A large amount of what appears in the media about the financial crisis is pure nonesense. To ascribe a financial crash of this magnitude to 'lack of confidence', 'financial spivs', 'short sellers' etc is merely ridiculous. But there are number of commentators whose views are extremely serious. Appearance of these here, and their criticism on SEB, is not a sign of disrespect but on the contrary a compliment. It means that such a viewpoint has serious analysis behind it.
Martin Wolf, chief economics commentator of the Financial Times, is in a sense the doyen of economic journalists. His articles are marked by superb in depth research and tackling the most serious issues with a clear ability to articulate their own presuppositions. Suffice it to say that anything written by him should be read immediately by socialists - although Martin Wolf is, as he clearly states, a liberal who is hostile to socialism. SEB will be looking at some of Martin Wolf's views - his blindspot on China, his understimation of the distortion inherent in markets, but meanwhile SEB readers will find his articles in the FT one of the best possible sources to follow current events.
The latest, in the FT today, considers the process of debt deflation which SEB has looked at in several posts. Wolf notes: 'while the US government (and those of other western countries) are committed to saving the core banking system, the non-bank financial system, including the hedge-fund sector, looks set to implode as financing dries up, with inevitable forced sales of financial assets and further insolvencies.
'This is the reality behind the euphemism, “deleveraging”. This occurs via mass bankruptcy, unless bad private debt is shifted on to the public sector’s balance sheet. “Debt destruction” is a better name. In the US and elsewhere, asset prices, particularly of housing, also continue to fall. Who is going to borrow to purchase such assets? What lender would use such assets as collateral, unless they are protected by generous equity cushions? The credit mechanism is broken. This must be so when spreads on riskier credits are shooting up (see charts). If banks cannot borrow easily, few can.'
Read his article here.
Martin Wolf's analysis
The Times - Karl Marx:did he get it right
Keynes, for three decades virtually the economic anti-christ, has now become so fashionable that it is almost embarrassing - the Financial Times decided last week to issue a primer on his views.
Don't forget as recently as 1971 Richard Nixon declared 'we are all Keynesians now' before all Right-thinking economists declared Friedman and Hayek had 'disproved' Keynes.
But The Times is concerned more radical conclusions may be drawn. It has decided to poll its readers on the following question:
'Did Karl Marx get it right? That's the poser in today's paper. The Prussian has recently been ignored by the mainstream - consigned to obscure curricula as the business world steamed ahead. But as markets plummeted last week, dog-eared copies of Das Kapital started to fly off the shelves.
'Comment Central wants to know your thoughts. Can you hear an 'I told you so' reverberating from Highgate Cemetery? Or are you still using the work of its most famous resident to prop up your television?
'Cast your vote here.'
Doubtless Keynes and Marx are having an interesting discussion in the afterlife about the finer points of economic theory. Here and now socialists should be looking with renewed interest at the views of the two most important left wing economists.
Don't forget as recently as 1971 Richard Nixon declared 'we are all Keynesians now' before all Right-thinking economists declared Friedman and Hayek had 'disproved' Keynes.
But The Times is concerned more radical conclusions may be drawn. It has decided to poll its readers on the following question:
'Did Karl Marx get it right? That's the poser in today's paper. The Prussian has recently been ignored by the mainstream - consigned to obscure curricula as the business world steamed ahead. But as markets plummeted last week, dog-eared copies of Das Kapital started to fly off the shelves.
'Comment Central wants to know your thoughts. Can you hear an 'I told you so' reverberating from Highgate Cemetery? Or are you still using the work of its most famous resident to prop up your television?
'Cast your vote here.'
Doubtless Keynes and Marx are having an interesting discussion in the afterlife about the finer points of economic theory. Here and now socialists should be looking with renewed interest at the views of the two most important left wing economists.
Libor drops and the economic focus shifts
Massive injections of liquidity, the latest being $540 billion offered to US money market funds by the Federal authorities, plus the $2.5 trillion in bank bail out programmes, are gradually bringing down interbank lending (libor) rates. As the graph below shows 3 month dollar libor has dropped from a peak of 4.82 per cent on 10 October to 3.83 per cent on 21 October. The immediate threat of a cessation of interbank lending, which would in fact mean the disintegration of the financial system, is slowly receding at least at present.
Although this is very early days in the economic downturn that is to come this trend so far confirms the analysis in SEB that the likely outcome of this financial crisis is a major recession, accompanied by a significant realignment of the weights of different economies internationally, rather than a real long term economic depression of the 1930s type.
If financial disintegration can be avoided then the centre of attention will shift to who will pay for the huge bailout packages that have been used to stabilise the financial system. The present trajectory is that the cost of the financial crisis will be born by the majority of the population. Increased unemployment, stagnant or declining wages, and possible losses in the direct bank bail out programmes themselves, will transfer income away from the population to recreate profitability in the banks. Financial stabilisation will be gained at the expense of economic and social hardship for the population and political discontent. Unnecessary luxury consumption and military expenditure will remain at high levels while the population suffers. The possibility of socialists in the economically advanced countries is to insist that, on the contrary, the living standards of the mass of the population is maintained and instead luxury and military consumption is cut - which will also require the state intervening more into the investment process to attempt to limit recession.
The main international shifts are evident. The US will be weakened, China and India will be strengthened. The leftward shift in Latin America will be placed in an economic situation in which compromise is harder - shifts to the right and to the left may be expected. Significant financial destabilisation will occur in some economically exposed countries - merely within Europe to the financial crisis in Iceland has now been added significant problems in Hungary and Ukraine. Overshadowing all this will be the issue of shifts in alignment between the major economic centres in the US, Europe and Asia. And the depth of the recession itself.
The economic process unleashed by the financial crisis is only at its beginning - not at its end.
Although this is very early days in the economic downturn that is to come this trend so far confirms the analysis in SEB that the likely outcome of this financial crisis is a major recession, accompanied by a significant realignment of the weights of different economies internationally, rather than a real long term economic depression of the 1930s type.
If financial disintegration can be avoided then the centre of attention will shift to who will pay for the huge bailout packages that have been used to stabilise the financial system. The present trajectory is that the cost of the financial crisis will be born by the majority of the population. Increased unemployment, stagnant or declining wages, and possible losses in the direct bank bail out programmes themselves, will transfer income away from the population to recreate profitability in the banks. Financial stabilisation will be gained at the expense of economic and social hardship for the population and political discontent. Unnecessary luxury consumption and military expenditure will remain at high levels while the population suffers. The possibility of socialists in the economically advanced countries is to insist that, on the contrary, the living standards of the mass of the population is maintained and instead luxury and military consumption is cut - which will also require the state intervening more into the investment process to attempt to limit recession.
The main international shifts are evident. The US will be weakened, China and India will be strengthened. The leftward shift in Latin America will be placed in an economic situation in which compromise is harder - shifts to the right and to the left may be expected. Significant financial destabilisation will occur in some economically exposed countries - merely within Europe to the financial crisis in Iceland has now been added significant problems in Hungary and Ukraine. Overshadowing all this will be the issue of shifts in alignment between the major economic centres in the US, Europe and Asia. And the depth of the recession itself.
The economic process unleashed by the financial crisis is only at its beginning - not at its end.
Who is blamed for the financial crisis?
The Financial Times on 20 October published an interesting poll on who the public in a number of countries blame for the international financial crisis. Given that this is a socialist economic bulletin we would be pleased to report that the public blamed the crisis on capitalism but it would not be accurate. Asked the question 'Would you say that the current global financial crisis has been caused more by the "abuses of capitalism" or by the "failure of capitalism" itself', those believing that the problem was capitalism itself were about 7 per cent in the US, 10 per cent in Italy, 12 per cent in the UK, 14 per cent in Spain, and 17 per cent in France. Only in Germany, of the countries polled, was there evidence that a very substantial of the population were blaming capitalism as a whole - 30 per cent believing the crisis was due to capitalism itself.
In contrast those believing that the crisis was caused by 'abuses of capitalism' were 46 per cent in Germany, 51 per cent in the UK, 61 per cent in Spain, 63 per cent in Italy, 65 per cent in the US, and 67 per cent in France. Those groups or institutions who were believed to have 'complete responsibility' or a 'lot of responsibility' for the crisis among the population of the European Union countries were bankers (80 per cent), Central Banks (70 per cent) and short sellers (64 per cent).
These results give no comfort to the idea that the population of any advanced country is chomping at the bit for socialism as yet. But they do show that very large sections of the population blame important capitalist institutions for the current events. It gives an interesting base line for assessing the situation. The full and detailed results of the poll can be found here.
In contrast those believing that the crisis was caused by 'abuses of capitalism' were 46 per cent in Germany, 51 per cent in the UK, 61 per cent in Spain, 63 per cent in Italy, 65 per cent in the US, and 67 per cent in France. Those groups or institutions who were believed to have 'complete responsibility' or a 'lot of responsibility' for the crisis among the population of the European Union countries were bankers (80 per cent), Central Banks (70 per cent) and short sellers (64 per cent).
These results give no comfort to the idea that the population of any advanced country is chomping at the bit for socialism as yet. But they do show that very large sections of the population blame important capitalist institutions for the current events. It gives an interesting base line for assessing the situation. The full and detailed results of the poll can be found here.
George Osborne and the natural selection of accidents
History involves the natural selection of accidents. The same fact may in one situation have no, or little, impact and in another totally polarise events. The explanation for the difference lies not in the fact itself but in its context - that is the relation this fact finds itself in with regard to fundamental social forces.This truth is shown again in the scandal now gripping the Tory party around George Osborne allegedly seeking illegal financial contributions from Russian billionaire Oleg Deripaska. A few months ago Osborne was a demigod - the person who supposedly turned the tide against Gordon Brown with his pledge at last year's Tory Party conference to abolish inheritance duty on property of less than £1 million financed by (an utterly spurious claim) that this could be one hundred per cent financed by taxing non-doms (those living/working in this country but not domiciled for tax purposes).By this morning's Financial Times Osborn was already becoming a figure of ridicule with senior Tory John Redwoood admitting that criticism of Osborn had become 'fashionable'. This was before Redwood or the FT knew about the Deripaska story.That latter story, in another context, might have been dealt with as a minor matter. But the reason that Redwood admitted, even before the Deripaska story broke, that criticising Osborne had become fashionable was because of the manifest inability of Tory policy to deal with a financial crisis that requires large scale state intervention. For the party of Thatcher suddenly to become the party of Keynes stretches credulity a bit far.So history found the accident of George Osborne's alleged conversation with Oleg Deripaska to discredit him further - conveniently just what was required by the situation. Demi-god becomes fall guy due to an intervening financial crisis.
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