As promised last week, in this week’s Sunday Stabroek column I shall start a fairly extended discussion of the staggering financial crisis and worsening credit crunch facing the global economy, The epicentre of these is the United States.
Historically, the economic record of market capitalism shows clearly that, from its earliest beginnings, substantial credit, financial, and economic crises have periodically occurred as this mode of production became more and more deeply entrenched among nations and in regions across the entire international economy. In its most recent phase of maturity, commonly referred to as ‘globalization,’ the periodic credit, financial and economic crises have continued unabated. Indeed, if anything, these are now being transmitted across the global economy at an unprecedented pace, if not instantaneously. These have also been more and more tilted toward their credit and financial dimensions as compared with previous crises. In this basic sense therefore, we can argue that the origins of the present crisis lie in the intrinsic dynamics of market-based capitalist reproduction.
Given this general observation, it is nonetheless true that over time these crises have emerged in different forms and with various textures and manifestations. The present difficulties first became apparent in the third quarter of 2007. Regular readers of this column would recall that I drew attention to this at that time when referring to the “triple whammy” as it was termed, facing the United States and the global economy. These were rising food prices, oil prices and serious weaknesses in the sub-prime housing mortgage market of the US. The crisis of rising food prices is not as much a priority now as it was then. The price of a barrel of crude oil is now less than half what it was at that time. The weaknesses of the United States sub-prime housing mortgage market has, however, intensified to unbelievable proportions.
Volatility
Over the past two months (September-October) both the scope and scale of the credit and financial crises have unfolded with dizzying speed across the global economy! During that period the stock market has also shown exceptional volatility, losing and gaining trillions of dollars from one day to the next in the market capitalization of firms listed there, while trending downwards. Thus the Dow Jones Industrial Index has lost double digit percentage points since mid-October.
The speed of transmission of the present crises has added enormously to its complexity. As matters now stand it would require some serious effort on the part of readers of this column to fully grasp and comprehend the main outlines of the present difficulties, let alone to be able to discuss the various solutions on offer intelligently. In my recent columns on the EPA I had advanced the view that the complexity and technical nature of the EPA undermined well-intended efforts to make it the subject of broad based public democratic discussion. This observation, in my opinion, is truer for the present crisis.
Technical terms
As an indication of this proposition I have listed below 15 technical terms, which invariably recur in all serious commentaries on the present financial crisis and credit crunch that I have come across in the public media. These terms are:
1. Bubbles (whether they are financial, housing, stock
exchange or something else)
2. Herding behaviour on the part of buyers and sellers
3. “Mark-to-market” as the accounting basis for pricing
assets
4. “Short- sellers” as a class of investors operating on stock
exchanges
5. Inside versus outside regulation of financial and credit
markets
6. Financial innovations as risk diversification
7. “Financial weapons of mass destruction”
8. Credit-default-swaps (CDS)
9. Structured finance and the securitization of assets
10. Derivatives and options
11. Transparency in contract reporting
12. Golden parachutes
13. Leveraging and de-leveraging of debt
14. Fannie Mae and Freddie Mac
15. Rating Agencies, which we do not yet have in Guyana
In the columns to follow I shall introduce all these terms and seek to explain their significance in context and in a manner that I hope is readily accessed by typical readers of this column. I wish to assure those not mindful of making this effort that it will be worth doing. As I shall endeavour to demonstrate, one of the most important contributory factors to the present financial crisis and credit crunch is that several of the key credit instruments on which the global financial system is grounded are opaque and not well understood by both buyers and sellers. When traded assets are opaque to buyers and sellers there are no ways to ensure that the prices of these assets reflect underlying market realities of demand and supply. As we shall see this is presently the main problem posed by the sub-prime housing mortgages.
Historically, all major financial crises and credit crunches associated with the workings of the capitalist economy have had, in different degrees, negative consequences on the real economy where goods and services are produced and distributed. These usually come in the form of unemployment, falling incomes, reduced private consumption, loss of consumer confidence in the economy, the wipe-out of pension earnings and so on. The most infamous example of this situation was the Great Depression of the 1930s. The principal concern being expressed about the present situation is not simply that it is already the worst since the Great Depression, but that it might, if not aborted, out-match the damaging proportions of the Great Depression.
The issues surrounding this will be treated in subsequent columns.
As we shall see although the negative effects of the crisis on the real economy are certain, their full dimensions cannot as yet be foretold. The jury is open as to whether the global economy is in for a protracted slowdown, recession or depression.
