Critical Times

The instability of worldwide stock markets continued into a second week with big swings both up and down in main capital cities. While most comments put the blame on the bursting of the housing bubble and the slow down in the economy of the United States there are more fundamental reasons. They are not going to go away even if there is some temporary stabilisation. The US government is attempting to rescue the stock market by pumping $US150 billion ($A173 billion) by way of tax handouts, one third of which are going to the middle class and the wealthy. The US Federal Bank has lowered interest rates in a hasty panic cut of 0.75 percent — the biggest interest rate cut since 1982.

Unemployment has risen sharply in the US, consumer prices have jumped, new home sales have plummeted and overall growth is at a low level.

Hillary Clinton claimed that it is a “global economic crisis” but the reality is that while its effects are global it is a “made in the USA” crisis.

The Australian media has been selectively quoting the remarks of George Soros*, billionaire, political conservative and financial guru who has meddled in the affairs of many countries. His most recent remarks concerning the present crisis are more to the point than those of most commentators.

Credit expansion

In a Financial Times article last week he wrote that “Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives … which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US President Ronald Reagon called the magic of the market place and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest.” George Soros goes on: “It is an obvious misconception because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves.”

Exactly the same policy of government intervention is being pursued by the US government in the present crisis.

By “fundamentalism” George Soros obviously refers to what has become known as “economic rationalism” or “neo-liberalism”. Soros writes: “Market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit. Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced.” But now, writes Soros, “The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves.” The truth is that many other countries are selling off their dollar reserves and trading in other currencies.

Credit boom

Writing of the credit boom Soros says: “Since 1980, regulations have been progressively relaxed until they have practically disappeared. The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks … the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility. Everything that could go wrong did. What started with sub-prime mortgages spread to all collateralised debt obligations. … The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no long get outside financing.

Final blow

“The final blow came when inter-bank lending … was disrupted because banks had to husband their resources and could not trust their counterparties. Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. … The current crisis marks the end of an era of credit expansion based on the dollar … The periodic crises [since WW II] were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”

Soros concludes: “Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recess than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world (see page 12).

“The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.”

*George Soros is the chairman of the Soros Fund Management.
the guardian