open Democracy News Analysis - America’s financial meltdown: lessons and prospects, Ann Pettifor - Comments

ally o. hing on "America’s financial meltdown: lessons and prospects"

ally o. hing — Tue, 03 Mar 2009 03:31:31 +0000

The housing crisis (in USA) started it all. We need lower cost houses and housing, based on medium affordable incomes of Americans. Builders can build for 1/3 of current costs if they abandoned the rectangular designs and go to the tetrahedronal ones to save on trusses and extra unneeded materials.

LIAQUAT HOSSAIN on "America’s financial meltdown: lessons and prospects"

LIAQUAT HOSSAIN — Fri, 28 Nov 2008 08:15:40 +0000

I hear the tremble of world economic outburst, destroying superpowers, creating isle of new lands for would be super powers and prowess.

Most of all, I can see more and more beggars in our streets are knocking at car windows, so transparent, we might have our days numbered.

You wrote an excellent stuff. Thanks.

Not logged in on "America’s financial meltdown: lessons and prospects"

Not logged in — Wed, 15 Oct 2008 20:38:20 +0000

At last, someone saying it as it is.
Who the hell pays CNN to report...

Ann, I'm an engineer, no sophisticated financial lingo.

America is broke people... in fact its in hyper inflation. Gross mismanagement by leaders.

They thought that because the dollar is the worlds reference currency, they could abuse it. They partly right because even though the USA is broke, the currency seems to hold its value against others.
That would never happen on another currency.

So those greedy bastards thought they could manipulate good economics, and now they in sherbet street, but the problem is that the dollar is *hooked* into the world as a basic measure of value.

The net result is, they are now crashing the entire worlds economy. See this link...

http://coolharbor.100free.com/debt/usadebt.htm

I dont believe its because they abandoned Bretton Woods... I think its because they were blatantly trying to manipulate global economics... they are dirty rotten scoundrals, and Bush is incompetent.

God Help Us, because the only way now is for all nations to first realise they hooked into an inflation machine that the USA cant fix, printing money just makes it worse, and that the world has to bail the US out of a deadly inflation cycle.
Bush is still trying to show everyone he has a bigger dick, and the problem is the WHOLE world has to get together and stop the inflation machine... if they cant, there will be a war.

You cant break money itself, and expect the planet to still be peaceful... lobby your governments, they have to fix it. What they doing now wont work...

This is no normal recession or down turn... Bush has broken money itself, just look at ALL the countries, they are crashing... the housing bubble is just a symptom... this is very very serious, the world has to talk.

Not logged in on "America’s financial meltdown: lessons and prospects"

Not logged in — Wed, 15 Oct 2008 09:48:05 +0000

it's a pity most of us thought that americans knew the secret of everything like war, ban, stopping others from producing nuclear reactor etc not minding that the are becoming fast unpopular among other nations. may God help them! Amen

PeeKa on "America’s financial meltdown: lessons and prospects"

PeeKa — Sun, 12 Oct 2008 21:03:39 +0000

Yes it's not going to be easy!

http://peekablog.net/2008/10/what-caused-the-financial-crisis/

Eluwitschanessic on "America’s financial meltdown: lessons and prospects"

Eluwitschanessic — Thu, 02 Oct 2008 14:25:07 +0000

Why can't we all just get along???

Cash&Burn on "America’s financial meltdown: lessons and prospects"

Cash&Burn — Mon, 22 Sep 2008 12:52:33 +0000

Pettifor notes that her 2003 book 'predicted' today's debt crisis, but I can't find myself agreeing with her doom-laden prognosis.

Firstly, surely she should welcome the present phase of deleveraging? There has been a credit excess, now the industries that have gained the most from this excess are collapsing. Who are the losers here? Consumers? Hardly, even mid-crisis credit conditions are relatively benign. If Pettifor could point to a substantial increase in defaults beyond historical averages amongst non-irresponsible borrowers (such as those that took out a mortgage without putting down a deposit), I'd be interested to see it.

Secondly, her book from 2003 was called 'debt and deflation'. She ignores the latter but rejoices about the former. Surely something half right is also half wrong, which is somewhat less impressive and suggests some kind of flaw in the analysis.

Thirdly, any focus on the IMF is largely redundant. The institution is basically irrelevant and is casting round for something to do. Globalisation of finance the rise of commodity-producing countries has pushed it to one side, and note Argentina's decision to ignore it. I can't find any mention of these issues in Pettifor's biased piece, instead she seems rather stuck in the 1990s.

spamlet on "America’s financial meltdown: lessons and prospects"

spamlet — Mon, 22 Sep 2008 10:46:30 +0000

This is all reassuring reading, and fits quite nicely with Tony Curzon-Price's piece:

http://www.opendemocracy.net/blog/admin/2008/09/19/constant-returns

Both require democratic reform before progress is likely, I fear.

JFox on "America’s financial meltdown: lessons and prospects"

JFox — Sat, 20 Sep 2008 09:42:33 +0000

The comments of drglasgow and DavidHSmith9 are both spot on. The latter's reference to fractional reserve banking (FRB) could not be more apposite. FRB lies at the heart of deregulation because it allows anyone with a banking licence to lend money they don't have. Few of us realize that when we borrow money from a bank, the latter is not on the whole recycling depositors' funds but creating new money out of nothing by means of a simple balance sheet adjustment. That's how banks have grown so fat. The loan increases their assets, while the interest on the loan adds to their profits. The collateral? Property that borrowers acquire with the money. Trouble occurs, though, when the borrower can't keep up with the interest payments and when the value of the property (i.e. the asset) goes down. Then, the whole structure starts to sink not least because the bank still has to go on providing cash to customers as well as interest on deposits. The bank can repossess the property - but, of course it isn't worth the amount stated on the balance sheet; and when the bottom drops out of the market, it can't be resold and turned into quick cash. Result? A liquidity crisis. Banks run to other banks for loans to tide them over. But no one trusts anyone any more....I'm simplifying here for the sake of brevity, but this is essentially what has been taking place. The new money banks create with loans gives them a wholly unearned purchase on the goods and services of the country (or the world) i.e. on the products of our labour. Successive western governments on both sides of the Atlantic have therefore presided over a system that, in effect, permits banks to act as swindlers. Their excuse for doing this is that FRB frees economies to grow. In fact what it does is uncouple the money supply from the growth in production of goods and services. Consequences? Inflationary pressures counteracted by increases in inequality as blue-collar and middle-class incomes are squeezed, well-paid jobs go abroad, and cheap imports replace locally-made products; while a rich elite grows ever more obscenely wealthy. World trade - and in particular the international exchange of financial instruments - has rocketed since deregulation; but growth of world output has been modest at best; and a third of the world remains unemployed. In other words, lots of money has been sloshing around the world, but it's been in the hands of speculators and gamblers - the kind who run banks, advise governments, and in the UK are called "sir" and "lord"; the kind who initiate runs on currencies and institutions they have identified as "vulnerable". Fundamentally, what is as stake here is not simply the fate of national economies - or even the world economy (if such a thing truly exists) - but the nature and even the viability of western-style democracy. But that is a subject for another day.

blackantelope on "America’s financial meltdown: lessons and prospects"

blackantelope — Fri, 19 Sep 2008 19:25:39 +0000

lets face the facts. we all had it coming to us. we got drunk in the biggest happy hour known to man. now the hangover. but at the core is the failure of goverments to realise that we were sleep walking into disaster. they are the gaurdians. the financial sector was completely out of control and we danced with them at the edge. but the small man will get wiped out with this. this will be a culling, mark my words the pain will ripple like a tsunami. the question is what new landscape are we walking into.

DavidHSmith9 on "America’s financial meltdown: lessons and prospects"

DavidHSmith9 — Thu, 18 Sep 2008 16:14:05 +0000

It is surely time to spell out solutions. There is one that might have attracted more attention if it had not been against the interests of bankers, and the politicians beholden to them. That is to replace fractional reserve banking with a system in which commercial banks are no longer allowed to create money out of thin air thus leaving the rest of us in debt to them. Instead central banks would create money at the behest of governments.

Under what I believe is the most practical system, on a certain date credit balances in customers’ current accounts would become legal tender and the absolute property of the depositer rather than just something owed to them by the bank. The commercial bank’s liability to the customer would become a liability to the central bank, which the commercial bank would be expected to repay within a reasonable period. Commercial banks’ credit balances on their operational accounts with the central bank would also become legal tender. After that all loan advances made by the commercial banks would be in legal tender.

This would remove banks’ excess profits and would give governments much better control over the money supply, and power to direct investment in specific directions. As such I believe it would be a useful adjunct to the Green New Deal, which Ann Pettifor helped to draw up.

As I understand it the credit crunch has led to a dramatic reduction in the money supply (97% of which has been in the form of debt in the UK in recent years). If the reform I suggest were implemented now, central banks could create new money without adding to the inflation caused by high prices for oil and other commodities. For more on this go to www.moneyasdebt.net and www.jamesrobertson.com .

efkdal on "America’s financial meltdown: lessons and prospects"

efkdal — Thu, 18 Sep 2008 09:41:35 +0000

If you live high off the hog as Americans and we do, if you do not earn that high standard of living by making something others wish to buy, then eventually you have to pay. Some (bankers, bonus takers) did better than others. You can decide where you fit. But now all of us, there is no proportionality, no fairness, bankers got more than me, but all of us will pay. That is the way our economic system, if that isn't an oxymoron, acts.

AZ on "America’s financial meltdown: lessons and prospects"

AZ — Thu, 18 Sep 2008 04:46:46 +0000

myriad bloated social(ist) programs

Uh, which programs might those be--Head Start? WIC? Medicare/Medicaid? Annual spending for every social(ist) spending program in the US still doesn't add up to even a fraction of what is spent in Iraq per year.

gebauer on "America’s financial meltdown: lessons and prospects"

gebauer — Wed, 17 Sep 2008 22:55:55 +0000

When will the humanities (like economy) learn that in the Universe nothing can be obtained or made from void? The leverage mechanism as described in the article is like the creation of "free" energy. You are not allowed to patent a mechanism like that, because it would be deemed as a fraud. I, as a citizen from the third world ask: Why are those financial geniuses not in jail? Because they are well connected?

Salao85 on "America’s financial meltdown: lessons and prospects"

Salao85 — Wed, 17 Sep 2008 18:23:40 +0000

I am confused.

You start out by saying that the problems are the fault of the private sector credit creation machine and not the Fed then you argue that the Fed could have controlled the whole thing by reintroducing capital controls à la Bretton Woods and used its isolation to control interest rates that were according to your opening not to blame in the first place and shouldn't be tampered with now. Is it international flows of "excess capital" from China to the Fed or private sector regulation that is the problem?

I thought you were going to argue that the circumvention of national regulations was to blame and the companies that are now going to the wall were over leveraged as a result. Wasn't it capital adequacy ratios, off ballance sheet value at risk and so on, not the lack of internaional capital controls that precipitated the colapse of these large companies?

What is "excess capital"? I can see why a country that is presently making money out of exhaustible resources would treat some of it's present income as a "retirement fund" or future development fund that can be used to restructure away from the resource once depleted, but, in the context of an industrial power like China where much of its population is in need of basic spending that this money could provide I'm not sure what excess means. Does that mean that China is partly to blame?

in a separate point you say that foreign capital is not intrerested in US assets sighting Korea Development Bank's refusal to buy Lehmans then you say Buffet is right that a major risk in the futue is the sharecropper outcome of American business being owned by foreigners. How can these both be true?

America’s financial meltdown: lessons and prospects, Ann Pettifor

ann.pettifor@neweconomics.org — Wed, 17 Sep 2008 23:59:31 +0000

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.

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