What We Value Is What We Save In a Crisis

“When a woman thinks that her house is on fire, her instinct is at once to rush to the thing which she values most.   It is a perfectly overpowering impulse, and I have more than once taken advantage of it. . . . A married woman grabs at her baby; an unmarried one reaches for her jewel-box.”

— Sherlock Holmes from A Scandal in Bohemia, by Arthur Conan Doyle

When a central bank thinks its house is on fire, it too will rush to save the thing valued most.  In the United States, the central bank has rushed to save the bonuses and dividends of its Wall Street clientele by hiding away the bad assets that can no longer be foisted on gullible investors.  In Europe too the response of central banks has been to save the wholesale banking and securities industry rather than the consumers and businesses underlying the real economy’s longer term productive strength.

For a comparative of what is valued elsewhere, it is worthwhile to look at what is being saved.  I received in my inbox yesterday documents outlining the efforts being taken by the Hong Kong and Chinese authorities to address the liquidity crisis in their respective jurisdictions.  They are available online here (Hong Kong) and here (PRC).  The contrasts with the West are striking, and humbling.

Hong Kong is swiftly introducing a scheme to guarantee credit to SMEs (small and medium enterprises) and exporters.  China is introducing controls to limit bank credit to over-extended speculative sectors, accelerate rebuilding in the regions affected by the earthquake earlier this year, and promote improvements in local infrastructure, education and economic adjustment.

Holmes would have been disgusted by a married woman who grabbed her jewel-box in preference to her baby.  In the same way, I am disgusted by the central banks preserving the privileges of the financial elite in preference to the jobs, incomes and businesses powering the real economy.  The US and UK authorities may criticise the banks for their inaction in freeing up lending to commercial businesses constrained by the credit crunch.  The Hong Kong and Chinese authorities are implementing guarantee schemes and innovating initiatives to rapidly address the problem.

As Holmes would have considered a child’s life worth more than jewels, I consider the workers and businesses in the real economy as meriting greater protection than the financial elite.  It is not merely that I think the financial elite little better than criminals for their irresponsible excesses of recent years, but that I fear long term harm and political instability will come from neglecting the needs of the real economy.

Shortsightedness is a peculiar affliction of the Western economies.  We cannot seem to project the consequences of our actions beyond the next quarterly report, fiscal year or – at most – election cycle.  Eastern policy makers have a capacity for longer vision – and longer memory – which makes them appreciate sooner the potential consequences of bad policy.  Perhaps this is a consequence of the longer term dedication required to gain political ascendancy in their less cyclical heirarchy. That China’s leadership is concerned with the implications for the real economy – and political stability – was confirmed this morning in an unusually blunt public statement by the chairman of the National Development and Reform Commission.  From the Financial Times:

The downturn in the Chinese economy accelerated over the past month and could lead to high unemployment and social unrest, the country’s top economic planner warned on Thursday.

Zhang Ping, chairman of the National Development and Reform Commission, said the government needed to take “forceful” measures to limit the slowdown in the economy, which included Wednesday’s large cut in interest rates and a sharp increase in fiscal spending. The rate cut was the fourth since September.

“The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November,” Mr Zhang said on Thursday at a rare news conference.

Mr Zhang’s warning about the potential for social unrest as a result of factory closures underlined the mounting concern in Beijing about the fallout from the global financial crisis.

“Excessive production cuts and closures of businesses will cause massive unemployment, which will lead to instability,” Mr Zhang said.

As Jim Rohm observed, “Failure is not a single, cataclysmic event. You don’t fail overnight. Instead, failure is a few errors in judgement, repeated every day.”

The crisis in debt markets has been rolling since the sub-prime collapse of August 2007.  The increasing illiquidity of commercial paper, trade credit, municipal finance and other debt markets was foreseeable and inevitable.  And yet the central banks and treasury authorities of the Western nations have done nothing to shield these essential sectors from the ill effects of the financial sector implosion while giving virtually unlimited funds to the banks authoring the collapse.

Any discussion of China always invites criticism of its anti-democratic governance.  It is worth remembering that the philisophical defense of democracy lies in the proposition that it is more likely over time to serve the interests of the electorate than a system which disenfranchises the people from the determination of their leadership.  If the democratically elected governments – through their appointed executives and central bankers – are free over an extended timespan to ignore the interests of the people, then how is a Western democracy superior to a Chinese bureaucracy?  From looking at the policies and practices of the past year, the merits of Western democracy are not immediately apparent in ensuring that policy responses to the financial crisis are aligned with the interests of the people.  Even over the past decade, it is not clear that the policies of the democratic Western governments have aimed to strengthen and broaden the economy to benefit of the electorate rather than a narrow, self-serving elite. According to Brad Setser, the World Bank is projecting increases to China’s trade surplus in 2009 as falling commodity prices lower production costs.  Those unelected bureaucrats are doing something right.

If China and Hong Kong recover sooner, prosper more, and gain global political and economic authority in consequence, it will be because they made fewer mistakes and made them less persistently than their Western counterparts.  If the promoters of democracy want to strengthen their case, they might best do so by ensuring that their leadership adheres to policies which promote the longer term health and well being of the economy as a whole rather than the short term enrichment of an undemocratic elite.

22 Responses to "What We Value Is What We Save In a Crisis"

  1. CS   November 28, 2008 at 9:09 am

    About a year ago Paulson referred to homeowners who turned their keys into their banks due to falling house values as “speculators”. Paulson’s condescension typifies the Wall St. attitude toward Main St. On Wall St. speculation as a source of wealth replaced investment about 20 years ago. The Bush administration believes gamblers should be the elite directors of the US economy.

    • Once again   November 28, 2008 at 10:05 am

      what rubbish

      • Anonymous   November 28, 2008 at 11:40 am

        Why is this rubbish? Maybe not formulated to perfection. CS has a point in that speculation by the not so rich home owners is treated differently by the US administration from speculation by rich bankers.

      • cs   November 29, 2008 at 11:26 am

        Rubbish? How do I know thee? Let me count the ways:1. The MBS’s on the balance sheets of banks and investment houses that aredifficult or impossible to value because they can’t be marked to market.2. Paulson’s and Bernanke’s statements earlier this year that the economy is in good shape – as agents of the executive branch, they drink Bush’s kool aid – flavor? Ownership society red. Krugman was pointing out the housing bubble about three years ago regularly on the editorial pages of the NYT.3. The conservative myth that borrowers are responsible for the banks’ bad loans; it’s the banks’ due diligence that was lacking.4. The notion that monetary policy could solve the banks’ insolvency.5. The notion that banks want transparency. They want credulousness. Right now they’re resisting the Congressionally-mandated transparency that went along with passage of TARP, claiming it would reveal their weaknesses. See. http://www.ombwatch.org/article/articleview/4410/1/552. How do these banks come clean about their balance sheets? In their SEC filings? In their Tax returns?6. The expression “Captain of Industry”; the chest-beating capitalists have come running back to mommy.7. Risk management. Please explain me what it really is. In my profession, architecture, whose entry requires years of education, internship and a nine-part examination, we don’t “hedge” our structural engineering upon whose lives people depend.8. The Bush administration is looking out for the American people.

        • CS   November 29, 2008 at 11:36 am

          9. The ratings agencies, Moody’s, etc. – drinking the financial industry’s kool-aid. Flavor? Buyoff green.BTW. in item 7 I should have written “structural engineering upon which peoples’ lives depend.”

  2. kaan   November 28, 2008 at 9:19 am

    London BankerExcellent post as always!

    • devils advocate   November 28, 2008 at 1:25 pm

      very insightfulhowever, short-sightedObama a la FDR is facing the same problems FDR facedand will put the workers/JOBS (and maybe small biz) ahead of Wall Stand do whatchina’s leaders are doing because democracy voted him in

  3. London Banker   November 28, 2008 at 9:22 am

    Also worth a read today is Michael Pettis’s excellent summary of global fiscal imbalances and the implications for Chinese adjustment.http://www.rgemonitor.com/emergingmarkets-monitor/254562/can_china_adjust_to_the_us_adjustment

  4. ex VRWC   November 28, 2008 at 9:49 am

    LBThought provoking post. It is clear that the axis of greed between Washington and Wall St is increasingly at odds with ‘main street’ Americans. This takes many forms:- The belief that by manipulating monetary policy the populace will respond in the way the elite expects. Chief among this is the expectation that by making credit more easily available, the sheeple (consumers) will resume consuming on credit. Obviously they should be retrenching, not expanding. And if consumers don’t consume, the elite are pushing on a string. So not only are they out of touch with main street, they are expending their precious ammunition in the wrong direction.- The belief that the sheeple will accept that ‘they are smarter than us, and just doing what needs to be done’. This is most manifest currently in the hopes placed in Obama’s ‘all star’ economic team. I thing when 10% unemployment, deflation leading to worse debt, and a more general economic collapse makes itself felt, this misplaced euphoria will give way to some serious civil discontent. And the outraged among us now who are observing the looting of the national treasury will be the first in line to make our discontent known. I try to contemplate how this might play out, but I do not want to go there – it is too scary.Rather than looking ahead to a rebalancing global picture and preparing Americans to adjust to this ‘post consumerism’ future, the elite are working frantically to preserve the illusion that things will remain the same. Their actions to save Wall St and the finance industry first are all they can muster right now, and it is not enough.In the post where Dr. Roubini spoke of the systemic meltdown, during the TARP debate, Dr. Roubini called for what essentially essentially the ‘triage of zombie banks’, shutting down those doomed to fail and strengthening the rest. This has not been done, and it was an essential first step. Now we are moving to monetization measures and other ‘unorthodox’ means in order to stem the crisis, but this crew has, all along, refused to do what was necessary from the beginning. Meanwhile, as you observe, the steps necessary to ensure an orderly function of society (ensuring food supply, ensuring contagion does not destroy global trade, establishing a last resort alternate essential credit and banking system) – these steps are ignored.This is the main shortfall of the elite – your image of them grabbing the jewels and letting the baby burn is very apt, and tragic.

    • Anonymous   November 28, 2008 at 12:49 pm

      An expert analysis as far as it goes. What remains unsaid in this & similar commentaries is that the Federal Reserve System is doing precisely what is was set up to do. . .protect & support the prosperity of their own (bankers). . . (as well as allow government to pick the politically connected (bribery) winners & losers by way of govt. spending (our tax dollars + the $-printing press)).. . to wonder at that reality is to ignore the facts & perpetuate the statist propaganda that somehow they serve the citizenry. I am not of the lunatic fringe, but a enraged citizen at the deception that has been promulgated through propaganda & our (statist)educational system. When will those of you with a public platform stop beating around the bush & get to the heart of the matter to inform the citizenry. http://www.mises.org can educate & interupt the statist propaganda. Now that the Fed & its fractional reserve banking system has exceeded even its own greed, it too will fail . . and I agree that civil unrest will likely start that process. It’s not going to be pretty.

  5. tinktank   November 28, 2008 at 1:18 pm

    Nice job-premise well supported. For those of us who understand the gravity of the situation, we are sadly disappointed by our leaders and horrified by the potential longterm failout. And for the those who continue blindly down the path of reckless consumerism and don’t have a clue about saving for the future we must wake them up! Please continue with your analyses and together, we will continue to enlighten others!

    • Guest   November 28, 2008 at 1:56 pm

      Speaking of “reckless consumerism”…”Wal-mart” worker dies when shoppers knock him downhttp://news.yahoo.com/s/ap/20081128/ap_on_re_us/wal_mart_deathApropos of London Banker’s quote from Conan Doyle, I rather doubt if Sherlock Holmes would be surprised by this horror. He might say that it’s just what you would expect from the barbarity and savagery of a hollow consumer-led economy.

  6. Guest   November 28, 2008 at 2:00 pm

    It’s amazing that both political parties in the US are entrusting the financial fix to the house of Rubin–the same people who created unregulated derivatives like CDS.

  7. TTS   November 28, 2008 at 2:19 pm

    Conclusions:1.Communism is far-sighted and capitalism is short-sighted.2.Human rights are more trampled on in democracies than in autocracies.

  8. interested reader   November 28, 2008 at 3:01 pm

    Inequality AND communism are indeed the worst of both worlds. There’s no philosophical justification for that, London Banker.

  9. Gloomy   November 28, 2008 at 3:17 pm

    LB,This is fabulous and I am forwarding it to my local paper, hoping that they will publish it.

  10. WiseGuy   November 28, 2008 at 6:06 pm

    LB – very thought-provoking article!You make a very important point: it isn’t what the government SAYS it is; it’s what the government actually DOES.I think it’s important that we move beyond ill-fitting labels and focus on actions and consequences.The question should be “is this an appropriate action given the circumstances?” rather than “is this an appropriate capitalist/communist action?”

  11. christos   November 28, 2008 at 9:46 pm

    It is plain to see that both parties in the US are to the right of the people and that what you call your democratic elections are simply a marketing of personalities but where real issues are irrelevant. What people fail to see when it comes to China is that they have a billion people to organize while your silly contest for president would hardly fit what is needed in a country like China… worst is your pathetic “please consume” to save the economy from imminent collapse. You have been brainwashed with the word socialism to the point it causes you hysteria, unfortunately to the detriment of the people for which you think your democracy works.

  12. ex VRWC   November 29, 2008 at 9:18 am

    Well I am in China now (business) and I will post some observations. The first observation: flying into Shanghai (on a half empty flight), I observed lights, which I thought was the coast. However it wasn’t. It was literally hundreds of ship lights, anchored. As we descended you could see the reflections of the container ships in the water. Seems to be a lot of excess capacity sitting out there offshore. Not sure what it means, but it seemed a little odd. I wonder how far down global trade really is?I plan to try and assess what I think are the prospects for a Chinese consumption boom. To the extent I can I will get some Chinese folks view of their prospects.

  13. CJ Hames   December 5, 2008 at 8:47 am

    I was a young boy in 1965. One lazy summer day, while my grandfather and I sat in rocking chairs on his front porch, I saw a terribly sad and frightened look on his face. It was as though he had seen a ghost. I asked him what was the matter. “In the end, credit will ruin America,” he said, staring off into space. That was the end of the conversation.For years I wondered what credit even was, but for some reason, I remember the conversation – perhaps because the statement was so foreign to me – like it was yesterday. For many more years I wondered what his minds eye saw that shook him so.Now I know.

  14. Guest   December 8, 2008 at 7:25 pm

    Until the influence of the monopolist lobbying corporate giants is reduced and on equal footing with small business, there will never be equity and the path toward 3rd world status will continue!

  15. Guest   December 10, 2008 at 10:26 pm

    I am disgusted to be an American right now. One should read the judgment cycle against Babylon in Revelation 18 and 19 to see how an earlier generation of the oppressed viewed their rulers’ evil collusion of policy and economics.