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Recession’s causes still not fixed

Written By: - Date published: 9:28 am, November 16th, 2009 - 41 comments
Categories: economy - Tags:

Recessions are meant to be about fixing economic problems that built up during the previous boom – unwinding imbalances in the parlance. Higher unemployment, with all its consequences, business failures, and higher government debt are the price of putting the economy on a more sustainable platform for the future.

But it’s not happening. All the problems are re-emerging.

The currency is back in the mid-70s US. That’s devastating for all exporters except dairy, which is riding the international price boom just as it was before the global recession. House prices are back to the peak of the bubble.

house price

We’ve got the same problems we had two years ago but now we’ve got higher unemployment and government deficits too.

Internationally, nothing has fundamentally changed regarding the causes of the crash. The banks are still unregulated, the toxic assets are still on their books, and the price of oil is marching relentlessly upwards.

It’s looking evermore certain that the world is only lifting out of recession because of governments’ stimulus but that’s not a sustainable solution. It’s like using a defibrillator to get a person’s heart beating again – it might work in the short-term but, unless you use that opportunity to fix the underlying causes, there will just be another crash.

We were told that there would be no return to the past. That in getting through this crisis we would reform the international economy on a more sustainable footing. It hasn’t happened. The problems haven’t disappeared, they’ve just been temporarily masked. Sooner or later, we’ll face the consequences of the governments’ failure to act.

41 comments on “Recession’s causes still not fixed ”

  1. Craig Glen Eden 1

    So before the election National said Government Spending was the problem and tax cuts was the other half of the solution. I AM STILL WAITING?

    Do they not believe in their own solution when will the plan start. When will the groupy tourist start doing something to grow the pie.

  2. prism 2

    There’s talk about taking our exchange rate out of the hands of speculators who are playing havoc with our overseas export returns. I am sick of having our cream skimmed off in this way, leaving the skim. There is another way, there must be. Someone mentioned Singapore’s system. Then an economist says better would be more Reserve Bank position in maintaining the currency. But doesn’t that just give the speculators another opportunity to play us like caught minnows?

    Can the USA clean itself up? Its financial industry’s laxity of trading standards is at the base of the worldwide meltdown.Over there big business has taken over the country, everything is up for grabs, even religious groups teach how to manage finances. The principles needed to enforce controls preventing shonky trading don’t seem to be there. And their celebrity leaders such as Reagan, playing the greatest role in their lives, opened this Pandoras box. A lot is expected of Obama to impose integrity on this bent system.

    • Deus ex Machina 2.1

      “There’s talk about taking our exchange rate out of the hands of speculators who are playing havoc with our overseas export returns.”

      From whence is this talk coming? Don’t forget, the Prime Minster himself owes everything he has – everything he is – to a spell as just such a speculator.

      There should be more than talk about it. The Kiwi dollar is so small in International terms that a single fund can hold enough of it to influence its value, and can apply pressure to NZ’s supposedly sovereign economic policy just as the Credit Rating agencies do.

      We need a common currency with Australia – but politicians are so afraid of this being wrongly seen as a ‘surrender’ to those the media thinks we love to hate, and that standing by the “Kiwi’ is a sign of loyalty and strength rather than stupidity that it’s not going to happen until we’re forced to go to the Australians to get us out of bankruptcy.

    • Zaphod Beeblebrox 2.2

      And disenchantment of the rural poor in the US is fuelling right wing redneck fervour. The same thing is not happening here yet- if it does you may not want to be a minority group living in NZ.

  3. tsmithfield 3

    A lot of the reason for the strong NZ and AU currencies is that a lot of the major powers (e.g US & UK) are in much worse shape than us. They are trying to reduce their own liabilities by monetizing their debt away. This serves to inject funds into their own economies by printing more currency, and simultaneously reduces the value of their own currencies, thus reducing the amount of international debt they owe.

    However, it is not all candy and roses for them. For instance, the US has just had a major widening of their current account deficit. Even though their exports are much more competitive (due to the low US dollar), their import costs for oil etc are much higher.

    The problem of the NZ currency is exacerbated by the carry-trade in the US dollar. Financial institutions are able to buy US currency and re-invest it in risky assets and stronger currencies with higher interest rates such as NZ & the AU.

    My view for the NZ economy is that we will progressively lose more and more manufacturing to the likes of China where the labour rates are much lower. Our emphasis in NZ is going to be progressively more and more on food production which we are good at, and tourism. The various free-trade agreements we have been signing with Asia is going to intensify this trend IMO.

    This could be seen as a negative or a positive.

    • Bright Red 3.1

      the NZD is the strongest performing currency in the world vs the dollar.

      This is not just a weak dollar story.

      The US inflating away its debt is going to be a big problem in years to come.

  4. tsmithfield 4

    Why are my comments awaiting moderation? I don’t think I have been saying anything particularly controversial lately.

  5. burt 5

    Sooner or later, we’ll face the consequences of the governments’ failure to act.

    That actually is what we are seeing now. The domestic recession that the NZ economy slipped quietly into even before the sub-prime crisis and the subsequent global economic crisis is exactly that a failure to act by the socialist Labour muppets who though they could just spend like drunken sailors buying votes forever. For years the opposition were screaming that the policies of the Labour party were reducing productivity and entrenching welfare dependency in the middle income brackets.
    Families suddenly flush with cash which they were incapable of earning through their own efforts also started spending up other peoples money like there was no tomorrow and we then wondered why when we threw money at people who would not be able to earn it themselves that they just spent it on new shiny consumer good and houses that before middle class welfare were beyond their reach.

    The policies of vote buying and feel good welfare that as a country we can’t afford will take years to ripple through the economy and years to reverse. ( remember how long Labour blamed the failed policies of the 90’s for everything bad while claiming credit for all the good stuff well you reap what you sow when you take all the credit and refuse to take the responsibility .. )

    • Zaphod Beeblebrox 5.1

      Yes agreed- government surplus was result of bouyant debt filled economy. But quick question- what did you think of Key and Brash’s rabid desire to spend the govt surplus on tax cuts? What effect do you think that would have had on property prices? Remember when Cullen was lampooned as Dr Scrooge?

      Agreed govt debt doesn’t help us- but the real enemy is the easy money borrowed to support our property boom. Do you see English and Key interested in doing anything about that?

      • burt 5.1.1

        Zaphod

        Do you see English and Key interested in doing anything about that?

        Short of National passing a law that stipulates that people need [x%] deposit to buy a house what can they do ? This is a bigger question than National vs Labour.

        The same thing that preceded this housing bubble burst preceded every other housing bubble burst. People borrowed heavily while interest rates were low then got stuffed up when the rates climbed because there was insufficient margin between their earnings and the expenses. People borrowed (close to) 100% of the current property value then when values fluctuated down they were holding mortgages bigger than the property value.

        Fashion said ‘you must own a house’ so people risked everything to get on the ladder even when logic and reason said the market was over heated . The govt is not to blame when people behave in ways that wisdom tells us lead up to pain the people who made bad decisions need to face the consequences.

        Controlling property values is not a role of the state teaching people to not taking foolish risks is the key to this and that unfortunately is something that some socioeconomic groups do a better job of than others.

        • Zaphod Beeblebrox 5.1.1.1

          People will act in a way that they believe will benefit them financially. If the govt acts in way that perpetuates high property values, you cannot blame people for acting accordingly.

          I’d hazard to guess that in western societies, there is hardly an aspect affecting property that is not affected by govt policy. If there is, let me know.

          • burt 5.1.1.1.1

            People will act in a way that they believe will benefit them financially.

            Well that is how it works in a perfect world. In the real world they act according to a mix of emotion and logic and they convince themselves that what they are doing will benefit them financially.

            They don’t always get it right and they don’t always listen to salient advice when that advice conflicts with their emotional desires.

            Govt policy cannot counter human desire for sparkly new shiny stuff or the desire to keep up with the neighbours.

    • Bored 5.2

      Burt, there may be some merit in your views on how people who dont earn spend this ill gotten gain. A true socialist would never try and spend money on welfare for the middle classes, which begs the question of how you equate Labour with socialist policies?

      • burt 5.2.1

        Bored

        A true socialist would never try and spend money on welfare for the middle classes, which begs the question of how you equate Labour with socialist policies?

        You have nailed it here, dim-bulb Cullen said ‘we are socialists and proud of it’ then went about implementing polices that were only about being popular and getting re-elected. This is exactly the ‘consequences of failing to act’ that Marty G wants to talk about but of course he blames National for the bad stuff. (Probably because Labour had no choice due to the failed policies of the 90’s hell for socialists it is like the years 1999-2008 didn’t happen isn’t it. National were to blame during 9 years of Labour and now they are to blame again Either Labour did nothing for 9 years and the 90’s are still to blame today or it is just possible that a decade of blaming the other team is a sword that cuts both ways )

        • Bored 5.2.1.1

          You have missed a corollary to the argument, if Labour were not acting like socialists, then socialism can hardly be blamed for the mess. By attacking Labour you also attack National, the two are indistinguishable in terms of their slavish adherence to a failed economic project.

          • burt 5.2.1.1.1

            OK, so ‘socialist and proud of it’ Cullen didn’t even know what socialism was… He knew how to buy votes though.

            • Bored 5.2.1.1.1.1

              Whats so surprising there? Its what all politicians do, promise and if possible deliver. And by the way, just as there are many types of capitalists, so too there are many types of socialist etc. I might have been a bit harsh on that count to Cullen, its the sort of dry versus wets equivalent of the left.

        • Craig Glen Eden 5.2.1.2

          Or Burt Labour ( Cullen) did a lot, paying back National Debt, rebuilding infrastructure, increasing personal savings and decreasing unemployment after National had stuffed the country getting rid of trade apprenticeships, destroying heath and education and not supporting research and development .

          So Burt what has National done to change things so far? Bloody nothing! They will do what they always do sell off anything to their mates that is currently making money and rort the tax payer.

          They create nothing never have never bloody will because they have no vision they take no risks and all they operate on is old money!
          You are getting what you voted for Burt nothing, a shell of a man who is running round shaking celebs hands.

          • burt 5.2.1.2.1

            Craig

            In the context of the pretty blue line graph supplied by Marty G – Labour did nothing. But suddenly national are to blame if it all happens again. Let me know if labour are ever responsible for “nothing” because so far – waaa waaa waaa – It’s all National’s fault ….

            • Craig Glen Eden 5.2.1.2.1.1

              No Burt things have happened that are out side this Governments control as was out side of Labours.The difference was that National was going to be different.
              They were going to give us tax breaks like it was the answer, National was going to cut Government spending because it was so out of control, but nothing that they have done has done anything to change anything regarding our economy. The pie is shrinking still, thats the point of the post. while National does nothing much, the economy still struggles along.

              Burt as I have said Labour was responsible for lowering Government Debt, reducing unemployment, increasing savings. What have National done Burt in the last 12 months, nooothing.

          • Herodotus 5.2.1.2.2

            So Labour reduced Govt (Head Office) debt yet the debt of NZ as a whole is about the size of out GDP check graphs/data on Labours banking review and see the graph follow an esculator.
            Debt per se is not always bad, it is what is done with that debt.
            We could do something re the banks leading by requiring ofr increasing the reserves that trading banks are required to hold. At the beginning of the recession I think the Res Bank allowed for the reserves held by banks to be reduced to allow increased liquidity. A small one would for the IRD to set rules for -vely funded investment properties to fall within existing capital gain/trading in property tax. As by definition if it cannot trade profitable then the purpose of purchase was for capital gain, and not to allow offsets in losses from proerty with other incomes for individuals.

  6. vto 6

    Had always felt this would a double-bottomed bottoming. First one pushed away by people in govt spending our childrens future to avert meltdown and so safe-guard their own ‘watch’.

    Second one, when the people in govt’s measures inevitably fail, the economies will fall to their natural equilibrium (well, short term equilibrium). Hopefully it wont be heavy but methinks it will be heavier than the first bottoming.

    And mine own thoughts put this down to not just recent actions of govts and regulations and sub-primes and etc, but down to a natural and longer cycle in human activity. It is due.

    • Zorr 6.1

      A lot of people out there have been predicting since the beginning of the recession that it would be “W” shaped. What we are looking at now is our modern equivalent of the failure of the New Deal. There has been a lot of talk about what is needed to be done to prevent it happening again and a lot of digging out of holes but no concrete solutions put in place to prevent us just falling in to one of the other holes we have dug.

      As the saying goes, the next steps a doozy.

  7. infused 7

    I always said there will be a second crash. Will be smaller though. Let it come.

  8. ben 8

    Marty, excuse the ad hominem, but it’s precisely because you are saying there’s a problem that I can breath a little easier that in fact everything may end up being all right. You are so infrequently right that this post lets me relax a little.

    On to substance: your post doesn’t have any. A chart with a blue line (nice touch) and no analysis. A repeated complaint that the sitting government didn’t do more.

    • Bored 8.1

      I too would be interested in some real analysis of why house prices inflated by 300% in 17 years during which time the Reserve Bank was charged with control of inflation. What was their inflation figure for this period?

      Other nice graphs to overlay on this one might be banking ratios outlining risk profiles, banking and finance bad debts, bank profits, rental house ownership ratios, tax subsidisation of second properties, actual capital available for productive activities, number of state houses built, housing demand etc.

      I suspect that in your call for real analysis any one of the above might prove acutely embarressing for any number of parties.

  9. millsy 9

    Hey burt,

    Unlike you I am glad we dont have an American style health system, and poor people dont have to live on the street.

  10. burt 10

    Hey millsy

    You display a fine appreciation of red wine.

    Love that ACC eh, levies (premiums) are going up, cover is going down and there is absolutely nothing you can do about it. Choice is such a nasty word for socialists isn’t it – it undermines the idea world where one size fits all and administrators are more important than patients.

  11. millsy 11

    Fuck off burt.

    Choice means that shareholders are more important than patients.

    Go to hell you money loving fuckhead.

    [Deep breaths before typing… we’ve all been there millsy. RedLogix]

    • burt 11.1

      [Deep breaths before typing… we’ve all been there millsy. RedLogix]

      Not everyone has been incapable of understanding how competition sharpens prices which subsequently reduces shareholder profits. Not everyone thinks state run monopolies deliver better value than competitive markets.

      • Zaphod Beeblebrox 11.1.1

        Straight out of the mouth of Michelle Bachmann and Sarah Palin. With such a perfect market in health care- no wonder US consumers are so happy paying $7-10K per year for health insurance. Nothing like a bit of free market (not) to ensure a cut for everyone except the end user who has no choice but to pay up.

        I hear the US military provides the most fantastic and affordable socialist health care system for ex-GIs, not bad for a state monopoly.

        • Daveosaurus 11.1.1.1

          “I hear the US military provides the most fantastic and affordable socialist health care system for ex-GIs”

          You hear wrong. I’ve got a friend who’s an ex-soldier in America (10 years’ service, served in Iraq) who’s been ripped off spectacularly by the health system once he retired. The American system can’t even look after their own servicemen – one more reason why it has to be dismantled and rebuilt from scratch.

          • burt 11.1.1.1.1

            We have no need to rebuild our monopoly system from scratch – the consumers have no choice so they can just take what is on offer or leave the bloody country. According to lefties – when costs go up and service levels go down – that is the sign of a healthy system. (IE: Working perfectly for the administrators who are after all more important than patients and that is why we have a one size fits all system)

            • Daveosaurus 11.1.1.1.1.1

              Costs go up and service levels go down when sectors are split up, deregulated and privatised. Just look at the electricity sector.

            • burt 11.1.1.1.1.2

              Daveosaurus

              ACC has not been split up (yet), privatised (yet) or deregulated (yet) Levies have gone up and services are being cut.

              And while we are on service levels, where do I find the service levels for hip operations? What sort of wait would I expect for getting a child’s tonsils out if they were problematic but not life threatening? And what is the current state of child oncology in Wellington at the moment? How many hospitals were already at (or close to) full capacity just managing BAU when the first Swine flu scare hit?

              Just what are we paying for Daveosaurus?

        • burt 11.1.1.2

          How much are you paying in ACC levies Zaphod Beeblebrox? Do you even know all the places where it is collected ?

          I never said I wanted a US style system, millsy made that up. It seems that when you have a brain as weak as millsy’s that there are two options only. What we have (good) and what the US have (bad) and any discussion about changing our system must therefore mean we will have a system exactly like the US system. I don’t get where that kind of thinking comes from but then I suspect I don’t have as good a knowledge of red wine as millsy either.

          • Zaphod Beeblebrox 11.1.1.2.1

            Thanks Burt
            Don’t argue that ACC is expensive to run, but that’s because it tries to insure for every ankle sprain, bee sting or idiot who writes his car off or dare I say it, Graeme Burton’s new prosthetic leg!! And yes I’m sure they have found lots of ways of covertly funding it. Why they sting you per vehicle registered, not just per litre of fuel purchased is beyond me.

            Not sure that leaving it to the private sector is the answer though, the dysfunctional US health insurance market shows how the insuree can become susceptible to overcharging if you are seen as a health risk and paying for kickbacks to insurers.

            So I say- stop making the catch all for everything, open it up to scrutiny, but keep it so that everybody can have equal access.

  12. burt 12

    millsy

    Choise means that shareholders are more important than patients.

    Classic, only a complete dim-bulb socialist would think competition is good for shareholders rather than consumers. It would take a dim-bulb socialist who has never had any experience running a business to not understand that choice (competition) is the worst thing for shareholders and the best thing for consumers (patients). Oh, except when the monopoly is govt eh millsy… then it’s different and its good that one organisation can charge whatever they want for any level of service they see fit at the time. (as demonstrated by ACC).

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