbers have flipped: In a Pew poll taken this spring, 35 per cent said trade deals were a good thing, 48 per cent disagreed. And that was when things were calmer, before the financial crisis got even more serious in September. "From a trade perspective, I'm very nervous," said Prof. Martin. With the strong likelihood of Democratic control of both the White House and Congress, "the House of Representatives will be crying for trade protection. It'll be up to the Senate and the President to stop them. I think it's an issue Canadians seem to be oblivious to — but it's an issue."

Protect the biggest banks

A major New York-based financial institution was on the brink. Regulators scrambled to find a healthy bank — or even a group of banks — to rescue it through an acquisition or merger. At the last hour, a potential deal fell apart, the struggling institution collapsed, and the episode touched off a cascade of bank failures.

It sounds like Lehman Brothers Holdings in 2008. But it also describes the Bank of United States (which, despite its grand name, was not controlled by the government) in December, 1930. At the time, it was the largest commercial bank to go under in American history. Saving it probably wouldn't halted the wave of bank failures that hit the U.S. financial system over the next few years, but because of its size, some historians believe it accelerated the evaporation of confidence. Two thousand U.S. banks failed in 1931.

Lehman's Chapter 11 filing on Sept. 15 marked a similar turning point. You can draw a link between that event and virtually every shock that has happened since. Losses on Lehman debt caused one of the oldest and largest money market funds to "break the buck" (i.e., to cause the fund's value to drop below $1 a share), which caused a run on the money market funds as investors pulled out their money, which made it hard for banks, General Electric Co. and other businesses that rely on a constant infusion of short-term debt to raise the money they need. Result: deep freeze in the credit markets, and investment banks like Morgan Stanley struggling just to survive.

"One of the things I thought we learned from the '30s is, when in doubt, you don't let a financial institution fail if there's a systemic risk," said Prof. Laidler, who believes Mr. Paulson either failed to heed this lesson or made a huge miscalculation. "I just can't comprehend letting Lehman Brothers go broke. I simply don't know how that mistake was made."

Be wary of the rosy scenario

Just before he left office in 1929, U.S. President Calvin Coolidge said things were "absolutely sound" and that stocks were "cheap at current prices." In the spring of 1930, Herbert Hoover said: "We have not passed the worst and with continued unity of effort shall rapidly recover." The "worst" was still three years away.

In August, 2007, at the start of the credit crunch, U.S. President George W. Bush declared: "The fundamentals of our economy are strong." In November, Prime Minister Harper said: "Yes, we have some problems, but as our esteemed finance minister said more than a few times last week … the fundamentals of our economy are as solid as the Canadian Shield."

Hearing this would have amused J.K. Galbraith, the great Canadian-American economist, who died in 2006. In an updated version of The Great Crash, he wrote: "Always when markets are in trouble, the phrases are the same: 'The economic situation is fundamentally sound' or simply 'The fundamentals are good.'

"All who hear these words should know that something is wrong."

*****​

How this crisis is similar:

Property bubble foreshadows trouble

The Great Depression didn't begin until the autumn of 1929, when chaos erupted in the financial markets. But then, as now, the market crash was preceded by a speculative frenzy in real estate that had burst.

Debt to excess

Brokerages in the late 1920s behaved as the subprime lenders of 2006 did, lending to almost anyone. But the buying of stocks on margin was only a small piece of a much bigger consumer credit boom. Between 1925 and '29, U.S. "instalment debt" more than doubled.

Wall Street was too clever

In the good times, investment bankers are lauded for what's benignly called "financial innovation." Only when those fancy products collapse in ruin are they seen as folly. The late 1920s saw an explosion in the number of investment trusts that made heavy use of leverage and proved to be nearly worthless after the crash. These were analogous to many of the debt-backed financial instruments at the heart of current problem.

A departing President struggles to cope

Though the economic contraction began in 1929-30, the banking crisis didn't really peak until 1933, according to Robert McElvaine, a U.S. Depression historian. President Herbert Hoover was an unpopular, lame-duck Republican who lacked political capital and couldn't contain the slide of confidence in banks.


How it's different:

Social programs help cushion the blow

Unemployment insurance, old age pensions, Social Security in the U.S. — these things either didn't exist in 1929 or existed in only a limited form. They're called "automatic stabilizers" because they put money into the economy as the private sector contracts.

There's still inflation

When the Depression began, Canada's most important export was food, not oil or wood. And the farm sector was already stuck in a deep deflationary funk. By the end of the '20s, the inflation rate in Canada was zero, and the U.S. was already in mild deflation. Today, most producers of commodities — including farmers — have enjoyed years of prosperity before the downturn.

The magnitude of the crisis is different

This may be the biggest financial crisis in 75 years, but let's put it in perspective. The unemployment rate in Canada and the U.S. is still barely 6 per cent. In the U.S., it has been rising quickly, but some key sectors, like health care, are still hiring. That's a long way from the 20-per-cent-plus rates of the 1930s. The latest data do not even show the economy is contracting.

Economic policy is more flexible

The U.S. is no longer on the gold standard, in which all dollars can be converted to a fixed amount of gold. It can let its exchange rate fall to help exporters. Central banks now understand the perils of deflation, and balanced government budgets are no longer a religion.

There is a lot of good advice in this article for incoming Prime Ministers (even re-elected ones) and incoming Presidents, too. It is also useful for we mere mortals who try to understand what is going on.

I am reasonably sure, based on everything I have read, that not even the US is going to slip into a depression; Canada should be able to get by with, at worst only one, maybe two quarters of zero or negative growth. BUT: it pays to understand what a prolonged, severe recession or even a mild depression might look lke.



 
A number of academics who've studied the era — including Ben Bernanke, the world's most important central banker — have said the severity of the downturn was made worse by the Fed's foot-dragging and its blunders. Certainly, the lesson has stuck with Mr. Bernanke. In 2002, at economist Milton Friedman's 90th birthday, he gave a speech in which he joked: "I would like to say to Milton … regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

What made the Great Depression "great" was the ham handed interventions of the "New Dealers", who's interventions in the US economy continually distorted market signals and diverted capital and labour from wher the market would have made use of them to areas where politicans and bureaucrats would benefit. I suspect that without the "New Deal", the "Great Recession" of 1929 might have been far shorter and had far lesser impact on the global economy.

I can already see the ham handed interventions of 2008 are having the opposite effects that the interventionists are expecting (notice how each wave of announcements are followed by market sell-offs?); and conspiracy theorists are already suggesting this is an orchestrated action designed to discredit free markets and create the climate for far greater State intervention in the economy.
 
suggesting this is an orchestrated action designed to discredit free markets and create the climate for far greater State intervention in the economy.

Well, if it is a conspiracy, they are succeeding.....It seems somebody(ies) is/are doing whatever to keep the government going one step further, then another, then another....
 
I think there are market forces at work that the financial guru's dont have a clue about. They seem to be forced to take steps or else be accused of doing nothing. I think if we dont do anything further and let the markets correct we will be alot better off. My real fear is that the steps now being taken will be the death of our free market system. We have seen how government managed economies have fared in the past.
 
>Don't demonize government deficits

I disagree; we must continue to demonize government deficits.  I haven't looked at the pros and cons of government deficit spending during recessions enough to know whether it is truly as useful as some economists claim.  (I have my doubts, because there is a sensible hypothesis that government spending results in significant misallocation of capital which prolongs rececessions.)  But, I will stipulate to it being useful and then add this: it doesn't matter, because in the real world governments are unable to adequately adhere to the partner principle of "spend in a recession" which is "pay down your deficit recession spending when the recession ends".  The resulting long-term damage is greater than simply working through the recession without adding to public debt.
 
Deficits, in and of themselves, are not inherently bad - they are never good.

There are some good reasons to run a deficit: a major war, for example, or some other equally threatening crisis. Sometime the national government must borrow money to fund programmes that are considered essential.

Deficit spending might be useful to, for example, build infrastructure during a depression - thereby creating real jobs. But the same deficit spending would not be acceptable to provide EI to the people who might, otherwise, be employed on those infrastructure construction jobs.
 
Thucydides said:
What made the Great Depression "great" was the ham handed interventions of the "New Dealers", who's interventions in the US economy continually distorted market signals and diverted capital and labour from wher the market would have made use of them to areas where politicans and bureaucrats would benefit. I suspect that without the "New Deal", the "Great Recession" of 1929 might have been far shorter and had far lesser impact on the global economy.

I'm not an expert on pre WWII American economics, but as far as I understood it 1932-33 saw the lowest levels of GDP and it was in 1933 that the first portions of the New Deal were brought in.  From that point on US GDP was in a pretty consistant climb, surpassing the 1929 GDP high sometime in around 1936.
 
Some economists and historians beg to differ:

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By
Meg Sullivan
| 8/10/2004 12:23:12 PM

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."

-UCLA-                                                     

Think about that when you listen to politicians (anywhere in the world) tell us how they will intervene to "fix" the economy.
 
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today's Globe and Mail, is a report on worrisome trends in China, including some that bode (even more) ill for Canada:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081012.wrchina13/BNStory/Business/home
Big red machine hits speed bump

GEOFFREY YORK AND ANDY HOFFMAN

From Monday's Globe and Mail
October 12, 2008 at 10:45 PM EDT

BEIJING AND TORONTO — Less than two months after the excitement of the Beijing Olympics, the economic news from China has suddenly taken a turn for the worse.

Auto sales are slumping. The stock market is nose diving. Developers are offering heavy discounts to promote their unsold houses and apartments.

Even in an economy that is still expected to grow at an impressive 10 per cent this year, the hints of trouble are worrisome. And the problems are concentrated in industries such as construction and automobiles, which have major implications for the commodities that Canada produces.

The slowdown in China is already causing a drop in global commodity prices. This slump could continue for the next year or two, analysts say.

“When you add it up, it's bad news for commodity prices in the short term,” said Arthur Kroeber of Dragonomics, a research firm specializing in the Chinese economy.

“Commodity prices had unrealistically high expectations of Chinese demand built into them,” he said. “We had to have a correction. It will be really bad for the next year, as we see an unwinding of those unrealistic expectations.”

Shares of Canadian mining companies have been decimated in a matter of weeks on the sudden grim reality of falling Chinese demand for commodities. Teck Cominco Ltd., in the process of closing a $14-billion (U.S.) takeover of Fording Canadian Coal Trust, has seen its shares lose nearly a third of their value in a week.

“Everyone's mindset has been affected. This is the most severe thing we've ever seen. You and I have never seen anything like this. Basically, no one in the market has seen anything like it, “ Don Lindsay, Teck's president and chief executive, said in an interview.

The latest data from China are not encouraging. China's passenger car sales, which had grown by 18.5 per cent in the first half of this year, have now declined for two consecutive months. Sales fell by 6.2 per cent in August and a further 1.4 per cent in September.

The property sector is equally weak. Apartment prices have dropped by 10 to 20 per cent in many Chinese cities, and real-estate websites are filled with promotions from developers offering discounts to potential buyers. A leading Chinese financial magazine, Caijing, describes the nation's property market as “a grim scene of slow sales, price cuts and failed land auctions.”

The price cuts have been heaviest in southern Chinese cities such as Guangzhou and Shenzhen, where real-estate prices have dropped by up to 40 per cent in the past year. But even in Beijing, after the Olympic boom, preconstruction sales of residential units fell 76 per cent in September from the same month of last year.

The slump in auto sales and housing construction is having a serious impact on commodities such as steel, copper, iron ore and coking coal. Half of China's steel demand is derived from the property market. Copper wiring in new apartment buildings is a major source of Chinese demand for copper.

“If consumers sit on the sidelines for three months waiting for housing prices to drop, the short-term impact could be fairly severe as people try to clear inventories,” said Howard Balloch, a former Canadian ambassador to China who now heads an investment bank in Beijing. “There's a price correction going on, and core demand is slowing down.”

Chinese consumers are nervous about the market meltdowns and other economic trends, he said. “They're less willing to take on auto financing. They'll delay all sorts of discretionary spending.”

In the long run, however, commodity prices will be pulled back up by China's underlying trends, including the massive migration of rural people to its cities and the government's huge investment in infrastructure such as subways and trains, Mr. Balloch said.

China insisted Sunday that its “overall economic situation” is still good. “The economy is growing quickly and the financial sector is operating steadily,” the ruling Communist Party said in a statement at the end of a four-day meeting of its Central Committee. “The basic momentum of the country's economy remains unchanged.”

But the party admitted that “contradictions and problems” exist in the Chinese economy. “We must enhance our sense of peril and actively respond to challenges,” it said.

The growth of China's manufacturing exports has been slowing because of the weakening of U.S. demand. The Chinese government is trying to boost domestic demand by cutting interest rates, and Mr. Balloch predicts that it will take other measures to stimulate the economy.

Others are highly skeptical that the government will be able to counteract the effects of the U.S. slowdown and the global financial crisis. “The government can't just spend its way out of this,” said Michael Pettis, a finance professor at Beijing University.

“Many of the government's tools simply don't work any more,” he said. “My guess is that commodity prices will soften for the next two years. They were extremely sensitive to the high growth expectations.”

The unprecedented seven-year bull run in commodities, which has been a key driver of the strong Canadian economy, appears all but over.

Analysts are now ratcheting back their commodity price assumptions on the belief that a global economic slowdown will sap demand for resources such as copper, nickel and coal.

Canaccord Adams, a major player in the mining sector, particularly in the junior mining space, slashed 2009 copper price estimates last week from $3.34 (U.S.) a pound to $2 a pound, a decline of more than 40 per cent.

“Global demand is slowing and that includes China. The copper market and commodities in general have had a really good run here,” Canaccord Adams analyst Orest Wowkodaw said in an interview. “Unfortunately, we think we're going to take a pause in the sense that the consumption levels have to come down given the global slowdown we think is happening. The equities are being revalued as an investment class.”

In the hardest evidence yet of the slowing demand, Russian steel giant OAO Severstal last week said it is cutting steel production by as much as 30 per cent because of the sudden shift in industrial demand.

“Demand for all commodities has to slow if credit is tight. There is no way that investment and growth can continue in the levels that we've seen in this type of environment,” Mr. Wowkodaw said.

Traditionally the Chinese 'consumer' has displayed a mix of extraordinary conservatism – hence the high savings rate, even during a boom, and a spirited capacity for risk taking – just what we might expect from a nation of equally spirited gamblers.

A certain 'slowdown' will, at least should be good for the Chinese economy – it is overheated and could use some discipline.
 
The global markets are up today so thats a good sign.The US markets are closed so we shall see what happens tomorrow. I suspect that the panic sellers are done and the bargain hunters are back in the market.
 
Daimler to Close Sterling Trucks Unit, Cut 3,500 Jobs (Update2)
By Chris Reiter
Article Link

Oct. 14 (Bloomberg) -- Daimler AG, the world's largest maker of heavy vehicles, will close its Sterling Trucks division in North America and cut 3,500 jobs as it reins in production and shifts manufacturing to Mexico.

The reorganization involves the closure of plants in the U.S. and Canada at a cost of $600 million and is aimed at saving $900 million a year by 2011, Daimler said in a statement today. The Stuttgart, Germany-based company will retain the Freightliner and Western Star brands in the region.

Daimler and competitors Volvo AB and Paccar Inc. have seen truck sales dive as growth slows and credit markets seize up. The German company, whose U.S. deliveries fell 30 percent in the first half, will shut Sterling's St. Thomas, Ontario, factory in March and one in Portland, Oregon, in 2010, when labor deals expire. A new Freightliner plant in Mexico will open as planned.
More on link
 
GAP said:
Daimler to Close Sterling Trucks Unit, Cut 3,500 Jobs (Update2)
By Chris Reiter
Article Link

Oct. 14 (Bloomberg) -- Daimler AG, the world's largest maker of heavy vehicles, will close its Sterling Trucks division in North America and cut 3,500 jobs as it reins in production and shifts manufacturing to Mexico.

The reorganization involves the closure of plants in the U.S. and Canada at a cost of $600 million and is aimed at saving $900 million a year by 2011, Daimler said in a statement today. The Stuttgart, Germany-based company will retain the Freightliner and Western Star brands in the region.

Daimler and competitors Volvo AB and Paccar Inc. have seen truck sales dive as growth slows and credit markets seize up. The German company, whose U.S. deliveries fell 30 percent in the first half, will shut Sterling's St. Thomas, Ontario, factory in March and one in Portland, Oregon, in 2010, when labor deals expire. A new Freightliner plant in Mexico will open as planned.
More on link

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Business News Network web site, is more, his time with a Canadian twist, on the rumoured GM/Chrysler merger:

http://www.bnn.ca/news/4079.html
CAW sees 'massive' job losses in GM, Chrysler deal

Reuters

October 14, 2008

Labor unions in the United States and Canada Tuesday expressed concern about the prospect of job losses from any potential merger between General Motors Corp. and Chrysler LLC, adding that union leaders had not been consulted by the automakers.
The Canadian Auto Workers union has asked both GM and Chrysler, which is controlled by private equity group Cerberus Capital Management, to clarify whether they are considering a merger.
   
"I don't see any positives in it on the surface," CAW president Ken Lewenza told Reuters. "You've got to believe this would be massive consolidation and massive job losses."
   
United Auto Workers president Ron Gettelfinger said the union had not had any "official discussions" with any of the parties involved in a potential merger, which he said remained "speculation."
   
But he said the UAW wanted to protect jobs.
   
"I would personally not want to see anything that would result in a consolidation that would mean the elimination of additional jobs," Gettelfinger told Detroit local radio station WWJ.
   
Cerberus approached GM in recent weeks about a merger with Chrysler, the No. 3 U.S. automaker. Cerberus has also shopped Chrysler around to other potential bidders without immediate success, sources said over the weekend.
   
The talks with GM hit a snag over the value of Chrysler and any resolution is still seen as weeks away, according people close to the talks.
   
Analysts have questioned the benefits of a merger for GM, saying the cost-cutting from combining operations could be slow to emerge and complicated by GM's existing problems of too many brands and excess capacity.
   
But a merger between GM and Chrysler would almost certainly prompt job cuts, plant shutdowns and the elimination of models and dealerships, analysts said.
   
Between them, GM and Chrysler employ about 205,000 workers in North America and produce 12 million cars annually.
   
"I think it's a very legitimate concern on the part of the unions," said Harley Shaiken, a labor law professor at the University of California in Berkeley. "It's almost certain that a merger would result in fairly significant job cuts.
   
"But it is unclear at this point what either company would gain in terms of innovation and competitiveness."
   
U.S. auto sales have sagged to 15-year lows this year as American consumers have struggled to deal with the worst housing crisis since the Great Depression, rising unemployment and tightening credit.
   
Just this week, GMAC, the financing company affiliated with GM, announced that it was limiting its auto lending to short-term loans to consumers with good credit.
   
U.S. auto makers GM, Chrysler and Ford Motor Co. have been hardest hit by the downturn, as sales of their highly profitable gas-thirsty trucks and sports-utility vehicles have dived.
   
The slowdown in sales has forced all three to either idle or close plants in North America.
   
GM has cut about 19,000 hourly jobs represented by the UAW through buyouts and early retirement incentives over the past six months. It now employs about 64,000 blue-collar workers in the United States, a spokesman said Tuesday.
   
Chrysler has announced plans to cut 22,000 hourly jobs since February 2007.
   
Labor professor Shaiken said unions would need to be persuaded to go along with any merger because "a disgruntled work force" could present a problem for the combined company.
   
"Do the unions have veto power? No." Shaiken said. "Are they a significant factor? Yes."
   
But David Cole, director of the Center for Automotive Research, said that the unions would be forced to accept job cuts for GM and Chrysler to survive.
   
"Their jobs are defined by how many cars GM and Chrysler sell," he said. "I think the unions will be pragmatic, because if GM and Chrysler can't produce long-term sustainable profits, then there is no such thing as job security."


Earlier today it was reported that the Daimler closing of a truck plant in Ontario will cost 1,400 Canadian jobs.
 
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is more ‘good news’ about the Canadian economy:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081015.wconfboard1015/BNStory/Business/home
No recession for Canada: Conference Board

DAVID FRIEND
The Canadian Press

October 15, 2008 at 11:53 AM EDT

TORONTO — Canada's economy faces some tough challenges as exports are further affected by a prolonged global slowdown and domestic demand weakens, the Conference Board of Canada says.

Despite the cautious sentiment, Board economist Paul Darby says Canada will avoid a recession.

He told the Conference Board's annual business outlook briefing that economic growth will be weak in many areas but he expects overall gross domestic product will be up next year.

Canadian tourism is expected to be one of the hardest hit sectors in the new year, while retailing, autos and furnishings will see a scaling back amid weaker consumer confidence, according to the board.

But the situation is different now than in the 1990-91 and 1981-82 recessions, Mr. Darby said.

“We're not part of the problem in a sense, even though we get into lower growth,” Mr. Darby said.

He said investments in business projects, including Alberta's oil sands, are weakening but will grow at three per cent next year.

Business construction in major cities like Calgary and Toronto will also slow to reflect the weaker outlook.

The U.S. turmoil is holding Canada's projected economic growth for this year to 0.8 per cent, the think-tank said Wednesday.

Mr. Darby projected that weaker domestic demand will contribute to weaker employment growth of 0.7 per cent in 2009.

“This is clearly no disaster,” he said. “Those are not employment numbers consistent with a recession”.

The Board's outlook makes several assumptions, including that the rescue packages in the United States and Europe will help loosen the banks' lending practices and increase business investments”.

“Living beside a troubled neighbour is taking its toll,” Glen Hodgson, another economist with the private-sector think-tank.

“Massive declines in the trade sector have shredded Canada's economic growth, and raw material prices have fallen off their peak levels. Still, the domestic economy has enough momentum to keep Canada out of a recession.”

If you have a spare $1,000.00 hanging around you can ‘subscribe’ to the Conference Board’s Canadian Outlook series.


 
tomahawk6 said:
The global markets are up today so thats a good sign.The US markets are closed so we shall see what happens tomorrow. I suspect that the panic sellers are done and the bargain hunters are back in the market.


Not so fast, according to is report, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081015.wmarkets1015/BNStory/Business/home
Stocks plummet again

STEVE LADURANTAYE

Globe and Mail Update
October 15, 2008 at 4:54 PM EDT

Investors abandoned any hopes of a quick recovery to the credit crisis Wednesday, driving North American markets lower on economic data that suggested massive government intervention may not be enough to prevent a recession.

The Dow Jones industrial average [DJIA-I]closed the day 7.9 per cent lower, or 733.08 points, to 8,577.91, while the broader S&P 500 [SPX-I]was down 9 per cent, or 90.23 points, to 907.78. The S&P/TSX [TSX-I]closed 6.4 per cent lower, or 631.83 points, to 9,312.83, after gaining 9.8 per cent Tuesday.

“Any euphoria over the notion that government actions are finally attacking the root problems of the crisis is rapidly dissipating as economic data turns south,” UBS wrote in a note to clients. “Systemic problems require systemic solutions which do not lend themselves to rapid resolution.”

September retail sales in the United States posted their biggest monthly drop in more than three years, down 1.2 per cent, compared to the 0.7 per cent decline economists had predicted. Consumer spending accounts for two-thirds of economic activity in the United States.

“The details of this report were simply disturbing,” said Millan Mulraine, an economics strategist at TD Securities. “On the whole, the strains on U.S. consumers are beginning to show, and this report is yet another indication that consumers are beginning to retrench their spending as they navigate against the headwinds coming from a weak domestic economy, tight credit conditions (despite the dramatic easing in monetary policy) and a deteriorating job market.”

Toronto was under pressure to hold onto some of Tuesday's gains, with oil falling $4.09 (U.S.) to $74.54 on expectations of weaker demand as the economy slows. Oil is trading at its lowest level since September, 2007. The energy sector fell 12.3 per cent, while the mining sector fell 9.9 per cent. Only the consumer staples sector posted a gain, up 1.6 per cent as Saputo Inc. gained 5 per cent and George Weston Ltd. gained 5.05 per cent.


Some observers think we have found the elusive ‘bottom.’ That may be true, but being at ‘bottom’ does not mean things are, suddenly, going to get better. The market may decide to stay at ‘bottom’ – even testing lower levels – until it is satisfied that all the big problems are’wrung out’ of the market and it is safe to reinvest.

 
BMO projects Canadian recession
HEATHER SCOFFIELD,  Globe and Mail Update
Article Link

OTTAWA — A second big Canadian bank is now forecasting a recession.

Bank of Montreal said Thursday Canada's economy will contract in the final quarter of 2008, and the first quarter of 2009, meeting the popular definition of recession.

“Canada cannot escape the knock-on damage of not only the U.S. recession, but also the wealth destruction arising from the plunge in our stock market and the slowdown in our housing markets,” chief economist Sherry Cooper said in a commentary.

Since commodity prices are being pulled down by a drop in global demand, Canada's energy sector can no longer be counted on to support the Canadian economy, she said.

“The boom has turned to bust. Canada, too, is headed for recession and our government will awaken to the need for deficit spending.”

BMO joins the Bank of Nova Scotia in forecasting an imminent recession, as well as economists at the University of Toronto, among others.

Still, the Conference Board of Canada, Royal Bank of Canada, forecasting firm Global Insight, and Toronto-Dominion Bank have all recently updated their expectations for Canada's growth, and figure the country should narrowly avoid a recession.

They're all in the same ballpark, however. The recession forecasters are not expecting a deep downturn, while the growth forecasters aren't expecting much growth.

For its part, BMO Nesbitt Burns forecasts a 1.7 per cent annual pace of growth in the third quarter for Canada, but a 0.7 per cent contraction in the fourth quarter, followed by a 0.5 per cent contraction. Growth should resume, but barely, in the second quarter, with a 0.6 per cent pace of expansion.
More on link

 
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is more about how problems on Wall Street/Bay Street impact the good people on Main Street:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081017.wpensions1017/BNStory/Business/home
Pension plans show worst quarterly drop in decade

JOHN PARTRIDGE

Globe and Mail Update
October 17, 2008 at 8:25 AM EDT

The global financial crisis slashed 8.6 per cent of the value from major Canadian pension plans in the third quarter, their worst three-month drop in a decade, RBC Dexia Investor Services said Friday.

This brought the year-to-date decline to 10.1 per cent at Sept. 30, the firm said in a news release.

“It hasn't been pretty – and judging by the performance in October so far, the situation is not getting any better,” said Don McDougall, the firm's Montreal-based director of advisory services.

The impact of the market meltdown on the pension plans and their ability to continue paying their members will depend on the timing of their next actuarial valuation and what their status was prior to the rout, Mr. McDougall said in a telephone interview.

“But it typically just means that their asset base has shrunk,” he said. “Now, to the extent that their liabilities are stable or going up. . .it means ultimately these schemes are going to be more costly.”

Mr. McDougall also indicated, however, that he does not think pensioners or soon-to-be pensioners need to be overly worried, unless a company is in trouble and its pension plan already shaky.

“These are long-term schemes and. . .what history has shown us is that markets go down, but they also go up – and very quickly,” he said.

In the most recent survey, RBC Dexia found that Canadian equities were the hardest-hit asset class among the 40 defined-benefit pension plans it surveyed, plummeting 18.2 per cent as commodity prices sank, dragging the S&P/TSX composite index to its worst quarterly results in 10 years.

Leading the plunge were mining and other materials stocks, which fell 33.6 per cent, and energy stocks, down 28.3 per cent.

However, Mr. McDougall said that most of the pension funds had already cut back their exposure to resources, enabling them to outperform the S&P/TSX by 1.7 per cent.

Among other asset classes held by the funds, global equities fell 11.2 per during the quarter, in line with the MSCI World Index.

The value of domestic bond holdings, meanwhile, fell 1.5 per cent.

“Spreads varied considerably,” Mr. McDougall said. “Longer maturity bonds dropped 3.1 per cent, while real return bonds lost 9 per cent, their worst quarter in 14 years.”

Overall, the quarterly value drop was the worst since 1998, when pension plans were clobbered by the fall-out from the Asian currency crisis.

The 40 funds surveyed were located across Canada and divided by size: 10 with assets of $1-billion or more, 10 with $500-million to $1-billion, 10 with under $500-million and 10 with $100-million to $500-million.

The sample is “representative of the big picture” of 300 pension plans with about $340-billion in assets that RBC Dexia tracks, Mr. McDougall said.

While military pensions are a government obligation the money allocated (voted) to pay them is invested in the markets. That asset base has shrunk, too.

 
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is an interesting and troubling article:

http://www.theglobeandmail.com/servlet/story/RTGAM.20081017.wbretton1017/BNStory/International/home/?pageRequested=1
Wanted: a new financial order

DOUG SAUNDERS

From Saturday's Globe and Mail
October 18, 2008 at 12:05 AM EDT

BRUSSELS — A week ago, French President Nicolas Sarkozy and German Chancellor Angela Merkel found themselves strolling together through the cobble-stoned streets of Colombey-les-Deux-Églises, a tiny village in the northeast of France, where they were attending a war-memorial ceremony.

The town is known as a place where French leaders, from the time of Charles de Gaulle, have gone to escape the world and restore their energy. There was much retreating and restoring to be done last Saturday: The previous day, their finance ministers had rushed home early from a Washington crisis meeting after stock markets had crashed dramatically and expensive national schemes to restore the credit system had failed.

None of the patchwork of plans appeared to work and the world economy was threatening to seize up. A few hours earlier, the head of the International Monetary Fund — a Frenchman — had declared that the world financial system was "on the brink of systemic meltdown." Both leaders had been on the phone with British Prime Minister Gordon Brown, and they had agreed to follow his plan for governments to purchase major stakes in their countries' failing banks, at huge expense. With that done, anything seemed possible.

It was during their stroll, and over lunch afterward, that these two often-feuding leaders arrived at another conclusion: Nothing would be truly fixed, they believed, until there was a new world financial system in place, a new economic watchdog supervising the world's economies.

That was a view that had been pushed strongly by Mr. Brown, in a memo that he had begun circulating among associates and leaders, and it agreed, on the surface, with something similar to what Mr. Sarkozy had been saying for weeks: That this was an unprecedented global crisis, beyond the scope or powers of any national government.

The next step, they agreed, would have to involve the whole world, and would require rewriting the rulebook of global capitalism.

With that lunch, Europe had reached a consensus, at least superficially, on a solution that had not been attempted in 64 years: a major global meeting that would attempt to redesign the world-finance system. It was an acknowledgment, at a high level, that with the current crisis, the entire postwar economic system may have come to an end. What comes next will be a matter of heated disagreement.

By Tuesday morning, the Americans were on board, at least as far as attending the proposed meeting — expected to be held in New York shortly after the Nov. 4 presidential election. Prime Minister Stephen Harper, fresh from his re-election, said Friday he also supports holding the meeting. All the G8 industrialized nations have agreed to attend, at least on paper, and it is expected that China, Brazil and India will take part.

While there's no consensus on what the new financial order should be and there are signs of deeply divergent views, these countries appear at least willing to talk about a new international order at a meeting the three European leaders are calling Bretton Woods II, after the 1944 meeting that started it all.

"Merkel became convinced at Colombey that Brown and Sarkozy were correct that the whole postwar system of finance does not work any more, and something new will have to take its place," said a European Union official involved with the talks.

Saturday morning, the Europeans will try to take Washington a step further. Leaving early from the Montreal summit with the Canadian government, Mr. Sarkozy and European Union Commission president José Manuel Barroso will fly to Camp David to sit down with President George W. Bush and try to persuade him to support Mr. Brown's proposals to create a new set of international institutions.

What they will be trying to sell is a seven-page document that Mr. Brown first made public on Wednesday morning. It proposes a set of organizations — a "new international financial architecture for the global age" — that will monitor risks in the financial system and provide an early-warning system; determine global standards of regulation; supervise international corporations in their cross-border activities, protect markets from excessive activities of speculators; stamp out major conflicts of interest and set standards for pay and bonuses; internationalize accounting standards, and provide transparency in complex financial transactions.

Given these sizable goals, the encounter with Mr. Bush may be the Europeans' least victorious moment: Aides to Mr. Bush said last night that he is not interested in a new international organization, would prefer to have debt and finance overseen by national bodies, and does not even want to fix a date for the meeting. Other Americans, notably Treasury Secretary Henry Paulson, are said to be more receptive: After all, it was Gordon Brown's bank-buying scheme that tamed the market crash after Mr. Paulson adopted it in the U.S. on Tuesday, at a cost of $250-billion.

"There's generally agreement that the rules used worldwide in the banking and financial system have probably to be changed," says Philippe Waechter, a world-finance expert who is head of research for the French firm Natixis Asset Management.

What exactly has to be changed, though, is a hugely contentious matter.

In 1944, while tens of thousands of soldiers were still dying in Europe's forests and villages, another era came to an end. Since the beginning of the First World War, the world's economy, which previously had been fluid, open and international, had become divided and segregated along national lines. This nationalism, protectionism and currency isolation had deepened with the 1930s Depression, and leaders of Britain and the United States feared that this would prove economically fatal in the postwar years.

John Maynard Keynes, the British economist, called for a major meeting of world leaders — to be held a few days after the D-Day landings — at the Mount Washington resort hotel in the mountain ski resort of Bretton Woods, N.H. The gathering was known as the United Nations Monetary and Financial Conference, although the United Nations did not yet exist.

Winston Churchill, Franklin Roosevelt, Joseph Stalin and Mr. Keynes, along with 700 officials from 44 nations, gathered in Atlantic City, N.J. on June 15 and then took the train to New Hampshire and met for 22 days — a far more leisurely pace than anything that will be held this year.

They were there to address a burning problem raised by Mr. Keynes: If, when the war ended, European recovery and rebuilding was to happen in any meaningful way, there would have to be free flows of capital and investment between borders, and currencies would have to be able to be exchanged for one another. No longer could nations act on their own; they would have to be sending capital across borders, often large amounts of it.

Over cocktails and steak dinners, the leaders built the architecture of the modern financial world: the International Monetary Fund, which provides loans to rescue countries in financial trouble; the body known as the World Bank, which finances the rebuilding of troubled economies, and the institution that became the World Trade Organization, designed to open borders and break down trade barriers.

Bretton Woods began a six-decade process of the de-politicization of money: In ever more dramatic ways, government and finance became separate spheres, and banking became a self-contained, increasingly unregulated world of its own. A flood of savings from the developing world provided banks with huge pools of money they could use to devise new profit-making instruments, free from interference.

Until this week, that is, when government and money came crashing back into one another. Suddenly, governments are the major providers of loans, and the major shareholders in banks, and the ability to keep the money flowing is beyond the authority of any one country. The idea that central banks can quietly stick to keeping inflation at bay is gone. Once again, we are aiming for the prevention of catastrophes.

On Monday, Mr. Brown arrived at a meeting of the 15 countries that have the euro as their currency and laid out, behind closed doors, that vague but sweeping set of proposals he would make public two days later.

"We now have global financial markets, global corporations, global financial flows," he told them. "But what we do not have is anything other than national and regional regulation and supervision. We need a global way of supervising our financial system."

The idea became surprisingly popular in Brussels on that day, partly because Mr. Brown's vagueness turned his seven-page plan into something of a Rorschach test on which could be projected each country's economic fantasies. Italian President Silvio Berlusconi talked about a world without the dollar, where the euro might become the reserve currency.

The otherwise conservative Mr. Sarkozy declared in a grandiose speech that "we need to found a new capitalism, based on values that put finance at the service of companies and citizens, and not the reverse." Such lines play very well in France, but are not likely to win any high-fives from Mr. Bush this morning in Washington.

Before a meeting date could even be set, the leaders squabbled over who had invented the idea. Mr. Sarkozy, through his aides, make it known that he had been proposing since Sept. 23 that a new global regulatory system be built.

Mr. Brown, in turn, had his aides point out that in January of 2007 he had argued that international finance regulation was "urgently in need of modernization and reform."

All of this sounded a bit rich to a community that had watched these European leaders, notably Mr. Brown as Britain's finance minister in the late 1990s, participate in a deregulation and neglect of the financial system that had allowed the complex network of mortgage-backed debt instruments to spiral out of control and destroy the debt-burdened banking system.

My opinion:

Bretton Woods still works, or it would if it was just left alone to effect “the de-politicization of money” making “government and finance ... separate spheres” and allowing “banking [to] became a self-contained ... world of its own.” The only question is: to what degree can we and do we need to regulate the global, self-contained banking system?

• Effective regulation aims to ensure honesty (transparency and, in banking, adherence to generally accepted standards for accounting and reporting) and equality of opportunity by preventing monopolistic behaviour.* Whenever regulation tries to control outcomes – which is what most people want – it is wrong. Only the market can determine outcomes and any and all attempts to interfere will do harm – never, ever ‘good’ for anyone.

• Brown, Merkel, Sarkozy et al claim the current system is “broken.” I doubt that; in fact, it may be that the system is working quite well – just balancing itself without care (because ‘systems’ cannot care) about the impact on Main Street  where all the voters live.

• A meeting is, at least, harmless – provided enough dissenting voices are heard.

The Brown/Merkel/Sarkozy proposal smacks of ’world government’ by the backdoor. The closest we have to a world government is the WTO – because, unlike the UN, it has a rules based system for sanctions. Any proposal.

Many banking systems are in trouble because, as Saunders says, ‘leaders’ like Brown, Merkel, Sarkozy and Reagan, Bush, Clinton and Bush participated in ”deregulation and neglect of the financial system that had allowed the complex network of mortgage-backed debt instruments to spiral out of control and destroy the debt-burdened banking system.” Canada’s banking system (like a few others) is not in trouble. Perhaps the problem is not that the global ‘system’ is broken but, rather, that individual, national systems are inadequately regulated. Perhaps well regulated national banking systems will interact quite well, without further ‘supervision’ within the existing global system.


--------------------
* I always remember an economics lecture several decades back in which we were told that ”there is nothing wrong with a monopoly so long as it is achieved and maintained in a fair and honest manner.” Such things do happen in small, relatively primitive economies – it might be easy to monopolize the milling business in an isolated community – or when new technology emerges – Intel had something close to a monopoly for a brief period but it’s efforts to maintain it were neiher fair nor honest.

 
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post is a good critique of the ‘Sarkozy Plan:’

http://www.financialpost.com/story.html?id=889454
Dangerous ideas
Canadian authorities should shun ideas at both ends of the ideological spectrum and remain pragmatic

David Laidler,  Financial Post

Published: Saturday, October 18, 2008

Some very dangerous ideas are beginning to circulate: Namely, that financial markets not only need immediate government help to get going again, but continuous supervision thereafter. U. K. Prime Minister Gordon Brown has called for a revamped International Monetary Fund that will provide early warnings of impending crises so that they can be prevented, and France's President Nicolas Sarkozy is proposing an international conference to set such changes in motion, while leaving little doubt that he believes the key to crisis prevention lies in a large dose of dirigisme.

The IMF was founded to oversee an international monetary system based on pegged exchange rates -- which broke down in the 1960s and vanished in the 1970s -- not to be the centre of expertise on financial system regulation. Indeed, we already have the Bank for International Settlements (BIS) for that. The BIS gave ample early warnings about the current crisis for anyone who would listen -- and is no doubt learning lessons from what has happened because it was ignored.

Economic policy, however, is the responsibility of elected politicians. Warnings and advice from international organizations, old or new, will be useless so long as politicians ignore them. Those same politicians, moreover, have a long record of turning to international agreements -- the Smithsonian, the Louvre and the Plaza agreements, for example -- as a way of evading their responsibilities for repairing the sources of instability already under their jurisdiction. If and when European politicians have succeeded in putting a coordinated regulatory framework in place for EU financial markets, or even for the smaller Euro Zone, and when they, the Japanese and the U. S. among others, have brought the potentially destabilizing long-term growth of their government debt under control, then it might make sense for them to try to reorganize the whole world's financial system -- but only then.

Perhaps the most dangerous of today's ideas is that it is possible to design a financial system that will promote economic efficiency but never again generate a crisis like the current one. The first modern financial bubble started in Paris in around 1719 and spread to London before bursting in 1721. There have been many since, and it seems unlikely that the current example will turn out to be the last. And even if it was, how could we ever be sure of that? As discussions of financial system reforms proceed over the next few years, therefore, they should pay more attention to improving mechanisms for dealing with the effects of crises than to vainly pursuing allegedly surefire methods of preventing them.

This is not to argue for letting nature take its course during the current crisis. That markets always function, an idea assiduously taught in many business schools for decades, is also dangerous and all too influential. It tempted U. S. Treasury Secretary Paulson into allowing Lehman Brothers to go bankrupt a month ago and misled 200 economists into opposing the rescue legislation that followed. The very market mechanisms that permit the economy to function are precisely what the financial sector provides, and while it can stand occasional individual failures, when the whole industry seizes up because of shared errors among its managers, then so does everything else.

In a financial crisis, each institution tries to look after itself by piling up stocks of safe marketable assets -- liquidity -- and if that requires a stop to lending, so be it. But when such a response becomes system-wide, there is no market cure for what ensues. Only the authorities can provide the liquidity needed to get lending started again.

Meanwhile, worries about inflationary consequences are misplaced. These fears arise from over-generalizing lessons relevant only when markets are functioning. At such times liquidity injections, not being needed, are spent, but in a crisis, they satisfy a desire to hoard, and hence relieve deflationary pressure. When misplaced inflation fears slow down the application of this remedy -- as they seem to have done recently -- institutions that start out lacking liquidity end up needing more capital as losses from declining business pile up.

Likewise, when things have gotten so far out of hand that the only reliable source of new capital is the government, fears of the onset of "socialism" must not inhibit policy. Capitalism is fine when it is working, but to do so it needs a functioning financial system. To do whatever is needed to ensure that system's continued existence is a matter of good government, not the first stage of the Revolution.

In the current circumstances, the Canadian authorities should shun dangerous ideas at both ends of the ideological spectrum and remain pragmatic. The Bank of Canada should provide the liquidity the financial system needs and if output and inflation are now set to fall, it should also ease monetary policy by all feasible means to keep inflation on its 2% track.

As to the federal government, if enabling the financial system to work requires more mortgages to be bought or interbank deposits to be guaranteed, it should do so; and if the budget slips into deficit, this should be tolerated. As to the international financial system, Canada is a small player and should be defensive, supporting changes that might help markets to function and opposing grand designs calculated to paper over those deeper seated threats to stability located in the houses of bigger players.

David E. W. Laidler is a Fellow in-Residence at the C. D. Howe Institute.




 
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