The current crisis: brought to you politician by inaction and unaccountable credit rating agencies

One must now ask whether we are headed for another round of financial crisis similar to 2008 followed by a major world recession or depression.

The bear market continues

By Professor George Irvin, Research Associate at SOAS

The signs stack up: Share prices falling precipitously on world markets; US sovereign debt downgraded; and  borrowing costs rising alarmingly in ‘too large to fail’ Italy and Spain. One must  ask whether we are headed for another round of financial crisis similar to 2008 followed by a major world recession or depression.

The answer is that we probably are. As Nouriel Roubini notes, there’s a better than average chance of a shipwreck because we’re fast running out of economic tools to deal with the crisis.

Banks already hold too many shaky assets, and bank insolvencies, once started, are like falling dominoes. With interest rates already on the deck, monetary policy cannot be loosened. As for Quantitative Easing – the modern form of printing money – the banks and the public seem ready to hold rather than spend, whatever amount of cash is created.  The real problem is lack of demand.

 The only big stick—a major round of world-wide fiscal stimulus—is now blocked by the neo-liberal right. Indeed, the media now refer to a ‘debt crisis’ as though government indebtedness was the problem. It is clearly not.

For thirty years after the war, most major governments carried more debt than they do today. They serviced this easily and eventually reduced the burden because they were able to use fiscal policy to boost and maintain growth.

 Today, by contrast, the OECD countries have handed the reins of power to the credit rating agencies (CRAs). The irony is of course that these agencies are run by the same grey suits who handed out treble-A ratings to sub-prime mortgage bonds.

But let’s not blame it entirely on the agencies. After all, this round of crisis was created both by the bone-headed actions of Tea-party Republicans in Congress (and Obama’s surrender to them) and by the equally bone-headed inaction of the European centre-right (Merkel has once again refused to strengthen the EFSF).

Financial crises lead to economic crises; ie, to growing unemployment, homelessness and poverty, with spill-over effects into the vulnerable areas of third world economies. At the end of the day, the rich remain well protected—-it is the poor who pay.

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  • Mark Stevo

    You really are shooting the messenger here. We had this with Greece when people were seriously suggesting the agencies were somehow at fault for having the temerity to suggest that Greece just might be a teeny bit fucked.

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  • George Irvin

    Yes, and now we have the CRAs telling us the USA might default although the US dollar is the world’s reserve currency and the FED can borrow cheaply and/or monetise. Innocent messenger, my foot—these guys (who are generally Wall St second raters) are now determining world fiscal policy. Learn some economics, Mark.

  • Mark Stevo

    You have CRAs downgrading from AAA to AA+, which is a long way from saying the US will default. That’s why there’s a scale of ratings.

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  • Robert

    Somebody will be making money out of this, and a falling FTSE will mean as soon as it rises lots of dosh will be made.

  • Leon Wolfson

    @1 – Well, yes, pouring gasoline onto a fire is generally something not considered exactly a polite gesture of friendship. They’re not the messengers in this.

  • Mark Stevo

    In the spirit of strained metaphors, pretending the fire doesn’t exist will not make it so.

  • Mike Thomas

    The rich pulling their money from equities are going to be taking losses, massive losses. They also will not be converting all their equities for cash, they will hold a diverse range of investment.

    So with equities tanking, debt bonds/gilts unattractive against risk and money inflating – they will be losing more than most people.

    Neither can you have it both ways, countries can only be ‘too big to fail’ if the other countries in the currency union are unwilling to bail them out.

    Financiers say that the 440bn EUR EFSF must be strengthened to 1trn EUR – bearing in mind that only 80bn EUR in funds are actually there.

    What makes this a crisis isn’t the lack of money, it’s a lack of political will to pay it back because that means a big fall in the living standards of Americans, German, French, Spanish, Italian, Greek, Portuguese citizens.

    And their politician can’t even agree what day of the week it is.

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  • Leon Wolfson

    @6 – No, but putting it out is generally considered the smart thing to do.

  • Dave Citizen

    The elephant in the room here is: can Humpty (AKA the finance dominated, constant economic growth system of Britain) be put back together again?

    At some point it may be necessary to contemplate the unthinkable: that the financiers and other members of the rich elite who are naturally desperate to return to business as usual are actually flogging a dead horse at our expense. Indeed, it may well be that they themselves have become an extravagance that we can no longer afford (wonder if their communities will suffer like when the mines were closed down?).

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