Welcome to Dr Lincoln's blog

Welcome for visiting my blog. Hope you enjoy the visit and always welcome back again. Have a nice day!


Links to some interesting readings

This post contains some very limited sources of articles, books, reports that are of interest to me, and hopefully to some readers.

"Fed up", by Alan Kohler on Fed policies and a statement. [Interesting piece of commentary on Fed policies and its statements]

IMF World Economic and Financial Surveys - Global Financial Stability ReportResponding to the Financial Crisisand Measuring Systemic Risks April 2009.
[Maybe it is a high level summary of actions taken by governments, but appears having very little new insights into combating the global financial and economic crises.]

Arguing for economics needs applying economics

This is a short comment on Bjorn Lomborg’s “Green energy a better bet”, an article in the Australian April 30, 2009 on http://www.theaustralian.news.com.au/story/0,25197,25405532-7583,00.html

The author argued for government to invest in green energies and for a need to combine natural science and economic science. The main arguments suggest that it costs more than the benefits it would bring to reduce carbon emissions either through ETS (emissions trading scheme) or carbon taxes, while on the other hand to invest $1 in green energies will bring about $16 of benefits. So governments should be proactive to invest in those energies instead of either doing ETS or carbon taxes. Further it argued that the current actions based on Kyoko will have negligible effects in lowering temperature.

While it seems the logic argued by the author is clear, it appears there are some important missing parts in its whole construct. I confess that I don't have as much hard facts as the author had, such as the costs to human beings of warming and the benefits and costs of green technologies investments. From logic point of view, one would expect that if investing in those technologies has such high returns, basic economics would favour that entrepreneurs will undertake them, if indeed the high costs of either ETS or carbon taxes become reality after their implementations or even at the expectation of their implementations. The point is that while there is a point that governments should be proactive in encouraging those investments, but economics will dictate that it is ultimately good business cases that will have a lasting effect on what will happen. It seems that the author is arguing for economic science without really applying economic thinking, after all!


Best policy requires best not second best approach

Comments on the report on Bair Seeks to Expand Power, Ending ‘Too Big to Fail’ (Update1), by Alison Vekshin, on http://www.bloomberg.com/apps/news?pid=20601087&sid=a2Hy2M0SSVqs&refer=home

The report started with the following:
[April 27 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair sought authority to close “systemically important” financial firms, marking her boldest attempt yet to expand the agency’s reach.
The FDIC should be able to take over and shut bank-holding companies and other large institutions instead of just failed commercial banks, Bair said today in a
speech at the Economic Club of New York. Such power would shield taxpayers from losses when government protects companies deemed “too big to fail,” a concept that should be “tossed into the dustbin,” she said.
“The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution,” Bair said. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program.”
The speech represents the first time Bair has said she wants the new power, countering arguments that the Federal Reserve is best equipped to manage the authority as Congress prepares to write legislation on the issue this year. Bair has previously said that some regulator should have resolution authority and suggested her agency could do the job. ]

Instead of breaking down or preventing big financial firms to reduce the risks of systematic failures, authorities could finetuning some regulations to minimise risks of failures of those firms by reducing their risk taking, and/or to attach conditions to any rescue measures so that the taxpayers will be paid back for the rescue actions, e.g. after the rescue and when they become profitable, they should pay some returns to the taxpayers. Any rescues are not forced and are up to firms to accept them. But authorities have the power to take over or nationalise if they don’t accept rescue and in the danger of bankrupcy. The condition requiring pay backs by rescued firms should be stated clear as part of regulations. So this will also naturally constrain firms’ behaviour and minimising moral hazard problem risks.

So, this represents a different approach to address the same problems, targeting the core of the problems and adopting best approach as opposed to second best approaches. Hope mine is a better one.


21st century macroeconomic policy framework

Subtract: The current financial and economic crises have exposed some of the deficiencies or inadequacy of the current macroeconomic policy tools in dealing with them. This paper proposes a new and third major macroeconomic tool to expand the existing macroeconomic instruments available at the authorities’ proposal. The new tool will be more potent in dealing with a major credit crisis such as the current one where the main conventional macroeconomic tools are ineffective.

We have been experiencing a great recession. The current one is more severe than any recessions since the Great Recession but not yet as severe as that one. However, at one stage the world main banking institutions nearly collapsed had the authorities not taken emergency rescue measures. So far it appears that the world has averted a very serious likelihood of another great depression. Aren’t we lucky!

Having said that, the world is far from out of the woods yet and is still in trouble of very serious financial and economic crises. World authorities, though having attempted various policy measures and used every policy tool at their disposal whether they were coordinated or not and conventional or not, are still pondering how to get the world out of the current world wide economic abyss. It seems there is still a long way before they are confident that they have got their policy prescriptions right and a real recovery as a result of those policies taken but not just hope is under way.

People would wonder what economists can do to aid the authorities in their difficult tasks. After all, is should be the economists task to provide theoretically sound and practically implementable policy frameworks for authorities to use to deal with any economic issues especially serious economic woes. Undoubtedly there have been various voices from economists since the outbreak of the current economic woe. It appears, however, there is a lack of a degree of consensus among economist that has been developed thus far.

I have not reviewed a comprehensively of how economists have proposed or prescribed to deal with the current crisis, I got a feeling that the main reasons lie probably in the following:

It is the tradition of economists to disagree among themselves and with others on issues;
They, as the authorities and other as a whole, have not got the “correct” solutions or prescriptions to the underlying problems;
Maybe some of them have got the “correct” ones, but their voice have not been dominant or accepted.

Irrespective which the causes are, it is still up to economists to demonstrate they can or have got the correct answers to the current problems. This article is an attempt of the author as an amateur economist to contribute to this task.

Current Keynesian macroeconomic policy framework
Although there are different macroeconomic policy frameworks available at present, the Keynesian framework is the one probably most authorities like to use in dealing with relatively serious economic downturns. Most economists may agree that the successes of the applications of the Keynesian framework have been a mixed one. For example, the rise of new classical economics as a result of the rational expectations revolution in the 1970s was a major response to the rather unsuccessful of the mainly Keynesian macroeconomic policies in the wake of the first oil shock.

Nevertheless, the Keynesian macroeconomic framework arose as a response by part of the economic profession to deal with serious economic downturns or recessions including possibly depressions. It appears it remains the dominant one, given that other frameworks are either providing no policy action prescriptions or even likely to be less effective, at least in the eyes of government authorities which have the task to either deal with or at least to portray to the public that they are doing something to deal with slowing or declining economies with rising unemployment.

From demonstrating policy approaches under the Keynesian macroeconomic theory, the framework of the IS-LM curves and the aggregate demand and supply curves become handy to do so. The IS-LM framework can show how the two main macroeconomic policy tools can be used to move the economy to its normal course when there is a downturn occurring. The aggregate demand and supply curves, on the other hand, provide a ‘general equilibrium’ approach to complete the whole picture of the economy from the macro point of view. It includes the supply side of the economy with labour market demand and supply and a production function of the economy assuming fixed current capital stocks. The supply side also provide a feedback to the demand side in terms of the price level, which in turn affects the demand side through real money supply, that is nominal money supply divided by the price level.

The IS-LM curves framework is shown in the figure 1. In the diagram, the vertical axis is interest rate and the horizontal one national output like GDP. The Keynesian theory goes like this. When there is an economic downturn, there is insufficient demand from the private sector resulting output to be below the desirable level or full employment level, such as Y0. The Keynesian policy prescription is to either increase government expenditures (fiscal policy) that will shift the IS curve to the right or up and lift the economy’s output (and the interest rate), or to increase money supply to shift the LM curve to the right or down to also lift the output (and reduce the interest rate), or a combination of the two to move both the output and the interest rate to the desirable levels.

Figure 1 The IS-LM diagram

Figure 2 shows the aggregate demand and supply diagram. The vertical axis shows the price level and the horizontal axis the output. The DD curves represent aggregate demand of the economy and the SS curve the aggregate supply. The expansionary fiscal or monetary policies discussed above are reflected by a shift in the aggregate demand curve from DD0 to DD1 with a resultant rise in the price level. This rise in price level will feed back into the IS-LM framework to decrease the real supply of money for given nominal supply and move the LM curve upwards or to the left. This in turn will cause the aggregate curve in the following diagram to move down or to the left, offsetting some of the effects of the original expansionary fiscal and monetary policies. However, it is not our intention to demonstrate this complex feedback effects here.

Figure 2 The aggregate demand and supply diagram

Limitations of the existing Keynesian macroeconomic framework
The above illustrations show a highly simplified version of Keynesian framework, but the essence of the framework is captured. It shows the essential nature of the Keynesian framework as a demand management of macroeconomic policies. It has not included how expectations of the economic agents in the economy are formed and how they could affect the framework. This can add into the picture of one of the ways that the supply side can come into play. However, adding realistic expectations only moderate the effectiveness of rather than negate completely the essence of the Keynesian approach. The rational expectations revolution added some new insights into how the economy might work, but offered few practical policy tools that government authorities can use in dealing with economic downturns.

The need to extend the Keynesian framework to deal with the current crises
Recognising current play of the Keynesian macroeconomic approaches, it is not too difficult to see another major area where those approaches are deficient in a theoretic perspective. While Keynesian theories would argue that monetary policy is ineffective when the interest rate approaches to or is zero and argue that only fiscal policy by increasing government expenditure will be effective in increase demand, it fails to recognise the scenario if and when the money market is in fact not working to such an extent that the aggregate demand becomes effectively vertical at a relatively very low level of economic activity and may even moving further to the left. The level of supply may be so low that it is practically not sufficient to simply increase government spending to remedy the prevailing economic problems. This, in my view, is likely to be the case in the current financial and economic crises.

Figures 3 and 4 are illustration of these crisis scenarios. Figure 3 shows that due to severe credit crunch resulting from the financial crisis, LM curve changed to LM1 and shifted to the left. This particular diagram presents a scenario that the LM becomes a mirror image of a L shape, comprising a vertical and horizontal segment, where interest rate is very low close to zero and the output is greatly dropped. Monetary policy becomes ineffective even the interest rate is very low. Fiscal policy can probably still result in some effects to certain degrees, but its effectiveness is limited either politically or runs into serious difficulties if the private sector investment and final consumptions decline too much.

Figure 3 Great recession and the IS-LM curves

Figure 4 shows the aggregate demand and supply curves corresponding to such severe credit crunch resulting from the financial crisis. Both curves changed and shifted to the left. The slope of the aggregate demand also curve became steeper. The aggregate supply curve becomes kinked with a horizontal segment and a steeper segment. The resultant result of such changes in the aggregate demand and supply is a flat or even lower price and a greatly lower output corresponding to that in the IS-LM diagram in figure 3.

Figure 4 Great recession and the aggregate demand and supply curves

A new macroeconomic tool
If this assumption is true, what can we do about it or what new policy tools do we need to deal with it more effectively? Given that the conventional macroeconomic tools have lost their potency, one has to look beyond the conventional methods. In effect, some of the world authorities have already attempted unconventional methods, such as the approach by the US Federal Reserves in the so called balance sheet manipulation. Recognising this, economists need to analyse whether those approaches are effective and whether they are the best macroeconomic policy approaches in the circumstances.

Based on these unconventional approaches, my current analysis is that there are serious deficiencies in those particular approaches. However, the balance sheet approach (or alternatively, direct quantitative interventions into financial institutions) can be modified or improved to overcome the current deficiencies and economists probably can formalise the essence of this approach with more effectiveness and minimised costs associated with it as a third main macroeconomic tool, along side the existing conventional fiscal and monetary policy tools. This should represent an extension or expansion of the Keynesian theories, because it still prescribes to the notion of government intervention – the main spirit of Keynesian, though in a different way.

How to implement the new tool?
How can we make this approach more effective and minimise its costs? Under the current US particular circumstances, one way is for the Reserves to provide most of the financial institutions with enough loans which would be able to effectively quarantine their troubled assets for a specified period. This will enable them to be in a position to restore providing credit flows to their appropriate levels and at the same time give enough them time and an opportunity to do whatever are necessary to sort out the problems with those troubled assets in an orderly fashion. By the end of the specified period, those financial institutions will have repaid back all their loans to the Reserves. The processes can be managed in such a way that the seemingly excess supply of money will not cause unwarranted inflation.

In a bank's balance sheet, the loans it owes to the Fed are liabilities and the troubled assets are still assets at their nominal value until part or the whole of the assets are sorted out, so they balance out with each other. This part of the balance sheet for these assets and liabilities is quarantined and allowed not to affect the bank’s normal banking businesses. On the other hand the loans it gets from the Fed represent healthy assets and will replace the troubled assets. In this way the bank’s balance sheet will be “healthy” for the duration of the specified period, so to speak.

In the Reserves balance sheet, the loans to the financial institutions are assets and the liabilities represent money supply. Although seemingly there can be a very large increase in money supply, this is offset by the prevailing contraction of the credit flows, so there is not necessarily pressure for inflation. As mentioned, the process can be managed to prevent inflation from occurring until all the increased money supply is recalled.

The loans from the Reserves to any financial institutions should be charged with an appropriate interest rate. The rate should be set in such a way that it will not be prohibitive to those institutions for them to return to some sort of “normality” with their lending businesses because that is the purpose of the policy, but at the same time represent a real cost, so it is not a free lunch and will deter financial institutions from thinking when there is a problem like this they will be bailed out by the authorities and they incur little costs.

With such loans charged with interests, the taxpayers will generally be better off directly and indirectly through benefiting from the resolution of an economic crisis, but will not be worse off even directly.

Concluding remarks
There is an urgent need for new major macroeconomic tools to complement the existing two main tools to successfully combat the current great recession and lift the world economy out of the ordeal. Direct quantitative interventions into major financial institutions to restore credit flows are likely to be such a tool. The best such interventions in the present circumstances seem to be loans from the monetary authority to the financial institutions with appropriate interest charges for a specified period. This will cause no or little to the taxpayers while resolving the crisis. Inflation can be prevented by prudent management of the processes.

Another show of the confused Treasurer trying to confuse the Australian public

This is a very short comment on the ABC news of “Australia dragged into recession: Swan” by North America correspondent Kim Landers, 25/04/2009 http://www.abc.net.au/news/stories/2009/04/25/2552602.htm?

The following first 5 paragraphes are from the report.

The report says that Treasurer Wayne Swan has emerged from G20 finance ministers' talks in Washington with no doubt that he is facing the most difficult economic environment in 75 years in which to frame next month's budget.

"There's no doubt there's a very sharp contraction to growth in Australia and we are certainly being dragged into recession by the global economy," he said.

"The Government has done everything humanly possible to cushion Australia from the impacts of this savage global recession."

"There wouldn't be a finance minister in that room who wouldn't swap places with Australia," he said.

Mr Lincoln's comments start from here.

Two points will make the point. First, has the government really “done everything humanly possible to cushion Australia from the impacts of this savage global recession”? One has to wonder. Just by thinking about the two large cash handouts from November done by he government, one will certainly conclude the Treasurer is either confused himself, or trying to confuse the public to conceal the government, especially his failure in fiscal policy. He either does not understand what the meaning of everything humanly possible or how to use fiscal policy to cushion Australia. He was spinning using a confused logic that what the government had done was the best among every humanly possible thing. How far is that from the truth? Mr Treasurer you need to learn some basic logic.

Second, is that true that “there wouldn't be a finance minister in that room who wouldn't swap places with Australia”? Did he just emerge from the G20? What do G20 include? One would think that they include China, India and the like, right? Then why would their finance ministers want to swap places with Australia? Did the Treasurer really mean they want to give up positive growth in turn for negative growth? To be fair to the Treasurer, he probably meant those finance ministers from the developed countries as opposed to all ministers in the room in the context. But certainly let's hope this is so.

Australia needs badly a competent Treasurer to be able to do the right things to successfully cushion the Australian economy from the impacts of this savage global recession. For the moment it appears that it unfortunately has neither.

We need additional macroeocnomic theory to combat the crisis

Comments on Michael Lind's commentary "Domestic disturbance", 24-5/04/2009, on http://www.businessspectator.com.au/bs.nsf/Article/Neglecting-domestic-duties-pd20090424-RE4TC?OpenDocument&src=sph

Whether it is two presidents in price, two Obamas, or one Obama in two situations, it reflects the sharp contrast between the degree of difficulties in handling the American foreign policy and its domestic economy at this particular time and in this unique situation. The unique situation has been that America was facing two disasters - one domestic financial and economic crisis, the other foreign policy crisis. The latter had probably been unprecedented. The former, however, was not as bad as the Great Depression, though very close to it. These two crisisses were very serious and their combination at the same time was unique.

In this particular unique case, whether there had been precedencies, however, is not an indication of the degree of the difficulties in resolving them. The American foreign predicament, though unprecedented, was relatively easy to remedy, the president only needed to do normal things in that area as most presidents could have done, and that is just what he has done. The task itself does not need to be innovative and is relatively easy, so to speak.

To resolve its domestic financial and economic crisis, on the other hand, is very different and not so easy. It will require some innovation and new approaches to achieve. This is because that there are some seemingly unprecedented policy vacuum areas in this case, although there has been the Great Depression as a precedent and we had some well established macroeconomic policy tools like fiscal and monetary policy instruments that were not available during the Great Depression. These main macroeconomic policy tools have often been adopted by government to increase the aggregate demand when demand from the private sector fell short and their success has been a mix. When they were mostly successful, the causes of the problems were correctly diagnosed and the policy tools correctly applied to the situation. When they were unsuccessful, either one of them or both went wrong.

The current crisis originated from the realisation of problems of sub-prime mortgages, worsened by declining housing and equity markets. That was further exacerbated by high leverages of most financial institutions and also assisted by the close international connectedness of most large financial institutions. All those caused the collapse in confidence. The realisation of financial losses, especially under the mark to market accounting standard, the need to de-leverage and recapitalise and a move to risk aversion resulted in a severe credit crunch not only in the US but also internationally. The collapse of some large financial institutions further worsened the case.

The two main conventional macroeconomic policy tools, namely fiscal and monetary policies can be effective to boost the aggregate demand to a degree when addressing a shortfall in the private demand in what I would call is relatively conventional demand deficiencies. The current crisis, however, has some unconventional features in that many financial institutions simultaneously require very large amount of capital injection and some of them may have been insolvent.

This is where the degree of the difficulties in dealing with it rises. Fiscal policy can only reach a certain degree in boost demand due to inevitable constraints. Monetary policy can only be effective when the interest rate is positive and the authority can further reduce it to lower financial costs. Both were probably implemented to their maximum degree. After that point, the authorities began to apply some what they call non-conventional policy methods. This is innovation mostly on the Federal Reserve’s part under its chairman who is an expert in studying the Great Depression and has been willing to try new approaches, although other authority figures may be tied too much with either conventional approaches or failed practices. This should be commended. But so far it appears that they have been met with a mixed success at the best and there could be very high costs due to these policies and methods.

There is a need to apply more non-conventional and effective approaches. It also needs to be applied in a manner to minimise the costs to the point which are unavoidable. This requires an extension or expansion of the Keynesian theory and approaches. We are eagerly waiting for this to emerge, but it should not be too long to come. 26/04/2009, 0:35 am.


Strategic gaming by Australian government - good or bad?

This blog will discuss potential strategic gaming by governments in relation to investment and trade. This issue arose from reading an article on KGB's Business Spectator, asking for the Australian government to price out the Chinalco bid to invest in Rio Tinto.

It seems that author seemed to understand more about Rio's business its own management team. He was concerned that the management is going to sell its assets short. Unable to influence the management, he attempted to influence the government.

It might appear to be legitimate concerns and a reasonable approach, if one assumes the game is going to be played only once and only Australian government has the choices to move, other governments are assumed to not react irrespective what the Australian government does.

However, assumptions are just assumptions. Sometimes they cannot be farther away from the truth. Anyone with some knowledge of game theories would understand that the above assumptions are very simplistic, unpractical and cannot be applied to real businesses.

If more realistic assumptions are made in the context of Australia - China relations and the international mining sector, one would certainly wonder why the Australian government would want to engage strategic gaming in relation to such investments. One has to consider carefully the potential possible options each government has, any first move, counter moves and continuous plays. Were it to start, there could be many rounds of plays and the outcomes for each side are very hard to predict.

Australia is a middle power internationally as it often self claimed. Its influence in the international arena is noticeable but fairly limited if one to be realistic. It is located in the Asia Pacific region and naturally wants to develop deep relationships with the Asia region where some of our important trading partners lie.

China is an emerging power with a rapidly growing economy now ranked third in the world. It will probably not be too long for it to replace Japan to become the second. Some forecast that China will become the largest economy before the middle of the century.

China would probably regard Australia highly. The main reasons include:
· The two countries are very complementary with each other economically;
a) Australia, an industrialised country with expensive labour costs, is rich in mineral and agricultural resources;
b) China, an industrialising and emerging economy with a huge need for resources, has abundant cheap labour supply, but lack of natural resources in per capita terms;
c) Compared to some other big resources rich countries, Australia is closer to China geographically;
d) Australia does not have too overly discriminative trade barriers for China, as some other larger industrialised countries do.
· As a result, the two sides are more likely to be partners rather than competitors or foes;
a) Australia needs external markets for its rich mineral and agricultural products;
b) China needs reliable and stable supplies of natural resources and needs friendly external markets for its labour intensive goods and services; and
c) Australia will benefit from cheap imports.
· Looking from international geopolitical point of view, there appears to be a need for China to have a close friend that is also the friend of the US – the world sole superpower, so when important matters can’t be more effectively be dealt with between China and the US, the mutual friend of both sides can play an intermediate role to facilitate achieving a better resolution of issues;
a) Australia is a strong US ally and is realistically pragmatic in dealing with China,
b) It is highly unlikely that the Australia and China will clash over extremely important strategic issues largely because of the larger international context, mutual needs and geographical locations.

Australia is likely to continue its strong engagement with Asia, including China to gorge stronger relations with them. After all, as Garnaut’s (1989/90?) book indicates, Asia is in the ascendance. It has been occurring for some time already. The 21st century is likely to be dominated by dramatic shifts between continental heavy weights with lasting implications for the whole world.
Before engaging in governmental strategic gaming, perhaps all sides will have and need to carefully ponder strategic thinking first. If we ask for transparency by the Chinese government on important issues, such as military spending, we ourselves will need to be transparent on important issues as well. Trade, investment and commercial considerations are likely to be more dominant issues in the heads of Australian and Chinese governments. Whether it is established on mutual trust or mutual deterrence, some transparency will be needed and equilibrium to be reached. It will be in our own interest to do our homework well and first before making strategic gaming moves.

Money supply and price level - the role of speed and its change

The first part is orignial comments on the article China’s economy: now the bad news, on http://www.eastasiaforum.org/ April 23rd, 2009, by Yiping Huang, Peking University and Australian National University. It should appear in association with the article on that website after moderation. See below.

Yiping's article attempts to demonstrate that 8% growth of the Chinese economy this year, though seeming a bit on the optimistic side to many, is more likely achievable than not. If it does as hoped, it will be good for the recovery of the global economy in general and a blessing to the Australian economy in particular given China is Australia's top trading partner and has underpinned the mining boom of the more recent years.

A point in the article touches the likely trend of price levels. The author argued that the key macroeconomic problem, deflation, is likely to exacerbate, contrary to many economists concerns about a potential inflation problem as a result of recent dramatic expansion of monetary base. It argues that the pessimistic view of the inflation issue would be right if the normal money supply mechanism works as usual, but it isn’t at the moment – though the quantity of money base increased, the speed of its circulation declined. So a different equation is at work now. He also argues that the rising output gap will have a downward pressure on price.

This, however, raises an important issue in managing the price level in the coming months and perhaps a couple of years. While the slowing in the speed of money circulation now may work may relieve the authority from worrying about inflation for now, the pressure is likely to be greater if and when the speed of circulation picks up and returns to its normal course sometime in the future. The difficult to predict the precise timing and its exact course will increase the pressure for the authority to do a finer job in fine-tuning monetary policy, especially given the unprecedented nature of the scale of global including China’s monetary expansion. A truly difficult and real test, but perhaps not necessarily impossible to overcome. Let’s hope so.

These part(s) has been added on later on.
The speed in which money circulates in an economy is one of the factors that affect the price level. Some other important factors include: the money base, the relationships between the money base and other money supply measures, reserve capital requirement and more recently accounting methods. The recent depressional financial crisis, though likely to differ in magnitudes to other earlier financial crisis, had its course in a sudden and dramatic reduction in credit flows, most likely to be associated with a change in risk premiums and a desire to increase own capital by financial institutions and reduce credit exposures. If and when such behaviours occur, the money supply in terms of the base money normally has not changed, but there are likely to be credit crunching, causing difficulties for both businesses and consumers to access finance and/or refinance. This slows demand and reduces output, businesses are closing down and laying off employees. The economy slows down or even may decline.It is noted that a financial crisis can be caused by a variety of reasons, as history has shown. Changes in some markets like housing, equity, national reserves etc can do some damage. A sudden realisation of real risks and or an increase in perceived risks can cause panic. Speculations may cause or facilitate a change in some market conditions.

Lincoln's longer profile

I am an amateur economist, now with a keen interest in public policy as a result of the current quasi depressional recession.

I am married, having a beautiful wife and a proud daughter who is a medical doctor - a real doctor, unlike me with only a name and unable to diagnose and treat diseases.

I live in Canberra, the Capital city of Australia. Approximately 250 km to the north east you can get to Sydney – the largest Australian city by population and 630 km south west you may reach Melbourne - the second largest city in Australia. It has clear seasons, with generally dry but fine weathers all year round.

I love Canberra as a place to live. It is a well designed city with a number of town centres. In its centre lies Lake Burley Griffin, with small mountains or hills dividing the town centres and part of the Great Dividing Ranges in sight not far away. In a little over a hundred km to the east you can get to ocean beaches. To its south, lies Mount Kosciuszko where you can find the peak of Australia’s highest mountain. The mountain together with surrounding ones are the places of Australia’s main skiing resorts. Yes Canberra is small by international standards with a population of over 300,ooo, and fairly quiet - you won’t be disturbed a lot of noises associated with many large cities. Traffic is generally not too bad and you can get easily around, although peak times jamming is increasing. It is an excellent place for study if it happens to be your pursuit of the time.

Australia is the world largest island and dry continent. The lack of rains means frequent droughts. Its dryness and high temperature during some warmer months are the main causes of bushfires, sometimes with devastating consequences. I am not a scientist by any imagination, but I think water and fire are two of the most pressing long term issues for Australia. If they can be brought under control, Australia will be a much better place and should be able to sustain a much larger population.

I was born in central China and lived for many years in northern China. It is a beautiful country with a great nation, rich culture and long history. There, naturally, you can find world highest mountains and regions and some of the longest and biggest rivers. The Great Walls, built over two thousands years and conversing tens of thousands kilometres, some restored to its past glory and some lying in ruins, compliment natural wonders to present beautiful and wonderful pictures.

I studied in North East University (BEng), Beijing University of Science and Techonology (MEng), the Australian National University (PhDEco).


Another example of poor polciy by government

The ABC reported that the government is to spend $10 million on building a war trail to commemorate the Australians who fought and died along the Western Front in northern France, announced by Veterans Affairs Minister Allan Griffin.

In normal times, this should be a very good thing and a commendable act. However, with no disrespect to the heroic forebears who made great sacrifices and fought on behalf of the country, it could be argued that it is not the appropriate time now to spend more money now with little benefit to the economy. To be fair to the government, this is a down graded alternative to the former government's $35 million plan to build a memorial at the battlefield of Villers-Bretonneux.

Everyone knows that we are currently at an extremely tough time economically, experiencing a global financial and economic crisis and a possibly severe domestic recession. Unemployment is rising sharply. The government, after a long period of denial, has now finally acknowledged that Australia is likely to experience a recession when it virtually does not have any other choices other than to do so. The IMF has just released its most recent update of the world economy and forecast the Australian economy will shrink by 1.4% this year, with unemployment rising to 6.8% by end of this year and 7.8% next year. A lot of families are already struggling to make ends meet now and the news means that more are expected to fall into this category in the coming year.

The government and the Treasurer have been talking up the prospect of an inevitable big budget deficit in the may budget to be out soon. The PM, the Treasurer and the Finance Minister have been arguing the need for making tough decisions over priorities and the need for further fiscal stimulus on top of the two packages in last November and more recently. People would have rightly taken the message to mean reprioritising, to spend more in areas that can boost stimulate the economy and limit the rise of unemployment, such as education and training, and appropriate infrastructure works that can enhance skills and future productivity. Where non-urgent and lower priority spendings can be saved or reduced, do it now, or if some spendings can be postponed to some time in the future, do it later. This is common sense. But the public has unfortunately been badly mistaken.

Tens of billions cash has been handed out, most of which have been or will be saved rather than being spent with little impact on demand to boost the economy, contrary to the government's wishful thinking, though not to its hidden agenda to bribe votes with an eye for the next election. The sad of the matter is that the government's first cash handouts in last November had been proven before it made the second stimulus package that contained another big component of cash handouts, effectively a repeat of its failed policy. Further, after a much delayed and an unsuccessful bidding process for its electoral promise to building a national broadband network (NBN) of around $10 billion, the government hastily announced a new initiative with a sky rocketing increase in the costs to over $40 billion to build a NBN of optical fibber to homes (as opposed to the original fibber to nodes), in the name of higher speed. This has occurred against the background of a declining economy, rising unemployment, a budget falling from respectful surplus to an ever increasing deficit to be filled up by borrowing and debt.

The minister stated that it is particularly important to act now as Australia moves towards the centenary of its involvement in the war, and the international focus that will occur in the years ahead. But Mr Minister, while it is not wrong to say this, how many years will be until the centenary? Do we really run out of time to build it before that? Can't we build it later after our economy has returned to its normal growth and unemployment is reduced rather than rising? Or, will this stop businesses from closing and save jobs? Has the government got its priority right? It is high time for the government to wake up, and wake quickly and do some sobering thinking and reflection. While the current global economic crisis is not Australia’s or the government’s doing, one has to wonder why Labour federal government is most likely to create more debt for the nation. The government will need to change course to better manage the economy and national affairs to enhance rather than diminish the nation’s welfare with an unnecessarily large burden of debt for future taxpayers. Please don't make avoidable mistakes such as this one.