About Ann Pettifor

Ann Pettifor is a Director of Policy Research in Macroeconomics (PRIME). In 2003 she edited ‘The Real World Economic Outlook’ (Palgrave) with a prescient sub-title: ‘the legacy of globalisation: debt and deflation’. In 2006 Palgrave published her book: “The coming first world debt crisis”. In 2008 she co-authored “The Green New Deal” and in 2010 co-authored an essay with Professor Victoria Chick: “The economic consequences of Mr. Osborne.”

Articles by Ann Pettifor

This week's guest editors

Just Money, introduction

In this exclusive extract from Just Money: How Society Can Break the Despotic Power of Finance Ann Pettifor describes how orthodox economics and finance have promoted a profoundly inadequate account of money. Change is necessary and possible. But it will come only through a revolution in the general public’s understanding.

We can end the despotism of finance, at a price

To mark the publication of Ann Pettifor's e-book, Just Money: How Society Can Break the Despotic Power of Finance, OurKingdom are running a series of articles that explore the nature of money and the politics of the financial system. Here Pettifor launches the series and introduces some of its key themes.

The Eurozone crisis: what way forward?

The simple truth unpalatable to Eurozone authorities is that small peripheral EU economies and even big economies like Spain and Italy, are victims, not designers of the liberalised financial architecture that was built way back in 1992, repeating earlier twentieth century failed experiments that led to financial crisis, immiseration and war.

The power to 'create money out of thin air'

Understanding capitalism's elastic production of money and moving on beyond Adam Smith and 'fractional reserve banking' - Ann Pettifor reviews Geoffrey Ingham's Capitalism

If the god Janus were an economist, he would work for the IMF

The IMF may be quietly ackowledging the failures of stringent fiscal consolidation but much damage has already been done. With over a thousand economists and a wealth of evidence at their disposal a mea culpa is long overdue.

Vultures are circling the carrion of sovereign debt

In the struggle between Argentina and a "vulture fund", a New York judge has sided with the vultures. It's a move that could have significant consequences in Europe. Public pressure may yet force a turning point: the introduction of an agreed process for sovereign default.

An open letter to the leaders of Europe: abandon the Euro's 'gold fetters'

European leaders need to abandon the fetters that chain them to the interests of private wealth, and threaten European disintegration.

How globalisation ends: debtonation-day, plus two

"A single day, 9 August 2007, will go down in history as ‘debtonation day' - the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation." I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation (see "Debtonation: how globalisation dies", 15 August 2009).Ann Pettifor is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)

Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007)

"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

"America's financial meltdown: lessons and prospects" (15 September 2008)

"The week that changed everything" (22 September 2008)

"Beyond the triple crisis: a green new deal" (27 October 2008)

So it has proved. 

On that fateful day, some American and German banks were unable to meet their short-term credit obligations, and France's BNP Paribas admitted it was facing difficulty in meeting some of its short-term mortgaging commitments. Bankers - most, until then, asleep at the wheel - woke up; realised the scale of debts on their counterparts' balance-sheets as well as their own; and in a panic, froze lending. Credit crunched. The conservative European Central Bank (ECB) and Washington's Federal Reserve pumped $90 billion into the system on 9 August 2007 alone - the first of many state-backed actions designed to protect the private financial sector from the ferocious discipline of the market's "invisible hand".

These desperate measures have been unable to avert the series of epic events in the world economy that have followed. These radiated out from the United States's sub-prime mortgage crisis and subsequent financial-institution collapses and bailouts of 2008: among them Bear Stearns, Morgan Stanley, Lehman Brothers, Fannie Mae and Freddie Mac. The impact has spread from the financial economy to the "real" one - damaging the lives of millions around the world through lost jobs, repossessed homes, food insecurity, health vulnerability, and many other social consequences. 

The global cost

The stalling of financial liberalisation, one of the defining features of the form of globalisation that had taken root in leading world economies and institutions since the 1980s, is a major index of the new situation. Deregulated, cross-border lending flows have ground to a halt and may even be in reverse (see Peter Brierley, The UK Special Resolution Regime for failing banks in an international context [Bank of England, 28 July 2009]). The total financial losses on debt-securities and equities since the start of the crisis had by mid-March 2009 reached an astounding $25 trillion - nearly twice the United States's annual gross domestic product. These huge global losses have entailed a collapse in transnational lending and a severe shortage of capital in many of the world's poorer countries (as well as mid-level states such as Brazil and South Africa).

The globalisation project had been driven by easy, if often onerously expensive, access to internationally mobile capital. Deregulated credit, not trade, was at the centre of globalisation  - even if an orgy of speculation in world trade was among the results. Many analysts and activists alike, misled into ignoring the role of finance in the global economy, got this order wrong. Their belief was that trade was the engine of the integration of national economies into the international economy. The anti-globalisation movement too became fixated on trade, neglecting the finance sector. As a result, many campaigners - like orthodox economists - were caught unawares by "debtonation-day".

Two years on the world remains in recession, albeit with considerable regional variations. The vast credit surpluses built up by countries such as China have created space for national-regeneration policies, but credit overall is no longer so easily available nor so mobile. Even after the extraordinary reductions in base rates by central banks, it is hard for households, businesses, individuals or many nation-states to access credit. Indeed amid rising bankruptcies and unemployment and falling wages and prices,  fall, the cost of debt continues to increase. Bank of England data suggests that around 30% of medium-sized companies in Britain pay more than 9% above the base rate for loans. Many such companies remain exposed to the parasitic behaviour of banks desperate to clean up their balance-sheets.

Since 9 August, 2007, many banks in the newly-defined space of the Group of Twenty (G20) economies have been directly or effectively nationalised (in the latter case, having their losses and risks guaranteed by the state). Trillions of dollars have been conjured out of thin air - through a process known as "quantitative easing" (or "queasing") - to ensure the banks' survival. These bailouts have now been transformed into taxpayer liabilities on government balance-sheets; the Bank for International Settlements is among those noting how unprecedented is this scale of support.

The bankers that declined the state's - that is, citizens' and taxpayers' - generous bounty have still benefited from the protection afforded by publicly-owned central banks. Such traditional investment-banks as Goldman Sachs, American Express, CIT Group and the General Motors Acceptance Corporation successfully converted themselves into bank-holding companies in order to gain access to Federal Reserve protection, liquidity and funding.

Many are now repairing their balance-sheets by borrowing cheap from central banks - and lending dear. In the world of nationalised, protectionist finance, there is a relatively clear path to renewed riches for the likes of Goldman Sachs.

The shipping news

This is how globalisation dies. The phenomenon was, again, believed by many to have become a permanent feature of the world's economy. But the globalisation of the neo-liberal era always existed only ephemerally within a vastly extended global bubble of deregulated credit (as opposed to the post-1945 era of tightly regulated credit.) As the credit-bubble burst on 9 August 2007, so did globalisation.

The collapse of the credit-bubble was accompanied by that of world trade, which shows no sign of easing. A World Trade Organisation (WTO) report n July 2009 forecasts a 10% fall in trade in 2009, which would be the biggest since 1945. Nowhere has the decline in trade been felt more keenly than in the shipping industry. In 2009, ships are travelling for months at half-speed in order to make voyages last longer and hide their excess capacity, while around 500 container-ships and their thousands of crew-members are idly stationed in creeks and estuaries around the world. For the finance sector, writes Anthony Hilton, "shipping was just another asset class, a bet on the world economy and an income stream which the financial models said could only go one way" (see Anthony Hilton, "Shipping puts all our problems in the shade", Evening Standard, 29 July 2009).

Yet the pre-"debtonation-day" credit-fuelled shipbuilding boom ensures further over-capacity. The soft loans to the shipping industry by (for example) the Chinese and Korean governments ensure that new ships are about to slip out of the yards of their shipbuilders, adding 30%-50% to global capacity. This at a time when when half the existing world fleet is less than five years old, and falling prices for steel and scrap-metal mean that there is little incentive to send older ships to the break-yards.

The long shadow

The plight of the shipping industry offers a clue about the chances of revival in the world economy. Many economists and commentators place great faith in China's massive fiscal stimulus and its increasingly reckless expansion in bank-lendin, as the instrument of global recovery. But any near-term expectation that China could play this role is delusional (see Bill Powell, "Can China Save the World?", Time, 10 August 2009). The International Monetary Fund (IMF) estimates that even on the most optimistic assumptions, China's economy will in 2009 amount to around 9% of global GDP, whereas the United States and the European Union combined will contribute 52%. A sustained recovery in both these regions, rather than the efforts of a billion (and still mostly very much poorer) Chinese will be necessary to pull the global economy out of recession.

On 9 August 2007, the world changed. Everyone - individuals, households, corporations, banks, governments, international institutions - is living with the consequences. "Debtonation-day", the culmination of the economic failures of the previous generation as well as the opening to a new period of crisis, continues to cast its shadow.

openDemocracy writers analyse the world's financial turmoil:

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

David Hayes, "A world in contraflow" (3 January 2008)

David Held, "Global challenges: accountability and effectiveness" (17 January 2008)

Fred Halliday, "The revenge of ideas: Karl Polanyi and Susan Strange" (24 September 2008)

Godfrey Hodgson, "The week that democracy won" (29 September 2008)

Grahame Thompson, "Deglobalising the crisis" (3 October 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)

Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism" (22 October 2008)

Paul Rogers, "A crisis-opportunity moment" (23 October 2008)

Mike Hulme, "Amid the financial storm: redirecting climate change" (30 October 2008)

Anita Sharma, "The core crisis: standing with the poor" (30 October 2008)

Simon Maxwell & Dirk Messner, "A new global order: Bretton Woods II...and San Francisco II" (11 November 2008)

Andre Wilkens, "The global financial crisis: opportunities for change" (10 November 2008)

Carne Ross, "United Nations in trouble: time for another San Francisco" (12 November 2008)

Paul Rogers, "A world in the balance" (13 November 2008)

Larry Elliott, "From G8 to G20: the end of exclusion" (16 November 2008)

Anand Menon, "Europe's eastern crisis: the reality-test" (5 March 2009)

Krzysztof Bobinski, "Europe between past and future" (6 March 2009)

Katinka Barysch, "The real G20: from technics to politics" (16 March 2009)

Krzysztof Rybinski, "There is no zombie free lunch" (18 March 2009)

Alison Evans & Dirk Willem te Velde, "Too little, too late? The UN and the global financial crisis" (23 June 2009)

Beyond the triple crisis: a green new deal

It is a small measure of the dramatic financial meltdown of 2007-08 that leading representatives of western liberal capitalism ransacked the past for reference-points to convey its scale. The "most wrenching [financial crisis] since the end of the second world war", said former chairman of the United States Federal Reserve, Alan Greenspan, in March 2008; the "largest financial shock since the great depression", said the International Monetary Fund (IMF) in April; even "the largest financial crisis of its kind in human history" said the deputy governor of the Bank of England, Charlie Bean in October.

Also in openDemocracy on the global financial crisis of 2007-08:

Tony Curzon Price, "Responsible recessions" (3 April 2008)

Willem Buiter, "The end of American capitalism (as we knew it)" (17 September 2008)

Fred Halliday, "The revenge of ideas: Karl Polanyi and Susan Strange" (24 September 2008)

Godfrey Hodgson, "The week that democracy won" (29 September 2008)

Tony Curzon Price, "Unprincipled madness" (1 October 2008)

Grahame Thompson, "Deglobalising the crisis" (3 October 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)

Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism" (22 October 2008)

Paul Rogers, "A crisis-opportunity moment" (23 October 2008)
All this before the crisis has run its course. For even after the massive bailouts and banking takeovers of September-October 2008, there is no end to the fear and panic in global stock-markets. A problem that was (during the epic week of 22-28 September when the Hank Paulson plan to stabilise Wall Street was being debated) seen by some complacent Europeans as being confined to the United States soon came to force European governments too into emergency responses; after Iceland's desperate situation was exposed, now emerging markets in east-central Europe (Hungary, Ukraine) have needed urgent assistance to provide credit and shore up the currency. For some global-south countries (Pakistan, Argentina) the difficulties are even more severe; and several of Asia's powerhouse economies (South Korea, China) have been forced into a rapid rethinking.

A systemic problem

The prospect that the huge funding packages of these weeks will not contain the problems, and that indeed things may get even worse, is terrifying for central-bank governors, financial institutions and politicians - and indeed for the citizens who will carry the greatest burden of the crisis in terms of disappearing jobs, repossessed homes, and tightened credit.

Yet I believe things will indeed get worse, for one reason above all others: that those in the financial and political establishments charged with making decisions to contain the crisis have shown themselves inadequate to the task. In particular, elected finance ministers, International Monetary Fund (IMF) staff, the governor of the European Central Bank (ECB), Jean-Claude Trichet and his fellow central-bank governors persist with flawed economic policies:

* dear money or high real rates of interest which aggravated the downturn by amplifying debts, bankrupting debtors and accelerating deflation

* sustained capital liberalisation - despite shocks to exchange rates, global imbalances and volatility 

* the dumping of even more debt on to the giant Ponzi scheme that is the globalised economy.

These policies have been responsible for a pernicious cycle in which easy money fuelled easy credit; easy credit fuelled consumption, which in turn fuelled economic growth; and alongside, "easy jets" and "easy cars" helped fuel a massive expansion of toxic greenhouse-gas emissions. 

This sequence makes clear that what is at stake is more than a financial breakdown that can be repaired by policy adjustments at the margin. Rather, the excessively indebted global economy is but one aspect of an  unprecedented triple crunch, each element of which has contributed to the current crisis:  

* an enormous Ponzi scheme of debt

* peak oil

* climate change.

It is becoming clearer that at heart the resulting crisis is "systemic" not "conjunctural", and that it requires a holistic response that addresses it in its linked as well as singular aspects: financial-economic, governance-political, environmental-ecological (see John Elkington & Mark Lee, "Finance, politics, climate: three crises in one", 14 October 2008). A small group of economists connected to the new economics foundation (nef) has proposed such a holistic approach, which they have termed a "green new deal". To implement this set of policies will require using all the resources of democracy to  make governments and regulators switch course, guided by and understanding that the threat of debt, peak oil and climate change must be addressed in imaginative and radical ways. 

A model infusion

The latest dominoes to fall have been in Europe. This is in part thanks to the misjudgment of one of the most orthodox central bankers, Jean-Claude Trichet - who has (as Aurelia Maccario notes) been exposed by the collapse of both the real and the financial European economy. In a show of macho defiance, he had in 2007 already rebuked Nicolas Sarkozy for objecting to the ECB's higher interest rates, and for not "adapting faster". In July 2008, at the height of the worst debt crisis in modern history, he and his board hiked borrowing costs on loans in the European Union.Ann Pettifor is executive director of Advocacy International.

In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)

Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007)

"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

"America's financial meltdown: lessons and prospects" (15 September 2008)

"The week that changed everything" (22 September 2008)

By this action they helped precipitate the crisis now engulfing economies like Hungary. Hungarians, like many east-central European citizens and companies, were lured by EU promises into buying mortgages and loans in euros and Swiss francs. These borrowers have now been hit by the fall of the currency in which they earn income (Hungary's forint), relative to the currency (the euro or Swiss franc) in which they owe debts.

The borrowing costs on their euro-denominated debts were increased by the decision of the European Central Bank (ECB) to raise rates. Its governor, Jean-Claude Trichet, somewhat embarrassed by the negative impact of that decision, now offers to "rescue" Hungary, by dumping another €5 billion ($6 bn) on an already debt-burdened economy. High interest rates and heavy economic conditions will further undermine Hungarian economic independence, and could cause social, political and ecological dislocation. 

The policies of the ECB, of other central banks, and of finance ministries and treasuries mean that the world is now embarked on a debt-deflationary spiral that destroys the value of assets, wages, incomes, goods and services - and will lead to political and social upheaval. The threats are very grave. 

The IMF's predatory lending has been rebuffed by emerging markets ever since its policies first caused and then exacerbated the southeast Asian crisis of 1997-98 and the Argentinean crisis of 2001. It seems not to have learned its lesson: for now it is pouring more debt down the throats of bankrupt countries like Iceland and struggling economies like those of Hungary, Ukraine, Pakistan and Argentina. The IMF is also encouraging central bankers to play the speculators' game by raising interest rates (in Hungary, for example, they were raised on 22 October 2008 to a staggering 11.5%.

This is unbelievable good luck for those hedge-fund managers facing major losses elsewhere, and roaming the world for gains; but this luck is predicated on the now inevitable bankruptcies of small and large businesses in Hungary's domestic economy, and on the livelihoods of those who are amongst the lowest-paid in Europe. It will come as no surprise if people in Hungary and elsewhere of all classes become disillusioned and angry at the failure of their central-bank "guardians" to protect their country's interests and finances; the chances of a populist backlash are thereby strengthened (see Andrew Dobson & David Hayes, "A politics of crisis: low-energy cosmopolitanism", 22 October 2008).

The IMF will further oblige international speculators by injecting billions of dollars into the bloodstream of central banks drained of hard currency.  This transfusion of capital will enable international investors and speculators to make a quick "smash, grab and getaway" - leaving central banks with even more debts, owed at high real rates of interest to the IMF. To repay these debts, without any change in basic structures or operating modes, will require even greater exploitation of labour and the ecosystem. 

The orthodox economic policies that aggressively deregulated lending and encouraged borrowing, also held down incomes while boosting consumption. In the context of prevailing industrial and commercial patterns, both had the effect of inflating greenhouse-gas emissions and contributed further to the creation of a global "debtonation".

When high real rates of interest raised borrowing costs, making debts unpayable, the collapse of the Ponzi scheme was inevitable. Now the chaotic deleveraging of debts is leading to the deflation of asset prices, particularly property prices, to bankruptcies, stock market falls and unemployment – with no end in sight.

The increasingly desperate actions of central bankers and finance ministers -  and the silence or irrelevance of academic, neo-liberal economists - are evidence of the flawed nature of the past generation's economic orthodoxy, and of the intellectual bankruptcy of the world's ruling elite. 

A democratic deficit

What strategy and policies should democratic citizens and progressive forces around the world adopt to help the global economy recover and challenge the destructive policies of these elites? (see Paul Rogers, "A world in flux: crisis to agency", 16 October 2008). It will not be easy, but three processes are essential 

First, it will be important to divert popular anger away from bankers and their bonuses towards the institutional failings of the real transgressors: the central-bank governors, regulators and the political legislators that created the framework for the giant house-of-cards that is global debt. It was politicians and regulators not private bankers or other oligopolistic businessmen who legislated for, facilitated and permitted the creation and growth of easy (but never cheap) debt that has fuelled both consumption and greenhouse-gas emissions. 

It's true that private bankers or oligarchs have effectively ensnared politicians. But in the end it is regulators that draft policy and politicians that sign and agree legislation; only regulators and legislators, prompted by citizens-voters informed with democratic arguments and ideas for change, who can implement a system-wide fix.  

Second, citizens all over the world need to build the political parties and movements that will rise to the challenge of climate change, peak oil and the current global financial meltdown.

In liberal-democratic countries whose democratic systems have withered or which still have inbuilt unfairness (such as Britain, with its centralised and winner-takes-all electoral system), this will mean an energetic work of reform. Democratic political parties in the past decades have been hollowed out of political content and power. The signs of revival around the Democratic Party in the United States - if they continue and are consolidated in practical results - are an encouragement to all those wishing to challenge the status quo in democratic economies.

To succeed, political parties must be rebuilt from the bottom-up. Such initatives as Moveon.org provide clear evidence that by exploiting the openness, plurality and uncensored reach of the web - and combining these strengths with down-to-earth, face-to-face "townhall meetings" - activists can reclaim the political agenda. 

This major task of democratic revitalisation will take time, but it is an essential process if the policies needed for restoring balance to both the economy and the ecosystem are to be informed by the active discussion and engagement of citizens.  

A radical agenda

The heart of such policies are a series of principles that if followed would lead to a more stable, strong and sustainable political economy that can begin to meet the tests of debt, peak oil, and climate change:

* unpayable debts must be recognised as unpayable, and written off. This needs to done as far as possible in an orderly, structured manner, and with due attention to principles of fairness and awareness of the causes of high levels of debt

* the monetary system must be managed in the interests of society as a whole, not just the finance sector

* debt/credit-creation must be carefully regulated

* capital flows must be regulated, and the power to fix the key levers of the economy (interest-rates and the exchange-rate) must be restored to elected, sovereign governments- accountable to labour and industry, and accountable to the ecosystem

* publicly accountable central banks must be free to a) inject debt-free money into the economy, and b) keep the cost of borrowing low, so that loan-expenditure projects can be easily financed

* incomes must be raised, to restore the balance between an economy burdened with debts and stripped of pensions, and people starved of income to repay those debts or unable to live in dignity

* there must be no eviction of people from their homes because of unpayable debts

* new forms of social, cooperative housing and housing finance should be developed

* resources must be raised to create jobs, by using the monetary tools above and by filling tax-loopholes and closing tax havens

* a "carbon army" of green-collar workers must be mobilised to insulate homes, transform every building into a power station, and build alternative sources of energy

* trade must be localised and regionalised in order to limit the impact of emissions, to cut oil consumption and to end trade imbalances, with only exceptional items traded internationally (when war-memorial panels in northeastern England containing lists of names of the fallen are stripped for the metal they contain to feed a ravenous global commodity-market, the destructive consequences of the dominant form of globalisation are vividly revealed)

* a new global and independent central bank should be established - based on JM Keynes's International Clearing Union - to manage and stabilise trade between countries, and to create both a trading currency and a reserve asset that is neutral between countries. This should be on the agenda of the G20 summit in Washington on 15 November 2008 as part of the discussion of a "new Bretton Woods" settlement.

In other words, the way beyond this period of severe crisis and multiple threats lies in a green new deal

The week that changed everything

The last week has changed everything. A series of extraordinary events in the United States - from the collapse of Lehman Brothers to the forced sale of Merrill Lynch, from the state takeover of insurance giant AIG to the Federal Reserve's emergency bailout plan - has transformed the crisis in the financial markets into an argument about the very foundations of the model of economic governance that rules the world.

Ann Pettifor
is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)

Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007)

"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

"America's financial meltdown: lessons and prospects" (15 September 2008

For three decades the ship of global finance has been steered by the economics of globalisation - the flawed neo-liberal economics of the Chicago school. Their navigational charts for deregulation and liberalisation have led the global economy into a financial hurricane of unprecedented intensity. This crisis will prove immensely destructive - of the value of assets like property, of jobs, of pensions and investments, and of the hard-earned achievements of companies small and large, everywhere. Above all, the crisis will damage the lives and the futures of millions of blameless citizens, most of them poor.

Orthodox economists did not see the crisis coming, even as the financial hurricane hit land on what I have called "debtonation day", 9 August 2007. They still do not understand it. They failed to warn their paymasters or the captains, crew and passengers of the finance-sector's ships. Even now, their intellectual and policy maps offer no way forward.

This is because orthodox, neo-liberal economic theory pays little regard to the role of finance in the economy. Systemic insolvency is not permitted in the assumed world of orthodox economics. Very few members of the Chicago school have read Irving Fisher's Booms and Depressions (1932); and if they have read John Maynard Keynes on the theory of money and interest, it was only to malign or marginalise his rationale for the regulation of finance. Instead, they lionised free-marketeer Milton Friedman, trenchant enemy of "big government".

But in the single week of 14-20 September 2008, the public and even much of the media began to register the scale of the finance sector's and governments' intellectual and policy failure. No one - it seems - is fooled anymore. Free-marketers now embrace big government with a fervour that embarrasses socialists. Even more conservative voices in the establishment media have begun to challenge the flawed economics that they have for so long championed.

The world may be moving on its axis, but the change has not yet gone nearly far enough: for neo-liberal economists remain at the helm of the global economy, and continue to disseminate potent mis-diagnoses of what is happening. These economists include the world's major central bankers and finance ministers. It is vital that their economics and their three principal delusions are challenged if the global economy is to be steered safely out of this all-consuming storm.

Three delusions

The first and most important of these delusions is the belief that banks and financial institutions are illiquid, when in fact they are insolvent. Systematic insolvency is, again, categorically excluded from world of orthodox economics. It was the failure of central-bank governors and finance ministers like Alistair Darling and Hank Paulson to acknowledge insolvency in the summer and autumn of 2007 that has prolonged and deepened the crisis. It is the failure to recognise insolvency now that lies behind the apparently endless, and ineffective flow of taxpayer-backed liquidity from central banks.

Second, central bankers are - thanks to their reverence for orthodox economic theory - allowing illusory inflationary pressures to justify keeping interest-rates high, and refusing to relax monetary policy. Despite a spike in oil and food prices, inflation is now falling. The deleveraging of asset prices (think of the fall in property prices) will force down a whole range of prices and if not checked, could lead to deflation. Deflation will be far more devastating to the population as a whole than mild inflation. The 1930s and Japan since 1990 are sobering precedents here. Central bankers must escape from the gridlock of orthodox economic theory and act now to check the downward, debt-deleveraging, deflationary spiral.

Third and most urgently, central bankers and finance ministers have to escape the constraints of orthodoxy - and think system-wide fixes not quick fixes. To ban a few short-selling speculators is but tinkering with a system that needs comprehensive overhaul.

Also in openDemocracy on the global financial crisis of 2007-08:

Saskia Sassen, "Globalisation, the state and the democratic deficit" (18 July 2007)

Tony Curzon Price, "The end of gentlemanly capitalism" (13 August 2007)

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

Avinash D Persaud, "The dollar standard: (only the) beginning of the end" (5 December 2007)

Fred Halliday, "Sovereign Wealth Funds: power vs principle" (5 March 2008)

Willem Buiter, "The end of American capitalism (as we knew it)" (17 September 2008)

Four solutions

What then should be done? Here are four steps.

First, a good place to start would be where Franklin D Roosevelt did in 1933 - by declaring a week-long bank holiday. The Federal Reserve, the Financial Services Authority (FSA) and the Bank of England could then take time and check the books of banks for well-hidden "toxic waste" - their massive undeclared liabilities, including more than $60 trillion of so-called "credit default swaps" (CDS). Only when regulators have a proper sense of the scale of the mess, can they take decisive and appropriate action. Right now they are sloshing buckets of our money about, unsure as to the whereabouts of the financial "weapons of mass destruction" that banks have concealed.

Second, there must be an end to "inflation targeting" - which is just a cover for keeping interest-rates high. High interest-rates are great for lenders/creditors, but a killer for debtors, and there are far more debtors in the economy than savers. If this financial crisis - and the planetary threat of climate change - are to be faced, there is a need for cheap (but not easy) money to help finance investment in energy security (for more on this theme, see the report I co-authored, A Green New Deal [new economics foundation, 2008]).

Third the Bank of England and the Fed should regain control over interest- rates - all rates. The interbank lending rate (the so-called Libor rate) should no longer be set by a closed committee of private bankers meeting daily at the British Bankers' Association. Rates must be set by a committee accountable to society; and, when setting rates, it must consider the interests of all who make the economy work - labour and industry as well as finance.

Fourth, in order to again exercise control over all rates, the Bank of England will have to reintroduce capital controls. That might require a new international agreement, along the lines agreed at Bretton Woods in 1947.

All of this is doable as well as necessary. These are the initial system-wide fixes needed to deal with systemic threats; the public have every right to expect the guardians of the nation's finances to implement them promptly.

If they are to do so, these guardians will need a new moral compass, new navigators and new helmsmen and women. But one thing that is not needed is a new navigation chart. That was provided by John Maynard Keynes in his The General Theory of Employment, Interest and Money (1936). Its ideas will today do just as well to restore the world to a period of stability as after the great depression of the 1930s. This was a period that Barry Eichengreen and Peter H Lindert (in The International Debt Crisis in Historical Perspective, MIT Press, 1991) described as "a golden era of tranquillity in international capital markets".

To return to such a golden era, the money-lenders, speculators, and orthodox economists responsible for the gross failures exposed by the week that changed everything must stand aside - so that everything indeed can change, and for the better.

America’s financial meltdown: lessons and prospects

The collapse of Lehman Brothers and the forced sale of Merrill Lynch which took shape over the weekend of 13-14 September 2008 have confirmed the scale and gravity of the global financial crisis. The difficulties at the insurance company AIG are a glimpse that there is more to come. But the extent of the wreckage makes it ever more important to analyse correctly what has gone wrong. For just as a faulty medical diagnosis can harm the patient, so a flawed economic diagnosis can lead to wrong conclusions and bad solutions.

Ann Pettifor is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)
Also by Ann Pettifor on openDemocracy:          
"The coming first world debt crisis" (1 September 2003)
"Ethiopia: the price of indifference" (19 February 2004)
"Gleneagles, 7/7 and Africa" (4 July 2006)
"Debtonation: how globalisation dies" (15 August 2007)
"Globalisation: sleepwalking to disaster" (11 December 2007)
"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)
In this respect, orthodox economists continue to be part of the problem that Lehman Brothers and Merrill Lynch (and, before them, Northern Rock, Bear Stearns, and Fannie Mae and Freddie Mac) represent. For so long they turned a blind eye to the finance sector, to privatised credit-creation and its role in fuelling asset-bubbles. In so doing they revealed their inability to predict, understand or offer solutions to a consuming crisis.

This article looks at how such failures took hold in the context of the deregulated global financial system of the 2000s, and why the predicted collapse of this system begins in the United States.

The deregulated economy

The former chairman of the Federal Reserve in the United States, Alan Greenspan, has himself said that what is happening to Lehman Brothers and Merrill Lynch is a "once-in-a-century" event. Yet the way many orthodox economists characterise Greenspan's own role in the global "debtonation" of the post-9 August 2007 era reveals how far they remain trapped in the rituals of evasion (see "Debtonation: how globalisation dies", 15 August 2007).

The key argument these economists make here is that the current crisis has been caused by the low interest-rate monetary policy Greenspan presided over after 2001. This case permits a twofold diversion - for it pins the blame for the crisis on interest rates (not deregulation of credit-creation) and on central bankers (not the private-finance sector). The policy implications of this focus neatly avoid proposals for what is clearly and urgently required: re-regulation of the finance sector.

But the argument that makes interest-rates a fundamental cause of the crisis is wrong even in its own terms - not least as it can lead to a recommendation that higher interest-rates are a way out of the mess. The crisis facing banks and individuals - indeed whole economies - buried under mountains of debt and threatened by an intractable deflation makes this a truly deranged proposal.

The phenomenon of "deleveraging" as a way of managing these mountains of debt helps explain why. Deleveraging means paying off (or more accurately writing off) the crazy amounts borrowed on the back of tiny amounts of real money - say the $1 million borrowed (or leveraged) on the back of $1,000 of sound collateral; deleveraging that debt would entail paying off / writing off $999,000. The inevitable result in many cases is bankruptcy, part of a wider deflationary momentum in the economy.

Debtors of all kinds - official, corporate, individual -  are already struggling to repay at the current high real rates of interest. That is the core element of the debt crisis (or "credit-crunch"). To prescribe higher interest-rates would turn crisis for many individuals, companies and banks into catastrophe.

Also in openDemocracy on the global financial crisis of 2007-08:
Saskia Sassen, "Globalisation, the state and the democratic deficit" (18 July 2007)
Christopher Harvie, "Gordon Brown vs Scotland: the balance-sheet" (17 September 2007)
Tony Curzon Price, "Gordon Brown: between rock and hard place" (18 September 2007)
Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)
Avinash D Persaud, "The dollar standard: (only the) beginning of the end" (5 December 2007)
Fred Halliday, "Sovereign Wealth Funds: power vs principle" (5 March 2008)
Tony Curzon Price, "Lehman: technocrats' endgame" (15 September 2008)
Here, the context of Alan Greenspan's post-2001 role is relevant in understanding the global economy then and now. For his policy of lowering interest-rates was a reaction to the bursting of the dot.com-bubble - which, like the property-bubble which burst in 2007, was fuelled and inflated by easy, unregulated and privatised credit-creation. Moreover, these low interest-rates in the early years of the 21st century were more a function of the new global capital markets than of the powers of central bankers to set low rates.

The result of deregulation (i.e. "globalisation") in the 2000s was and is that capital can flow free and untrammelled  around the world. The accompanying collapse of the Bretton Woods system (which contained mechanisms for curtailing the growth of imbalances between nations) meant also the growth of large balance-sheet contrasts (massive deficits in the United States and Britain, huge surpluses in China and Japan, for example). The countries in surplus - China most of all -  exported their excess capital to the US.

This flood of capital lowered rates of interest in the US - to the chagrin of Alan Greenspan, who by this time was trying to raise rates. Greenspan could have done this by erecting barriers to the movement of capital - capital controls - thereby preventing China's surplus capital from having an impact on US interest-rates. Instead, he preferred to pretend that he was impotent in the face of a mysterious "conundrum".

An Alan Greenspan or any other central banker armed with controls over the movement of capital would be able to switch a key lever of the economy: the rate of interest. That is, not just the "policy rate" or the "official rate" (often known as the "bank rate") but all rates - safe and risky, short and long. Where central bankers abandon such controls, and delegate powers over interest-rates to private bankers, they are impotent in the face of capital movements that affect the yields on bonds, and therefore of interest-rates within their domains.

The sharecropper society

The momentous news of the collapse of Lehman Brothers and the sale of Merrill Lynch - part of the larger process unfolding since "debtonation day", 9 August 2007 - brings all the failings of the seven years that preceded it into even sharper focus.

In 2003, as part of a team at the new economics foundation, I edited a book intended to "shadow" the International Monetary Fund's "world economic outlook", which we believed was based on the delusions of orthodox economics (see The Real World Economic Outlook, Palgrave, 2003). An article in openDemocracy at that time - five years ago almost to the day - heralded the "provocative new research ... which argues that the ‘first world' is approaching a major debt crisis... The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina" (see "The coming first world debt crisis", 1 September 2003).

The book and article explained that the current, post-Bretton Woods international financial architecture ("globalisation") was so structured as to enable the United States to "hoover up" money from the rest of the world, and use these resources to live beyond its means. I wrote then: "It is this financial system which makes US financiers so confident that the rest of the world will continue to finance their nation's extravagant spending binge. In the words of David Goldman, head of debt research at Bank of America Securities: ‘America is at little risk for the foreseeable future, simply because the world's capital has nowhere else to go' (Wall Street Journal, 13 August 2003)".

The fall of Lehman Brothers is final confirmation that the world's capital does now have somewhere else to go. This event thus marks the beginning of the collapse of today's international financial architecture, which has rested on very shaky foundations since Richard Nixon's administration unilaterally dismantled the Bretton Woods system in 1971 and began to shape the new.

The reason why the Lehman Brothers collapse is historic is that this institution expected until a very late stage to be saved by the state-run Korea Development Bank (KDP). But Seoul looked at the books and had other ideas: on 9 September 2008 - to the astonishment of Lehman's shareholders and investors - this ever-so-reliable ally of Washington refused to fund a bail-out.

The fact that such sovereign wealth funds as the KDP are no longer willing to finance reckless US institutions is of itself of the greatest significance. It implies a lack of confidence in the solvency of US financial institutions, and indeed of the United States as a whole. This will lead to a fall in the dollar, which will have profound economic implications for the global economy, and for globalisation as a whole.

The billionaire investor Warren Buffett wrote a letter to shareholders in March 2005, in which he predicted that by 2015 the net ownership of the US by outsiders would amount to $11 trillion. "Americans ... would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an ‘ownership society' will not find happiness in - and I'll use hyperbole here for emphasis - a 'sharecropper's society'."

Buffett was and is right. The collapse of banks and investment funds, and of the international financial system - a consequence of the unpardonable folly of the powerful - is serious and dangerous enough. But what is even more to be feared is the emergence of a sharecropper society, angry at its downfall. Thus will America's problem become the world's.

The global financial mess: blaming the victims

We now know that on 9 August 2007 - which I called "debtonation day" - central bankers and regulators finally woke up to the scale of bad debts on the balance-sheets of banks and other financial institutions. On that day blindfolds were removed and scales fell from the eyes - of at least some of the key players in the finance sector. The "guardians of the nation's and the world's finances" finally began to emerge from a long period of stupid and unforgivable denial of the havoc wrought on the international economy by the privatised, deregulated and globally integrated finance sector.

Ann Pettifor is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave, 2003) and author of The Coming First World Debt Crisis (Palgrave, 2006)

Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007)

"The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008

But it has taken more than a year for the wider public to realise that "debtonation day" was but the prelude to a terrifying prospect: large-scale and prolonged economic failure of a globalised, highly integrated economy, built on a financial house of cards.

The floating world

In creating huge burdens of debt, particularly in the Anglo-American economies, private financiers have defrauded and deceived tax collectors, investors and regulators - a level of deception partially exposed on "debtonation day". Worse, they have burdened the productive sectors of the economy - the companies that you and I work for - with unpayable debts, which have already begun to hurt consumers, bankrupt key sectors of the economy in the United States and Britain, and to weaken the economies of (among others) Germany and Japan. Now the private-finance sector - represented for example by the management and shareholders of Fannie Mae and Freddie Mac and Northern Rock - are holding a gun to the heads of regulators and politicians. The demand is that losses be socialised or nationalised. The alternative, they warn, is global financial armageddon.

Until recently the vast bubble of debt these private institutions created was regarded by orthodox economists, regulators, politicians and investors as representing real, and possibly eternal wealth. Their delusions fed on the economic mantra that asset prices (such as property, commodities, works of art, racehorses, or commercial brands) were rising because of a shortage of supply and an excess of demand for assets: not because they were being powered upwards by the availability of "easy money" or credit.

By finally admitting to the unpayability of debts on their books, and by making write-downs and write-offs, banks were and are in effect admitting to extensive deception of their fellow-bankers, regulators and investors. Each day brings fresh news of the destruction of wealth - and fresh allegations, such as the revelation that Merrill Lynch wrote off $9.4 billion in July 2008 (see Jeremy Lerner, "Citigroup results set to lift US stocks", Financial Times, 18 July 2008). This brings the company's losses over the last year to $19 billion - losses largely suffered by investors, including pension- funds.

It is reported that the Massachusetts secretary of state promptly charged Merrill with "fraud" and "dishonest and unethical" conduct "for creating and implementing a sales and marketing scheme, which significantly misstated the nature and stability of the auction-rate market. As a result, thousands of investors were abandoned with illiquid investments......." (see "Massachusetts sues Merrill over auction securities", Reuters, 31 July, 2008).

These losses and alleged deceptions have generated deep distrust in the whole sector, which stopped making credit available in the week running up to 9 August 2007, and thereafter tightened up on lending to all borrowers. This shortage of credit led in turn to the bursting of housing and other asset bubbles in the Anglo-American economies, and in economies like that of Spain.

Central bankers and elected politicians acted swiftly to refinance heavily indebted banks, and bail out incompetent managers and shareholders. However nothing has been done to remove the debt burden from borrowers in either the domestic or the corporate sectors. It was announced on 5 August 2008 that the British government is offering Northern Rock, a failed private bank now nationalised, a further £3.4 billion of taxpayer-backed funds. But the current Labour government in Britain has little consolation for their debtors. Northern Rock’s notorious "Together" loans were offered to a market of desperate people anxious to buy a roof over their heads in a rising market. These were set at 125% of the value of a property and six times the borrower's salary. Now, the number of house repossessions by this government-owned bank has risen from 2,215 to 3,710 in 2007-08, an increase of 67%; more than two-thirds of 70% of these repossessions related to “Together” loans.

So while the British government is using taxpayer funds to socialise the losses of a bank whose gains were largely privatised, it is simultaneously punishing the Rock's borrowers by evicting them from their homes. Herein lie the seeds of social upheaval and discontent.

Also in openDemocracy on the fallout of the 2007 financial crisis:

Saskia Sassen, "Globalisation, the state and the democratic deficit" (18 July 2007)

Christopher Harvie, "Gordon Brown vs Scotland: the balance-sheet" (17 September 2007)

Tony Curzon Price, "Gordon Brown: between rock and hard place" (18 September 2007)

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

Avinash D Persaud, "The dollar standard: (only the) beginning of the end" (5 December 2007)

Fred Halliday, "Sovereign Wealth Funds: power vs principle" (5 March 2008)
The house of cards

The stupidity, poor economic analysis and sheer ignorance of those - central bankers, politicians, auditors - that have a duty to act as guardians of the nation's and the world's finances has had and will continue to have very grave consequences for the whole of the global economy, but also for millions of individual and corporate borrowers.

Their conduct stems in part from a failure of economic analysis. More precisely, the economics profession has failed to correctly analyse and alert policy makers to the impact of the finance sector - and of privatised credit creation - on the global economy. Indeed the economics profession has had a (not accidental?) blindspot for the role of haute finance in the economy, while at the same time encouraging its deregulation.

Now, just as the curtain is being raised on the house of cards built by the finance sector, so a cabal of economists is working to pull it down.

Their main concern is - of course - to protect the sector from governmental or democratic oversight and regulation, and to transfer private losses to taxpayers. To do so, they need to distract attention from the sector, limit debate, prevent a coherent analysis of the causes of the crisis emerging, and blind citizens to the "science" of finance.

The first tactic in the campaign to divert attention is to blame the victims. The most hapless of these are sub-prime borrowers - people in low-paid work earning $7 an hour in the poorest districts of Ohio (for example) who were persuaded by dodgy mortgage-floggers that they could take on a adjustable rate mortgage at "teaser rates", go to the ball and have a roof over their heads.

The game of blaming the victim is conducted of course, in more elevated terms by the high priests of finance, and by the economics profession. One of these is Josef Ackermann, chairman of the board of directors of the Institute of International Finance, and chairman of the management board and group executive committee of Deutsche Bank.

Ackermann has explained the current financial crisis thus: "for the first time in history, a crisis triggered by US housing finance problems is having global ramifications" (see "How the banks can win back confidence", Financial Times, 31 July 2008). No mention here of sub-prime borrowers, but the inference is clear: this crisis originated with those borrowers and with the property market, not with reckless credit creation by the private finance sector.

Others prefer just to blame "the bursting of the housing bubble" - which they would have us believe occurred simply as a result of spontaneous combustion. Alan Greenspan now argues that the "financial crisis is heralded, in fact defined, by sharp discontinuities of asset prices" (see "The world must repel calls to contain competitive markets", Financial Times, 4 August 2008) In other words, it's the spontaneous combustion of property and other asset prices, he suggests, that caused the financial crisis. We beg to differ and contend that it was the dramatic contraction of credit in August, 2007 that precipitated the collapse in asset prices.

The arguments put forward by Greenspan and mainstream economists has as its main goal the maintenance of the system of financial globalisation. To do so, they insist in effect that the crisis "is nothing to do with us, guv." That way analysis of the role of the finance sector, and excessive credit creation can be avoided.

Yet another frequently repeated analysis is that the crisis was caused by the decision of the Federal Reserve to cut interest rates after 2001, in order to lessen the impact of an earlier crisis - the bursting of the dot.com bubble. So Chris Giles argues that "there is little doubt that the immediate cause of both the commodities price boom and the credit crisis has been low global interest rates" (see "Shifting down the gears...", Financial Times, 5 August 2008).

Alan Greenspan, governor of the Federal Reserve, was indeed obliged to cut interest rates in 2001 as a reaction to the financial crisis of that time, tackling one of the increasingly frequent crises of international financial capitalism over the decades since deregulation began in the 1970s. The 2001 crisis was caused by easy, if costly credit (offered at high real rates of interest to corporates) blowing up and then bursting the dot.com bubble. It's true too that Greenspan's actions eased the crisis, and encouraged banks and other lenders to go on yet another spree, and lend even more recklessly. But if he had not acted, then the credit-crunch of 2007 would have occurred much, much sooner.

The fact is that while official rates of interest were low for a period after 2001, they had been much higher before. And even while official rates were low, few companies embarking on risky investment were able to borrow at these low official rates. But the credit-crunch occurred precisely because the scale and cost of debt was too high, so debtors began to fall into arrears and default.

The exit strategy

There is a frequently heard and self-justifying argument - expressed especially at times of crisis - that bankers have no responsibility for the amount of credit in the economy; they are mere intermediaries (like restaurateurs, one has said, "struck down by a sudden drying up of a food supply for which they have no responsibility").

This argument is more than a little ingenuous. Bankers create their own "food supply" for serving borrowers: credit. Credit is not created by an outside body, like the Bank of England or the Federal Reserve. Thanks to the outsourcing of credit creation by central bankers and politicians, the provision of credit is overwhelmingly an activity undertaken by private banks, few of which have been, or are adequately regulated. The fact that credit (or "the food supply") has dried up is entirely a function of the incompetence of bank managers like Adam Applegarth of Northern Rock, and of the loss of trust that he and others created between banks and other financial institutions. It has nothing whatsoever to do with governments.

The public - the borrowers, and therefore ultimately the victims of this vast private debt-creation machine - must not be fooled. Credit creation is a remarkable power, granted to banks and other financial institutions. By entering a number into a ledger, and guaranteeing the sum against an asset (like a property) a private financial institution can leverage very large sums of credit. The private sector has used these powers like a magic wand - to inflate a vast bubble of credit, or debt, which in turn inflated the housing and other bubbles.

Since JM Keynes and FD Roosevelt first argued that finance must be regulated - must be servant, not master of the economy - the finance sector and its apologists in the economics profession have lobbied, deceived, bullied and bribed regulators and politicians to prevent all effective regulation over its activities. They have also demanded the removal of all controls over the movement of capital and effectively removed central-bank control over the setting of interest rates.

On 9 August 2008, the anniversary of "debtonation day" it is incumbent on citizens to hold haute finance's feet to the fire, and to demand strict regulation, transparency and oversight of the sector's activities. But on this anniversary it is also important to begin to promote solutions.

I suggest that there are only two solutions to the credit-crunch. The first is a grand jubilee - the cancellation of all unpayable debts, the clearing up of balance-sheets, and the restoration of stability to the financial system. If this solution is unacceptable there is a second: to raise the incomes of the indebted, to enable them to repay debts, and to drastically lower interest-rates to enable companies to reschedule and repay debts.

If neither of these solutions are applied, the outcome will be the accelerated destruction of the financial system.

The G8 in a global mess: 1920s and 1980s lessons

Japan hosts the G8 summit in the northern island of Hokkaido on 7-9 July 2008 at a time when its prolonged period of deflation and economic failure have rendered its politicians impotent. Philip Stephens notes that - despite Japan's still considerable role in the global economy - the country's politicians are the weaklings of global geopolitics. "Where is Japan?", he asks. "The question is one of psychology rather than geography. Japan is still the world's second most powerful economy. Politically, it is all but invisible" (see "Japan goes missing: invisible host at the summit", Financial Times, 4 July 2008).

Ann Pettifor
is executive director of Advocacy International. In the 1990s she helped design and lead the international campaign Jubilee 2000. She is editor of The Real World Economic Outlook (Palgrave 2003)
and author of
The Coming First World Debt Crisis
(Palgrave, 2006). She blogs at debtonation.org
Also by Ann Pettifor on openDemocracy:

"The coming first world debt crisis" (1 September 2003)

"Ethiopia: the price of indifference" (19 February 2004)

"Gleneagles, 7/7 and Africa" (4 July 2006)

"Debtonation: how globalisation dies" (15 August 2007)

"Globalisation: sleepwalking to disaster" (11 December 2007

It was not always thus. Until as recently as 1990, Japan was booming. The earlier financial deregulation and low interest policies of the Bank of Japan had encouraged those Japanese who owned assets (such as property) to borrow against these assets. The ensuing excessive lending and borrowing fuelled a property bubble, which further enriched the wealthy. In 1987 alone, house prices rose in Tokyo by 67%. During the bubble years, "easy money" financed purchases of assets like stocks and shares, race horses, jewellery, art, New York's Rockefeller Center and Hollywood's Columbia Pictures (see the excellent book by Graham Turner, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis (Pluto Press / University of Michigan Press, 2008).

The governors of the Bank of Japan were and are supposed to share with central bankers worldwide an obsession with inflation. Yet they stood by and allowed asset-price inflation to rip. Soon it became a massive bubble, and Japanese politicians - especially Yasuhiro Nakasone, prime minister from 1982-87 (and buddy of Ronald Reagan) - were able to adopt a more confident pose upon the world stage.

As with all bubbles, bursting was inevitable - and in this case, as so often, painful. The property boom began to implode in 1989, and at that point the hard men of the Bank of Japan set out to prove their virility by concentrating on a different threat: wage inflation. The fear that wage inflation would lead to flaccid economic growth led them in May 1990 to inject their economy with the "viagra" of higher interest rates. But even after the stock market had crashed violently by the end of 1990, not only did interest rates stay up, but the bank pushed them up a fifth time to 6%.

Remarkably, rates stayed high throughout the ensuing turmoil, as non-performing loans piled up on the balance-sheets of banks; homeowners watched house prices fall; companies failed; and the "salarymen" of Japan began to lose their jobs. The social consequences were enormous: families suffered, marriages broke down, and many treated their pain with alcohol and drugs. Japanese politicians returned to their more familiar pose of caution and discretion, and were now near-invisible at global gatherings.

The bubble was brief and the reckoning long. But what is relevant in the global context is that the Bank of Japan's macho behaviour in exacerbating the nation's crisis was far from unique.

An American echo

A long way back, by early 1929, the governors of the United States Federal Reserve had begun to worry that their earlier limp regulation of the banks and of credit had fuelled the dysfunctional stock-market bubble. They had been happy to watch the rich growing very much richer on the back of lax lending, but were now concerned that those with jobs might demand higher wages - a threat they called "inflation". They resolved to address this threat with higher interest rates. On 9 August 1929, they raised interest rates from 5% to 6%.

Also in openDemocracy on the G8 and the global economy:

Ehsan Masood, "The aid business: phantoms and realities" (18 July 2006)

Michael Hopkins, "Sustainable development: from word to policy" (11 April 2007)

Stephen Browne, "G8 aid: beyond the target trap" (6 June 2007)

Paul Collier, "The aid evasion: raising the ‘bottom billion'" (11 June 2007)

Kweku Ampiah, "Japan and Africa: a distant partnership" (6 June 2008)

Simon Maxwell, "Development in a downturn" (4 July 2008)

Interest rates, as they were to do in Japan in 1990, stayed high throughout the crisis - in this case, the chaos and widespread panic of the 1929 stock-market crash. Because prices were falling, real rates of interest were much higher than the nominal rate of 6%, thus inflicting severe pain on stock-market borrowers. Nevertheless the hard men of the Federal Reserve kept rates up, forcing debtors into default, companies into bankruptcy, and people out of their jobs and homes. Their actions are widely acknowledged to have been responsible for the prolonged economic failure that became the "great depression".

By coincidence it was on the same day seventy-eight years later - 9 August 2007 - that the global economy "debtonated" (see "Debtonation: how globalisation dies", 15 August 2007). The Bank for International Settlements (the mother of all central banks) has confirmed in its (seventy-eighth) annual report that on that day "turmoil in financial markets came to the boil...and central banks felt compelled to take extraordinary measures to restore order in the interbank market" (see the introduction to the Bank for International Settlements report, 30 June 2008).

It was central bankers - those "guardians of the nation's finances" - that had been responsible for the turmoil in the first place. Again, central bankers - like the governors of the Federal Reserve in the 1920s and the Bank of Japan in the 1980s - had been persuaded by the ideologues of neo-liberal economics that if they repressed wages and prices, and simultaneously deregulated the finance sector, perpetual economic growth would be guaranteed, hedge funds would prosper, and the rich would be a whole lot happier. And so it proved - until, that is, 9 August 2007.

Today, decision-makers in the United States, Britain and Euroland are confronted by the same threats which faced their predecessors in America in 1929 and Japan in 1990. Although unemployment is starting to rise sharply in some countries - notably Spain - the European Central Bank (ECB) worries that wages might rise. So, on 3 July, the ECB applied a dose of interest-rate "viagra" to the weakening Euroland economy by raising interest-rates to 4.25%.

As Angela Merkel, Nicolas Sarkozy, and Gordon Brown stand alongside Yasuo Fukuda and other colleagues in Hokkaido, they might usefully ponder the impotence of Japanese politicians - and begin to look for better ways to repair the systemic dysfunction of an unsustainable global economy.

Globalisation: sleepwalking to disaster

On 9 August 2007, globalisation's rickety financial levees were broken by a storm-surge of debt, invisible to most punters, but scary enough to frighten bankers. This debt includes highly leveraged corporate debt traded on secondary markets, household mortgages, credit-card debts, car loans and other substantial outlays. But what scares financiers and other experts are the truly big debts racked up by financial institutions, including those that have insured against loan defaults.

One of the least understood, but potentially most lethal financial products they have engineered - away from the regulatory scrutiny of central bankers and finance ministries - is called a credit default swap (CDS). In reality, they are not "swaps", but a form of insurance (for illumination, read the blog of one "Hellasious", of Sudden Debt).

Debtonation: how globalisation dies

A single day, 9 August 2007, will go down in history as "debtonation day" - the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.

It is a moment that I (alongside many others) had long predicted, most notably in an article for openDemocracy written in 2003 (see "The coming first world debt crisis" [1 September 2003], and my book of the same title [Palgrave, 2006]). The problem, as with Cassandras in other areas of life, was to gauge the precise timing of the global financial crisis that we knew was approaching.

Gleneagles, 7/7 and Africa

The effect of the London bombs was to aid the powerful and damage the weak. Campaigners for global justice must not be deflected, says Ann Pettifor.

Ethiopia: the price of indifference

The rich world’s blocking of debt relief for Ethiopia, the world’s poorest country, creates a terrible burden of complicity.

The coming first world debt crisis

The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided, says Ann Pettifor of the Real World Economic Outlook, only by serious efforts to bring regulation and balance to the international economy.
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