Think an Obama Administration would spell an upwards march on the US aid budget? Think again.
The Obama / Biden campaign platform is formally committed to a doubling of US foreign assistance to $50 billion (which by my calculations works out at 0.36% of US gross national income – still a way off from the 0.7 target, but hey).
But now, it looks as though that commitment got dropped – in a little-noticed part of the Vice-Presidential debate between Biden and Palin on October 3. The debate chair asked:
“What promises — given the events of the week, the bailout plan, all of this, what promises have you and your campaigns made to the American people that you’re not going to be able to keep?”
And the very first thing that Joe Biden said in his reply was this:
“Well, the one thing we might have to slow down is a commitment we made to double foreign assistance. We’ll probably have to slow that down.”
And that was it; no explanation, no regrets, just a bald statement – a blunt demonstration of the relative weakness of the development lobby in the US.
It’s disappointing that Crikey, like others in the liberal media, have fallen for the nonsensical line that the so-called “financial crisis” is either real or requires urgent action. Anyone who disputes this claim, which is advanced with evangelical fervour by its advocates, is howled down as a heretic and a “denialist”. The days of the witch-hunt are truly back.
Put simply, there is no evidence of a human-induced financial crisis, regardless of the hysterical claims advanced in trendy films like Al Gore’s Inconvenient Loot. The financial environment moves through cycles unrelated to human activity. Financial records from the distant past demonstrate that key indices have previously been much lower than they are today, and move up and down of their own accord. Man’s contribution to these movements is dwarfed by the natural rise and fall of markets.
The following graph shows that the long-term financial trend is — inconveniently for crisis fanatics — resolutely upwards:
And to anyone objecting that the market is now declining — what happened yesterday?
Another rise. So much for the purported, so-called, alleged myth of anthropogenic financial collapse, which is not real at all, but actually made up.
Any recent, temporary falls in the Dow Jones Index are nothing to do with human-induced crises. Quite apart from natural ups and downs, recent sun spot activity has increased the cash burn rate, contributing to a mild reduction in credit availability, but again it is a wholly natural cycle, unrelated to human activity. The current cycle of solar activity is due to end in the next couple of years, returning credit availability to normal.
If there is to be any attempt to mitigate this wholly fictional crisis, it should be done with moderate, balanced measures that take into account the needs of businesses and the importance of maintaining job growth and profit share. The fanatics urging us to take immediate action must be rejected.
We should take no unilateral action, but await a comprehensive international agreement that includes the big financial emitters like China. To do otherwise would be to risk our own economy without having the slightest impact on the problem we’re trying to fix. Local jobs will be lost due to “bailout leakage” as firms simply move offshore to countries where taxpayer money is not being wasted propping up uncompetitive firms.
Other industries will simply be wiped out due to massive increases in their costs arising from the additional tax burden. Our LNG (Lots of Noxious Gits) industry is particularly vulnerable.
If we are foolish enough to take unilateral action then we must ensure full compensation for affected companies so that they are not required to contribute to the bailout. A special Bailout Liability Underwritten Banking certificate (BLUB) crediting firms with the amount of money contributed to the bailout must be provided to all trade-exposed industries, particularly those in bailout-intensive sectors.
But before we proceed, further work needs to be done on an appropriate bailout target. Setting too high a bailout target risks imposing a massive burden on the economy. A low bailout target would provide a sensible transitional pathway to stabilising the financial sector at $550 million ppm (payouts per manager) by 2050.
This prudent, moderate, sensible, balanced course of action, while opposed by trendies and financial crisis fundamentalists, will ensure we protect the very jobs and businesses most at risk from this new secular religion.
As the financial crisis has intensified, Alex has frequently pointed us to the thoughts of NYU’s Nouriel Roubini, a long-time prophet of economic doom (see here, here and here). Given his warnings of “systemic meltdown”, you might imagine that Professor Roubini is a dour figure. Not so. In a bizarre twist to the Demise Of Capitalism As We Know It, gossip blog Gawker has gone to war with the prof:
It’s time to call bullshit. The image of Dr. Doom may satisfy the needs of the media and partygoers this Halloween—but Roubini is anything but dour. The 50-year-old Iranian-Jewish economist is a promiscuous Facebook friend who draws a cosmopolitan crowd to the frequent parties at his Tribeca loft—an apartment with walls indented with plaster vulvas, incidentally.
I’ll leave you to investigate Gawker’s initial assault and follow-up post, which includes recent correspondence on the current crisis from, er, St. Tropez. Still, in this time of generalized panic and depression, it’s good to see that one of our gurus is having a good time (and pretty hot for 51 too!).
Although there’s no consensus on whether we’re heading for a 2-3 year recession or a much longer period of deflation a la Japan in the 1990s (c.f. Nouriel Roubini on V, U and L shaped recessions), four implications for development are already clear.
First, donor countries are going to be facing a dramatically different situation in their public sector budgets from next year. With the US Treasury’s $700 billion bailout plan now approved by Congress, the incoming US Administration will face a budget deficit of up to a trillion dollars next year, rather than $300 bn as planned. Other donors will find their budgets constrained too – by falling growth, lower tax revenues and probably also higher public debt. In the UK, for example, public borrowing next year is likely to have to rise from an expected £43 bn to £100 bn or more.
All this means that governments will have less to spend – so we should start worrying now about what that means for development assistance. While it remains to be seen whether those governments that have committed to spending 0.7% of national income on aid will row back on those commitments, it now looks much likelier that for example climate adaptation costs will come out of aid budgets, rather than being additional to 0.7% – as they should be.
This shift will be compounded by the second implication of the credit crunch: change in public attitudes. So far, the full impacts of the financial crisis have yet to hit the real economy in developed countries. But when they do, they will accelerate a switch that we can already see, towards more priority on issues that are ‘close to home’, and less on global issues like development and climate change.
Third, the financial crisis will obviously hit growth in developing countries. Monday’s stock market falls hit developing country exchanges hardest: the benchmark MSCI emerging markets index, for example, fell 11% as investors fled for safety. Meanwhile, the debate about whether developing countries in Asia and Africa have ‘decoupled’ from developed countries seems to be ending, with the conclusion that developing country growth is not immune from a downturn in the wider global economy.
And fourth, a reduction in commodity prices for the duration of the global downturn (however long that may be) as demand for them falls. As I’ve mentioned, futures prices for grain crops are already falling; we can expect that trend to be supported by falling energy prices, which will reduce some of the pressure on food that’s come via fertiliser prices, transport costs and demand for crops as biofuels.
That said, let’s be clear: the fall in commodity prices due to a global downturn does not mean that we’re out of the woods for good on high food and fuel prices. As Javier Blas notes in the FT today, the downturn also means that necessary investment in increasing supply will be put off. As soon as we’re out of the dowturn and demand starts going up again, we’ll discover that there’s been no shift in the underlying supply fundamentals – and hence that the stagflation drivers we were all worrying about until the credit crunch really began in earnest are just waiting where we left them. Let’s hope policymakers use the current easing as a moment of opportunity to start getting long term policy frameworks in place to manage high commodity prices a bit better than we did over the last two years.
Nouriel Roubini summarises how successively larger and larger bailouts seem to be having less and less effect:
– When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks;
– when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks;
– when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse;
– when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%.
– Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities.
– Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today [Thursday].
Looks like today’s all set to be another rough one: the FTSE 100’s down 10% since opening…
