Can government(s) solve the global financial crisis?

A common assumption is that if there is market failure, as there has been in the global financial markets, government must step in and sort things out. This overlooks the risk of government failure.

A great deal of hope is being pinned on the forthcoming G-20 summit in London but will it amount to anything more than warm words or photo opportunities? The predecessor G7/G8 summit did not have a very distinguished record of achieving anything, other than perhaps in the 1970s.

Now we have a G-20 which may represent a trade off of legitimacy for effectiveness. The Foreign Office has recognised the realities of the situation by creating a list of A list and B list countries which to their chagrin has leaked out. Australia is on the B list which will go down well there where they understandably dislike being patronised by poms. Australia has moved a long way from the 'stone age diplomacy' it was accused of in the 1970s.

Getting anything meaningful out of a G-20 discussion is going to be very hard, particularly given that some countries such as Germany are reluctant to provide a further fiscal stimulus. Meanwhile government debt piles up with no discernible effect on the economy. Of course, traction takes time but there has been a massive failure of confidence in the financial markets.

Meanwhile, the UK government has been plagued by initiativitis, often badly coordinated with tensions within the Government and between the Government and the Bank of England coming to the surface. One response has been to beef up the Treasury press office which was used to being busy just twice a year for the main budgetary events. At least Alastair Darling seems to have realised that the cupboard is so bare that he cannot afford more ineffective tax cuts.

The latest idea from Peter Mandelson is that if you get a car that is nine years or more old recycled you will be able to claim a £2,000 credit that can be used to purchase a new or nearly new car. Bingo! It's green and it stimulates the car industry.

But wait a minute. How many people with nine year old cars can afford a new one? And what about the taxpayers who have slightly older cars and don't benefit from this handout? I have to declare a personal interest here as my car is seven years old. But I am going to look at a replacement next week and provide my own stimulus to the economy.

At the end of the day it's going to come down to individuals and their confidence in the economy rather than government gimmicks and declarations from the G-20. That confidence is not going to be easy to restore. David Cameron is going to inherit a poisoned chalice and is going to have to make some very tough decisions.

I don't envy him his task and it will be interesting to see how the new influx of Conservative MPs is likely to shape up such as Chris White who is odds on to win Warwick and Leamington. Chris, of course, has motor industry experience and getting that industry going again will be one of the biggest challenges.

The harsh fact is that there is overcapacity in the industry. General Motors have been going round with their begging bowl threatening to close plants and playing one European government off against another. It's all very reminiscent of the game that Chrysler played in the 1970s, allowing them to walk away with a large pile of public money, leaving a business that was far from viable. Whether we learn from past mistakes is open to question.

The force of the regulatory state

The man from Transco knocked a large hole in the wall of my recently upgraded basement this week. I was very pleased that he did because he discovered that our mains gas regulator dated back to the introduction of natural gas in the late 1960s (gas used to be manufcatured from coke) and the switch was incorrectly positioned.

However, what really amused me was his comment as he surveyed the debris: 'You'll be right with the regulator now.' The regulatory state does indeed penetrate our own homes.

Lib Dems go in for gaming

Following Nick Clegg's speech at Harrogate which at least seems to have enthused his own activists (but was the pale blue tie a subliminal message?) unconfirmed reports suggest that they may use game theory should they hold the balance of power after the next election: Gaming

There are those who would argue (e.g., Colin Hay) that such rational choice approaches have undermined the democratic process by calling into question the role of political decision-making. Should that be the case, the adoption of game theory fits ill with the commitment of the Lib Dems to reinvigorate democracy.

Which game will they use? The chicken game? Or perhaps they would be better off cutting a pack of cards or rolling a dice?

The global financial crisis

While I have been away from Britain, the news seems to have been getting worse and worse. Australian television referred to the meeting between Brown and Obama as one involving the heads of two of the world's weakest economies.

Obama has had to throw good money after bad to bail out AIG yet again and prevent systemic failure of the financial system. General Motors has the begging bowl out again and one has to ask whether taxpayers' money has to be used to prop up any failing company, at least without a major restructuring. There are employment consequences, of course, but there are also opportunity costs.

At one time there was some hope that the acquired assets could be nurtured back to health and taxpayer funds recovered. This now looks much less likely. At some point politicians will have to be honest with voters: public services will have to be cut and taxes will have to go up. This is going to be a long and deep recession with painful consequences.

More from Beaudesert

Brisbane: Australia has some sophisticated politicians and some good ideas. After all, that's why I'm here, to do some policy learning. But you wouldn't think it if you were following the campiagn in Beaudesert.

#1: Warwick Capper's short political career is at an end and he can return to Surfers Paradise. Having undertaken to launch his campaign with placard waving bikini clad girls, he failed to file his nomination papers. Add a 'r' to his name and it would be a good pseudonym for a student writing in the Warwick Boar.

#2: The seat is currently held by the LNP although the incumbent is not standing again. The LNP candidate was arrested and fined for storming the set of Big Brother apparently to promote his rock band. I know the federal environment minister is an old rocker who still does the occasional gig for a good cause but ...

#3: Pauline Hanson has already had a go at free trade. Immigrants next? Of course, there's always a market for nativist populism, even more so in a recession. In vox pops, some voters praise her for her honesty. So accepting Australia as a multi-cultural society is not honest?

At least it's a distraction from increasingly grim financial news.

Quantitative easing

If reports in The Australian are to be believed, the Bank of England is poised to introduce quantitative easing. Electronically created money will be transferred to the accounts of banks to buy up bonds.

Against the background of ever more gloomy financial news, not least bad results from HSBC, this is the last shot in the locker. It effectively undermines the authority of the Monetary Policy Committee which in many ways has been the central economic-policy making institution since 1997.

Is this the end of depoliticisation as a fashionable academic concept? Those who would defend its value would point to its cyclical character. The preferred default position for a capitalist system is an automatic decision rule not tainted by poltical intervention.

Brown features in Queensland poll

Brisbane: With the Queensland state election now under way, voters watching television this evening were confronted with the grim visage of Gordon Brown in an election advert. For reasons best known to himself, the LNP opposition leader seems to be in denial about the fact that there is a recession. His words of repudiation were juxtaposed with those of the British prime minister and President Obama.

At least the election is providing a little light relief. Former fish and chip shop owner Pauline Hanson at one time led the populist One Nation Party. She then went on to found Pauline's United Australia Party. This could start a fashion: Dave's Conservative Party or Nick's Liberal Democrats.

Now she is standing as an independent in an electorate south of Brisbane. Confronted with old allegations about the misuse of election funds, she had an impressive temper tantrum on television.

One of her opponents is a former rugby player who is being backed by a mens' magazine and has free false teeth as part of his platform. Read more here: Beaudesert

And we thought that Lembit Opik had a few kangaroos loose in the top paddock!