Economic and financial markets …

Responding to Professor Joseph Stiglitz in his article published on the website of the Guardian newspaper entitled, “Turn left for growth” and dated Wednesday, 6^th August 2008.

Professor Stiglitz writes:

… By contrast, the new left is trying to make markets work. Unfettered markets do not operate well on their own – a conclusion reinforced by the current financial debacle. Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are “self-correcting.” During the Great Depression, similar arguments were heard: the government need not do anything, because markets would restore the economy to full employment in the long run. But, as John Maynard Keynes famously put it, in the long run we are all dead.

Writing in response:

ONE:

An interesting article by Professor Joseph Stiglitz.

Mr. Stiglitz writes, primarily, from a US perspective but, when he writes:

… In contrast to the right, the left has a coherent agenda. It’s one that offers not only higher growth, but also social justice

and then, again, says:

… An increase in GDP can actually leave most citizens worse off.

It should leave in our minds what would likely happen if a Conservative Party gained office in Britain.

The term that Professor Stiglitz uses during his commentary of “self correcting” markets might be true in the sense of ‘price corrections’ as equilibrium is always found where supply can match demand. If demand for a particular product then exceeds the available supply there is an automatic correction in the form of higher prices. We have witnessed this during the current cereal shortages as prices have rocketed around the world. Self-correcting, maybe, but that doesn’t necessarily make it favourable, if anything it confines the poor and destitute to even less inferior goods and products.

Governments have influence and control over markets, if they so desire. For example, adopting certain elements of the social chapter when Labour in Britain came to office in 1997 was the reason as to why we have minimum wage rates. However, where the markets did require reform the government didn’t go far enough, such as within financial markets. Here the government should have worked much closer with the FSA, eradicating the loopholes that ultimately were the demise of the Northern Rock Bank. Most of the problems associated with the Northern Rock were due to its management of assets, high risk portfolios and poor decision-making because short term securities were being sold in financing long-term debts, a recipe for disaster during periods of economic downturns. Government intervention could have been made sooner in, for example, regulating the payment of banking bonuses. These run to hundreds of millions of pounds annually and really should only crystallise after results have been made known. Previously, such bonuses were being paid irrespective of gains or losses on high risk deals.

…

TWO:

INFLATIONARY PRESSURES are also important in the context of economic growth. Cutting interest rates as the US has done could still stoke inflation because of the time-lag effects as the anti-inflationary effect of China’s exports start to diminish. Moreover, lower official interest rates run the risk of bailing out the knaves and fools in the markets without relieving the impact of widening credit spreads.

On balance, though, the inflationary risks are probably worth taking. But, there are other dangers. Lower US rates could undermine the dollar, which in turn risks increasing inflation in the US and exporting recession to other countries, notably Britain, the eurozone and Japan, by reducing US demand for imports.

In addition, if house prices continue to fall, too, consumers will cut back their spending, especially in the US where it has been a sustaining force in the world economy. Economic growth, in terms of housing, could actually turn deflationary, as people’s net worth’s are likely to be continued to be affected in the next couple of years. Asset depreciation is a real concern.

However, the tripartite arrangement, orchestrated by Gordon Brown, could become a key instrument for policy makers in reducing the possibility of a full-blown recession.

 

© Mark Dowe 2008: all rights protected

 

Reference(s):

• Professor Joseph Stiglitz, “Turn left for growth”

 

• Economist, “More worried about growth”