News & Analysis
Russia Takes the 'Monetary' Road Less Travelled
Russia signaled a change in its policies to fight the financial crisis on Wednesday, indicating that it would switch from bailing out individual companies to supporting the economy through the banking sector. Moscow also plans huge budget cuts in an attempt to limit its fiscal deficit – rejecting pressure to follow the US and other western countries to try to stimulate the economy with a big boost in public borrowing. The proposals suggest that Moscow is losing hope it can stave off the crisis with public spending and is instead battening down the hatches for what might be a prolonged recession. The plans also indicate that the authorities are not giving in to public demands for a quick-fix response and are ready to resist pressure for money from cash-strapped oligarchs. – Financial Times
Dominant Social Theme: Bad Russians, bad!
Free-Market Analysis: OK, we know how hideous the Russians are. Vladimir Putin has been nationalizing everything in sight, and what he doesn't nationalize the KGB (or whatever it is called now) beats into a pulp, especially reporters. But nonetheless, the above article excerpt makes some interesting points as to how Russia is dealing with the financial crisis versus the West.
Bear in mind, it is the opinion of this report that central banking over-printing of money distorted Western economies over many years and caused secondary and then primary bubbles, including the latest which is the biggest of all. Now, Western bankers are trying desperately to re-inflate the bubble, which is problematic at best, and are even giving money directly to banks and other business to keep them afloat.
The policies of re-inflation being followed by the West will only prolong the crisis. First of all, you have to let deflation happen. The bubble has burst and deflation actually allows more money to be spread around the economy because lower prices give people more discretionary income. Second, you have to give people tax cuts so that they can keep more of their money and put it to good use. Third, you have to stop monetization by central banks, which is only going to cause inflation down the road and while you are at it, you have to stop the bailouts of industries that are ready to fail. Finally, you have to reduce regulation which is killing business and generally reduce government oversight, with its costs, ineffectiveness and general intrusiveness.
Western governments, as we have indicated, America in particular, seem to be following an alternative course. Bailouts are supporting businesses that need to close, including especially the banking sector – America and likely the entire West is greatly "overbanked." Central banks need to stop fighting deflation, need to stop providing rebates in the guise of tax relief and need to stop the secretive monetization of the currently deflating bubble in the hopes of blowing it back up again.
The West's program is all about putting money into the hands of the powers that be – who will attempt to continue business as usual. The free-market anti-bubble approach puts money in the hands of individuals who can then exercise individual human action to create new businesses that are necessary.
So what does all this have to do with Russia? Given the reporting of this article, it would seem that Russia, inadvertently or not, is leaning towards more free-market stimuli than the West. Oh, the irony! The reporting we've excerpted gives us a taste. Russia is going to cut government spending, reduce government bailout attempts and cease to borrow in an attempt to reflate the economy. They are bracing for a "prolonged recession." Good on ‘em!
Of course, we can't help but note the Financial Times has reported on all this in a slightly disapproving tone – as if the Russian approach is unorthodox and even defeatist. But these approaches are actually classical liberal, so far as they go, and if the Financial Times is to be believed, they are both broad and comprehensive. Here is some more from the article:
Russia's planned policy change was revealed by Igor Shuvalov, the first deputy prime minister, who said the government was deliberately choosing to allow gross domestic product growth to fall to zero or below in 2009 to stabilize the economy and maintain foreign exchange reserves. Moscow was rejecting the advice of those economists who had suggested using the reserves to finance a budget deficit of 10 per cent of GDP to promote growth, Mr. Shuvalov told investors at a closed-door meeting in Moscow. According to those present, the deputy prime minister also said the state would invest "several percentage points of GDP" in strengthening the banking sector, covering "possible future losses" and supervising a consolidation plan that would see the number of banks cut from 1,100 to 500.
We have pointed out several times that one of the tragedies of the fall of the Soviet Union was the rush of Harvard-trained graduates to that injured titan to advise on the creation of a modern welfare state with an aggressive central bank and a federal regulatory structure – the trappings of neo-conservatism that have proved a costly failure throughout the West. They worked no better in Russia – and engendered a good deal of antipathy as well. Now that country seems to be shaking off at least some of the most doctrinaire of its Western economic approaches.
Yes, if the Times article is to be believed, Russia's leaders are seemingly taking a classical liberal approach. The above excerpt informs us that in addition to cutting government costs, Russia's leaders are prepared to let their economic bubble deflate further and that the overbanking that afflicts the West will be reduced by nearly two-thirds. This will take place even as Russian leaders refuse to float more debt to re-inflate the economy. So what does this leave Russia with? Less national debt, fewer banks, and an economy likely free of much of the distortive effects of central banking inflation. Contrast this to the approach of the West, especially of Britain and America, which is focused around increased regulation, Keynesian monetary stimulus, stealth taxation and a generalized attempt to reflate by supporting failed businesses and industrial policies.
Conclusion: Are we alone in pointing out the irony of what is occurring? Well, probably. Convinced as we are of the efficacy of "human action," it galls us slightly that we have to read about the Russian approach to the crisis in the Financial Times – disapproving tone and all. In fact, reading between the lines, there are hints that the IMF, too, disapproves of the kinds of actions that Russia is taking. We know, in fact, what the IMF would demand: higher taxes, and increased regulatory interference so that banks behave "responsibly." Maybe the IMF should take a closer look at what Russia plans to do – and with an open mind.