30 September 2008

Money does NOT make the world go round

Peer Steinbruck is quite right (in my humble opinion) to fear a global financial disaster of seismic proportions, the size of which the world has never seen. Laissez-faire politics may seem an easy option for governments: they get to share in the good times and yet when things get messy they can just blame the financiers and come up smelling of roses themselves.

I hold the na├»ve belief that all these economists with impressive degrees from prestige, elitist educational institutions must surely know what they are doing. They are scions of members of the Establishment – finance is in their genes. Current events, however, suggest two possible options. Either the money men have no idea what they are doing (and thus must face accusations of ineptitude) or they know perfectly well what they are doing and they just don’t care about the consequences. My money’s on the second option: they know full well they can’t lose. No one (at the top) loses his job or his money and certainly no one will go to jail just because a few home owners became home losers.

Herr Steinbruck has probably read his history lesson. Laissez-faire economics did not help the newly industrialised nations during the Industrial Revolution. It helped the industrialists but did little to provide comfort for their workers. Industrialists were simply left free to abuse the system with impunity, as they saw fit. For example, child workers could be freely used to swell profits for factory owners. Yes, the “invisible hand” of capitalism produced wealth but there is no reason why that hand should distribute all its hard earned benefits to all and sundry. And in any event, in a free market economy, individuals take financial decisions on a “what’s in it for me” basis, not on the basis of “what is good for society as a whole”. Yes, it is theoretically possible for all to participate in this free market economy and do well. But there will always be the dispossessed in society who need the kind of help/services that do not provide a healthy yield on one’s investment, such “loss making” enterprises as schools, health services, social housing, policing etc. You can’t farm out everything to private initiative – a private entity running e.g. a hospital will expect to make a profit, something hospitals are notoriously bad at doing.

Ireland too knew phenomenal economic success, thanks to a progressive government that actively sought to bring in foreign companies, with tax breaks and minimal beaurocracy. However, this cannot last especially when so much of the economy depends on prices in the housing market and how many new homes are going up. If everybody rented their home (as is the custom in central Europe) and invested their savings in other more stable areas, then perhaps the mess would not be so extensive.

It may be that the good days are over for the States and that they will have to acquire a taste for humble pie in place of apple pie. I leave the last word for Hamlet: “Every dog has its day”

Reward for Mismanagement
(Berliner Zeitung, 29 Sept)

The paper’s Opinion section quite logically observes that if a company does not conduct its business well, it will go bankrupt. Not so in the US. There Congress has approved further billions to support the American automobile industry. The money will help fund factories convert to producing more environmentally friendly cars. The industry will receive $25 billion at favourable rates of interest. There is nothing wrong in a government supporting the production of environmentally friendly products. However, what the government is really doing (continues Berliner Zeitung) is using the environment excuse as a guise for a billion-dollar reward for the auto company bosses’ mismanagement of years. European and Asian car manufacturers, in contrast, have long known that the trend was for low-consumption vehicles. Faced with rising fuel prices, drivers can no longer afford to fill their gas-guzzlers and don’t want to buy new ones. The net result – the big American auto companies are thrown deeper into trouble. This injection of billions is unfair competition for some European car manufacturers and a subsidy that they can only dream about. [Vive la difference, the Old World versus the New World.]

Global financial crisis putting German infrastructure at risk
Published: 29 Sep 08Online: http://www.thelocal.de/14581/20080929/

German states that have financed their infrastructure through cross border leasing with the United States are at risk of losing their transportation systems as the global financial crisis looms, daily Berliner Zeitung reported on Monday.

“The crisis can have an affect on all cross border leasing businesses,” Winfreid Fuest from the IW institute for German economy told the paper. The German cities who financed their metro systems, canals and even trade fair centres may have to pay the price for failing US banks and insurers. “Established securities are becoming worthless from one day to the next,” Fuest said, adding that it’s difficult to predict the sums of money this problem might involve because such cross border leasing contracts are rarely transparent. The practice involves a city selling its assets to a foreign entity, which then leases the business to the city - which then avoids certain tax expenses. Among other cities, Berlin has financed up to six trade fair halls. Subway and street car vehicles and equipment have also been rented from the US. Meanwhile Cologne‘s canal system, Ulm’s power plants, and Gelsenkirchen’s schools and public buildings were all financed through this system. The paper estimates that the practice involved some €40 billion in the 1990s alone.

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I sincerely hope Germany is not trying to emulate Britain in looking to private enterprise to help fulfil its civic responsibilities. It it does, then it can only come a cropper! Britain favours a system whereby public bodies enter into long-term contracts with private firms to design, build and operate assets such as hospitals or schools (a grand system going by the name of Public Financial Initiative). Usually the private firms lack the expertise, management skills and resources to do a good job.

Hamlet’s take on political events has particular resonance both in Bavaria and Austria. Whereas we cannot say that there is something rotten in the state, people do want change when they see the old regime is tired/arrogant/ineffectual, whatever. Don’t forget as well that a whole new batch of young voters (16 and 17 year olds) voted for the first time in Austria, Europe’s youngest electorate. Fresh blood with new perspectives.

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