the g-20 summit is coming up and in the uk press there's been at least some debate about fundamental problems that have shaped the present crisis, what they are and what to do about them---and a parallel debate about what the political perceptions are of each. this seems of basic importance because unless there's some agreement about the core problems, it's obviously impossible to fashion, much less co-ordinate, appropriate responses.
this from today's guardian:
Quote:
G20: urban myths and meddling
Leaders need to wake up to some unpalatable facts before they can tackle this financial crisis effectively
There are a couple of unpalatable facts which it is vital for the leaders assembling in London this week to understand if they are to tackle this financial crisis effectively.
The first is the cause of the crisis (no doctor would attempt to treat a patient without first trying to diagnose the cause of the illness). That's easy. The crisis was caused by bankers' greed, and the evils of the bonus system. This led to banks lending too much to subprime borrowers and trading in an alphabet soup of derivative and structured credit instruments such as CDOs, CLOs and CDS. So all governments have to do is recapitalise the banks, get them lending again, pillory some bankers, and the problem's solved.
Sadly, this urban myth gets nowhere near the root cause of the problem. The credit bubble, the puncturing of which has been so cataclysmic, arose from a series of policy responses primarily, but not exclusively, from the US Federal Reserve. Every time the market has been in difficulty, from the crash of 1987 to the dotcom bust of 2000-03, the US authorities rushed to the rescue, cutting interest rates and taxes to stimulate demand and make investments look cheap.
By not allowing the market to experience the inevitable consequences of a downturn, the actions of the authorities led to soaring credit creation and asset price inflation, the collapse of which is now much more painful than any of the downturns they prevented would have been. As we can see from this, interfering with nature is a dangerous thing. Yet that is the policy response which is now being maintained. By propping up bust banks and auto manufacturers, the authorities will merely prolong the inevitable agony.
What is more, they haven't thought about what caused them to adopt those inappropriate policies. The major problems in the western economies had one big cause: the deflationary shock caused by Asia and, in particular, China's emergence as a low-cost manufacturer. This deflationary influence on the cost of goods collided with a political imperative to maintain western jobs and living standards through lower rates of interest and lax credit in order to enable consumption to continue.
Even if the G20 manage to fix the problems in the financial system, which seems unlikely, demand will not return to its former level. Without strong domestic demand in the surplus countries, and in particular China, there will be a capacity overhang. This is colliding with the long overdue and demographically vital savings/expenditure adjustment in western economies which will lead to a depression.
Unpalatable fact number two is about the creditworthiness of governments, which is partly expressed through their currencies. Many governments have had to guarantee their banks' obligations in order for their banking system to survive, and monetary policy has moved on from the conventional up through the gears via zero interest rates to so-called quantitative easing.
The effect of quantitative easing - the purchasing of securities by the central bank - can be gauged in its popular description: "printing money". It inevitably risks a debasement of the currency and inflation. Which brings us to another important fact G20 leaders should bear in mind: when did America leave the gold standard? The gold standard was what ensured that there was a fixed amount of gold held for every paper dollar in issue. Once it was abandoned, the world began its experiment with a fiat reserve currency, in which the only thing that made anyone believe $1 would buy a particular amount of goods was because the Fed said it would.
So how long has the US been off the gold standard? Most people seem to assume that this occurred as a response to the Great Depression, or as part of the recovery from the second world war. In fact the gold standard was abandoned in 1971, by executive order of Richard Nixon. Not only does this seem shockingly recent, it also suggests that the bull market conditions that began in the early 1980s followed this abandonment. Maybe the conditions of the past quarter-century were far from "normal" (to which everyone seems to want to return) but an aberration caused by this.
Meanwhile - as the leaders of China and Russia seem well aware - the US has embarked upon an experiment which is likely to lead to the debasement of the world's reserve currency.
• Terry Smith is chief executive of Tullett Prebon plc
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Terry Smith: G20 - urban myths and meddling | Comment is free | The Guardian
this is written from a variant of a neoliberal perspective, yes?
the difference between it and many such you see in the states is it's historical reach--that it at least tries to piece together structural characteristics from looking at a slice of the past that extends beyond the immediate past.
on the one hand, what is outlined here is a policy/action trajectory that runs in exactly the opposite direction from conservative/neo-liberal claims---repeated interventions by the state to ameliorate downturns or crises using devices that function to encourage continued debt accumulation. the writer's position is schumpeter--these actions forestall the inevitable "creative destruction"---which is all very nice if you're looking at it from a remove, but which often looses the shiny adjective when you're going through it.
the diagnosis which follows from it is about demand collapse.
on the other hand, you have an interpretation of the problems of the dollar as reference currency. it's hard to say what the argument is in this section---the author points out the obvious concerning when the global system went off the gold standard (1971) and merely points out that what followed is not "normal" (according to what standard exactly?)---but what do you think follows from this? where do you think the argument goes?
and how do the parts hang together?
what picture does the piece give you of the economic and political situation at this point, in the run-up to the g20?
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meanwhile (if i could prevent automerging of posts, i would) this report was just issued by the oecd.
it is sobering and quite different from the relative pollyanna-ness of most american reporting on what's happening:
G20 leaders get OECD warning that global trade is in freefall | Business | guardian.co.uk
link to the oecd press release:
GDP to plummet 4.3 percent across OECD countries in 2009 as unemployment climbs sharply
here's a link to the entire report, which is pretty interesting if you go in for this sort of thing.
http://www.oecd.org/dataoecd/18/1/42443150.pdf
the summary of how we got here is pp. 11-17.
factoids to note: you get a little idea of just how exposed the transnational banking system is to the effects of derivative trading along the way---11-15?% of total assets globally, varying of course by region.
but you get to the scarier stuff starting on p. 17.
have a look.