I have been looking and watching the economy for many years and I did see this recession coming from the early ninety's. As far I could see, it was inevitable. When capitalism is allowed to take such a hold because regulations are relaxed 'to allow freedom to make more money', then saturation of the market and the never ending pressure to make more and more profit each and every day, month and year by the share holders, and when that doesn't happen, confidence falls, shares are sold and companies falls. It is possible, and this nearly happened in the UK, that a company whose shares are on the stock exchange, can employ thousands of people, have a turnover of thousand or millions, have a capital base of thousands, and for all intents and purposes a buoyant and stable company. But if the shareholders loose confidence in the company and sell their shares, the company can go bust. Extraordinary! I ask, is this the right structure for businesses to run under?
Looking from the UK to the UK and world economies, I see various ways of doing the same thing, making money at the expense of society. Now that the world recession is happening because of the credit crunch, what is the best way for a country to deal with it? Is it to plough loads of money into the financial market and hope, which is akin to trying blowing up a burst balloon? The financial bubble has burst. No matter what people think, the financial situation has now changed and different ways of doing business must be found.
A change in the banking business is first. Split the business into two businesses as it was a couple of decades ago, where there was the “High Street” bank serving the local businesses and individuals, and the “Merchant” bank which does the investing in big business and foreign exchange and takes the larger risks. This would allow the merchant bank to go bust without effecting the guy in the street. Invest in local businesses to encourage the country to be more self sufficient so the effect of the world would have a lesser effect on guy in the street. Don't put all our eggs in one basket, as my grandmother used to tell me.
History shows some scary situations. Recently in Japan they were just coming out of a recession when the world recession hit them. It took 10-15 years for them to come through this. They managed to do this by investing in the financial system, lowering interest rates which didn't help because if there is no money to lend, then it doesn't matter how low or high the interest rate is, lending will not happen. Is this the right thing for Australia to do? I hope you know the answer!
In the States, during a downturn a few decades ago, the government there thought that investing in infrastructure would “kick-start” the economy. It didn't. Millions of dollars were spent and nothing happened except for a few good roads and bridges and some workmen were employed for a while but the economy stayed where it was.
So, what's the answer?
The economy is all about the movement of money. Keep interest rates at a reasonable level, don't drop it like a stone. The idea behind this is that in a recession people tend not spend, but to save. If you encourage people to save, they will have enough money , after a while, to feel confident to spend some. Also with reasonable interest rates there will be investment in the economy because money can be made. At the end of the day, it's the customers in the street who keep businesses going not the government. Without customers, there is no business. You have to encourage the customer to spend, if they don't have the money to spend, how can they? In a recession, brought about by excessive lending/borrowing, who in their right mind will borrow more? By reducing taxes across the board and I mean direct taxes like income tax and business tax, a reduction of the burden of tax will put more money in the pocket to spend in the local economy.
If the financial industry is going to have to re-structure then shouldn't the government also have a look at how it gathers taxes? The government needs money to function, and this it gets through the tax system. In times or recession, people will have less money, worry about whether they will have a job next week, spend less, and obviously, want to pay less tax. If there are less people employed then there will be less money being spent in the street and less tax to be collected, meaning there will be a shortfall in the Government coffers.
Attitudes need to change. The idea that money and more money is all that matters is a fallacy. The pre-occupation with growth leads to market saturation then stagnation followed by crash and the house of cards come tumbling down. An American Indian once said, when will they understand that when all the fish have gone from the river and the trees gone from the woods, that you can not eat the dollar? Money helps but is not the be-all and end-all.
I do think that the governments around the world have got it wrong because they are looking at business, not at people. If the government gave the money to the people (tax cuts etc.) the people would either put it into the banks, thereby increasing the banks funds, or spend it in the high street so the local business can put it into the banks. Both ways, the banks get the money! By putting the money straight into the banks, no-one gets the money because the banks need it as a capital asset, so it goes no where and helps no-one, no movement of cash.
Only time will tell, but I'm doing what I can to make sure I have enough funds spread so my losses will be minimal when the big crash comes.