from the hip

Denmark has been hit very hard by the international recession. Private consumption has dropped rapidly. Car sales are hit especially hard. The Danish newspaper Politiken writes:

Car sales are generally a good indicator of whether people are hanging on to their money; In the fourth quarter of 2008 car sales dropped no less than 23.8 percent. Other goods dropped 1.1 percent.
The new figures come the day after new unemployment figures showed an increase for the fourth month in a row. January jobless figures showed an increase of 5,000 with unemployment now at 2.3 percent.

The Danish GDP for the year 2008 as a whole is negative. And, as yet, there a few signs that the drop in the Danish economy is declining.

The Scandinavian countries are known all over the world for their welfare states. The Scandinavian countries have provided their citizens with low priced kindergartens, free education, great universal care programs, social security, care for the elderly, and much more.

But the current international crisis challenges the welfare states of the Scandinavian countries as well. The Danes have now started discussing the future of the Danish welfare state. Danish newspaper Politiken writes:

The prospects for the Danish economy are so bleak that reforms are needed if the country is to avoid cutbacks in schools, elderly care and other public services according to Minister of Taxation Kristian Jensen (Lib).

“With the current state of the economy there are two choices for the future – either less welfare or extensive reforms. The economy is not sustainable in the long run with the reforms and agreements that we have introduced to date,” says Kristan Jensen.

The Danish government is planning to enact a tax reform that will increase the already very high taxes in Denmark substantially. However, the secretary of Finance does not think even this will be sufficient in the currently difficult situation:

“The first step is that we carry through a hopefully ambitious tax reform this spring – and then, when that has been enacted, we must see what the status is. But my view is that a tax reform is not the only tool needed to move forward,” says Kristian Jensen.

The question now is: Will the welfare state of Denmark as we know it surivive? And: Which is the next Scandinavian country to reform its welfare state? My guess is Sweden!

Citibank (or Citigroup Inc.) is in trouble. Over the last year, its stock price has dropped from above 30 dollars to less than 4 dollars (3.77 at the close of NYSE today). Its value has been in free fall the the whole week, despite attempts by the bank to shore up it stock prices by asserting its value. Times writes:

Citigroup was the world’s biggest bank until February, when it was overtaken by the Industrial and Commercial Bank of China. Citigroup is now only the fifth-biggest in America, after falling behind US Bancorp, a Midwestern commercial bank, this week. Bank of America is the largest bank in the United States.

By now, this kind of rapid decline in value is a story we have seen before. We saw it with Lehman Brothers. We’re seeing it with GM and Chrysler. And others. in fact, in quite a few other cases.

And now the question is: Should government bail out Citibank or let it slide? The proponents of a rescue operation say that Citibank it too big, one can not let it fall. And they point out that if Citibank goes, the banking system will fall. And we have heard all those arguments before. We have, in fact, heard them every time there is a government bailout. As well, we have heard them repeated over and over by lobbyists for all those industries allegedly needing a bailout. (Just so that it is said, I have nothing against Citigroup, nor do I own or have traded its stock. And the argument I am trying to make is more general and applied to a large number of corporations, and not only to Citibank.)

But does that make the statement true? I think not. First, there is a difference between a bank and a system of banks. Letting a bank fail (Citibank has a positive cash flow, so it may not fall, but that’s not the point here) may actually strengthen the system of banks, as the bankruptcy process will weed out the gold from the dirt and clean the system of debris. As well, three Detroit car manufacturers, unable to cope with competition and having lost marked shares for 20 years, do not constitute the car industry – not in the world, not in America.

All those attempts to equate individual members of industries with the industries themselves are seeking to establish false identities between entities that simply are not identical.

The real question, to my mind is: If this depression is as deep as or deeper than the crisis in 1929, does the American government – or any government for that matter – really have the resources it takes to bail out every business deemed to be strategically important over the duration of this crisis? I think not. Not if government is also to continue to attend to its (their) core business – to provide regulation, defense, social services, health care, and all those other businesses.

This, I think, is likely to be the right perspective in which to view government intervention at this stage. And, if I am right, shelling out huge sums on failing businesses may reduce the ability to act in the future, possibly for greater benefits and facing even tougher challenges. And maybe, just maybe, the crisis is as much a political crisis – involving politicians and regulators in panic, deepening the crisis with every move they make – as a financial and banking crisis.

I started writing about the credit crisis in the US and the possible international consequences of that crisis a long time ago. But writing about it gave me a strange feeling. Obviously I was writing about something that interested just a very few. And, equally clear was the feeling that I was writing about something nobody really wanted to hear about. Also, I strongly felt back then, something which major actors in the financial world as well as governments and central banks were more or less in denial about.

I am not happy to have been right. I am not happy that this crisis so far has turned out to be every bit as serious as I and a relatively small number of other people wrote back then. On the contrary, it is sad. Of course.

Today I feel that perhaps it is that unwillingness to see, to listen, to take the right measures at the right time, that has turned what was once a credit crisis in the US, originating in flawed valuation of the so called sub-prime mortgages, into the wild international beast we today speak of as the international financial crisis. Today governments all over the world fight against this crisis. And we have seen, I should think, that the crisis is not due to the price of oil, and that it cannot be solved by interest rate cuts. And a large number of financial institutions, from Lehmann to the Royal Bank of Scotland, have fallen victim to the crisis. At first there was no response. Then there was too little too late, as the Dainish Bank, for instance, noted. And now it is pure panic.

But now the fight is very much an uphill battle. Much time has been lost. And in this case lost time translates into lost confidence. That confidence must, of course, be restored. But it will take time. And even when the confidence in the international financial system has been restored, the battle will not have been won. There will also be serious shake outs in many sectors of the economy, will large companies failing and new winners emerging. And the global recession we are facing will not be over until consumers start increasing their spending again.

I fear they will not do so for quite some time.

See also:

• Financial Times: The week that panic stalked the markets
• Wall Street Journal: EU Writes Menu of Options
• Financial Times: UK to inject £39bn into banks
• Politiken: IMF frygter finansiel nedsmeltning
• Politiken: Eurolande klar med finansiel redningsplan
• Times: Royal Bank of Scotland under state control
• Guardian: Europe follows Brown plan for survival as EU bank bail-out plan is agreed
• Dagbladet: Europeiske land vil samkjøre krisepakker