Economics
Crisis as an Inevitable Feature of Capitalism
What were the immediate and long-term causes of the current political economic crisis?
Today’s economic and financial crisis began in the rich world particularly in the U.S.A. It has been referred to as a financial meltdown, storm or credit crunch. Credit crunch is an economic condition in which investment capital is hard to get. It means that there is hardly any credit available for investors. For the rich countries, it has created panic and has been seen as the worst in recent years and has been compared to the 1930 great depression. In other words it has been a big crash or a bust (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
Even though troubles in the U.S. subprime mortgage market triggered the current financial crisis, its deep cause on the financial side is to be found in the faulty institutions and practices of the current financial direction, often referred to as the New Financial Architecture (NFA). This refers to the integration of modern day financial markets with the era’s light government regulation. After 1980, increased deregulation accompanied by fast financial advance inspired powerful financial booms that ended in disaster. Governments answered with bailouts that permitted new expansions to start. These in turn ended in disaster, which triggered new bailouts. Over time, financial markets grew ever bigger relative to the nonfinancial market, significant financial products became more multifaceted and opaque, and system-wide leverage burst. As a consequence, financial crises became more menacing. This process ended in the current crisis, which is so severe that it has pushed the global economy to the brink of depression. Fear of financial and economic crumple has provoked unparalleled government salvage efforts that have been, to date, not capable to end the emergency (Crotty, 2009).
In order to appreciate the root cause of this crisis one needs to comprehend the root cause of boom and bust. Dissimilar to popular opinion, this is not the product of capitalism or the free market, rather it’s caused by the environment of the banking and monetary system itself in the way it functions. The boom cycle is attained by the three pillars of the global financial system, which are fiat money, fractional reserve banking, and central banks. When the pyramid of debt created by this trinity gets out of control, it must be liquidated, creating what is known as the bust. There are many factors that led up to this situation:
1. Banks lend out more money than they take in. The basis on which banks can and do fail, is that if all depositors ask for their money back at the same time, the bank would be unable to meet such a demand as the money is simply not there.
2. Banks use what is termed a fractional reserve policy, which means they can literally take in $1 on deposit and lend out $10. Therefore the foundation of the banking system is essentially fraudulent. The money one thinks the bank has is really in fact not there. The business of fractional reserve banking is founded on faith and assurance.
3. it’s deceitful because banks are lending out money held on deposit which is supposed to be on demand and are in effect making money on money they do not have, and have no right to use.
4. Because of this fractional reserve system, and the fundamentally deceitful nature of it, it’s always probable that banks can fail. In order to avoid this scenario, central banks were created to be lender of last resort. In other words to supply the money the banks don’t have, in order to make good on their false promises. This is intended to maintain the faith in banks.
5. Central banks control the money supply at will, by controlling all fundamentals of the fractional reserve course, by changing the reserve requirements and the total money supply as and when believed to be necessary. Operating under a state granted monopoly, central banks have massive hidden power.
6. Governments love fiat money, fractional reserve banking and central banks, because it gives them access to free money with which to influence the electorate and carry out their goals. It permits governments to appear generous by over-promising on social welfare and to take aggressive actions by financing wars and disorder out of the same supply of money.
7. Money can be manipulated in this manner because it is what is called fiat money. Fiat money is paper money that really has no true or inherent value. It is given value simply by government authority, by way of the legal tender laws in each nation. Unlike the money which naturally evolved throughout history, like gold and silver, fiat money has no natural restrictions and no historical model for long-term success. When the state pumps up the fiat money supply, it loses its purchasing power.
8. Governments and bankers love fiat money and fractional reserve banking because they are partners and co-conspirators in the business of engaging in deceitful financial transactions.
9. The current economic crisis has its foundation in the growth of easy credit which creates the boom and bust cycles. This is made doable by loose monetary policy as set off by central banks and authorized by the political powers using the devices of fiat money, fractional reserve banking and central banks (the global financial/economic crisis: causes & solutions, 2008).
2. How has the current crisis impacted upon financial markets, the “real” economy and our everyday lives?
What we are seeing is an era where greed has become the foundation for economic growth. It is, therefore necessary to go beyond short-term financial bail out solutions and to seek long-term transformation based on sound ethical and moral principles which will govern a new financial design. The signs of the times are indicative of the fact that it is today probable to talk about these fundamental changes because international belief and the promise of cooperation are encouraging and there is a spirit of shared liability (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
Free market capitalism based on neo-liberal economics, meaning less state intervention in the market, is unfortunately considered the best system of wealth creation ever revealed by humanity. Today, it has proved to be impractical. It has taken dissimilar forms in history in a lot of countries but essentially it is about who should control capital. At the international level, this dispute is vague because there is no global government. Economically powerful companies, banks and multiparty organizations backed by the uniformly powerful states that control them in an inequitable way, rule and sway the world as is now being seen. These forces are once again proposing unsustainable solutions to the current crisis (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
A democratic state which stands for the public should in reality be the monitor that controls the failure of markets on the one hand and makes sure that practice of ethics and social justice on the other should direct all markets. What is really happening in the world is that there is a propensity to dampen this from happening despite the fact that the current free system has shaped several disasters in the area of food, jobs, and ecology and has further widened the gap between the rich and the poor between and among nations (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
Primarily, free market capitalism generates its own crisis. The misleading notion that markets can adjust themselves has now been uncovered as false. “Mr. Allan Greenspan the former Chairman of the U.S. Federal Reserve Bank and a staunch believer of free market has also admitted that markets cannot regulate themselves. The system created a global casino system which rests on virtual wealth. Finance has been detached from real economy. Secondly, new financial instruments and institutions were formed to manage this unjust and unfair system that punishes those who produce real assets and rewards those who do nothing except to speculate. Usury has been legitimized and institutionalized. This system has created financial bubbles that have bust” (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
The U.S. is the largest economy in the world. It has shaped the dollar as a worldwide currency. This arrangement gives it influence to stir other economies in the world. In the late nineties, the U.S. banks and the financial devices of the government became depositories of the excesses accumulated from petroleum producing countries. Banks were in effect flooded with money and ready to lend to those who needed it. It was at this time that the cheap lending and borrowing with a later rise in interest rates shaped the debt crisis for a number of poor and middle income countries threatening to default on payments. “Several other financial crises occurred including the Asian one in the 80s as finance became increasingly speculative transforming money into a commodity that can be sold and bought while de-linking it from real production of goods and services” (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
The U.S. is a property owning civilization and a number of the people wanted land and housing. Americans however scarcely ever create savings. “The country itself lives on other countries’ savings by issuing bonds to finance its excessive consumption. The current crisis began with cheap housing loans offered by banks. Banks provided loans but instead of holding the loan in their books, they packaged them into collateralized debt obligations (CDOs) and sold them to other agencies. These agencies passed them on to others and spread them globally as assets” (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
Interest rates were lowered and housing loans went up with construction activities leading to land prices increasing. The real estate was booming, generating employment and incomes. But as the rate of interest on housing loans came down, banks started to compete to get more business. Because of low interest rates, it was probable to borrow more from the same monthly payment to pay the old loan and still have some left as extra for a vacation or to buy something else. Some went for a second house as an investment. The problem started when housing loans came to be at rates below the prime rates of banks, known as sub-prime lending. Banks thought that land prices would continue to go up and did not bother to examine economic credentials of borrowers and their capability to pay back. “The scenario was known as ninja loans – no income, no job no assets” (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).
Lack of appropriate information to borrowers and slow rising of interest created trouble for some borrowers to close the mortgages. Defaults appeared and questioned the sustainability of the real estate and housing boom in 2007. In the middle of 2007, the bubble began to burst when information came out that mortgage hedge funds with two institutions were in trouble. “The problem spread to CDO’s linked to subprime mortgages which in turn had its impact on some investment banks. At the end of 2007, well-known financial institutions like Citigroup, Merrill Lynch, Lehman Brothers, UBS, and the Bank of America had to announce major write downs. The crash came in the middle of 2008 with Lehman brothers going bankrupt. Lehman brothers were outside the banking system (shadow banking) and could not get support from the Federal Reserve Bank of the U.S. The American Investment Group (AIG), the giant insurance firm operating globally also went under” (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009). Attempts were made to fix the situation through mergers and buyouts but the situation did not become stable. With this came fear spreading to the stock market which is the altar of free market capitalism. The credit squeeze and layoffs affected many households, predominantly those relying in credit cards. Because spending went down, it led to deflation which turned into recession (Steinberg, 2008).
3. What has been the response of governments to the political economic crisis?
The political leaders who once thought that one could spend and borrow their way to affluence now seem to distinguish that indeed something is very wrong. Yet they still do not view the big picture and have instead paid attention to individual elements of the problem without taking a holistic approach (the Economic Crisis and the U.S. Policy Response: Just Right, Too Little or Too Much, 2011). “Their reaction to the economic mess was to pass bailout bills worth over $700 billion, provide insolvent banks with taxpayer cash, guarantee bad debts, and purchase toxic assets. These responses have channeled most of the to our financial institutions in order to increase their liquidity” (Avizius, 2009).
The first problem with taking this approach is that the government is handing money directly to the very same people who caused the problem to begin with. These people are vermin on the system. They do not create anything. They do not generate any wealth. They just maneuver the money that the producers in the economy have managed to save or invest and skim a percentage off the top for themselves (the Economic Crisis and the U.S. Policy Response: Just Right, Too Little or Too Much, 2011). This leads to what is known as a moral hazard. While it may not have been the perfect answer, it would have been a better to give every American taxpayer a check with the stipulation that it must be used to pay down debt, or if the taxpayer had no debt they could put the money into a bank and hold it there for 1 year and after that the money would be theirs, to do with as they please (Avizius, 2009). This would have offered an immediate shot of cash to the banks, allowing the people who would in the end have to pay the bill to have at least reaped some of the benefits. This advance would have served to prevent some foreclosure on homes as well. This approach would have given money to the banks that made cautious decisions and allowed those that were totally insolvent to fail. The responsible banks could have picked up the slack of the ones that failed.
The second problem with the bailout approach was that the people who were in charge of put into practice the program, were themselves complicit in making the mess, and failing to foresee and inform the nation of the problems that are now being seen. “Secretary Paulson was the CEO of Goldman Sachs for 8 years before becoming Treasury Secretary. He was in charge of the largest Wall Street firm that wrote these questionable financial instruments and then made even more money by betting against these very same instruments once he knew the market was going to collapse. Paulson left the scene with an estimated personal net worth of $700 million. Timothy Geithner was president of the Federal Reserve Bank of New York and also failed to predict and warn the nation of the impending disaster. He played a major role in the $30 billion bailout to prevent the bankruptcy of Bear Stearns. He also played a major role in the bailouts to investment banks. Now these same people who failed to see the warning signs of this crisis were placed in charge of trying to fix it and are distributing $100’s of billions of borrowed money to their friends on Wall St.” (Avizius, 2009).
The third problem with government’s response was the fact that the funds were distributed and the public was not told to whom (Sylvester, 2008). The only thing that we do know is that only those companies deemed too big to fail had money given to them with few strings attached. This can be seen as a sort of reverse Darwinism where the weak survive because of government intercession, leaving the accountable and strong to fend for themselves in this atmosphere that favors the big and weak providing them with competitive advantages as a consequence of government interference (Avizius, 2009). This continues to be a system where profits are kept by the elite, but losses are publicly financed by the taxpayer standing the entire capitalist system on its head. This is corporate welfare at its absolute worst (Steinberg, 2008).
The fourth problem has to do with how the bailout money was used. It created companies that used the money to get even bigger and fatter than they were before. One of the problems was that bank lending had frozen and the goal was to get banks to start lending again. Yet, most of the money was going to all of the too big to fail companies. Common sense would tell anyone that any company that is too big to fail is a mortal threat to the economic well being and national security of the United States. These companies should be broken down into smaller pieces in order to reduce this threat. Instead we have again another vicious result that these banks and financial houses are using the funds extorted from the taxpayer to obtain and merge with other banks to become even bigger and fatter than their current too big to fail size. “This is not a sustainable model and is what got us into this mess to begin with. If we had smaller banks and financial houses, this economic mess would be significantly easier to manage” (Avizius, 2009).
The fifth problem with the bailout is its focus on trying to get things moving by having the banks start lending again so the consumer starts spending again in order to continue what was an unsustainable model to begin with. The banks are now doing what they should have done in the first place and that is to be careful who they lend to. The consumer is now doing what needs to be done by no longer spending, paying down debt, and saving. These things are precisely what the economy needs to start healing itself and to build a solid basis for the future. Instead the government is trying to restart the existing system and keep the flawed model going. This may delay the eventual crash, but will only worsen it once it does come. There needs to be some pain so that the problems in the system can work themselves out, rather than putting off the pain and making the situation worse by piling added debt onto the problem. The bottom line here is that these problems were caused by too much debt, and the government’s advance is to solve it by creating even more debt. Common sense tells us that cannot work (Avizius, 2009).
The sixth problem with the bailouts is that no one seems to be asking where the money is coming from. There are only two sources from which it can come: creditors or to have the Fed print the money. If the government prints more money than it is currently doing, there will most certainly be ruinous inflation in the future (Steinberg, 2008). This inflation would destroy those on fixed incomes or collecting pensions. “This printing of money out of thin air could ultimately result in the total collapse of the dollar. We have so far wasted over $350 billion in bailouts and not added anything to the productivity of the nation which is needed to solve this problem” (Avizius, 2009).
The seventh problem with the government’s response is that one of goals they are trying to achieve is to even out home prices. This approach is comparable to a doctor giving a patient with cancer pain killers to ease their suffering, but not doing anything for the cancer itself. The government is treating the symptoms of the problem, not the root cause of the problem (the Financial and Economic Crisis, 2009). In the economy, over the last couple of decades there have been millions of people who have lost their well paying jobs and are unemployed, underemployed, or employed with earnings considerably less than at their previous jobs. “These people can no longer afford the houses they have. This causes them to go into foreclosure and starts the downward economic cycle. Once home prices reach a market dictated price level where the masses can afford to buy again, the prices will stabilize. Any attempt by the government to try to fix prices is doomed to failure and will result in vast amounts of money going down a black hole. This money will then not be available for other productive uses. Home prices must naturally drop in order for the workers in the economy to be able to afford them again” (Avizius, 2009).
There are certainly other issues with the government’s approach to this current crisis. What we have seen with this economic crisis is the consequence of exceptional greed by a few at the expense of the whole nation and world. The growth of personal wealth by the privileged is astounding. We have seen the largest reallocation of wealth from the lower and middle classes to the elites in history. The corporate media talks about redistribution of wealth, but in reality this wealth has flowed upwards, not downwards. “The masses have been told that this wealth it will trickle down to them. Now they have become aware that the elites are feasting at a huge table, and the masses are supposed to be happy for the crumbs that trickle down for them to share among the masses. The sheer weight of the by these greedy people threatens to bring down the entire system. The unintended consequence of this may well be that middle America will no longer be investing and supporting the conglomerates of greed” (Avizius, 2009).
4. Does the crisis mark the (beginning) of the end of neo-liberalism and/or capitalism as we know it?
For over three decades, neoliberalism has reshaped the worldwide political economy. Largely, neoliberalism stresses the requirement and appeal of transferring financial power and control from governments to private markets. Starting in the 1970s, this viewpoint dominated policy-making in the West, and spread internationally after the Cold War. A lot of analysts credited neoliberalism with the prosperity and power of the global economy during the 1990s and 2000s. “The Global Financial Crisis of 2008 has shaken neoliberalism’s hold on policy, with many suggesting that its policies were responsible for the collapse. The current crisis may have shaken neoliberalism’s supremacy, but it remains un-challenged by serious alternatives and continues to shape post-2008 policy” (Centeno & Cohen, 2012).
Given the attention dedicated to analyzing globalization since 1980 as approximating neoliberalism, it is important to question whether the post-Washington accord represents a noteworthy departure from this model, or simply a deviation on it. Clearly, a toughened role for the state need not mean the end of neoliberalism. “Indeed, it has been described a phase of roll out neoliberalism in the U.S. And the UK, characterized by new forms of institution-building and governmental intervention, in which neoliberalismis increasingly associated with the political foregrounding of new modes of social and penal policymaking, concerned specifically with the aggressive reregulation, disciplining, and containment of those marginalized or dispossessed by the neoliberalization of the 1980s” (Esteva, n.d.).
“This shift has resulted as a response to the failures of the Washington Consensus to make good on its claims, to the 1997 Asian economic crisis, and to increasingly trenchant contestations of neoliberalism in civil society and states. Whether the result can be characterized as an extended variant on neoliberalism is not easily answered, reflecting theoretical uncertainties about where the borders between neoliberalism and other modes of capitalist governance lie, as well as the variegation of really existing modes of governance across time and space. One aspect did not change, however. The location of expertise in a geography of power emanating from the global north in general, and U.S.-based institutions in particular” (Sheppard & Leitner, 2009).
There is universal agreement that we are at the end of an historical cycle. But the agreement vanishes when one tries to identify the corpse. We can no longer accept that it is just another business cycle, as the experts still proclaim, but neither can we blindly take for granted the end of globalization, neoliberalism, capitalism or the modern era, as many critics currently argue. Raised with a guarantee of infinite prosperity beyond business cycles, at the end of history after the marriage of capitalism and liberal democracy, people have suddenly entered an era of decreasing expectations and increasing doubt (Esteva, n.d.). “There is no doubt that hard times loom over us as global fear grow. Denial operates its consistent shield masking despair with business as usual, while at the other end of the spectrum, prophets of destiny indulge in apocalyptic randiness” (OECD Strategic Response to the Financial and Economic Crisis, 2009).
While current policy action has rightly concentrated on dealing with instantaneous stability concerns, an inclusive strategy is needed to calm the impact of the current recession and put the global economy back on a continued growth route. This must include productivity enhancing changes in order to support growth beyond the short-term. So far, the fiscal stimulus measures all have include investments in infrastructure, offering an outstanding opportunity to deal with other pressing tests. Packages should include enticements for friendly investments, in order to maximize growth while addressing change. Measures to maintain innovation should add to a long-term growth, while social and regional policies should also be leaning towards recovery. Given the size and importance it will be critical for governments to make sure that policies are carefully designed and well implemented. An effective and sustainable global response will necessitate the involvement of all major players, as well as better co-ordination and greater coherence among the major international organizations (OECD Strategic Response to the Financial and Economic Crisis, 2009).
In the wake of the 2008 financial crisis there has been a mark left on major institutions, and homeowners, along with a huge scar in the way American Politics operates, or the lack there of. American Voters now more than ever want to have there voice be heard on Capitol Hill, and their anxiety of money is becoming smaller and smaller as the amount of money that the country deals with grows larger and larger at a constant sky-rocketing rate (How American Politics Have Been Changed by the 2008 Financial Crisis, 2010). Change needs to happen and the sooner the better.
References
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