A world in economic crisis

More on the der Spiegel’s article on the IMF

Posted in G20, Greece, Hungary, International Monetary Fund, USA by Aussie on October 7, 2010

Despite the rather flowery language of the author, this article on the IMF and where it wants to head is worth reading. It takes time to digest because it becomes necessary to remove all of the flowery language to get down to the nuts and bolts.

There are several European countries that are in danger of collapse: Spain, Greece, the U.K., Ireland, Turkey, Italy and a new one to add to the list Hungary.  The IMF seems intent upon interfering in the economies of these countries by providing loans coupled with austerity measures. This is certainly the prescription that was given to Greece. (I have already covered the issue of the laziness of the Greeks).  The question though, is whether or not this interference is justified, especially when these Socialist countries do not seem to want to reform, let alone grasp the reality that their Socialist policies might be to blame for the imminent collapse of their respective economies.

Hungary had been on the brink many times since the fall of the Berlin Wall, and it had been borrowing from the IMF on and off for several years, until the negotiations were broken off. Any country borrowing from the IMF must be prepared to make certain necessary reforms including: a reduction in the civil service employees and employee pensions.  Here is an outline of Hungary’s interaction with the IMF and the results for that country (not all that encouraging):

Hungary has been an IMF member since 1982. The country embarked on economic reforms early on, and to do so it needed IMF loans — to the tune of $520 million in the first year of its accession to the Fund. Hungary, a model student when it came to developing a market economy, relaxed its import policies in 1984. Subsidies were cut and the Hungarian forint was devalued, all at the request, urging or instruction of the IMF.

The country received six more loans by 1996, one for $365 million, another for $480 million, and in 1991 the Fund approved a loan worth $1.6 billion. In all those years, Hungary was reinventing itself. The banking system was restructured to satisfy free-market requirements, and a value-added tax was introduced. In 1990, the government passed laws to allow foreign investment, removed customs barriers, reduced government bureaucracy and lifted controls on prices and wages.

But there was a dark side to the policies, even though they pleased Washington, attracted investors and were rewarded by the financial markets. The real wages of Hungarians — those who even had a job — declined by 22 percent between 1989 and 1996. When the Berlin Wall fell and the country opened up to global markets, Hungarian industrial production declined by more than a third, unemployment rose and inflation reached 30 percent. In other words, workers, retirees and the overwhelming majority of Hungarians had less in their pockets from one year to the next, they had to work longer for a pension that was smaller than expected, and when they became welfare cases, the state no longer felt responsible for them — because the very nature of the state had changed.

Hungary’s accession to the EU in 2004 brought a new round of so-called adjustments. And then came the global economic crisis. By 2008 Hungary was on the verge of default. To avert a disaster, the IMF, the World Bank and the EU joined forces to provide Budapest with $25 billion. The IMF, which put up $15.7 billion of the total, dictated the conditions: pension cuts and a freeze on civil servants’ salaries. It was back to square one for Hungary.

The real gems in this article come from the economist Rogoff from Harvard University.  These gems includes not very flattering assessment of the new financial reform legislation, as well as some not very flattering comments about the way in which the IMF and the G-20 handled the GFC.  Here are some of the statements and assessments by Rogoff:

“A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt.”

and on the Wall Street reform legislation:

The government asked him to comment on a draft bill on the regulation of the financial sector. “The draft had 2,000 pages,” says Rogoff. “I don’t know what to say to that. I suspect that those 2,000 pages are filled with enough loopholes that Wall Street will discover and exploit to come up with new business models.”

A real reform of the banking and finance sector would have to drastically shrink the system to a business volume that existed 30 years ago. Rogoff says: “The financial market, with all of its products, adds up to $200 trillion, $120 trillion of which represents trading in debt securities. I remember a speech given by Angela Merkel. She said that the Americans make the profits while distributing the risks, with all those debt securities, worldwide. That’s true. This could be curbed.”

On the IMF and crisis management efforts:

“We are fundamentally too quick with bailout packages and too hesitant with default,” he says. Rogoff believes that the G-20 and the IMF, with their protective mechanisms, have already pre-programmed future misconduct. Experts call this a “moral hazard,” the notion that bailout packages, instead of preventing crises, simply create new ones. “It boils down to the banks ultimately speculating with taxpayer money,”

The final gem in this piece comes from the Chinese IMF worker Min Zhu. It is actually a sage piece of advice, and I might add here that it is quite obvious that this is the remedy that Europe should be seeking (rather than agreeing to follow the Watermelons to the precipice of destruction):

. “There is the issue of social welfare, and demographic change. Everybody has longevity, so the cost for the pension and health insurance is very different today than, say, 20 years ago. The model, of course, does not fit today’s needs. It would not survive tomorrow.” Besides, he adds, Europe needs a growth strategy, an industrial strategy. Europe must invent new products and sectors that meet the demands of the world — otherwise, with labor costs of $30 an hour, they won’t prevail “against a country that pays $3.”

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16 Responses

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  1. Felix said, on October 8, 2010 at 12:22 am

    This is an incredible article.

  2. Carlyle said, on October 10, 2010 at 6:57 am

    Sigh. World Economics is SO SCREWED UP! It is just a patchwork of patchworks of patches and glue over the top of that. We basically have two broad choices:

    1. Continuing to fiddle and diddle with the economic knobs. We may in some circumstances be able to appear to make some things better for a short while. But all it does is postpone THE CRISIS and makes sure it will be bigger and harder when eventually it all comes tumbling down.

    2. Take every opportunity to steer the situation toward sanity. And the only possible sanity is a “self correcting” system. We need a system that will largely run itself and adjust itself without human control – or at least a very minimum. That will undoubtedly cause some level of pain to some people during the interim – and even in the final equilibrium condition, but we all need to understand and accept that.

    Regardless of it’s collection of actual faults and perceived faults, a Free Market system driven by Capitol is THE ONLY KNOWN SELF-ADJUSTING Economic System. Everything considered, that is it’s primary virtue.

    The reason other systems are continually put forward – and even adopted – is that IN THEORY they can better the capitalist system. This becomes a hypnotic call to “progress”. Progress itself is neither good nor bad – in fact, again, IN THEORY one might say that is a good thing as long as it is evolutionary rather than revolutionary.

    BUT

    For any of these “better” economic systems to work, there MUST be some sort of superior class of people to “operate the levers”, and further – two very specific conditions MUST be met:

    1. The ELITE must be knowledgeable and wise enough to know which levers and knobs to push and twist and by how much. Furthermore since this system – especially at a national or international scale – is exquisitely “touchy” and “delicate” and complex and large – you need a lot of ELITEs and they must work in a concerted whole that would make the Berlin Philharmonic look like pick-up amateurs in comparison.

    2. The ELITE must have the honesty, goodness, purity, character, and incorruptibility of saints. Literally.

    Now, what exactly are the chances of any of these essential characteristics even being approximately met? That is why – regardless of ideology, fairness, or any other criteria you can imagine, the NUMBER ONE criteria for any Economic System, MUST be Self-Correcting.

    The second most important criteria is that the system must be at reasonably stable and predictable over the lifetimes of typical economic transactions. A self-correcting free market meets this criteria. It never strays far from it’s theory and when it does, all activities are describable via the mathematically solid foundation of Probability Theory. What may seem like chaos under a microscope actually has structure and statistical understandability at the macro level. People, businesses, and government entities can all cooperate and live at peace with each other within such a scheme.

    But even if a Saint were to “tweak” the system from time to time, there would be an unacceptable level of unpredictability and arbitrariness that could not be modeled with any mathematical process. Therefore EVERYBODY is continually in “surprise mode”.

    The G20, the Federal Reserve, the Eurozone, and World Bank, and the International Monetary Fund, regardless of whatever theoretical good they may claim, are all examples of a human-managed economy. They all promote a permanent class of elites, they all promote corruption in proportion to their power and breadth. And lastly, their constant ‘insertion’ into the system – again, no matter how well intended – totally disrupt any predictability or stability.

    ALL of these things need to be gradually phased out.

  3. Carlyle said, on October 13, 2010 at 2:58 am

    Off-topic to your specific article, but as this may be the biggest financial/economical debacle facing the ENTIRE WORLD, I thought it was within the spirit of your overall blog to post this.

    (As you may recall, I am a physicist and engineer. It REALLY galls me that my fellow scientists have sold out like this. All my life, I believed that scientists were they one place you could turn for truth. They were the only people who dealt in cold hard facts. They were the only people who had “pure” motives and no “hidden agenda”. As that is obviously no longer the case, where do we turn for TRUTH?)

    Global Warming is CR-P — a monetary boondoggle, not science

    Did you hear that Europe in bracing for perhaps the coldest winter in hundreds of years?

    One of the impertinent questions I have been asking is: “Suppose you knew exactly what might cause worldwide trending elevation in temperatures – and supposed you could slow it down – would that be a smart thing to do?”

    Over the next epoch of 100-1000 years, Global Cooling is just as probable as Global Warming. And the results could be even more devastating. (Simple California example – how would you like an Ice Age that had year ’round snow and ice as far south as central California, and say the Sierra Mtns near Yosemite under a MILE thick of glacial ice?)

    So suppose we all save carbon, spend the wealth of all the developed nations, and then just to find out that we hastened and deepened the next Ice Age? What fools and morons we mortals be!

    So, here is one of the best write-ups yet. Sounds just like something I would write:

    October 11, 2010
    Brave scientist calls out the global warming fraudsters
    Thomas Lifson

    Big money and big politics have corrupted Big Science, and global warming is the proof.

    The American Physical Society is the pre-eminent academic organization of American physicists, and supportive of the global warming fraud, which has generated billions of dollars in research funding for Big Science. In an extraordinary act, a prominent scientist has resigned from the APS, in protest of its forsaking of genuine science. Generally, scientists do not voluntarily separate themselves from such honors as membership in the APS.

    Harold Lewis, Emeritus Professor of Physics at the University of California, Santa Barbara, sent the following letter to Curtis G. Callan Jr, Princeton University, President of the American Physical Society, an act Anthony Watts likens to Martin Luther nailing his theses to the door of Wittenburg Cathedral. The letter speaks for itself, laying out the problem of corruption of big science:

    Dear Curt:

    When I first joined the American Physical Society sixty-seven years ago it was much smaller, much gentler, and as yet uncorrupted by the money flood (a threat against which Dwight Eisenhower warned a half-century ago). Indeed, the choice of physics as a profession was then a guarantor of a life of poverty and abstinence-it was World War II that changed all that. The prospect of worldly gain drove few physicists. As recently as thirty-five years ago, when I chaired the first APS study of a contentious social/scientific issue, The Reactor Safety Study, though there were zealots aplenty on the outside there was no hint of inordinate pressure on us as physicists. We were therefore able to produce what I believe was and is an honest appraisal of the situation at that time. We were further enabled by the presence of an oversight committee consisting of Pief Panofsky, Vicki Weisskopf, and Hans Bethe, all towering physicists beyond reproach. I was proud of what we did in a charged atmosphere. In the end the oversight committee, in its report to the APS President, noted the complete independence in which we did the job, and predicted that the report would be attacked from both sides. What greater tribute could there be?

    How different it is now. The giants no longer walk the earth, and the money flood has become the raison d’être of much physics research, the vital sustenance of much more, and it provides the support for untold numbers of professional jobs. For reasons that will soon become clear my former pride at being an APS Fellow all these years has been turned into shame, and I am forced, with no pleasure at all, to offer you my resignation from the Society.

    It is of course, the global warming scam, with the (literally) trillions of dollars driving it, that has corrupted so many scientists, and has carried APS before it like a rogue wave. It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist. Anyone who has the faintest doubt that this is so should force himself to read the ClimateGate documents, which lay it bare. (Montford’s book organizes the facts very well.) I don’t believe that any real physicist, nay scientist, can read that stuff without revulsion. I would almost make that revulsion a definition of the word scientist.

    So what has the APS, as an organization, done in the face of this challenge? It has accepted the corruption as the norm, and gone along with it. For example:

    1. About a year ago a few of us sent an e-mail on the subject to a fraction of the membership. APS ignored the issues, but the then President immediately launched a hostile investigation of where we got the e-mail addresses. In its better days, APS used to encourage discussion of important issues, and indeed the Constitution cites that as its principal purpose. No more. Everything that has been done in the last year has been designed to silence debate

    2. The appallingly tendentious APS statement on Climate Change was apparently written in a hurry by a few people over lunch, and is certainly not representative of the talents of APS members as I have long known them. So a few of us petitioned the Council to reconsider it. One of the outstanding marks of (in)distinction in the Statement was the poison word incontrovertible, which describes few items in physics, certainly not this one. In response APS appointed a secret committee that never met, never troubled to speak to any skeptics, yet endorsed the Statement in its entirety. (They did admit that the tone was a bit strong, but amazingly kept the poison word incontrovertible to describe the evidence, a position supported by no one.) In the end, the Council kept the original statement, word for word, but approved a far longer “explanatory” screed, admitting that there were uncertainties, but brushing them aside to give blanket approval to the original. The original Statement, which still stands as the APS position, also contains what I consider pompous and asinine advice to all world governments, as if the APS were master of the universe. It is not, and I am embarrassed that our leaders seem to think it is. This is not fun and games, these are serious matters involving vast fractions of our national substance, and the reputation of the Society as a scientific society is at stake.

    3. In the interim the ClimateGate scandal broke into the news, and the machinations of the principal alarmists were revealed to the world. It was a fraud on a scale I have never seen, and I lack the words to describe its enormity. Effect on the APS position: none. None at all. This is not science; other forces are at work.

    4. So a few of us tried to bring science into the act (that is, after all, the alleged and historic purpose of APS), and collected the necessary 200+ signatures to bring to the Council a proposal for a Topical Group on Climate Science, thinking that open discussion of the scientific issues, in the best tradition of physics, would be beneficial to all, and also a contribution to the nation. I might note that it was not easy to collect the signatures, since you denied us the use of the APS membership list. We conformed in every way with the requirements of the APS Constitution, and described in great detail what we had in mind-simply to bring the subject into the open.<

    5. To our amazement, Constitution be damned, you declined to accept our petition, but instead used your own control of the mailing list to run a poll on the members' interest in a TG on Climate and the Environment. You did ask the members if they would sign a petition to form a TG on your yet-to-be-defined subject, but provided no petition, and got lots of affirmative responses. (If you had asked about sex you would have gotten more expressions of interest.) There was of course no such petition or proposal, and you have now dropped the Environment part, so the whole matter is moot. (Any lawyer will tell you that you cannot collect signatures on a vague petition, and then fill in whatever you like.) The entire purpose of this exercise was to avoid your constitutional responsibility to take our petition to the Council.

    6. As of now you have formed still another secret and stacked committee to organize your own TG, simply ignoring our lawful petition.

    APS management has gamed the problem from the beginning, to suppress serious conversation about the merits of the climate change claims. Do you wonder that I have lost confidence in the organization?

    I do feel the need to add one note, and this is conjecture, since it is always risky to discuss other people's motives. This scheming at APS HQ is so bizarre that there cannot be a simple explanation for it. Some have held that the physicists of today are not as smart as they used to be, but I don't think that is an issue. I think it is the money, exactly what Eisenhower warned about a half-century ago. There are indeed trillions of dollars involved, to say nothing of the fame and glory (and frequent trips to exotic islands) that go with being a member of the club. Your own Physics Department (of which you are chairman) would lose millions a year if the global warming bubble burst. When Penn State absolved Mike Mann of wrongdoing, and the University of East Anglia did the same for Phil Jones, they cannot have been unaware of the financial penalty for doing otherwise. As the old saying goes, you don't have to be a weatherman to know which way the wind is blowing. Since I am no philosopher, I'm not going to explore at just which point enlightened self-interest crosses the line into corruption, but a careful reading of the ClimateGate releases makes it clear that this is not an academic question.

    I want no part of it, so please accept my resignation. APS no longer represents me, but I hope we are still friends.

    Hal

    Harold Lewis is Emeritus Professor of Physics, University of California, Santa Barbara, former Chairman; Former member Defense Science Board, chmn of Technology panel; Chairman DSB study on Nuclear Winter; Former member Advisory Committee on Reactor Safeguards; Former member, President’s Nuclear Safety Oversight Committee; Chairman APS study on Nuclear Reactor Safety; Chairman Risk Assessment Review Group; Co-founder and former Chairman of JASON; Former member USAF Scientific Advisory Board; Served in US Navy in WW II; books: Technological Risk (about, surprise, technological risk) and Why Flip a Coin (about decision making)

    • Aussie said, on October 23, 2010 at 7:49 pm

      This is perfect. It is not quite in line with the content of this blog… BUT…. I have another blog or two where I have been highlighting the fact that it is really GLOBULL Warming. Thanks for posting this and reminding me that I need to update that blog as well 🙂

  4. Carlyle said, on October 16, 2010 at 2:40 am

    More Questioning – Keynes Redux

    Interesting that a Keynes discussion is the topic on Red State this morning.

    Oh yeah. I know quite a lot about some things. I know almost nothing about others. But, in THIS particular case, I know a VERY LARGE AMOUNT of “a lot” – more than many otherwise “reputable” economists.

    This is exactly like AGW – most economists support Keynes because it fits with their strongly held Lunatic Liberal ideology – and most importantly, “that is where the money is”. In the meantime, since it seems impossilbe to arrange large-scale “experiments”, “test cases”, or if you like “drug trials” – we are always left with the lame excuse of the Snake Oil Salesman: “Just think how bad you would be if you HADN’T drunk my elixir!”.

    It is also revealing that even “right thinkers” like Erickson maybe don’t quite “get it” to its full depth yet. At the end he mentions old guys like Adam Smith, and modern moderates like Milton Friedman, but fails to identify the REAL heros – the ones who got it dead right – the Austrians!

    http://www.redstate.com/erick/2010/10/14/let-dead-and-defunct-economists-stay-dead/

    Let Dead, Defunct Economists Stay Dead

    Posted by Erick Erickson (Profile)

    Thursday, October 14th at 9:28PM EDT

    I gave a talk at the Heritage Foundation and the subject of economics and policy came up. I’ve been dwelling on this 2009 article in the New Zealand Centre for Political Research Weekly and I think it is relevant today too.

    I stumbled onto it a couple of weeks ago and think it makes a worthwhile point — we keep digging up these dead and defunct economists like Karl Marx and John Maynard Keynes and we need to put them back in the grave and keep them there.

    Now, a friend of mine at the Heritage event today said I said something about killing the Keynesians. If so I misspoke. We need to keep the living Keynesians around somewhere to remind us constantly why they are so terrible. It is John Maynard and Karl themselves we need to permanently put six feet under.

    We keep having the problems we’re having because people forget. They forget just how terrible the economic policies of Keynes and Marx actually are and inevitably after a twenty year gap or so they come back in full force and screw things up again.

    They’re zombies.

    Consider this bit from the article:

    A landmark event in economic history was the open letter signed by 364 British economists in March 1981 protesting against the Thatcher government’s (non-Keynesian) economic policies.

    Its most telling paragraph read: “Present policies will deepen the recession, erode the industrial base of our economy and threaten its social and political stability.”

    Ironically, the economy began to recover at that very time (March 1981), and the upturn extended to mid-1990.

    As the article notes, Keynes himself said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” Consistently in government, Keynes is the defunct economist.

    The question I was asked at Heritage today was about how I’d respond to Obama and those who say that but for the stimulus the economic situation in the country would be far worse.

    I’d say that the prescription was wrong and the fact that we are still in a slump with massive unemployment is proof positive that yet against Zombie Keynesian continues to steer government bureaucrats off the rails and keep us in a rut. We don’t need a bigger stimulus, we need a different plan altogether.

    If we’re going to dig up the dead, let’s dig up Milton Friedman and Adam Smith. Keep Keynes in the grave.

    • Aussie said, on October 23, 2010 at 8:10 pm

      I still think that the problem is not Keynes but his disciples who have got it wrong. I continue to feel certain that Keynes would never approve many of the things that were done (in his name). These economists are not Keynesians. They are more like Marxists in what they have promoted. The level of the interference that they advocate is enormous.

      If you take time to read through some of my posts on this blog you will see that my position is clearly that there is too much government expenditure, and that this level of government expenditure will lead once again to the Stagflation that we had in the 1970s.

      When Stagflation hit the first time I was going through my economics studies at Melbourne University. I can clearly remember that towards the end of the year the lecturer brought up the subject of Stagflation. Up until that time the lecturers had been teaching Keynesian economics in an uncritical way. By the time I graduated the employment market had deteriorated to the point that very few Commerce graduates could get jobs – it was that bad, not even the big accounting firms were taking in the graduates.

      After the second world war the Australian Government had been relatively successful in keeping its hands on the levers by using the Keynesian theory to control employment and inflation. It is true that we had credit squeezes etc during that time. Any recession was not all that deep and the measures taken by the government were normally adequate to bring about the necessary adjustments. However, by the early 1970s the economy began to break down.

      It is only this year that I have begun to seriously look back at that period to discover why we had the stagflation in the first place. One of the factors that gets mentioned is the first oil shock. However, that does not explain why the stagflation persisted from the mid-1970s through to the mid-1980s. The answer seems to rest upon understanding the role of government, especially a government that went wild with spending.

      In Australia that government was the Whitlam Government. There was a very rapid increase in Government spending after Gough Whitlam won the 1972 election. In looking back I believe that this is a part of the big picture in understanding why the Keynesian prescriptions do not work under certain circumstances.

      I will try to write up a post that specifically addresses this question because I do in fact see that there is a link between the high levels of Government spending which is inappropriate and the prolongation of the stagflation in the 1970s. I also see the link between the stagnant world economy that we have now, and the high levels of government expenditure.

      Whilst everyone loves to blame John Maynard Keynes and his theory, I would suggest that the real blame belongs to Harry Dexter White, and the Fed during the time of FDR. The Øbama Administration has been following the FDR policies and at the same time has been using Marxist tactics to bring down the U.S. economy. I also see other factor s at play, namely the influence of the Watermelons aka the Greens or the Green Party.

  5. Carlyle said, on October 24, 2010 at 7:32 am

    I like your tag line at the top right of your blog better than your continued quasi-defense of Keynes. While I must certainly agree that some of Keynes disciples and associates (and as you indicate, most notably HDW) are ‘worse’ and even evil – that does not detract from the fact that Keynesian Economy is just plain wrong and cannot work. It is inherently a Ponzi scheme and not only depends on inflation, but causes inflation.

    Anybody can make the current economic situation (whether at the government level or the household level) better in the near-term by destroying the long-term. That is all Keynesian economy is or ever was. It also requires a vast bureaucracy to “diddle the levers”. And, yes, such diddling can appear to accidentally work from time to time in the short-term. But on the average, even in the short term it is a crap shoot at best. In the long term is will not work and is disastrous.

    And, to any who may challenge me with – “but it is the best we could do at the time with the best people and the best knowledge” – I say “crock”. The Austrians knew the right answer before Keynes became popular. They were right then and they are right now. See: http://www.mises.org.

    As you can see, I dislike Keynes a lot – and attribute much more “wrongness” to him than you seem to do. And just to twist the knife a little, I will here repost something I posted on another blog a few weeks ago. I know you read it there, but maybe some of your readers here will find it interesting:

    So – how did we get this Terrible Grand Ponzi System that almost destroyed the entire world, and may still?

    That is a long chapter in a long book. The simple answer is John Maynard Keynes – the biggest economic and financial CRANK in the history of the universe. In those days he was the Fair Haired Wonder Child and could do no wrong. His theories and mechanisms fixed most if not all the problems staring everybody in the face. And like our own Zero he was a master of sleight of hand and just swept away any downstream objection.

    Finally – another long chapter of a long book. By people “in the know” Keynes had been largely discredited and PROVED wrong staring in the early 40′s and totally debunked and trash-heaped by 1959. So why was he not tarred and feathered?

    1. The whole world economy was set up on his advice and theories and any harm to him or his reputation would have economically DESTROYED THE WORLD.

    2. In order to make his system work, it takes A LOT OF GOVERNMENT micro managing the economy. So, guess who likes his theories most?

    So, even today, 2010, if you take an Economics Degree in a major Ivy League university, what and who do they teach? Who is the wise and noble leader. Kind of the same reverence that Jews would give, say, Moses, or Abraham? Come on. Guess!

    And where do things like TARP and OBAMA MONSTER STIMULUS come from? Guess. Straight out of the core teaching of Keynesian Economics.

    • ozzieaussie said, on November 5, 2010 at 1:55 pm

      The reason that I defend J.M Keynes to some extent is that I feel his work is misunderstood. Ever since he wrote his theory he has been “blamed” for everything that is wrong. I happen to think that the people who claim to be Keynesians are in fact Marxists, and that they promote Marxism using Keynes as cover for their own ends.

      This does not mean that I agree with Keynes on everything. It just means that there was a time and a place for what Keynes advocated. The time was the 1930s and the place was the United Kingdom.

      I can only use the Australian experience with regards to economic policy. The Keynesian prescriptions more or less worked up until the end of the 1960s. Then, by the early 1970s the policies began to fail. The question that is raised for me is “Why?”…. I am still in the midst of studying the answer to that question, especially here in Australia.

      The point to be made is that Gough Whitlam and the ALP won government in December 1972. As soon as they won government there was a wild spending spree. Since I have not detailed everything that took place it is difficult for me to adequately explain. However, some good examples of spending out of control: (1) making university tuition free. On the surface it sounded good and was of benefit to myself, yet in the long run the result was tuition fees that sky-rocketed because the universities were relying upon Govt for funding. (2) Medibank – this was the first version of an attempted takeover of our healthcare. Medical was supposed to be “free” which is of course b.s. The long term effect has been medical fees that have sky-rocketed and there were other effects that made the medical profession look bad. (3) regional development. The increased expenditure was yet another example of poor policy. It was never going to work.

      I should add here that it was not just the Whitlam government at fault. The McMahon government also bears some responsibility for poor budgetary decision-making in its dying days. The mild expansion of the last budget prior to the election was in fact a disaster and helped to fan the flames that led to the stagflation.

      Now here are some reasons why Keynesian theory did not work at that point in time. Keeping in mind that the period in which Keynes made his observations was vastly different to the period of the 1960s and early 1970s, it is necessary to seek other differences. So far I have found the following:

      (a) there was a wages-price spiral. This was boosted by the fact that the unions here in Australia considered that they had a free go because the ALP had finally won government. The increased demand for higher wages caused prices to rise, which in turn caused the unions to continue their pressure for higher wages.

      (b) the number of days lost due to these same strikes had an enormous impact upon the economy. This was due in part to the unions that were wielding power in this way – like those in charge of keeping the electricity sub-stations running.

      When it comes to American questions, this is more difficult to answer. For example Krugman and those of similar mind, are seen to be Keynesians, but in fact their leftist agenda places them firmly in the Marxist corner. It should be pointed out that Keynes would never have approved what we have seen going down, and that includes TARP, the bailout of General Motors and Chrysler, as well as a number of other actions over the past two years. Keynes was a Capitalist, not a Marxist.

      • Carlyle said, on November 6, 2010 at 2:49 am

        1. I believe you are suffering a crisis we all have to face at least once in our lifetimes. (I think God pre-ordained it to help us all build character.) The crisis being that we were taught one thing or another (religion, politics, lifestyle, etc. etc.) – accept it and believe it – and are then confronted later in life that the whole thing may be wrong and rotten to it’s core. Obviously a life-shaking experience!

        2. in re: “The Keynesian prescriptions more or less worked up until the end of the 1960s. Then, by the early 1970s the policies began to fail. The question that is raised for me is ‘Why?'”

        My answer is that the whole edifice was build on a foundation of quicksand. The only way Keynesian Economy EVER works is by “controlled inflation”. That, in turn, has two problems: 1) who is smart enough and noncorrupt enough to do the controlling, and 2) inflation ALWAYS borrows from the future to make the present better.

        So, of course it worked for a while. I don’t believe Keynes himself was inherently corrupt – and perhaps this is all you are really saying – but obviously a number of his disciples were or became so. But that does not take away from the fact that the house of cards HAD to come tumbling down, sooner or later. Fate seems to have chosen circa 1970 as a good time for that.

        Bottom line – Keynes is a good case study in a particular circumstance at a point in time. Universities SHOULD be teaching it – exactly as a case study – with background, history, pros and cons, results, lessons learned, and all that. For universities to still be teaching it as THE WAY TO GO is academically irresponsible in the extreme. For modern governments to attempt to follow it – is positively criminal.

        Please again refer to Von Mises, Hayek, Hazlitt, Rothbard, and other luminaries of the Austrian school. They knew the right answer BEFORE Keynes – and it is STILL the right answer.

    • ozzieaussie said, on November 5, 2010 at 2:03 pm

      I forgot to add here that Keynes knew that his theory had been disproved and he did not seem to mind. I would think that he actually expected to see people set about disproving his theory.

      It should always remembered that theory is not fact, it is nothing more than an hypothesis that is based upon observations. As such, only those students worth their salt would have set about testing that theory, and debunking where that theory was wrong, as well as explaining why it was wrong, and then developing their own theories.

      The problem is not J.M. Keynes, but it is with his disciples – Krugman, Summers, Romer, Geithner and co. These are the people who have proved themselves to be an epic fail. Most of all, it is Krugman because, he portends to be Keynesian, and he promotes what Keynes advised, up to a point. The fact is that Krugman left out a lot of the actual detail, and ignored the wiser advice on what should happen during boom times, or in a time of war. It is no wonder that Keynesian theory has failed, because the disciples have added their own interpretations, and desires to try to bring about an outcome that would be a Marxist state.

      The Øbama advisors are Marxist in nature. They are not true Keynesians. They rely on big government. On the other hand Keynes only saw govt having a short term role… and therein lies the difference between Keynes and those who claim to be his disciples.

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    potenzmittel says:
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