Thursday, April 2, 2009

G-20 gives a Trillion

The main Headline on Drudge this afternoon Super Pump: $1 Trillion to IMF, World Bank

An important bit which will not be mentioned. Boring but important:

Brown also says the 20 countries at the summit will enact common policies to crack down on tax havens, regulate hedge funds, and rebuild trust in the financial system to "prevent a crisis such as this from happening again."

He says the G-20 nations will also give emerging powers a greater say in the world economy.

Brown did not outline any new fiscal measures but says that the stimulus packages already announced by major nations have already been the biggest in history.

Obviously, to me at least, that the world leaders at the G-20 Summit never took an economics course above what they needed to sound like they know what they are talking about. (They probably learned to look what they know what they are talking about in Drama Class.) To take this blurb in parts.

1. Crack down on tax havens, regulate hedge funds, and rebuild trust in the financial system. So they want to eliminate tax havens, where capital is stored and used between expenditures. You know, saving before investing. Also, low tax states/countries are the emerging economies in the world. Ireland for instance. Capital didn't start to flee until the Irish raised tax rates. If we weren't bailing out the bets(CDS's, derivatives, etc.) that Hedge Funds have made over the last several years they would have received the haircut that the market wanted to give them, creative destruction. Driving them into the ground to be replaced by more responsible investors and capital. Trust will not be rebuilt in the financial system until new capital can be raised by the LARGEST INVESTOR CLASS, I.E. the middle Class. Raising taxes on them and shrinking economic growth with greater regulation and higher taxation will be ruinous.

2. The G-20 will not help emerging economies. It will stifle and kill their ability to grow through increased regulation and the loss of incentives that these economies should have at their disposal, lower taxes and cheap energy which would level the playing field and attract venture capital.

3. In regards to the stimulus. We have spent more money than I can even fathom to try and increase "liquidity" into the markets. I see this as being an incredibly stupid move. We will never know the true "value" of the world's toxic assets until the real underlying value of the assets can be factored and then sold or written off. Of course this would entail severely restricting our monetary policy to squeeze the real value out of the toxic assets. In simpler terms, who can "afford" those assets and who is floating on credit. This is what the market has been trying to do.

So a quick exit question. With the yield curve for banks, what they are paying to borrow the money vs what they are getting back in payment, making it easy for any banker to make money. Why do we still see a "frozen" credit system. My bet is that the market fears that investors feel that we haven't seen the worst of this big bear yet.


  1. I'm really feeling you on point number two. Developing countries ALWAYS get the worst of it when the First World decides to rewrite the rules of commerce.

  2. any time we have a recession they want to re-write the rule book as opposed to just letting the market find it's own equiblibrium