How will the meltdown affect development?

December 30, 2008

Complexity Economics and Evolution – a Truly Big Idea

December 30, 2008

How much is $700bn?

December 30, 2008
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The arguments for a bailout to avoid systemic collapse are of course genuine and persuasive, but so are the arguments for aid and against standing by and allowing a child to die every 3 seconds, or a woman to die in childbirth every minute. To put the proposed Wall Street bailout into perspective. $700bn:

· Would clear the accumulated debt of the 49 poorest countries in the world ($375bn) twice over
· Is almost 5 times the annual amount of extra aid needed to achieve all the Millennium Development Goals on poverty, health, education etc ($150bn a year)
· Is about 7 years of current global aid levels ($104bn in 2007)
· Is enough to eradicate all world poverty for over two years (UNDP  calculates it would take $300bn to get the entire world population over the $1 a day poverty line).

On the other hand it’s
· only a quarter of the cost of the Iraq war ($3 trillion on Joseph Stiglitz’ calculation )
· a half of annual global military spending ($1339 bn)

Priorities, priorities

10 comments

  1. It’s a good point, Duncan, and the figures you’ve presented here illustrate it powerfully. I’m finding your blog to be a very interesting and stimulating read.

  2. The difference is that the $700bn doesn’t actually involve spending the money (it’s about guaranteeing debts, which are ultimately secured on real, productive assets).

    For the collapse to actually cost $700bn, all the assets backing the debts would have to be worthless (i.e. all house prices fall to zero, all private-equity owned non-financial-services companies are liquidated with no net assets, etc.), whereas to the aid, poverty relief and debt relief would actually involve paying real money upfront.

    (this makes the military budgets even more shocking – that *is* real money which really *has* been spent…)

  3. Duncan- The perspective you offer is chilling. I plan to share this post with colleagues with whom I work with at a public library serving a small town in Ohio, United States.
    Introducing a global perspective in such a setting is challenging. I find the greatest challenge to be introducing a global perspective to the youth of this community. In addition to a lack of awareness, there is a lack of interest, which is deeply saddening.

    john b-
    would you be willing to explain the concepts of guaranteeing debt and assets backing debt? Or direct me to a source which explains these concepts in very basic terms? Please pardon my naivete- but I would like to grasp these concepts- and share with friends and colleagues who are also confused. Thank you.

  4. I agree that real money spent on military budgets and the like could better be channeled in things like debt relief. What I’d like to see more of is helping those in need to help themselves, eventually becoming more self-sufficient through sustainable industries (including eco tourism) they create and maintain.

  5. Very simply: guaranteeing debt means that if the person who actually owes the debt can’t pay it back (i.e they’re bankrupt), then the person who’s guaranteeing the debt is liable to pay it back instead. This often happens on a micro scale for parents of, say, kids who’re university students – they may agree to guarantee the rent (because the student doesn’t have any assets to recover if s/he doesn’t pay).

    In the context of this crisis, we know that most of the assets in the financial system are still worth more or less what they were (because banks’ loans are ultimately secured against houses, factories, businesses, etc), while a few aren’t (because they involved lending someone 125% of the value of a house which is now worth 60% of what it was worth then).

    But if I’m trying to work out whether I should lend money to Bank X, I don’t know whether its assets are mainly the first sort (in which case lending money to Bank X is fine) or mainly the second (in which case I might lose the money I lend). So I don’t lend it the money – and so it collapses whether or not its underlying assets are good, because it needs to borrow money to stay in business, but it can’t.

    In the long term, this is a silly system and banks need to be able to better trace risk and work out who’s left holding the dodgy assets. But in the short term, in the absence of a guarantee saying “if you lend Bank X money and Bank X goes bust, then we’ll cover your loss”, everyone will go bust whether or not their assets are any good, and we’ll all end up living in caves and eating bugs.

    The guarantee basically buys time to work out which assets are actually dodgy – and because most of the assets aren’t dodgy (they’re your house, your employer’s bonds, etc), most of value of the guarantee won’t be required. It would only be required if your house was reposessed / your employer went bust – and if more than 10% of houses in the US are repossessed and companies go bust, we’ve got a lot more to worry about than this bail-out…

  6. Hey, John B, you are forgetting opportunity cost. If capital is soaked up from the world to prop up our economy, that means new businesses can’t get that capital and existing businesses have a harder time growing. And the way the money is being spent is not going to ever turn a profit. Homes were ridiculously overvalued, so there is just about no way that we can recoup the investment by pursuing housing.

    Our housing bubble has burst, but the money is going into Fannie and Freddie to keep housing prices high, even though the homes aren’t worth anything near what they are being valued at. So… the money is being spent on depreciating assets.

    what we need is for people to lose their homes, move into something they can afford, bad businesses to go bankrupt so entrepreneurs pick up the foreclosed production facilities without having all of the toxic union liabilities. We need to start paying our debts to other nations, we can’t maintain this horrible balance of trade where we produce much less than we consume.

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