open Democracy News Analysis - Global meltdown plc: annual report, Ann Pettifor - Comments

Martin Robertson on "The global financial mess: blaming the victims "

Martin Robertson — Tue, 03 Feb 2009 12:57:24 +0000

Late to the debate but have you seen this:

http://www.global-mess.webs.com

If forecasts for reposession and unemployment get halfway to their peaks, like this chap could have his hands full!

BigC on "The global financial mess: blaming the victims "

BigC — Wed, 17 Sep 2008 21:02:15 +0000

Ann Pettifor's analysis is spot on as far as it goes. The immediate problem is, as she says, the stupidity and incompetence of the finance industry. I quite like the idea of writing off debts which should never have been written in the first place. This would work providing strict criteria were observed to prove that the original writing of the debt was irresponsible and reckless and you'd probably need some sort of sliding scale to take into account degrees of recklessness. Details aside, the idea is sound.

And it is risible nonsense to say that this would make further credit impossible. Create a market and those credit providers that had not been (deservedly) wiped out would be swarming around it like ants around a honey jar. And the case for realistic regulation would be irresistible with recent experience in mind.

However, this would still leave us with the structural problem of an economy based on leapfrogging asset price inflation. House prices going up because of demand and demand being encouraged further by the fear of even higher prices in the future. The rewards once you are on the ladder are obvious. In 20 years time you will still be paying today's accommodation prices but earning wages fed by 20 years worth of inflation. You will thus have increased your disposable income with no increase in your productivity. The shortfall will of course have to be taken up by those who rent or those newly entering the housing market. That this is unfair is obvious, but it is also unsustainable as it is a process of transferring the bill for the lifestyles of the better off onto the worse off who will ultimately be unable to bear it.

Salao85 on "The global financial mess: blaming the victims "

Salao85 — Wed, 17 Sep 2008 11:56:33 +0000

Interesting article and comment. Here are some of my thoughts:

On the last point, the second solution, increasing peoples incomes in order to reduce their real debts, that is 'real' in economic terms, is eminently doable, by allowing inflation to increase. And we may well see this yet because it also has the added attraction of reducing government debt at a time when public balance sheets are serriously weak. Governments, particularly the US, may well be drawn to the possiblity of inflating away their debts. Such inflation would benefit anyone that can get a pay rise at the same time not need any new credit (which may even be the majority of people). However such tactics hurt the young entering the market and are obliged to live without the credit their parents had, and if inflation continues to increase unabaited for too long, they may also find that they have to live without a job, along wih a growing unemployed, as the initial Philips Curve feel good turns into rational actor downsizing of business activities.

I don't know a huge deal about writing off private debt but it must be recognised that this is very different to sovereign debt. Bankrupted people and companies, unlike countries, don't get to hold on to their assets (its an altogether different proposition to reposess Joe Blogs car than to reposess a country's sovereign territory). If they did keep their assets, concider the case of one of the 75%+ of people who didn't lie on thier subprime mortgage application, even though the lenders in some cases encouraged them too, and haven't defalted. If their colleague in the bigger house next door fails to pay his falsely aquired mortgage as part of a systemic failure and they both get given their houses tomorrow is that fair? What would that mean for their future behaviour?

Interesting in the arguement between John Kay and Martin Wolf unfolding in recent issues of the FT, Kay, a devotee of deregulation and living with an imperfect world says "the explosion of securitisation [ ] is at the root of current problems." Note it's not the consumer but the system is at fault. He argues against Wolf that regulation was the cause of this explosion, Wolf argues that the lack of regulation was the cause. Niether blames the consumer.

We are at a cross roads, I think everyone who is interested in economics and finance knows it. Feels it. Something I would like to see is a broadening of the law. I bought a book in 2001 on financial derivatives, published by the FT. In it there is a chapter on "reglatory innovation". This is dedicated to finding loopholes in regulatory structures. I think it's a more subversive text than anything you can find on the internet about making bombs, yet because it is written by someone with no obvious axe to grind other than his own enrichment it is somehow not seen as such. Incidentally the author even back then said that the structure of regulation is patently wrong and makes false distinctions between different streams (insurance, investment and retail) which result in the intetwining of all with each other through derivatives. Should those people who conspired to circumvent capital adequacy regultions be treated like those who conspired to cause injury and death. Why should the former be acceptable? There is certainly enough research that shows during resessions following banking and currency crises all manner of social problems show marked increases - property crime, violence, divorce, suicide, delinquencies of varrious kinds, illness, mental and physical. Can those who have been engineering around regulations be to blame? Is it the regulators themselves that are to blame? Or even the eventual consumer?

It is unrealistic and, I don't think, even desirable, that one group be singled out for all the blame. There is an entire system that has been built on a simple philosophy that is the cult of the individual responding to price and price alone and it has affected the behaviour of every walk of life. It has also brought material benefits to much of the developed world and some parts of the developing world although the distribution of this benefit has usually been hugely unequal. This is a problem that needs addressing. There is no baby and bathwater or wise monkey solution

There are many people who defend themselves currently from their accusors saying they were doing what they did simply becuase the bank, insurer or colleague next door was doing it and they had to keep up. My friend who is the head of pricing at one companies trading operation told me nearly three years ago now that he had customers phoning him up asking him for a refresher on how the derivative they bought yesterday worked. That abandonment of individual responsibility is complex and, I believe, a key to changing our vision of ourselves as individuals responding to prices in the sense of liberal creeds. We are much more akin to hurds.

The immediate problem of managing from day to day currently preocupies many governments. This might involve many alternatives, debt restructuring, buyouts etc (including private individuals). Along side this crisis management is the question of how, if at all, we stop the same thing happening again.

precycled on "The global financial mess: blaming the victims "

precycled — Wed, 17 Sep 2008 08:03:57 +0000

I see no hysteria in the article, perhaps just an over-exuberance of metaphor. Steven Rogers emphasises government complacency. Anne Pettifor reveals the trickery of private financiers. Obviously both players took part in this destructive game.

Curious though to draw up a short list of just two solutions. I bet readers can suggest more. I'm not an economist but a few other useful actions come to mind:

1. Reclaim money creation for the benefit of nations, rather than for private greed.

2. Cut dependence on global shenanigans by helping start regional community currencies (which could be vastly more powerful than the 'voucher' type experiments in the UK).

3. A windfall tax on the past 5 years undeserved mega-buck bonuses paid to those who got us into the mess.

4. Build a stable platform for investment of wealth by switching the global economy from unsustainable wealth-destroying activities to sustainable activities which meet people's needs and build ecological resource productivity. See http://www.blindspot.org.uk.

James Greyson

Martin Large on "The global financial mess: blaming the victims "

Martin Large — Wed, 17 Sep 2008 06:26:00 +0000

Ann's analysis is timely, as we need to understand what is going on and why-and just how the credit crunch is being used by the shock doctors of government and the finance sector(like Hank Paulsen of Goldman Sachs and the US government ) to extract even more staggering amounts of money from ordinary people.

Yes, the finance sector needs tough regulation and transparency-but we also need to take the monopoly of credit and money creation away from private banks and put credit creation into a People's Bank for public benefit.

Not logged in Lawrence Efana on "The global financial mess: blaming the victims "

Not logged in Lawrence Efana — Tue, 16 Sep 2008 21:00:09 +0000

Happy news: this is not an 'ideological' discourse! We seem all to agree that capitalism has served us all this far, but that we certainly would loose nothing if we are courageous enough to once again take the pains to look into the fundamentals - this time around: to wholeheartedly allow the new be born, now that we see the follies we see - if we see!

Ann Pettifor indeed, only takes the pains implicitly to draw attention to the - if you like it: 'moral', or call it 'ethical dimensions' of interest to allow me write "collective responsibility", where necessary and or unnecessary. In history, when we once called it " a successful practice", she exemplifies with two mutually interesting cases, reminding respectively of (i) Keynesianism in theory; and (ii) Roosevelt-era pragmatism. For unusually interesting insight, look into a range of the keywords and phrases she decorates the article with: 'deception', 'bubbles', 'private sector', 'prospects of large-scale economic failures', 'regulators', 'tax payers/collectors', 'deregulation', 'global', 'integrated financial sectors', 'investors', 'debts', 'allegations', 'revelations, pension funds', 'illiquid', 'unethical conducts', among others. Certain readers are bound to agree with her, because of such keywords and phrases, that the probability is high that the free market is now more vulnerable, as well as banks and no less witty and non-witty consumers.

The question is how much of similar threats we are ready to argue the contexts in which Keynesianism suffered - a point of history lesson! In comparison, it would however appear that Neo-liberalism suffers more the syndromes of shifts toward unwarranted senses of economic smartness - an arm of which is dented among others, when profits are reported even though losses are suffered. Business trust across the spectrum of investors, shareholders and the consumer is not better for that! Some of Ann Pettifor's keywords and phrases tend to question therefore: whether they could be parts and parcels of the fundamentals of capitalism, making the sense we like to see in business risk-taking, and if so what consequences? These are implicit notwithstanding the 'balance' and 'softness' of her arguments.

Therefore, about our global development experience tied to benefits and challenges], nothing seems wrong to thread how she asks more from analysts. Not ill-meant for those in the modernizing world who recall history of the 'academic' discipline: "economic science". No question about it. Modernity is taxing it in a new era of interdisciplinary knowledge, assumed integrative and representative, partly of what policy/decision-making in its critical rational forms needs - no less also across large and small financial sectors. Glad to say that her idea in "..... blaming the victims" is all embracing - statistically implicit and inclusive of each and every person who might be defined as actors - be they bankers or consumers of various kinds including government, because of dependence on advisers and expert recommendations. I mean to add that it's not about passing bucks but intensifying on convincing grounds for needed changes and moral cautions.

Ann Pettifor is famous beyond first world problems. In this article, debt forgiveness - longstanding in many past pleas, is not hammered on here in terms of 'barefoot economies'. Even so, the analysis in this article is indicative enough to be meaningful and capturing. Parallel to awareness of the kind argued, Steven Rogers makes a good argument for 'realism', observing: "The global economy is not a propping balloon. It's more like a tire that's sprung a leak. The leak needs to be patched and the tire reinfilated; the situation needs to be soberly assessed and measures taken to keep the problem from recurring. This is underway. It's an imperfect process, but all our processes are". Implicitly Rogers and Pettifor rock in the same boat - not far from each other in value, but perhaps in method - if I have not over-assessed or ill-appreciated them in context of the corner-stones and their implications.

Both are good at calming the overall situations: what our make-believe world needs in order to stand the numerous conflicting tests of existentialism and hope for sustainability in mankind's progress in our time. Even so, "fakt-idiot"- an old German conception of people in science] and extensive all-consuming "technocratic knowledge" identified partly with economic science as a discipline on own merits - old fashion on the culture of professionalism and simultaneously also subservient insensitively at times to modern 'dried-up' or 'merciless: strategically rational choice-focus], are all relatively too adversarial for change. Pragmatic consensual deals across value compartments do face restraints, thereof creating partial burdens, some of which are not wrong when placing some technocrats and professionals in their deals or analytical approaches at center. Its problems surely diminish, delay hence might not be as correcting as expected in the positive argument of Rogers about sober assessments and measures - added to our "imperfect processes".

The article sincerely raises a compelling need to not to stop asking the question: what type of world do we want for ourselves and children - is it going to be a world of corrupt selfish and overdriven individualistic pursuit for creation and squandering wealth in which at the end dealing with the aftermaths would mean unbalance interventionism that leaves out the most vulnerable? There is logic for each outcome at the same time as the question arises: how far systems can and or not go in juggling sensitive values, such as those likely to morally impose on us 'unorthodox' demands of collective responsibility - a question implicit, but not obvious in the discourse, if we reduce the author's informing article to one such! That the new not yet born tasks every concerned world citizen is partly because, globalism looks beyond national boundaries pronouncing interdependence, transcendence and the need for good examples. We see how open democracy emerges meaningfully in these terms as we go on!

Lawrence Efana [Finland]

eleanor schiano on "The global financial mess: blaming the victims "

eleanor schiano — Tue, 16 Sep 2008 12:48:30 +0000

Ann Pettifor's analysis is brilliant. I have been warning of the current financial crisis for years. You may read my story (not updated - it is ongoing) at Yahoo search - "The Eleanor Schiano Story".

Funny thing is, for years -starting in '05, I went everywhere to warn US of what was happening in financials, debt collection, mortgages, and in our court systems. I went to US Solicitor General, US Attorney - Christopher Christie, NJ Dept of Justice, Washington Dept. of Justice, NJ and Washington "crime victims" departments, NJ Public Advocate, Senate Judiciary Committee, almost every Senator in Washington, numerous congressmen, Attorney Generals in other states, Department of Public Ethics in Washington, IRS chief attorney in Washington, Federal Bureau of Investigation in NJ and Washington, Dept. of Commerce in Washington, Securities and Exchange Commission, Senator Cody in NJ, Governor Corzine in NJ, Office of Comptroller of Currency, Federal Reserve Bank of Richmond, VA., Federal Trade Commission, US. Administrative Office of Courts, Office of Housing and Urban Development (HUD), numerous other individuals, and numerous journalists at newspapers. Everyone ignored me. They could have prevented billions of dollars being lost had they addressed the situation back then - but they did not. As a result, fraud is rampant and out of control.

steve brockbank on "The global financial mess: blaming the victims "

steve brockbank — Tue, 16 Sep 2008 10:28:27 +0000

what I would like to understand is whether you think this marks the end of the dominance of neo-liberal social and economic theory and if so what, as a model, you believe will replace it.

John Keeley on "The global financial mess: blaming the victims "

John Keeley — Tue, 16 Sep 2008 06:12:59 +0000

I would be interested to know what you think of Loren Goldner's analysis:

http://home.earthlink.net/~lrgoldner/imperialism.html

Steven Rogers on "The global financial mess: blaming the victims "

Steven Rogers — Thu, 21 Aug 2008 22:14:22 +0000

Voluntary forgiveness of a small percentage of sovereign debt is a very different thing from mandatory forgiveness of private debt. I don't see how it's possible to avoid the conclusion that this would have a severe impact on the ability of lower income people to access credit. And while seeing lenders under financial stress, and possibly going under, might be viscerally satisfying, it really doesn't do anyone any good.

It should be possible to work out a compromise short of outright forgiveness, involving extended payment terms or borrower assistance, that would avoid the negative consequences of either inaction or excessive action.

As for "repressing incomes", I'm not sure what exactly this is supposed to refer to. Who is actually repressing incomes, and how? And, for that matter, why? Anyone who follows stock markets knows that rising personal incomes are something the corporate world - and western governments - just love to see. When people have more they spend more, and that means more revenues and more earnings. Western corporations make high-priced goods, and people need money to buy them.

Ann Pettifor on "The global financial mess: blaming the victims "

Ann Pettifor — Mon, 18 Aug 2008 12:11:46 +0000

In response to one point in Mr. Rogers' comments on the blog - for which many thanks - the writing off of debts. While we may argue over whether writing off debts, clears or destroys balance sheets, let us not argue over what it does to the provision of new credit.

For it was this flawed argument that was used against those of us that called for the sovereign and unpayable, debts of poor countries to be cancelled by 2000. Once debts were cancelled, sovereign debtors immediately, and unsurprisingly, became more creditworthy. International creditors piled in to lend new money.....including the World Bank.

This presented poor countries with a new problem: how to keep lenders at bay? How to stop getting into a mess again? Certainly debt cancellation had not deterred creditors.....It had simply reflected reality. This after all is the principle behind all bankruptcy law: the enlightened recognition by the drafters of such laws, that debts become unpayable - often because of 'external shocks' - and that to restore health (i.e. activity) to the economic system, its vital to write them off, and begin again. Nothing new, or radical here, at all.

On increasing incomes: I merely suggest that governments are acting against the interests of the banking sector by attempting to repress the incomes of the heavily indebted (often in debt because of having to supplement their low wages by borrowing).

Governments currently attempt to repress incomes by the unpleasant means suggested by Mr. Rogers - i.e. diktats to managers in the public sector. To save the finance sector, they could withdraw these diktats...that is my only point.

Ann Pettifor

Steven Rogers on "The global financial mess: blaming the victims "

Steven Rogers — Fri, 15 Aug 2008 11:21:44 +0000

Ann Pettifor
needs to take a deep breath, and relax.
Perhaps a mild sedative is called for, or some chanting of an
appropriate mantra. If no appropriate
mantra is available, I suggest “hysteria is pointless”.

Governments
control the creation of credit through their control of interest rates. When governments wish to reduce the supply of
credit, they raise interest rates, thereby reducing demand for credit and
necessarily reducing supply. When
governments wish to increase liquidity, they reduce interest rates, therefore
increasing the demand for credit. All
wise governments know that if interest rates stay too low for too long, demand
for credit will exceed the rationally available supply and bad things will
happen, but Governments are not always wise, and political objectives sometimes
take precedence over sound financial management.

When the US
equity bubble burst in 2000/2001, a wise government would have simply accepted
a necessary recession and moved on. With
the impact of 9/11 compounding the equity correction, the US economy was judged
too vulnerable to endure a recession.
This may in retrospect have been unwise, but at the time it seemed to
make sense. Interest rates were dropped
to very low levels, and held there for a long time. Demand for credit naturally expanded, and
when it exceeded rationally available supply, suppliers adopted irrational
means to supply the demand. Cheap credit
drove prices for assets up, and the combination of cheap credit and rising
asset prices created the illusion of a free ride, with the increasing value of
the asset covering the cost of the credit needed to acquire it. This illusion was, of course, illusory, but
nobody wanted to say that, because the illusion made so many people happy.

At this point,
government should have responded by cranking up rates, reducing demand for
credit, and deflating the bubble.
Politically, though, this was not an appealing prospect. Just as the Clinton administration was never
interested in controlling the equity bubble, the Bush administration, waging an
unpopular war and struggling for credibility, was never interested in deflating
the real estate bubble. No politician
wants to get up in front of the people and tell them their houses and/or stock
portfolios are worth too much, and government is going to step in to reduce
their value. It’s easy to propose
countercyclic intervention, as Kemal Dervis did in a recent OD essay (which, by
the way, provides an excellent and informed antidote to Ms Pettifor’s
hysteria), but we have to accept that countercyclic intervention to control a
manic phase is politically a very difficult prospect. Voters like bubbles, until they pop, and
politicians don’t want to poop the party.

Let’s not forget
that until the illusion faded, subprime mortgages were seen, on both sides of
the political fence, as a progressive device for extending home ownership to
people previously unable to afford it.
What politician wants to pull the plug on something like that? Let’s also not forget that even if subprime
defaults reach 20%, as they might, that still means 80% of these borrowers will
end up owning a home, which they would not otherwise have been able to do.

The credit
explosion was not created out of thin air by the financial industry. It was a rational response to a perverse
incentive, created by government out of perceived necessity and sustained
beyond its rational limit by government’s unwillingness to take an unpopular
step.

The global
economy is not a popping balloon. It’s
more like a tire that’s sprung a leak.
The leak needs to be patched and the tire reinfllated; the situation
needs to be soberly assessed and measures taken to keep the problem from recurring. This process is underway. It’s an imperfect process, but all our
processes are.

Ms Pettifor’s
proposed “solutions” reveal an almost staggering ignorance of economic
realities.

Cancellation of
debts does not clear balance sheets, it destroys them. If governments force across-the-board debt
cancellation, that precedent will make it almost impossible for anyone to
extend credit to anyone beyond the most creditworthy (the rich) in the
future. That would result in an economic
collapse that would make the current problem look like a momentary dizzy
spell. For the middle and working
classes, who would be completely deprived of credit, it would make matters a
great deal worse than they are now.

Ms Pettifor’s
second solution is to “raise the incomes of the indebted”. Precisely how this is to be done Ms Pettifor
does not say… by government fiat, perhaps?
Are we supposed to decree higher incomes, without consideration for the
relationship between incomes and prices, or the relationship between the value
of labor and the value of the goods and services the labor produces? Does
anyone really need an explanation to understand why this is impossible?

One can only
breathe a sigh of relief at the knowledge that the Pettifors of the world have
little or no impact on economic policy.

Tony Flynn on "The global financial mess: blaming the victims "

Tony Flynn — Thu, 14 Aug 2008 12:42:25 +0000

Wonderful. The only point that is missing is the inflated mortgage and arrangement fees that funded the massive yearly bonuses for bank staff and other people in the Finance Sector of the City of London. All smoke and mirrors behind that curtain. Wasn't that a criminal deception?

There is however, an alternative solution to this financial chaos.

Westminster Politics and the changes in financial regulation allowed much of this nonsense. Even considering the destruction of the private Pension Schemes, Westminster had a duty to protect the savers and guard their retirement savings. But what did that useless lot of little Westminster virgins do? Absolutely nothing. And all got screwed.

Now is the time for all Employers and all Employees to alter their Employment, Work and Payment contract. Using an off-shore Agent, all staff can be employed and paid from an off-shore location so as to Legally avoid all Direct Taxation.

Then, using your Parish, Town and County Council, it is possible to construct an alternative system of Taxation that is controlled by the Taxpayers. As things are, I would feel much safer if Ann Pettifor and her team were in charge of the FSA., or at least HM Treasury. Regards, ATFlynn, "Norfolk's Mutineer"

Global meltdown plc: annual report, Ann Pettifor

Tue, 02 Sep 2008 22:36:17 +0000

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.

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