[OPE-L] The Financial Times goes a little bit Marxist...

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Jan 22 2008 - 16:47:03 EST

It was an interesting day in the Financial Times, it seemed that the liberal-minded authors tried to think a bit more social, and the social people tried to think a bit more liberal. Anyway, here's a snippet of a critique of Mr Bush's rescue package that's actually quite provocative:

"So do not be fooled by anybody who says that the central bank should cut interest rates for the benefit of innocent citizens who have been caught up in this maelstrom. The first, second and third beneficiaries of the Federal Reserve's pending helicopter drop of cash will be banks, not ordinary people or companies.

Eventually, of course, if one maintains an absurdly soft monetary policy for long enough, the cheap money will trickle through the financial sector to the rest of the economy, but at the cost of higher inflation and reduced purchasing power. 

As time goes on, the financial sector's health will gradually improve. Eventually, the credit squeeze will be over - and the next irresponsible lending boom can begin. 

It would therefore be unwise, to say the least, for policymakers to rely on monetary policy alone. By far the best policy response - though clearly limited in scope - is a well-targeted fiscal policy stimulus, a point recently made by Lawrence Summers, the former US Treasury secretary, in his Financial Times column.

The best stimulus package would be one that could be agreed today, enacted tomorrow, targeted specifically at subprime families, and was only temporary. Back in the real world, where politicians run fiscal policy, this is obviously not going to happen. While the usual pork-barrel-type stimulus package that is now shaping up in the US is far from ideal, it is still marginally better than letting the central bank sort out this mess alone. 


A JP Morgan economist offered the following useful idea:

"Between 2001 and 2006, Chinese SOEs have seen profits grow at a compound annual rate of 28 per cent, with a few resource groups reaping the biggest gains. The payment of SOE dividends into public coffers will provide a source of fiscal income and curb wasteful spending.

After negotiations over control of the funds, the finance ?ministry and Sasac issued a statement last December, establishing a payout rate of 10 per cent of post-tax profits for 18 energy, telecommunications and tobacco groups, and 5 per cent for some 99 centrally-administered SOEs in competitive sectors such as steel and electronics. Dividends on 2006 earnings will be assessed at half the applicable ratio. As industrial restructuring proceeds and the number of loss-making SOEs declines, we expect that the parent SOEs will be required to hand over 30 to 40 per cent of their profits, in line with international norms.

Attention must shift to the question of how best to use the funds yielded by this policy.

Initially, some money may fund further restructuring in the state-owned sector, so that such enterprises can compete on a global scale.

Ultimately, however, dividend income will best serve the nation by boosting state finances in support of China's massive social welfare obligations. The money could make up some of the shortfall in China's pension obligations, estimated at over $1,000bn - or could bolster government spending on education and health.

A boost to social welfare can alleviate the pervasive uncertainty that hinders development of China's consumer economy.

By strengthening the social safety net, China can persuade its citizens to reduce precautionary savings and consume more, thereby rebalancing the economy and enabling more sustainable, long-term growth."


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