As we all know, habits are hard to break, especially when they have been reinforced by repeated behaviour for so long.
The fall out from the US losing it’s triple A rating will only be known in the coming days. The comments in the business pages are fairly predictable on the whole. The Spectator through Fraser Nelson writes that Obama is “addicted to debt” while at the same time stating that the triple AAA rating may not affect US borrowing at all except make it somewhat more expensive to borrow.
It’s kind of amusing that Obama is being blamed for high debt, when it was President Bush who ran up the deficit at the same time as cutting taxes they could not afford on the same ideological grounds stated by commentators on the right. Apparently the same arguments used for Cameron et al for “inheriting the crisis”, cannot be applied to Obama by the very same people.
Yet at no point does Fraser Nelson, or many others question the legitimacy of the credit rating agencies themselves.
World leaders are bracing themselves for a volatile week ahead where the markets have us all on the run, and could well create the crisis they are worried might happen by making the Italian debt too expensive to service.
Since 2008, responsible governments have been trying to contend with a catastrophic financial crisis by dealing with the symptoms and not the causes, because as usual the causes are very difficult to confront. A financial crisis that was not predicted by most economists, the IMF, World Bank, world leaders, think tanks or credit rating agencies.
Indeed the IMF and the credit agencies were at the forefront of causing the crisis by a) an economic orthodoxy of encouraging or even forcing countries to deregulate, sell assets and open up markets b) valuing assets and financial products with AAA ratings that were in fact junk, thus encouraging frantic trading in worthless financial products that were too complicated and/or no one could understand or value.
Yet now, whenever a country justifies it’s economic policy or deficit reduction plan, it immediately quotes the endorsement of the IMF as an authority on sound economic management, which it quite obviously is not. Then we trot out the belief that we have to satisfy the credit agencies, which have been completely discredited.
CREDIT CRUNCH AND RECESSION
In 2008 governments looked to the only crisis in the recent history that matches the extent of the crisis today – the 1930’s – and attempted to ensure that a depression did not ensue.
The US tried to let some institutions fail, like Lehmans – this was a disaster and the realisation of banks being too big to fail led to the effective state ownership of the banking system and coordinated stimulus packages.
Recession hit, tax revenue fell and deficits increased. Since then, rather than bouncing out of a deep recession, the western economies are stagnating and are being hit hard by other external factors and economic shocks – natural disasters, war, commodity prices, food prices and raw material costs.
While some discussions have been had regarding ensuring that the financial crisis does not repeat itself, the world financial system and the ideologies and agencies that influence it have not changed.
The IMF and World bank are at the forefront still of economic prudence; credit agencies still have the ability to sink economies and companies; neo-liberalism is the mainstay economic ideology; while the banking industry and derivative products have not been reformed.
In short – the CAUSES have not been dealt with.
THE FUTURE FINANCIAL CRISIS
Next week could see the other credit rating agencies downgrading the US – if this happens the costs of borrowing for the US will increase and further undermine markets. It could also call into question the dollar as a banker currency.
The markets could well ensure the crisis hits Italy as the interest costs to service the deficit rises toward 7%. This would lead to a default position, even though their deficit is relatively low (under 5%) and their debt is largely held by Italian investors. The self fulfilling prophecy of the markets acting hysterically could be the straw that breaks the back of the Euro zone with the dithering of northern European leaders.
The markets are held as the bastions of correct decision making by marketeers. “The markets are always right” is the mantra – but in reality, they can “create” the very problem they are afraid of. Akin to the phobia of having a mental breakdown, and worrying and getting so stressed out that it creates one. Hardly logical.
When we consider the underlying problems of the world economy, the debate over how deep to cut the deficit seems “almost” irrelevant. If we do not reform how we create money; the undemocratic and ideologically driven IMF; and allow the banking sector to be too big to fail, then a further crisis and financial collapse is inevitable.