Britannia Radio

Liam Halligan here sets out why what the west is doing is WRONG and 
what it should do.  Meanwhile second here Ambrose Evans-Pritchard 
tells the picture of  Asia - which is far worse than here.  Indeed 
the disaster there is so deep that it could pull all of us further 
down into the abyss.

xxxxxxxxx cs
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SUNDAY TELEGRAPH   4.1.09
1. NOTE TO JOHN HUMPHRYS: I would rather be miserable than wrong
(Barack Obama needs to re-introduce Glass-Stegall to begin to end 
this crisis)  [Eh? -cs]

Appearing on BBC Radio 4's Today programme over the festive period, 
this columnist was labelled "miserable". But, as I explained to John 
Humphrys, our financial predicament is no laughing matter.

By Liam Halligan

What did the great radio inquisitor want me to do? Insist that if the 
Government keeps borrowing and listeners merrily load-up their credit 
cards during the post-Christmas sales, then everything will be fine?

Well it won't be. The UK - like most Western economies - is in a 
grave situation. Our money markets are frozen, denying vital 
liquidity to millions of credit-worthy firms. Unless the inter-bank 
market reboots, then even hastily revised 2009 Western growth 
forecasts - down from 2-3pc a year ago to a 1-2pc contraction now - 
could turn out to be too optimistic. We face the very real danger of 
chronic unemployment across the so-called "advanced economies" and 
widespread social unrest.

Yet the Keynesian bail-out solution, accepted as "essential" by 
practically every mainstream commentator, will do nothing to unfreeze 
our credit markets. It's even more dangerous than the disease it's 
supposed to cure.

Panicked politicians have now closed their ears to reason and are 
ripping up the rules. And as the bail-out continues, and the 
investment banks channel public funds to senior executives, the 
vested interests that caused this crisis are adding insult to injury.

With failure and incompetence thus rewarded, huge damage is being 
done to the very fabric of Western market-driven commerce. That could 
spark a damaging populist backlash, recreating the economic dark ages 
of heavy regulation and state diktat, crushing the entrepreneurial 
spirit that has long driven human progress.

So there are good reasons, Mr Humphrys, to be miserable - not only 
about where we are but, even more so, where the policy consensus is 
taking us. And when asked to give my opinion on the UK's most 
important radio show, I'd rather be miserable than wrong.

Commentators shouldn't only criticise, but also suggest ways out of 
this mess. So I'll repeat my call for banks everywhere to be legally 
forced to "fully disclose" and write-down their sub-prime liabilities 
BEFORE further taxpayer-funded recapitalisation.

The Swedes took this hard-headed approach during their early 1990s 
banking crisis. We've adopted, instead, the head-in-the-sand Japanese 
variant  [see below! -cs]- creating our very own zombie banks which 
are technically alive (allowing powerful executives to keep their 
jobs and save face) but commercially dead and a drain on society, 
given the weight of their toxic debts.

On top of full disclosure, Barack Obama could now make a move which, 
for all the hype of his inauguration later this month, would prevent 
a repeat of this credit crunch.

The incoming President is fond of citing America's New Deal of the 
mid-1930s - given that he wants to repeat the depression-era use of 
public works. But the most important part of the US policy response 
to the 1929 Wall Street Crash was the more obscure Glass-Steagall Act 
of 1933.

Named after the two Democrat senators who sponsored it, Glass-
Steagall prevented commercial banks - which take deposits from 
ordinary households and firms - from engaging in the high-risk 
speculative activities undertaken by investment banks.

Or at least it did - until 1999 when, after millions of dollars of 
political donations from investment banks, Glass-Steagall was 
repealed by then President Bill Clinton - at the urging of Robert 
Rubin, his Wall-Street trained Treasury Secretary.

That unleashed the forces which have landed us where we are now. 
Investment banks took over commercial banks - using their retail 
deposit base, on which there was an implicit government guarantee, 
for risky speculative trading, not least in opaque derivatives. The 
promised "Chinese Walls" were fiction, as swash-buckling investment 
bank culture pervaded "plain vanilla" institutions supposed to be 
servicing regular activity.

The situation was made more dangerous when, on top of this repeal, 
the US financial authorities allowed the investment banks to raise 
their debt-to-capital ratios from 12:1 to 30:1 or even higher. This 
lit the fuse on the commission-driven securitization and debt-fuelled 
purchase of tens of millions of dodgy mortgage-backed securities - 
which inflated the US housing market as politicians wanted, but 
spread "sub-prime" sickness around the world.

So will Obama re-introduce Glass Steagall? Will he heck. On the 
contrary, the man upon whom the hopes of the West now rest is 
bringing back into government many of Rubin's acolytes who drove the 
repeal in the first place.

Meanwhile, some of America's most powerful investment banks have been 
allowed to convert themselves back into commercial banks - attempting 
not only to qualify for more bail-out finance, but to close down any 
debate on the need for a new Glass-Steagall.

Has Obama got the audacity to end the party and order the Wall Street 
denizens to behave? Will he reintroduce the necessary firewalls upon 
which the stability of Western banking depends? My instincts tell me 
he won't. But perhaps I'm just being miserable.
  =-=-=-=-=-=-=-=-=-=-=-
2. Asia needs to fully wake up to the scale of the West's economic 
crisis
Asia is not going to rescue the world economy.

By Ambrose Evans-Pritchard

The news from Japan, China, and the Pacific tigers has moved from 
awful to calamitous since the global industrial system snapped in 
October.

A raw reality is being laid bare. The mercantilist export model of 
the East is proving dangerously geared to the debt-driven excesses of 
the West. As we go down, they go down too. Some are going down even 
harder.

Japan's industrial output contracted by 16.2pc in November, year-on-
year. "For an economy which lives from the prowess of its industrial 
exports, this is simply earthquake," said Edward Hugh from Japan 
Economy Watch.
Japanese exports fell 26.7pc. Real wages fell by 3.1pc, the seventh 
monthly fall. Taken together, the figures are worse than anything 
during Japan's "Lost Decade". They have a ring of 1931.

The fall-out in Japan has already shattered the authority of premier 
Taro Aso. His approval rating has dropped to 21pc. The cabinet is in 
revolt. The world's second biggest economy no longer has a 
functioning government.

Credit Suisse warns that Japan could slide into deflation of minus 
2pc by the autumn. Since interest rates are already near zero, which 
means that real rates will rise as the slump deepens - the surest 
path to a liquidity trap.
Kyohei Morita from Barclays Capital estimates that Japan's GDP shrank 
at an annual rate of 12.2pc in the fourth quarter. "It's shocking," 
he says. Singapore has already reported. Fourth-quarter GDP 
contracted at an 12.5pc annual rate.

Taiwan's exports fell 28pc in November. Shipments to China dropped 
45pc. Korea's exports dropped 18pc in November and 17pc in December.
"We are looking right in the face of an unprecedented regional 
depression," said Frank Veneroso, the investment guru.
"If there is one part of the global disaster that is not reflected in 
today's massacred markets it is this Asian debacle. The source of the 
collapse appears to be above all a contraction in China."

One has to careful with Chinese figures. When I covered Latin America 
in the 1980s, veteran analysts watched electricity use to gauge 
economic growth since they could not trust official data. It is 
striking that China's power output fell 7pc in November.

Asia has clearly failed to use the fat years to break its dependency 
on the West. It has stuck doggedly to its export strategy - by 
holding down currencies, or by subtle policy bias against consumption.

In China's case it has let the wage share of GDP drop from 52pc to 
40pc since 1999, according to the World Bank.

The defenders of this dead-end strategy are now coming up with 
astonishing proposals to put off the day of reckoning. Akio Mikuni, 
head of Japan's credit agency Mikuni, has called for a "Marshall 
Plan" to bail out America by cancelling $980bn of US Treasury bonds 
held by the Japanese state.

This debt jubilee does have the merit of creative thinking, but it is 
entirely designed to keep the old game going. "US households won't 
have access to credit they have enjoyed in the past. Their demand for 
all products, including imports, will suffer unless something is 
done," he said.

Let me be clear. I make no moral judgment on the "neo-Confucian" 
model, nor - heaven forbid - do I defend the debt depravity of the West.

A stale debate simmers over whether the Great Bubble was caused by 
Anglo-Saxon and Club Med hedonism, or by an Asian "Savings Glut" 
spilling into global bond markets and fuelling asset booms, as 
Washington claims. It was obviously a mix.

Two cultural systems interacted through globalisation, locking each 
other into a funeral dance.

The point is that this experiment has now blown up. Whether or not we 
slam straight into a global depression depends on how we - East, 
West, all of us - handle this.

The top sources of net global demand as measured by current account 
deficits over the last 12 months have been the US ($697bn), Spain 
($166bn), Italy ($71bn), France ($57bn) Australia ($57bn), Greece 
(53bn), Turkey ($47bn), and Britain ($46bn).

Most are tightening their belts drastically, and in the case of 
Britain the shift has been so swift that the arch-sinner may soon be 
in surplus. If they are draining world demand, then world demand is 
going to collapse unless others step into the breach.

The surplus states - China ($378bn), Germany ($266bn) Japan ($176bn) 
- have not yet done so, which is why the global economy went off a 
cliff in October, November, and December. Beijing is planning a 
$600bn fiscal blitz.

But how much of it is an unfunded wish-list sent to local party 
bosses? It will not kick in until the middle of the year, an eternity 
away.

For now, China is dabbling with protectionism to gain time - a risky 
move for the top surplus country. It has let the yuan fall to the 
bottom of its band. Vietnam has devalued. Thailand and Taiwan are 
buying dollars.

Watching uneasily, the Asian Development Bank has warned against 
moves to "depreciate domestic currencies".

Anger is mounting in the West. Alstom chief Philippe Mellier has 
called for a boycott of Chinese trains.
"The Chinese market is gradually shutting down to let the Chinese 
companies prosper. There's no reciprocity any more," he told the 
Financial Times. Optimists say the collapse in oil prices will give 
Asia a shot in the arm. Governments are still flush, with ample scope 
for fiscal rescues. Asia's central banks are sitting on $4.1 trillion 
of reserves.

They have the means, perhaps, but do they have the will to act in 
time? Or do Beijing, Tokyo, Taipei, Kuala Lumpur, - and indeed Berlin 
- still cling to their assumption that others will spend for them?

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