How central banks and governments are saving us from financial disaster: Kohler

Say what you like about the measures being taken by governments and central banks this year; they have learned from history.

Say what you like about the measures being taken by governments and central banks this year; they have learned from history.

If there is a financial meltdown and economic depression (that is, very high unemployment), it won’t be their fault, which is no doubt partly a result of everyone’s study of the Great Depression and Japan’s lost decade, not just Federal Reserve chairman Ben Bernanke’s.

In 1929-30 in the US and in 1990 in Japan, the authorities fiddled while the economy burned.

Most other recessions apart from those two were caused by an official tightening of interest rates to control inflation – that is, in the immortal words of Paul Keating, “recessions we had to have”.

Now the global central banking and economic political machinery has clanked into the most extraordinary co-ordinated global action ever seen on the planet.

In the past four weeks all G10 central banks have cut interest rates, as well as Australia, China, India and Korea. The Australian Reserve Bank is expected to cut again tomorrow, probably by another 0.5%, although the collapsing currency might stay its hand until December. The US Federal Reserve stands ready to cut rates to zero. Japan is at 0.3%. Even the ECB is cutting.

Most central banks are now providing virtually unlimited liquidity against collateral. Some, especially the Fed, are accepting just about anything as security.

Meanwhile governments are stepping in with bank deposit guarantees, treasury purchases of mortgage securities, and fiscal stimulus packages to put cash directly into the hands of consumers.

In the Great Depression, the US Fed actually raised interest rates after it began to defend the gold standard and governments the world over just stood by watching impotently until 1932. And after the 1990 crash in Japan, the government there waited for four years before starting tentatively to take action.

We can argue till the cows come home about the Australian and Irish governments’ unlimited, free, bank deposit guarantee, but it’s done now.

The problem for Australia is that, unlike Ireland, it has $1 trillion outside the banking system in a variety of investment funds.

A two or three year bear market in equities and property is going to make government guaranteed bank deposits look pretty attractive, as they already do to those with money in cash and mortgage trusts. The guarantee could see a profound restructuring of the investment and financial services industry, and total domination by banks, as money flows to where it is safest.

Call it an over-reaction by the Australian Government or the price of non-vigilance by the investment industry – it is a reality. The implicit government guarantee inherent in APRA supervision has become explicit.

Besides issuing guarantees for savings, as long as the money is in banks, governments are also writing cheques directly to their citizens imploring them to spend it.

No matter that we got into this mess through too much spending of other people’s money, here’s some more – spend that too.

More can still be done. If banks continue to refuse to lend, central banks could do it themselves – directly lending to companies – or they could lend unsecured to banks instead of demanding collateral.

Governments could make it a condition of receiving deposit and funding guarantees that banks must lend, or else they could simply nationalise them, as Britain is doing, and then instruct the management to get a move on and start lending.

And the Government can, and will, channel super fund cash directly into consumers’ pockets by going into deficit and issuing bonds to the super funds. In return the funds could get an effective government guarantee by investing in government bonds.

The collapse of the market-based financial system as a result of excessive debt has meant that governments and central banks have had to step in and rescue it to prevent a blowout in unemployment.

It might actually work – in fact it has a much better chance of working than at any previous time in history.

But the price for the free-market financiers will be a loss of liberty and rewards.

Maybe the golden days of unbridled financial markets and accumulations of wealth will return, but not for a while.

Whether the political and bureaucratic rescue plan works or not, and depression-like levels of unemployment and misery are prevented, governments and central banks are going to run things for quite a long time.

This article first appeared on Business Spectator