Saturday, February 9, 2013

The Next Financial Crisis

A brief review of the documentary "Overdose: The Next Financial Crisis" by Devell Borgs under the auspices of journeymanpictures (available on YouTube).

This is an excellent production with superb editing, imagery, commentary and archival clips. The idea of an overheated economy with too much government influence (which this production explores) is a common theme however, which is often oversimplified. This documentary is no exception.

Testimony by Ben Benanke, indicating that there does not appear to be any evidence suggesting a housing bubble, is captured. In defense of the Fed chief, the existence of the bubble was often questioned, but rarely predicted. The market reflected that perception, that housing prices were not over inflated. Hindsight is always 20/20, so many wonder, "How could everyone have been caught left-footed?"

Peter Schiff is frequently featured and captured, indicating that the government had to provide housing loans, because the private sector would not have invested in mortgages, with the risk that such investment required. This is not totally accurate. The private sector in fact lost billions, as a result of its exposure to the sub-prime market.

The documentary indicates that the stimulus lacks definition and that public spending on projects which are unproductive, will not help the economy in the long term. Although there is substance to this argument and may well be the reason why the fiscal spending initiative has not succeeded in lifting the economy out the recession, there is a school of thought which suggests that any form of government spending (irrespective of its perceived merit) will help the economy from sinking deeper into negative growth.

In the U.S. the move out of recession has been lackluster, while the economy has until now, avoided an increase in unemployment and further recession. The producer, Devell Borgs, suggests that because of the increase, artificially, in government spending  and the monetary policy of the Fed which has been "excessively loose", worse is yet to come.

This supposition ignores the Keynesian approach to recession, which advocates increased government spending (with a loose monetary policy). Conversely, in the times of high economic growth, Keynesian economics would dictate decreased government spending (with a tighter monetary policy), with intent to flatten activity curves and decrease volatility in the economy.

By current accounts, even when the government does participate in the economy to reduce the impact of a recession, lower overall government involvement is an objective which is ultimately sought. This is the approach which Greenspan and Bernanke have adopted, although their management of the economy has been limited to driving the reins of monetary policy, rather than fiscal policy.

Many, like Borgs, argue against any government participation, as this only creates an illusion, hiding the real challenges within an economy, suggesting that the approach is ill-conceived and that it will ultimately come to haunt its manhandlers.

Devell Borgs' documentary is highly recommended, if not just for its consideration of an economic approach which I do not agree with, but which has gained some support.

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