This rather overblown metaphor is simply to point out that, at the end of this shambles, standards of living everywhere will be very much lower than before the universal bankruptcy.
There is US$600 trillion (trillion!) of multi-leveraged, packaged and repackaged debt sloshing around the world and no one, absolutely no one, knows who really owns it or knows how much these toxic assets are worth, if they are worth anything – which means that no one, absolutely no one, knows what to do to solve this developing catastrophe. Bail-outs, stimulus packages, IMF hand-outs, one interest rate cut after another, one desperate mini-nationalisation after another, all are proving to be too little, too late. The great ones of the world shuffle around in a maze of make-believe. They remind me of Yeats’s great line in The Statues – “ Mirror on mirror mirrored is all the show.”
I cannot understand why there is still a debate whether what is fast developing is going to be a severe recession or something worse. It is going to be much worse than a severe recession. The only comparable period of financial and economic misery may perhaps be the Great Depression and this meltdown will be even worse than that world disaster since economies are at a much higher level than they were in the 1930s, and the fall therefore will be that much more calamitous. The only development that might avail against this great meltdown is an immense new war (as World War Two brought an end to the Great Depression) and that is not a very happy solution to contemplate.
It is generally reported that what started this worldwide disaster was the bursting of the American sub-prime mortgage bubble. But much more than this was involved. As Nouriel Roubini, Professor of Economics at the Stern School of Business, has pointed out: “The crisis was caused by the largest leveraged asset bubble and credit bubble in history. Leveraging and bubbles were not limited to America’s housing market, but also characterized housing markets in other countries. Moreover, beyond the housing market, excessive borrowing by financial institutions and some segments of the corporate and public sectors occurred in many economies. As a result, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, and a hedge funds bubble are all now bursting simultaneously.”
A number of vicious circles of deleveraging, sinking asset prices and proliferating margin calls are all spinning together out of control, all fuelled by fear and panic, those accelerators of disaster par excellence.
This is systemic failure of immense proportions. This is a generalized run on banking systems everywhere. And the so-called shadow banking systems – broker-dealers, non-bank mortgage lenders, restructured investment instruments hedge funds, money market funds and private equity companies – are also experiencing a run on their short-term liabilities. We are beginning to see the results all around us. Those who too trustingly grasped at the too-good to-be-true returns in this shadow world are ruing the day. There is greater rue by far to come.
In this meltdown surely it is obvious that developing countries, especially small developing countries, are going to suffer more than anyone. Joseph Stiglitz, Professor of Economics at Columbia University and 2001 Nobel Prize winner, summed up the situation very well after attending the recent World Economic Forum in Davos:
“This crisis raises fundamental questions about globalisation, which was supposed to help diffuse risk. Instead, it has enabled America’s failures to spread around the world, like a contagious disease. Still, the worry at Davos was that there would be a retreat from even our flawed globalisation, and that poor countries would suffer the most.
“But the playing field has always been unlevel. How could developing countries compete with America’s subsidies and guarantees? So how could any developing country defend to its citizens the idea of opening itself even more to America’s highly subsidized banks? At least for the moment, financial market liberalization seems to be dead.
“The inequities are obvious. Even if poor countries were willing to guarantee their deposits, the guarantee would mean less than that from the United States. This partly explains the curious flow of funds from developing countries to the US – from whence the world’s problems originated. Moreover, developing countries lack the resources to engage in the massive stimulus policies of the advanced countries.
“Making matters worse, the IMF still forces most countries that turn to it for help to raise interest rates and lower spending, worsening the downturns. And, to add insult to injury, banks in advanced countries, especially those receiving aid from their governments, seem to be pulling back from lending in developing countries, including through branches and subsidiaries. So the prospects for most developing countries – including those that had done everything ‘right’ – are bleak.”
When untold millions are losing their jobs and are therefore poorer, when untold millions are losing value in their houses, stock portfolios and other assets and are therefore poorer, when untold millions of savers are getting less and less for their savings as interest rates go down towards zero and even the prudent are therefore poorer – I cannot understand where the increased spending is to come from to revive the various economic corpses littering the landscape. Of course governments can spend by printing money hand over fist but that isn’t going to be nearly enough to fill the rapidly growing private shortfall. And anyway I thought governments printing money led to galloping inflation which is financial meltdown by another route.
What I really hope is that I have completely missed something and that a magic wand – perhaps one waved by President Barack Obama – will miraculously moderate the meltdown, then convert it into a sturdy recovery which will in turn lead to the first Great Euphoria of the 21st century. But what I very much fear is that what we are experiencing is a Great Adjustment which in truth the world needs to survive at, yes, a much lower but at the same time more sustainable standard of living.
