Posted by: r.m. | October 12, 2008

let’s put money in context

So, this financial crisis that has grabbed international attention.

Let’s visualize the numbers of the crisis with one example: one million homes to be foreclosed in the US. In other words, one million families to lose their homes.

Noam Chomsky writes: “The immediate origins of the current meltdown lie in the collapse of the housing bubble supervised by Federal Reserve chairman Alan Greenspan, which sustained the struggling economy through the Bush years by debt-based consumer spending along with borrowing from abroad. But the roots are deeper. In part they lie in the triumph of financial liberalisation in the past 30 years – that is, freeing the markets as much as possible from government regulation.

These steps predictably increased the frequency and depth of severe reversals, which now threaten to bring about the worst crisis since the Great Depression.

Also predictably, the narrow sectors that reaped enormous profits from liberalisation are calling for massive state intervention to rescue collapsing financial institutions.

Such interventionism is a regular feature of state capitalism, though the scale today is unusual. A study by international economists Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20 companies in the Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments “socialise their losses,” as in today’s taxpayer-financed bailout. Such government intervention “has been the rule rather than the exception over the past two centuries”, they conclude.

In a functioning democratic society, a political campaign would address such fundamental issues, looking into root causes and cures, and proposing the means by which people suffering the consequences can take effective control.” (To read the full article (Anti-democratic nature of US capitalism is being exposed) – click here

Karl Marx predicted this crisis (not with its full details, but generally). “In short, what Karl Marx called ‘the financial oligarchy’ is demanding that the state should take over their burdens and maintain the ‘value’ of their valueless credit instruments while insisting that the poor workers and the middle classes shall take care of themselves. In other words, they demand communism for themselves and capitalism for the poor because capitalism is the only way the poor can ‘compete’ to survive, while the oligarchs have the protection of the state to look after their needs.”

But this crisis is not simply a crisis of democracy, and not simply a crisis of selective protection, but it is also a crisis in the fundamentals of our current economic make-up.

Ecological economists argue – rightfully – that the crisis is deeper.

“Can the economy grow fast enough in real terms to redeem the massive increase in debt? In a word, no. You can keep piling on interest and creating debt, but you’re fighting a losing battle against a natural force of the universe: entropy. To put it another way, lenders can’t just create wealth out of thin air, pulling financial abstractions out of their assets whenever it suits them. Theoretical, invisible wealth must be matched by real goods. Imagine if we were to transition from a society of debt-based wealth—buy now, pay later—to one of real goods-based wealth—save now, spend later. The world as we know it would fundamentally change.”

As Herman Daly — who left his post as  Senior Economist at the World Bank to teach Ecological Economics at University of Maryland’s School for Public Policy and to become one of the World Bank’s sharpest critics — “points out that the current crisis is really one of the “overgrowth of financial assets relative to growth of real wealth.”

Daly believes that “financial assets have grown by a large multiple of the real economy” and that “paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities.” Exploding debt liens have simply outgrown the wealth.

Daly wrote: “Growth in US real wealth is restrained by increasing scarcity of natural resources, both at the source end (oil depletion), and the sink end (absorptive capacity of the atmosphere for CO2). Further, spatial displacement of old stuff to make room for new stuff is increasingly costly as the world becomes more full, and increasing inequality of distribution of income prevents most people from buying much of the new stuff—except on credit (more debt). Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer (the cost of feeding and caring for the extra pigs is greater than the extra benefit). To keep up the illusion that growth is making us richer we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so‐called assets are, for society as a whole, debts to be paid back out of future real growth. That future real growth is very doubtful and consequently claims on it are devalued, regardless of liquidity.”


Responses

  1. What really shocked me and still does is the fragility of the whole so-called Global Economy. How could, in God’s sake, such an intertwined and complex system be based on a primitive, not to say bestial, human instinct: Trust.


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