[Gllug] [Long] Down-under response. Was: File On 4 on waste in Govt computing projects

[David L Neil]

On 07/03/10 00:20, Richard Jones wrote:
> On Fri, Mar 05, 2010 at 10:16:23AM +1300, David L Neil wrote:
>> Compare this with the UK and US governments giving wads of cash to the
>> merchant bankers, who instead of passing it on (even to their
>> oft-sacrificed retail brethren), simply held on to it and used it as
>> fuel for the bonuses they are paying themselves today.
>
> The US also distributed cash to the population, in the form of "rebate
> checks" (cheques) in the $300-$600 range to most taxpayers.  It's not
> really clear how much effect that had.  Wouldn't sensible people have
> mainly held on to this money because of their uncertainly over future
> prospects?  They would have saved it in the bank, and the banks would
> still have had to increase their minimum capital ratios, so would not
> have been lending it to anyone.
>
> Rich.


Rich (et al),

You are correct about the lack of clarity. It takes time to see these 
things, and given the size of the economic slide and the duration of the 
downturn it becomes even more difficult to see something as more than a 
'blip', particularly if it was too little. (or in the case of the 
heralded (US) investment in a "broadband infrastructure", way too late 
(it still hasn't really started, and certainly not involved expenditure 
at the $scale touted).

The bottom line, as one would say, is that the people who needed it, 
either saved it and eked-out its benefit (hard to see statistically, ie 
from aggregated data) or perhaps foolishly blew it all in one go (a 
visible 'blip' if enough people did that). My earlier observation about 
Aussie youngsters enjoying the Queenstown (New Zealand, South Island) 
ski season was quickly observed anecdotally through sheer numbers, and 
then as the formal stats came in the year-on-year comparison of both 
visitor numbers and apparent spending per person revealed the benefit 
(in this case, to New Zealand rather than Australia).

The logic of holding-onto the money is an assumption. If someone has 
'enough' then yes I'd agree. However a second person thrown out of work 
and with few resources would probably employ the funds (hopefully on 
necessities) fairly quickly - and by the same token those with less 
personal responsibility (or experience of economic lean-times?) would 
probably contribute to an immediate 'blip' (apropos the Australian 
example, above).

The 'immediate' is what the politician/economists want (see, understand, 
... [choose your own word here]). The "sensible" course is not! What? 
The thing about hunkering-down and saving today's 'ciggie and beer' 
money in case you need it for tomorrow's 'bread', is that this takes 
money "out of circulation" - not quite true if you bank it - unless the 
bank also holds onto funds!!! (see also, below)

What was (?is) needed, is to have money being spent on 'stuff': if you 
buy something from me, I will tend to take that cash and spend it with 
someone else, and he will ... This is the "money-multiplier effect" 
illustrated: the same 'wad of notes' passes through three (or likely 
more) hands and transactions (the latter important when one takes tax 
revenues and ultimately, government spending, into account). If you 
(sensibly as an individual, but maybe not in the community view) hold 
onto that cash, I end up 'short', as does the person I would have paid 
it to... My immediate reaction is to say 'business is bad' and thus I 
'hunker-down' too - and this view 'ripples' to our mythical third-man, 
etc, etc. Because we have (all) stopped spending, there's 'no' sales and 
thus no point in manufacturing (or writing software, except for 
fun/employment of the unemployed mind - ok, given the audience: 
"scratching an itch"). Thus we have recession and/or depression [no, for 
those of you who know, I'm not going there!]

Thus if by giving you/us all some $ or £, the government persuades you 
to keep spending, money will continue to flow around the economy and 
your perception of 'impending doom' will be forestalled. Of course the 
(fervent) hope is that this delay in perception will be just long enough 
to ensure that the initial 'shock' is minimised and the natural optimism 
of the community (?wisdom of crowds) will carry the day. (see also phone 
deals which give you free minutes during the first month in the hope 
that you will develop and maintain expensive habits thereafter!)

The other assumption is that the money 'gift' is made quickly enough so 
that pessimism and negativism don't set-in first. Politicians move 
quickly???

Having avoided going back there for some years, I can't speak to the 
American situation beyond what I read (and not just 'the newspapers'!) 
but the choice of approach utilised down-under at least contributed to 
Australia's extremely confident position when compared to any/all of the 
western countries.

Unfortunately the UK government put their money into the hands of 
'bankers' - and when I say this, I mean the merchant and investment 
bankers, the very people who caused the crisis: (a) by their 'complex 
swaps'* and (b) by pushing their seen-to-be-junior retail arms, ie the 
'high street banks', into offering ever more risky mortgage amounts and 
contracts (as mentioned elsewhere in this thread), which in turn were 
revealed as houses-of-cards when liquidity dried-up and (house) prices 
fell (negative-equity).

* which were a means of describing 'paper' as "assets", redefining the 
same paper elsewhere as a risk (always were "liabilities" under any view 
of accounting), and by slicing-and-dicing, re-selling the same 'items' 
over and over and in slightly different ways, for ever-increasing sums 
(pocketing a fee for their 'expertise' at every transaction) - despite 
there being no value-added if indeed there was ever any real value (a 
liability = value???) from the start.

Those bankers did exactly as you suggested a (conservative and sensible) 
individual would do. They figured that if they held onto a war chest 
they would be able to buy-out and otherwise bludgeon their (financial) 
competitors, or at the very least, that they would have some assets on 
the books with which to counter the enormous paper-losses they had 
created earlier (as above). Most didn't even share their largess with 
their retail arms...

Thus, the great British public only saw 'relief' in the form of lower 
interest rates (on their credit debts - but effectively losses and 
disincentives to save, also mentioned elsewhere) - and ONLY saw that IF 
they held a mortgage!!! I lived in Shepherd's Bush which displays the 
complete socio-economic range. I can tell you that when a 'factory' shut 
down (lack of sales, everyone holding their cash...) for every four or 
five executives worrying about their mortgages (whilst 'enjoying' this 
relief), there were hundreds or even thousands of folk on the White City 
council estate who not only lost their income but received no help from 
these 'economic measures' at all (rent assistance comes from the regular 
and every-day social security schemes - ie government expenditure which 
is funded by a decreasing work-force/spending population... So a 
"double-whammy" to use the economists' term to describe the government's 
dilemma).

A lot of Brits fail(ed) to see an economic downturn (perhaps I moved in 
the 'wrong circles'?) - certainly a visit to ShepBush's Westfield 
shopping center showed no shortage of people who had money and who were 
prepared to spend (even if it also showed shops opening and then 
closing-down unfortunately rapidly). Maybe a cash handout or rebate 
would simply have ended-up as coffees, Burberry, and bling? However the 
folk who were affected, were affected badly, and in large numbers (as 
evidenced by any economic data you care to quote), despite being 
relatively 'invisible' to those still working/spending/partying, and 
despite the huge impact they have had on both the money-multiplier and 
public funds.

The comment about capital ratios disappears with a bit more thought. If 
the amount of money passing through banks increases, that's no problem. 
If cash-money enters a bank and is then held/amalgamated to be utilised 
in a long-term transaction, eg a mortgage, then ratio regulations come 
into play (necessarily).

Most ratios were reduced or relaxed, although they were so low in the UK 
and US that they completely failed to cope with the very situation for 
which they were designed (to protect the bank, the mortgagees, the 
savers, and the national economies) AND the bankers knew this!

Thus the example mythical transactions from you, to me, to 'Fred', were 
simply deposits into cheque accounts followed by withdrawals - no bank 
ratio (beyond the overnight money market...) in sight. The 'ratio' that 
is a problem in our 'chain' is not the bank's but the government's. Yes 
our much beloved VAT/GST! The decision to reduce sales tax was for 
exactly the reason (you) stated. However, again it benefited those who 
needed less help by more (in $/£ terms). It probably didn't encourage 
those 'hunkered down' to spend more, but it did reduce the 'drag' on the 
amount of spending that was subsequently re-spent (multiplied by more, 
by de-multiplying by less).

Whereas in the UK the government has been forced by its own income needs 
to re-instate the rate of sales tax, here in New Zealand they did not 
but discussion is underway to increase sales taxes beyond any historic 
level. The Opposition has opened-fire in predictable fashion (probably 
THE point in which they are closets to populist thinking!?). The 
government's plan is to commensurately (their claim, but without detail) 
increase social security and pensions (etc) so that the lower 
socio-economic group(s) will be no-worse off. They claim to seek an 
"adjustment" which attempts to shift more of the tax burden onto "the 
rich" without appearing to/actually taxing the income which makes them 
'rich'. Yeah right! Another whole discussion or political 
smoke-and-mirrors re-interpreting of monetary policy... but mentioned to 
show that this economy is rising again and it is thought, can afford the 
'hit' of such a measure - both in economic thinking and 
individual-perceptions...

Regards,
=dn
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