Alan says "As is so often the case the best government policy is to stand back and allow market forces to correct the imbalances that are in place." That supposes that markets inherently work toward balance but Steve Keen argues that when markets are unstable they lurch further and further to instability. Alan Moran's prescription will lead to debt deflation, Steve Keen's advice is a debt moratorium. We shall see.

Alan finishes with "governments which have persuaded themselves that it is they who have caused the previous levels of prosperity and therefore will be blamed for inaction." Too true, and which ever is in power when a recession looms will be punished by the electorate.

Good old Alan Moran. In his defence of the 'free market', he's like an unreconstructed Marxist forever defending the purity of Communism.

Alan, mate, we got into this mess in the first place precisely BECAUSE governments stood back and let 'market forces' run free.

Capitalism only works if there are agreed rules and laws. And those laws have to be enforced.

Sooner or later, you and the rest of your hairy-chested mates in the libertarian lobby are going to have to accept your time of manipulating the policy debate to your own ends is over.

Now get back to the back of the bus.

Mr Denmore,

You are quite wrong. It was government social engineering, Central Bank's meddling and the inaction of regulatory bodies that were the root causes the current meltdown.

Alan is correct the solution is not the current craze of spending on comsumption and infrustructure or in bailing out failing business, for if as is now likely, this recession is prolonged the larder eventually becomes bare.

Governments would be better off concentrating on and targeting spending and subsidising creative and solid businesses in those activities that are directly involved in the creation of wealth.

What's your solution?

Keith,

You are joking aren't you? So it was the dastardly government "social engineers" who forced the Dr Frankensteins at investment banks to package up dud mortgages into securities which were then flogged to the public by commission-paid financial advisers acting on bogus ratings from credit agencies paid by the product engineers?

So it was the government "social engineers" who forced poor company directors to accept hugely inflated compensation packages to leverage up their balance sheets and take massive risks in pursuit of short-term returns?

So it was the government "social engineers" who encouraged mafia-like securities wizards to build elaborate Ponzi schemes and fleece retirees across the world of their life savings?

Let me spell it out for you. This crisis was caused by an ABSENCE of proper regulation, by a blind faith in market forces, by a naive belief that greed would act in the service of the wider good, by a disenfranchisement of the public by shadowy self-interested forces and by an almost religious zealotry that put society at the service of "the economy".

The wonder is how quickly the free marketers turn into socialists when their fortunes are lost.

By the way, you need to get your own story straight. On the one hand, you complain about government interference. On the other, you say governments should be "subsidising creative and solid businesses". I never knew libertarians were in the business of picking winners.

As to my solutions. The answer is what governments and central banks are now doing - pump priming and cutting interest rates.

The consequences of following Alan Moran's advice - of just standing back and letting creative destruction take its course - can be seen in what happened during the Asian crisis. The IMF told Indonesia to follow the Washington consensus - cut spending, raise interest rates and let market forces rip. The country nearly imploded and would have done so, had it not been for the pragmatic intervention by our own Reserve Bank, who argued for a less doctrinaire approach.

Perhaps we should let the meltdown occur.

And then when we all totally shocked and awed into submission by the thus universal ensuing global catastrophe, we can then accept the Shock Doctrine therapy courtesy of the benighted Chicago boyz---of which the author is a fully paid up true believer.

Whether interventions such as $6bn to an over-capacity car industry which for decades could be viable with at most two suppliers and $10bn in "welfare" payments will alleviate the downturn is moot; but Alan is surely right to see longer-term problems arising from the mode of dealing with the crisis. Surely even emergency action could have been taken in such a way as to improve the structure of the economy, e.g. by measures which tackled the welfare-to-work transition, promoted entrepreneurism and productivity and increased incentives for future saving and wealth creation. Treasury didn't have to invent anything, just draw on work already done in such areas. There's never a good time for "knee-jerk" reactions such as we've seen, always a good time to lay better foundations for the future. The Howard Government wasted many such opportunities, more "me-tooism" from Rudd, although his role model appears to be the desperately bad Peter Beattie rather than Howard.

Having had our super savaged, my wife and I have put our welfare handouts in a secure high-interest account rather than, as requested, splurging them on unnecessary current consumption.

the writer dosnt have any clue>>,it was designed to encourage lending and to provide a hand-out to those who over-committed in terms of mortgage debt.>>
we are over commited because howard lied real the REAL inflation risk
we now have a higher debt/equity ratio for hosing than ever[because we dont expewct inflation/intrest to go up FAST

when it does ,THEN people will default>>However, the banks’ problems are not liquidity but risk of non payment.<<

they take risk[if they get it wrong they should lose

>Low interest rates will therefore make them even less likely to see value in using their own liquid resources other than in buying government bonds.<<

how well did this work in japan
bonds mean govt debt[that failed
no more intrest brearing bonds [that become securities
THE REAL PROBLEM
later you talk about 5 trillion mortgauge backed securities [BACKED ON 800 BIL of mortgauges

#>>Treasury advisers have been transformed from seeking to rein-in government spending to instigating a new era of government pump-priming.<<

we need to use the funds howard stashed away for the public service BEFORE GOVT LENDS [creates intrest repaying bonds[thats where we WENT WRONG last time

the 'trust'funds are for all ausytralia
[what tax paYER ISNT SEVING THE PUBLIC?
WHO DIDNT FUND TELSTRA[WHY SHOULD THE PUBLIC[TROUGH]SERVANTS KEEP THEIR DARN sper cash cow[while we pay intrest on NEW DEBT[bonds]

Triggering the present downturn
was the collapse of the $6.5 trillion US
mortgage backed
debt market.

Financial engineering created silk purses out of the sows’ ears of 800 billion in housing loans. Those loans were fuelled by GREED ,special intrests stealing everything via fraud[and fiat currency[and mates rates credit]

is "Moran" spelled correctly? i'm pretty sure there's supposed to be two O's.

Personal greed; people borrowing money they damn well knew that they could not afford; people not being able to control themselves or their money; people thinking that they have the right to live like rich people even if they are not rich; people wanting everything now: these are some of the the causes of the current economic distaster.

You can't legislate for fools, nor can you regulate them. More regulation of business and finance as a tool of stability is a total myth.

Both Howard and Rudd have been complicit in compounding the economic morass now enveloping Australia.

The regulatory agencies are somewhat paralysed because that is what the powerful banking, insurance, financial services lobby has influenced to allow continuance of reckless financial behaviour. Funding for ASIC was reduced last year and that agency is not adequately resourced to cope with all of the shabby corporate behaviour now emerging.

Successive federal governments have resisted pleas to prohibit immoral stock lending for superannuation funds. The Labor Party virtually controls a large segment of national savings through industry super funds so there appears to be murky reasons for their reluctance to introduce adequate protection of super investments.

The nation steered away from a national superannuation scheme when the compulsory superannuation levy was introduced. Infrastructure Australia supremo Rod Eddington claims governments do not have adequate funding available for infrastructure projects; but even an optional national scheme would provide an enormous financial reservoir for government borrowings to overcome infrastructure deficiencies. He is of course being blind to the abject failure of many public/private partnerships which heavily penalize taxpayers.

The first home owner grant scheme was ill-conceived and its recent expansion reflects very shallow appreciation of the overall national economic scenario by the major political parties. The fundamental problem with housing affordability in Australia is inflated land valuations created by state governments during the real estate boom of 2000 to 2004. Why waste public monies on handouts to subsidize the construction industry when such funds could be directed to state and local governments conditional upon revaluing land to pre-boom levels? The lending institutions are being well funded due to federal government benevolence so should be able to withstand any devaluation of their previous loan securities.

Alas; successive Prime Ministers of Australia have been ego driven autocrats lacking in leadership and vision. Kevin Rudd is inclined toward rash promises and obsessed with keeping his public commitments however unwise with dark clouds looming.

Australia has lost its way.

Mr Denmore,

No joke. It was the Democrats in Congress who strenghtened the Community Re-investment Act which provided penalties to force banks to lower their lending standards in order to lend to underprivilrdged and minorities. The Democrats had control of Fannie Mae and encouraged that organisation to buy these toxic loans from the banks. Fannie Mae was the first organisation to parcel and on sell these 'derivatives'.

The real estate 'bubble' was propelled by Greenspan's tweaking of interest rates, keeping recession away. Increased in rates in 2005 led to the property market stalling resulting in an inability of those with low start loans to refinance or sell above purchase price as their loans repayments increased.

You've not covered these earlier underpinning actions. Your post accurately detailed most of later occurrances.

I agree oversight activites was lacking but the regulation to do so was always in place. I disagree there was an absence of regulation.

I complain about how the Government is interfering. I've never suggested there shouldn't be Government involvement ... or regulation.

The only difference between your and Alan's positions is that one will result in a short sharp correction and the other will simply prolong the correction. Alan's answer would see a short period of pain. I don't think you'd said you'd accept your solution might lead to a period of prolonged pain or how long that period might be.

What do you do when interest rates reach zero and it also becomes impossible for governments to easily finance deficits?

I agree the IMF policies tended to be destructive for local people and am sympathetic to your view.

My solution targets wealth creation as opposed to doing nothing or simply supporting consumerism and mostly wasteful infrustructure spending.
Picking winners ... why not ... It's what the market usually does and those types of business will standout as our economy gets deeper into depression. And of course infrustructure spending is exactly that also... all about picking winners, as is propping up the presently uneconomic car makers.

Keith, I'm afraid that your argument about it all being the fault of the Clinton administration is a rather desperate talking point dreamed up in the blogosphere by Republicans during the presidential election campaign to deflect blame for the crisis from the spivs in the financial markets.

Yes, there may have been some lax lending under Fannie Mae and Freddie Mac in the late 1990s, but the worst that would have happened - had not the Dr Frankensteins of the derivatives world got involved - would have been a rise in defaults and a tightening of lending standards.

What CAUSED the crisis wasn't the initial relaxation of lending standards, but the bundling of these mortgages into obscenely complex derivative products, which banks subsequently leveraged to the heavens, while shifting the risk onto off-balance sheet vehicles. This way they escaped the oversight of prudential regulators.

You're right about Greenspan keeping monetary policy too loose. But Greenspan was the surpreme non-meddler. A life-long devotee of Ayn Rand and a member of the libertarian right, Greenspan thought he was getting out of the way of the uber-capitalists. Instead, he was throwing them a can of petrol and a couple of boxes of matches.

Now, we are all living with the consequences. By the way, while I'm no neo-libertarian, I'm not an old-fashioned Keynesian either. What I am is a pragmatist. And what's needed now is smart regulation that ensures that society does not in future have to carry the cost of excessive risk taking by institutions who benefit from implied government guarantees.

The plain fact is that global liberal market capitalism, as we know it, is on the brink of self-destruction. The people who will save it will be those who are not the victims of any ideology, but who put people first in framing public policy responses.

Keith, “picking winners” is always a bad policy. Commercial businesses and investors thrive or fail on their capacity to correctly identify and pursue profitable opportunities. The skills required for this are highly valued and are in great demand, particularly by firms and investors who operate globally. If there is a profitable opportunity available, it is unlikely to be overlooked.

Nevertheless, governments and public servants with little relevant expertise frequently think that their capacity to identify and pursue viable commercial opportunities exceeds that of the businessmen whose livelihood depends on that capacity. In practice this almost invariably leads to poor investment choices at great cost to the state concerned. More effective are market facilitation strategies which accept that the role of government in economic development is to provide an environment which enhances the opportunity of the private sector to identify and successfully pursue profitable opportunities.

Interventionist policies are based on the view that a government can obtain better economic results by direct intervention in the economy rather than by facilitating markets. There is little or no evidence to support such an approach. The Soviet bloc countries were strongly interventionist with extremely negative results. A recent World Bank report concluded that since the break up of the USSR, the economic well-being of the former Soviet bloc countries has been directly related to the extent to which they have opened up to trade and embraced pro-market capitalist policies). Within Australia, interventionist policies in Victoria, SA and WA around 10-25 years ago led to significant losses.

Queensland’s economic growth in the last decade has been in spite of, rather than because of, government intervention. A major factor has been booming world markets for minerals and metals, over which the Government has no control.

My advice to Ministers is: be sceptical of any public servant who brings to you a “wonderful” investment opportunity which has not been pursued by commercial investors. Your first question should be: “Have you mortgaged your house to invest in this wonderful opportunity?” Unless the answer is a resounding “Yes!”, go no further.

Mr Denmore “Sooner or later, you and the rest of your hairy-chested mates in the libertarian lobby are going to have to accept your time of manipulating the policy debate to your own ends is over.”

My chest may not be hairy but my politics are libertarian and I for one, disagree with your proclaimiation and lies to the reason for the current economic bust.

“This crisis was caused by an ABSENCE of proper regulation,”

No this crisis was caused by socialist minded politicians making credit easier for people who would not normally get money from bankers through using government funds to underwrite the borrowers debt.

No different to that nasty Victorian government (fat Joan Kirner) scheme to let people with insufficient income borrow against a government housing scheme which left them owing more than their houses were worth.

The “blame” was due the fraudulent and corrupt socialization of regulation to make a political whim and fact (nothing new in that, just a repeat of the litany of lies which under pin every socialist fantasy/nightmare.

The other problem with socialist policies is it is like building up the banks of a river instead of dredging away the silt, short term fix but when the flood (economic bust) comes the devastation is over a far wider area because the river has lifted over the level of the immediate hinterland.

Faustino “Nevertheless, governments and public servants with little relevant expertise frequently think that their capacity to identify and pursue viable commercial opportunities exceeds that of the businessmen whose livelihood depends on that capacity.”

Exactly.

Government playing lady bountiful with tax payers money.

Regarding the $10 billion vote buying exercise…. If the government had not taxed people to gain the surplus from which the corrupt , unearned vote bounty payments were paid, it would have still been in the community for people to spend as they wished.

If government left me to spend what they expropriate through taxes I would do a damn better job than all their wishy-washy re-engineering bunkum will ever produce.

Mr Denmore,

Wrong neither Fannie nor Freddie had lending policies ... ever. They had buying policies. They bought mortgages from the banks. Without understanding that your whole arument is flawed.

The lending standards were forced to be lowered by the enforcement of the penalty clauses in the Democrat 'owned and operated 'Community Reinvestment Act. That required lending to the poor and minorities even if they couldn't meat the Banks normal lending criteria.

Fannie, bought these mortgages. Fannie was the first organisation to bundle and sell these on the derivatives market.

There would have been no collapse if these loans had not been made and and normal tried and tested lending standards these loans would never have been made.

I understand what happened next and accept all your explanations as relevant but you seem to have some idealogical mindset that prevents you accepting the real source of the problem.

You should ask yourself who is it so?

'The plain fact is that global liberal market capitalism, as we know it, is on the brink of self-destruction. The people who will save it will be those who are not the victims of any ideology, but who put people first in framing public policy responses.'

Like to back up that assertion with ...at least some reasoning. Like to explain why and how?

Speaking of Doc Frankenstein, I just lerv that photo of Moran. It was taken in the IPA's dungeon. There must be some beakers with bubbling, smoking potions nearby and...MWU-HAH-HAH-HAH-HAH! Deez MAGNIFICENT creations, my free-range monetarist children, deez market forcez, are now set loose to do their work in this cruel, unjust world. Hah! They will never laugh at us again!

You're on the, er, "money" there Denmore, for want of a better term! One point though, on your comment: "Greenspan thought he was getting out of the way of the uber-capitalists". Greenspan is a liar, constantly muddying his comments with vagueness and ambiguity like any practised sophist does. Greenspan did not just think he was "getting out of the way" and being a good, butt-kissing cultist and groupie for Ayn Rand. No, Greenspan knew that he was getting a knighthood and lifetime pass into the globalization oligarchs' Hall of Fame. At the same time as Greenspan was devising his "magic", unrepentant Nazi collaborator Soros was writing his prescription for the current corporatist bailouts (in his book 'The Alchemy of Finance', as excerpted recently in AFR.

Also, Greenspan must be one of the most hideous-looking people alive, so I guess he was always one of the most eager volunteers for work in the dungeons of Ayn Rand, IPA, the Haileybury School, LSE, etc.

Funny how keith still defends that funny position about "it's all Bill Clinton's fault" and "the fault of the US Democratic Party's Politburo", poor people getting house loans, etc. As Denmore indicates, Greenspan's derivatives bubble was already in place well before the usurers' ecstatic achievement in forcing Clinton to repeal Glass-Steagall. You should check some time lines there keith.

hey Mil

Nice to know you are still hooked into that drip feed that's keeping you in idealogical denial.

some interesting facts being revealed in first hour
using the mp3 links you can fast forward past the slower bits

http://www.republicbroadcasting.org/index.php?cmd=archives.month&ProgramID=1&year=8&month=12&backURL=index.php%253Fcmd%253Darchives.getyear%2526ProgramID%253D1%26year%3D8%26backURL%3Dindex.php%253Fcmd%253Darchives

there is a big collapse on its way[do we want to keep the fed in the hands of the bankers;for proffit for the bankers]letting them turn intrest bearing bonds into cash[they alone[the fed alone]can issue

banks arnt lending[meaning the real economy cant lend its wage moneys] meaning wage earners dont get paid[meaning they default, meaning no one can pay rent, or buy food[the farmers cant plant [capitalism has failed]
now what?

why not just keep the economy turning over by allowing the people to spend, then big buisness earns who gets our cash

when the commies collapsed the people got shares
well we got fiat currency[currency swaps can keep our exchange rates near where they are [or else we all enter hyperinflation while the factories slowly get shut down till there is only looted factories left rotting]

half of the worlds banks will be in serious trouble next year
govt needs to come up with something better than giving more cash to those who set this up by being too big to fail[if the big guy fails cut em down to size[as soon as possable [but keep em going[or ready to go]or let em go now

ongoing[responsable]spending is the only cure
to do this consumers need to have money to consume[cut personal tax on wages] only tax legal income[profit ,not wage]