« Growth of Private Equity in the Gulf region |
Main
| Beneficial dialogue : Supervisory Risk Review Process in the Banking Sector : »
May 23, 2008
The Trillion Dollar Meltdown and the Three Trillion Dollar War: Linking Fiscal Policy and Risk Management
Recently, I came across two books. The first one was an obvious choice,The Trillion Dollar Meltdown- Easy Money, High Rollers and the Great Credit Crash by Charles R Morris dealing with the Subprime crisis. The scond book "the Three Trillion Dollar war: by Stiglitz and Blimes discussing the true cost of the Iraq war. Reading both in sequence sets me thinking about the linkages of fiscal policy, macroeconomic management and risk management.
It appears that the contents of the two are linked to each other, like perfect fits in a jigsaw puzzle. The messege that comes across in the book is something like this-
State, even with all the hype about market capitalism, is a big ticket spender in the economy. Its fiscal policy results in the rise in consumption, savings and credit worthiness of millions. If state spending is distributed well, the credit worthiness of many in the economy go up and they are able to service their accumulated debt in a better manner. In a society already stooped in debt, the impact is even higher. If on the other hand, the spending, trillions of dollars in this case , are diverted to replacing military machinery and similar stuff, distributional impact of fiscal policy is uneven. The fiscal policy then creates the unwanted impact, decline in savings of population and consequent erosion of creditworthiness, something which the average credit/gdp ratio will definitely hide. Thereby, fiscal policy create conditions for a financial crisis, which banks and financial institutions , in their zest for greater market share, may lose sight of. Financial crisis, can, thus be seen as a fallout of lack of distributive justice in fiscal policy.
Posted by sunandoroy at May 23, 2008 09:20 AM
Spending without return adds to the liability and disrupts the entire fiscal mechanism of any state. State is bound to take up social spending which, inter-alia, also contributes in various ways in boosting the overall return enhancing the pace of the econmy. The concern of fiscal management lies with striking a balance between social and economic spending by the State that could nullify the impact of zero / low return on account of social obligations. This could be done if State also adopts economic professionalism by giving weight to competitiveness, qulaity and timeliness.
Posted by: Vineet Srivastava at May 23, 2008 11:01 AM
I have not read either of these books.
There is a beleif that when the state spends, it results in kick starting the economy. Agreed - in trying times the state investments spur economic activity. In the case cited, the economic activity is there - manufacture of guns or whatever. Therefore the economy will be benefitted. What is lacking is the supply - there is a diversion of resources from butter to guns. This reduces supply of butter and therefore spurs consumer inflation.
As long as the investment for war supplies is within the country economic activity will look up. A case in point is US where it is recognized in some quatrers as more of an armament industry economy. However, in a country like India, or Pakistan, where armamnets are purchased from another country - there will be a diversion of investment to counterproductive ends and the conclusion you have arrived at will hold good.
Posted by: Girish V S at May 26, 2008 07:13 AM
Post a comment
