Uneasiness about govt stimulus packages

DESPITE all the efforts to contain the damage, the International Monetary Fund last week raised its estimate of the potential deterioration in US-originated credit assets held by banks and other institutions to US$2,2-trillion (N$22,5-trillion) from the US$1,4-trillion estimate last October.

South Africa’s Finance minister Trevor Manuel has warned that ‘hurried interventions’ – in the form of huge stimulus packages – might come to nothing.Econometrix chief economist Azar Jammine fears worse – that the rescue measures are simply delaying the day of reckoning, and that an even more serious economic downturn is waiting down the line, when that day eventually arrives.’I’m very sceptical about intervening to try to boost economic growth through massive fiscal and monetary stimulus, to eliminate the bad debts that have been created over two decades. You don’t solve such a massive problem artificially. When you’ve had two decades of excesses there has to be some pain to eliminate them.’He fears ‘a massive resurgence of inflation, which will trigger a huge increase in interest rates, which will hammer economic growth just as it starts its longer-term recovery’.There is no alternative to facing the pain, Jammine says.Michael Power, a strategist at Investec Asset Management, has a similar view.’Any reflationary package that is merely trying to restore the status quo ante is entirely missing the point and ultimately is compounding the problem. When one British government official suggested UK consumers should ‘shop their way to prosperity’, he showed how little he understood the depth of the current crisis.’Reflation expenditure in the current climate should be focused on investment rather than on consumption.’Tax cuts proposed in the US ‘for the currently employed, so they can go out and buy more ‘stuff’, would be precisely the wrong way to reflate’, Power says.’We have to rebuild the savings culture, demote instant gratification and stop borrowing money from grandchildren without any intention of paying it back.’Jeff Gable, the head of research at Absa Capital, has a very different take.He argues that quantitative easing by central banks, ‘at least so far’, has not been inflationary.Quantitative easing comes when central banks in effect print money, buying securities from cash-strapped banks to keep the market liquid.’Demand destruction in the world has been very substantial and much of central banks’ balance sheet expansion has gone to replace credit that would otherwise have been provided by the market but is currently absent thanks to the credit crisis.’Importantly, it is not on top of credit already there. It prevented the deflationary impact of businesses going bankrupt as they could not finance their normal operations. It would be inflationary if the world was going its normal excited way and the Federal Reserve threw money on top of it.’Gable points out this type of assistance is very short term in nature, with contracts rolling over within three months.He concedes that there is the ‘much broader question of what the impact of fiscal stimulus will be, because fiscal packages tend to be sticky’.In other words, they take time to come through. It is difficult to get the timing right and to judge the appropriateness of the measures at this point.But, he says: ‘If your house is on fire, you don’t tap the fireman on the shoulder and say please don’t shoot the water, you will wet my carpets. You know your carpets are going to be very wet, but you worry about them second. Policy makers are right to focus on the whole house now, not just on the carpets.’He notes the ambivalence of market commentators. ‘People following financial markets closely would highlight the failure to support Lehman Brothers as one of the policy errors in the US.’Lehman filed for bankruptcy protection in September because it could not stay open without support, which was not forthcoming from the Fed or US government.’The moment they let Lehman fail, things went from very bad to much worse for markets. Interest rates shot through the roof and financial institutions struggled far more than before Lehman’s failure.’But Gable points out that before the failure the authorities were criticised for supporting failing banks because of the moral hazard – institutions acting recklessly, knowing they will be rescued.Historians with the benefit of hindsight may be able to judge which view is correct.But even hindsight may not give definitive answers, as it is not possible to measure what might have happened if other policy decisions had been taken.Meanwhile, policy makers must find a way to balance present and future dangers.Dennis Dykes, Nedbank’s group chief economist, says: ‘We have to sweat things out and wait for confidence to seep back in.’But he agrees with Jammine and Power: ‘What is needed is a change in mindset, which produces more savings by both governments and individuals.’In this respect, he fingers countries with very low savings rates, such as the US and South Africa, where household savings are very low or even negative.-Business Report