Sunday, November 16, 2008

Transferring assets to taxpayers may not be all that bad!

I have been pondering the dynamics of the financial crisis and how it will change our world forever.
It is indeed ironic to ponder that the country which has caused this crisis, the USA, is considered to be the doyen of capitalism and the country which appears to be the best placed to weather the storm is the former "communist" state of China. China has been able to put itself in this position only because of its adoption of 'capitalist' and 'free market' behaviour.
We are seeing the injection of huge amounts of government funds into the banking systems to restore liquidity and keep businesses moving.In many cases the governments of these countries will end up owning these assets.
In addition we are seeing 'bail-outs' of companies in the private sector.
There will be an enormous transfer of assets from the private sector to the public sector.
Its not that this has ever happened before and its not there wont be benefits to the taxpayers.
In the 1980's there was a banking crisis in Scandinavia which affected the economies of Norway,Finland and Sweden. The governments responded by essentially taking over the banking systems. In recent years, before the financial crisis, my understanding is that the governments of these countries have started selling down their interests again and recovering their investments.
What we need to remember is that the government's assets are owned by the taxpayers of that country. So it is possible that the acquiring of these assets could be a good investment for the taxpayer.
Firstly by the taxpayer buying certain assets they may avoid further collapse of their economy and reduce their pain.
Secondly in due course the assets will most likely recover their value as the chaos dissolves and then produce a profit for their owners, the taxpayers.

Lets ponder ABC Learning Centres locally. The Australian Government has propped them up while the administrators are assessing their options. It is unlikely the Government will have to bail them out further because child care centres are usually profitable little beasts and it is hard to meet the demand for child care. But lets say it did acquire them on favorable terms presently.
The Government would simply need to hold onto them long enough for private equity to become interested again .
Its not a dissimilar exercise to the privatising of the Commonwealth Bank some years ago. Based on profits over quite a few years the market would place a value on it and offer shares again to investors.

The bigger problem is with industries that will really need to go through a restructuring. One good example is the car industry in the US. There will be huge costs for the US Government in propping this industry up. There will also be a huge cost in not propping it up---unemployment,decimation of particular communities and other flow-on effects through the economy as dealers struggle and advertising revenues are slashed etc.

To work out which way we should go we have economists. But we will find that they be divided and in the end politicians will have to decide. Oh dearie me! That is a daunting prospect!

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