The US has embarked on an unsustainable course, keeping its financial industry alive by massive bailout schemes and financing it by budget deficits and mounting public debt. Many like Warren Buffett are getting worried about the aftermath of these policies.
Some like Simon Johnson have called for an end to these policies and reversion to a straightforward cleanup and pruning of the banking system. They see a surge of crony capitalism on the Beltway.
Recently Buffett's proxy, Charles Munger, added to the fire. The probabilities are that sooner or later the Treasury will be compelled to move, but so far they resisting hard for political reasons. There is no telling that there is going to be a V-shape recovery. It could also come as an L or U recovery. It is certain, however, that the US will not be competitive globally with high public debt and high taxes. There may be no other recourse but to deflate the debt by monetization.
Berkshire Hathaway Inc. Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co. said banks will use their “enormous political power” to prevent changes to the industry that would benefit society.
“This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”
Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the recession.
“We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”
As for dealing with the aftermath and mountain of debt, this depends on the position of the foreign creditors. As long as China needs US markets to sell its goods, the Chinese government will not be in a strong position to demand tough terms, but if they become more independent and self-reliant on domestic consumption, then things are likely to turn nasty. Chinese authorities are clearly getting concerned about US sovereign debt and a possible US Treasuries crisis.
There is great revival of Keynesian thinking in the US, but this economic theory developed prior open, global markets. In those days, the US was a creditor nation and a major center of production. Today, the US is the world's largest debtor and has outsourced much of its productive capacity to lower cost producers. In today's environment, these expansive policies are likely to result in currency devaluation and higher interest rates.
Many EU countries have tried similar Big Government/ high public debt policies and failed. Since the 1980's, they were all obliged to embark on privatization plans. The heavy public debt created a permanent drag on their economies. After being so badly burned in the past, the EU declined the Geithner invitation to follow similar expansive US policies, rolling up public debt.
Some like Simon Johnson have called for an end to these policies and reversion to a straightforward cleanup and pruning of the banking system. They see a surge of crony capitalism on the Beltway.
Recently Buffett's proxy, Charles Munger, added to the fire. The probabilities are that sooner or later the Treasury will be compelled to move, but so far they resisting hard for political reasons. There is no telling that there is going to be a V-shape recovery. It could also come as an L or U recovery. It is certain, however, that the US will not be competitive globally with high public debt and high taxes. There may be no other recourse but to deflate the debt by monetization.
Berkshire Hathaway Inc. Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co. said banks will use their “enormous political power” to prevent changes to the industry that would benefit society.
“This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”
Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the recession.
“We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”
As for dealing with the aftermath and mountain of debt, this depends on the position of the foreign creditors. As long as China needs US markets to sell its goods, the Chinese government will not be in a strong position to demand tough terms, but if they become more independent and self-reliant on domestic consumption, then things are likely to turn nasty. Chinese authorities are clearly getting concerned about US sovereign debt and a possible US Treasuries crisis.
There is great revival of Keynesian thinking in the US, but this economic theory developed prior open, global markets. In those days, the US was a creditor nation and a major center of production. Today, the US is the world's largest debtor and has outsourced much of its productive capacity to lower cost producers. In today's environment, these expansive policies are likely to result in currency devaluation and higher interest rates.
Many EU countries have tried similar Big Government/ high public debt policies and failed. Since the 1980's, they were all obliged to embark on privatization plans. The heavy public debt created a permanent drag on their economies. After being so badly burned in the past, the EU declined the Geithner invitation to follow similar expansive US policies, rolling up public debt.
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