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.
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.
25 Responses to “The current crisis: brought to you politician by inaction and unaccountable credit rating agencies”
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.
RJH
(Left Foot Forward) The current crisis http://t.co/FEN93Vn
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?).
Osborne's austerity is failing at the one thing it's supposed to do | Left Foot Forward
[…] The current crisis: brought to you politician by inaction and unaccountable credit rating agencies – George Irvin, August 8th […]