or positive light depending on whether you are a destructive cynic or a constructive sceptic and I am the latter.
Cynicism is a mind-set of automatic doubt whereas scepticism employs critical thinking to determine validity. The word sceptic is from the Greek word skeptikos which means to inquire or find out. It is said that scepticism (factual analysis) is the best way of seeking the truth.
The French mathematician, scientist and philosopher, René Descartes (1596-1650), insisted on thinking for himself rather than simply accepting what he had been taught. He resolved to hold nothing true until he could be absolutely certain of it.
Descartes eventually discovered that the one thing he could never doubt was the fact that he himself existed, since the very act of doubting required a doubter. He expressed this conclusion in the now famous Latin phrase “Cogito, ergo sum” – I think, therefore I am. To paraphrase Descartes – I think, therefore I blog.
Finally, please note that each blog post was originally written to be read independently of the rest. Given this fact, some repetition and overlap occurs when stand-alone posts covering the same topic – albeit from different angles – are reproduced together in this one book.
Like it or not, you can’t escape politics. Every day around the world, governments make decisions that affect our day-to-day lives. Politicians determine how much tax we pay, what laws we obey and how much money the state spends on essential services like roads, education and healthcare. The blog posts in this opening chapter examine public policy in a range of areas including regulation, competition, trade, privatisation and globalisation. There’s also a comment on government bureaucracy and the need to eliminate red tape.
In defence of bailouts
At the height of the Global Financial Crisis (GFC) in 2008, the world was on the edge of an economic precipice. Financial markets were in meltdown, global banks were on the cusp of failing and powerful shockwaves were being felt around the world.
Faced with financial Armageddon, governments moved to rescue the troubled banking system. Household names like Citigroup and Bank of America were in a state of peril. Lesser known institutions like Fannie Mae and Freddie Mac were also in distress.
Governments, quite rightly, could not sit idly by and watch their banking systems crash. If banks were allowed to go under, the damage to national economies would have been incalculable. Bailouts were, therefore, used as a circuit breaker to mitigate contagion risk.
The risk of contagion in banking, also called systemic risk, is akin to a chain reaction. Bank failures create a domino effect. Financial difficulties at one bank can quickly spill over to other banks or the financial system as a whole, resulting in a wave of distressed institutions.
The GFC starkly revealed how interconnected the financial world has become. Problems in the US subprime mortgage market spread rapidly to other parts of the market and impacted the stability of institutions everywhere. This ripple effect had the potential to fell both solvent and insolvent banks.
Contagion arises because banks are financially exposed to one another, both through the payments system and through other types of activities such as loans and derivatives. These balance sheet linkages (or interbank liabilities) between financial institutions mean that they are too interconnected to fail.
Banks and other financial institutions play a critical intermediation role in the economy. They act as an intermediary (go between) in moving money between investors and borrowers. Put another way, banks act as a middleman between suppliers of funds and users of funds.
Moreover, banks clear cheques, settle ATM transactions and effect electronic transfers and other payments. No banking activity is as fundamental to society as payments. The list of payment instruments includes debit cards, credit cards, direct debits, direct credits and Internet banking.
Not to be forgotten is the role of banks in credit creation. Banks create money through their lending activities. When a bank makes a loan to a customer and deposits the proceeds into a bank account, new credit money is created.
Money borrowed from a financial institution increases the money supply. A distressed banking system provides reduced credit which results in a lack of money (credit squeeze) for the rest of the economy. Without access to capital, businesses contract and unemployment rises.
Virtually every business and individual in the world has a bank (or credit union!) account. Modern trade and commerce would be almost impossible without the availability of banking services. This is why governments acted in unison to bring stability to the global banking system.
Not every distressed institution received a bailout. Both in Australia and abroad, authorities arranged “shotgun marriages” with stronger institutions taking over ailing competitors at knockdown prices. Examples include JP Morgan’s buyout of Bear Stearns and the acquisition of BankWest by the Commonwealth Bank of Australia.
Many people remain angry that taxpayer funds were used to prop-up the banking sector. Citizens around the world are unhappy that they had to pay for the mistakes and oversights made by banks. However, as I outlined above, rescuing troubled institutions was the lesser of two evils.
The public backlash to what many saw as rewarding bad behaviour is understandable. I too feel annoyed. Smaller financial institutions, like credit unions, did nothing to bring about the financial crisis. Yet we now face increased regulation because of the cavalier behaviour of others.
Posting Date: 4 February 2013
In defence of globalisation
The car that I drive was made in Japan. The watch that I wear was made in Switzerland. The suit that I don was made in Malaysia. The iPhone that I use was made in China. Like all Australians, I have access to a wide range of affordable yet quality products. I benefit from the lower price of these items since they are made more cost-effectively overseas.
But what if the government told Australians that they could no longer buy imported goods. I suspect there would be riots in the streets as globalisation impacts our everyday lives. Australians would no longer be able to spray French perfumes, drive German cars, self-assemble Swedish furniture or watch flat-screen televisions from Korea.
The strongest argument for globalisation is that it enables you to profit from specialisation. For example, the Chinese are very good at producing low-cost goods. Economists refer to this as a comparative advantage. China’s comparative advantage is due to its cheap labour and low production costs.
As a result, China has an edge in making clothes and, Ralph Lauren, the designer of the uniforms for the 2012 US Olympic team, arranged for the uniforms to be manufactured in China. Predictably, some US senators engaged in populist politics and were up in arms that American athletes had to don “Made in China” uniforms.
There was outrage on Capitol Hill with calls to “burn the uniforms” and that it was “embarrassing” for the athletes to wear them. For my money, these comments reflect a lack of understanding of comparative advantage and how trade works. A Forbes Magazine contributor put it well in saying that “someone should tell these folks that if you want to have exports, you also have to have imports”!
The reality is that the Made
