Wednesday, October 08, 2008

Slamming Neoliberalism by Setting Up A Straw Man

Martin Manurung wrote an op-ed on the US crisis in Kompas daily. I think he made some points.

First, the US administration doesn't give you a good example of neo-liberalism (or to be precise, classical liberalism). My take: agree and by that, it is wrongheaded, like many of us would like to do, to identify classical liberalism with what US administration does and has done.

Second, when it comes into what makes the crisis, Martin said:
Initially, many corporations have been given incentives to grow by excluding them from regulations that impede wealth (or capital?) accumulation. They are "being facilitated" by regulations that deliberately made easy that let moral hazard through the creation of various "peculiar" and high risk financial products.
Yes, some government regulations seemed to facilitate that peril. Fannie Mae and Freddie Mac, for example. They are government sponsored programs.

Third, he also said:
It strongly suggests that the return of state role in the US tends to become an effort to protect more capital owner than public. The thesis of the state as capital owner's benefactor, as had been said by Karl Marx, is really manifested in the US crisis.
If so, can we just get rid of minimize the role of the state?

Well never mind, but can we just see the bailout as an attempt to save the economy in general, too --regardless whether you like the idea or not?

p/s: I am reading an open letter to my friend on the left (HT: Aco)

18 comments:

  1. i read the same post. I still don't get your point tho - WHY DO WE NEED TO SAVE THE ECONOMY?

    Is 'too big to fail' really a good enough reason?

    I'm tied to the market, and yet, i can't see a good enough reason to abandon such basic rules.

    PS: Can someone here explain to me why we INCREASE interest rate?

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  2. If US government and the fed don't save the economy, the economy will get worsened. The US and the global economy probably will suffer economic down turn like the Japanese does in 1980s-1990s, or the second Great Depression for the worst scenario.


    Indonesia government increase the interest rate to hold the currency from deeper depreciation.

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  3. I think you can't make a clear distinction about 'neoliberalism' and 'classical liberalism'. What Martin said, I think was about the neoliberal phenomenon discuss and discourse among many scientists, after Reagan and Thatcher era, and supported by Milton Friedman, Becker, etc.

    There is a different principle between 'neoliberalism' and 'classical liberalism' on the function of the state. As my opinion, according to David Harvey investigation at A Brief History of Neoliberalism, neoliberal state is a kind of state apparatus whose fundamental mission was to facilitate conditions for profitable capital accumulation on the part of both domestic and foreign capital.
    Harvey calls it 'accumulation by dispossession'.

    Philosophically, neoliberalism also believes that all of human behaviour and form of life regulated by economic principle, assume about an economic man (homo oeconomicus).
    From this point we can criticize about its assumption, is it right that 'economic man' really the whole aspects of man or it just a parsimony that lead to a missing 'telos' about what is man really?

    another think I hope you can clarify is it right that all of the process of US economic just a searching of a new equilibrium? and if this right, what kind of moral assumption or argumen you can propose because the cost is very expensive, material and immaterially.

    Finally, as my reading of economic history since two centuries ago, I find that social protectionism is a pathology of capitalism, and a self-regulating market system just an utopia, as Karl Polanyi said.

    How can you convince us about the capitalism and neoliberal agenda that lead us to more turbulence era.

    thanks for your response and I am sorry for my English but I hope you can understand the main points.

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  4. @Lionel:

    'Saving the economy'- is a dodgy term. Who exactly is the government supposed to save? (and why?)

    In all likelihood, 'saving the economy' will benefit a small few preferred groups, while it won't be enough to deal with the most urgent problems. I'm not an economist, but one doesn't need to be an economist to see that this isn't 1920s and the oh-so-monstrous Great Depression not exactly a comparison. By most measures, current 'crisis' resembles little of it.

    Panicky interest hike doesn't and won't help currency depreciation. It's almost like they're stuck in 1997. rate hike won't stop capital going out - the foreign funds need liquidity and capital will go out regardless, at least in the immediate future. The opposite logic to argue that this is a domestic policy to curb with the inflation seems almost reckless in the face of an uncertain world market.

    It just don't add up - i need an economist to figure this one out and explain how i am wrong in this assumption - anyone?

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  5. @treespotter
    Well, I think you have a wrong perception of the bail out policy. If the financial system frozen, the loan/credit system, i.e. consumer credit, investment credit, interbank loan, etc., will also frozen.
    The main street will feel the same impact like the wall street does, nonfunctional credit market.
    Thus, saving financial system is the first priority to protect everybody interest. You can punish wall street "troublemakers" later after saving the system.

    OK, the Great Depression is an old story, and its probably hard to compare with the current. But a decade of Japan economy break down in the late 1980s is a good example of the impact of credit crunch and financial mess that happening in developed country. Nobody want that happened in US and Europe, and that's why Bernanke desperately told the congress to bail out the financial system.

    Inflation is Indonesia problem. The rising interest rate can calm it down, but I think it's not the main purpose to increase interest rate.
    1997 is another story. It is inappropriate to compare 1997 act with today. In 1997, we have banking failure and bank run as the fundamental problem of Indonesia economy crisis, especially the capital flight.

    Probably longer explanation rather than "held currency depreciation" is desirable.

    The increase of Interbank interest rate, i.e. LIBOR, is the sign that bank and investor need cash desperately and reluctant to invest in longer time period. They demanding higher rate of return to invest in long time assets. Indonesia is still a country that need foreign investment to boost its economy. If Indonesia want investor's money stay here, they must increase interest rate (rate of return) to persuade the foreign investor to put their money here, otherwise no.

    Well, I hope my humble opinion can, at least, answer few of your question.

    Thanks.

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  6. hi lionel,

    i'm pretty sure i get the bail out bit right - my comments on Rizal's earlier post - or my own post on Friedman's suggestion (on my page).

    the problem with the US market is not liquidity - it's insolvency due to bad assets. The bail out (as it was packaged in congress) was confusing at best, and not entirely sensible (in my opinion, i know i'm not alone) although, predictably enough, most Indonesian economists seems to think that it is the gov't jobs to 'save economy'. I beg to disagree for points i've mentioned before (on the other posts).

    What the bailout does is NOT protecting anyone's interest but a select - and arbitrarily chosen few. That's my problem with it.

    Japan breakdown in 1990s (not 80s) was due to sudden slowing in productivity - credit worsened only after growth stalled and public spending failed to restart. so that's not a good analogy.

    With Indonesia's problem, i can't see how interest hike would help anything. Capital outflow WILL happen, regardless even if you hike interest rate to stupendous level, in 1997-98 some countries increased it to 50% range and it didn't work. I'm sure Rizal and the other economists here can dig up lots of ref materials on how high interest rates induced by the IMF back then failed on almost all the countries that it was prescribed to.

    first it has to do with confidence, and more importantly, in this particular case, it's because the banks are stretched and forced to dump their assets. JP Morgan Chase dumped billions of Indonesian assets to meet their obligations in the US - you could increase interest rate to the max, nothing will change it. they will dump it anyway. a 50 point hike will DO nothing to the market (i think the result in the last three days was rather obvious).

    an argument to introduce interest rate as an instrument to manage inflation also falls flat in the current situation since more liquidity in the market (ID) is PRECISELY what is needed.

    Capital outflow WILL happen - inducing temporary pressure on the currency and the capital market. market valuation will go lower. within the next few months, contracts will expire and the market will be priced cheaper and there will be money coming back in, a high interest rate will work contrary to what the economy need in that sense, no?

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  7. well, actually, on why - and indeed if at all - the government needed to 'bail out' Wall Street is precisely what Martin wrote about (and what Rizal commenting on).

    I'm not talking about punishing anyone, more if that was the right thing to do. Gov't owning banks is just NOT what gov't should do in an open market regime. Unless you're China, that's a different story.

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  8. and uh, yes, to Rizal, perhaps it wasn't so clear before, but no, i can't see the bail out - as it was packaged - to be helping the economy except for the psychological impact (you covered that on your previous post, or maybe you're just ignoring it wholly). It's not about liking the idea or not - liking has no place here. it's whether it's the right thing to do or not.

    i'll shut up now.

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  9. Save the economy = Save the credit market from crisis

    Credit market crisis = GDP drop + Unemployment Up.

    Further thought:
    1. Can no-bailout avoid the credit market crisis?
    2. Can bailout avoid the credit market crisis?
    2. If no, can the existing design of bailout help?

    My whole posting on bailout is on how you need to get the proposition and question right --not my take on bailout.

    My tentative answer for three questions above:
    1. No
    2. Maybe
    2. No, especially after the political flip-flops and the idea of another bailout, including bank recapitalization.

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  10. i promise, this is my last comment here.

    I had never implied that the gov't should do nothing and just watch to punish ppl. i'm not too dumb to not grasp the idea of an economic crisis is bad.

    The government should, must and will intervene, one way or another.

    Bailing banks and hedge funds is NOT the way to do it.

    bailout is by definition - to bail someone out - in this case, banks.

    Using this method, exactly like you pointed out: the answer is no.

    glad at least i got that bit right.
    pardon me for being so dumb.

    signing off.

    PS: save the economy save the world sounds like economists watch too much heroes.

    and u still haven't answered the ID rate hike q.

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  11. @treespotter
    It seems that you have wrong points on the Japanese Crisis. The cause of Japanese Crisis is like what happened in US today, property market bubble, not sudden productivity drop. The bubble burst caused money market crisis. Then, its affect economic growth later, after Bank of Japan take the wrong action to solve the crisis.

    US government decision to let Lehman Brothers go to Bankrupt is the right thing to do? No, its cause panic in the market. Does causing panic in the market is the right thing to do in condition like this? No, it will exaggerate the crisis.
    Today, one of Japan insurance company fill the bankrupt protection form, and also one of Japan real estate company fill it too. Then, everyone got panic again, and things went worse.
    So the first rule in economic crisis management is don't cause panic. If everyone get panic, every intervention are useless. What government want to told from bail out policy? Please don't get panic, if wrong thing happened, we will bail (help) you out.

    Why Indonesia high interest rate fail to stop deeper crisis in 1997? Because everybody in the market don't trust Soeharto government commitment to solve the crisis. There are enough references to explain and prove my point here that the problem of 1997 is MARKET TRUST.

    Indonesia today does not suffer market trust problem like the 1997 did. It is inappropriate to compare today with the 1997.
    I will write my argument, AGAIN, that Indonesia increase interest rate to increase the Rate of Return to invest in Indonesia. Indonesia does not suffer the same problem with US and Europe. Indonesia local banks does not suffer liquidity or insolvency problem. So decrease interest rate is non-sense.
    What they need is no further decrease of Indonesia asset price. Increase interest rate is the only answer to this.

    In conclusion, It is not only about save the world, but not make the crisis go deeper.

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  12. think we're talking two diff things. nobody was ever suggesting gov't do nothing.

    they DID the wrong things. that's my probs. then again, what do i know.

    thanks anyway.

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  13. treespotter i think is next to hitting the bull's eye. here's why:

    this article and the prev. one on 'tree-barking' implicitly (and explicitly) presume that:

    1) national economy exists;
    2) the current monetary system MUST NOT collapse as it is the one we MUST have.
    3) the heart of any economy is the financial system.

    nations in fact cannot trade; the reality is jacks trading with joneses.

    the current fiat system has its own seed of fallibility; if a certain group of men can monopolize printing paper, there nothing stopping from inflating it.

    the heart of economy is not financial system, it is, rather, money. (without govt's 'protection' each bank is already bankrupt under the fractional reserve.)

    as a medium of exchange, money really never comes out any government's decree. it is a free market phenomenon as men has learned to exchange to stay alive, more preferably indirectly to avoid reliance on the double coincidence of wants under the barter.

    THEY increase interest rate on the pretexts that stability can be created; prices can be planned; market created. sound economics, as a social study of HUMAN activities, never assumes stability in the first place. bad economics is obsessed with creating stability and advocates that a certain body should plan for individual citizens.

    what america's doing is precisely what caused Japanese long stagnant economy; what it is repeating right now, it did in the advents of the Great Depression and the panics in the 19th centuries.

    the solution taken by this country of might ... is being mistaken as right.

    --Nad

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  14. My two-cents:
    To Anonymous, on moral argument for the idea for searching of new equilibrium, I think, if we let the the market to work, we'll come up, theoretically, to something called general equilibrium when you have a Pareto efficiency a.k.a you can't get better off without making one worse off. I think, this is, if anything, the moral argument.

    To Nad, this Austrian/Mises argument sounds very familiar to me here :-).

    Getting rid of current monetary and financial system perhaps a prospective long term project --in which, with my limited readings on Austrian economics, I am, at best, skeptical about. But, with short run possibilities of Great Depression, this might not be a feasible project at the moment.

    To T/S, actually I am not religious about bailout/no bailout. Ex post, when looking at the messy political process as well as erratic/panicking response from the government (government failures) like this, perhaps no bailout (1) is even better than messy bailout (3).

    On domestic interest rate, I don't know. Perhaps BI website has the answer.

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  15. I keep breaking my words and remain attached to you guys. can't resist the good stuff, i think :)

    anyhow, i dont want to hijack Rizal's post anymore than i already have with longer comments so i'm gonna do further stuff on my page.

    Meanwhile, I'm reading some very peculiar things happening with the domestic 'bail out' plan and I'm very keen to hear what you guys think.

    I might well be wrong and i'll be very happy if you can tell me where i get the digits wrong here.

    Cheers all, have a good weekend.

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  16. Rizal:

    You wrote:
    "...if we let the the market to work, we'll come up, theoretically, to ... Pareto efficiency a.k.a you can't get better off without making one worse off. I think, this is, if anything, the moral argument."

    Pareto efficiency is a moral argument? If in the "disequilibrium" called the Second World War, Hitler had eliminated all Jews, then would you call this Pareto-efficient equilibrium result moral? [It should be Pareto efficient, since once all the Jews are dead, only the utility of Hitler's supporters matter].

    Pareto efficiency is silent about distribution -- and moral arguments are more often (though not always) about distribution than efficiency.

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