Sir Mervyn King has stated about the World Economic Crisis that:
This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever.
Just the latest in a line of adjectives to be uttered by world leaders; economists; the IMF; the World Bank; politicians and commentators.
This latest declaration of doom is nearing the end of the last roll of the dice for the Euro and the current system of capitalism as we know it.
Even John Major is being seen as being back in vogue as he waded in to the debate on the economic crisis by stating that the Euro is unbalanced and that Germany has massively benefited while the weaker Euro nations have suffered. His argument is that the Euro was formed with the wrong exchange rate causing massive imbalances within the Euro zone, so it was formed at the wrong time, without the right convergence policies in place and at the wrong rate.
He may well have a point, but sadly, his analysis probably comes from his own personal inadequacies on economic policy in the early 1990’s when he himself made those very same mistakes when entering the ERM. The result was a massive home grown recession.
The past week has been another turbulent week for the markets, banks, investors and savers.
The latest of many shocks to the system has been the downgrading of British Banks by the credit agency Moodys. A bizarre evaluation of the Vickers report which actually means that the UK government is less likely to bail out banks in future.
I have thought about the logic of the markets and credit rating agencies a lot recently, and this latest news just confirms many of my suspicions. Basically there really is no hope for the system as it works at the moment.
The markets are so divorced from the realities of the real world that the two cannot coexist. Those that profess to believe in the Capitalist system as we know it today, are the very people who seem to forget how it works and why.
The Vickers report, although welcomed by many, may well be seen as weak in some areas, but is the least that could and should be done to try to make the capitalist system within the UK work. Indeed, reform of the world system is required, but few are contemplating such a move.
Capitalism works on the basis that those that take unnecessary risks that do not succeed are allowed to fail. The survival of the fittest is crucial to it working properly within the boundaries of laws and regulations.
Sadly, the way the markets and credit rating agencies react appears to be without any logic. Some might say, in a simplistic sense, almost Socialist in intent. You couldn’t make it up.
The idea of Vickers is to make those that take the biggest risks and fail, to be allowed to fail and for the burden not to be taken by the tax payer or government. What the credit agencies appear to be saying is that we should not let anyone fail and the government should intervene.
By downgrading banks in this way, it causes a further climate of fear which is already in a severe cycle, much like a whirlwind, causing havoc across the world.
The credit rating agency Fitch on Friday, proceeded to downgrade the credit worthiness of Spain and Italy. This further exacerbates the problem by creating difficulties for those countries financing their debt. This in turn puts more pressure on the Euro zone and in itself creates more debts for governments making the overall debt crisis worse. The cycle just goes on.
The credit rating agencies are now a part of the problem rather than a solution to guide where the money should go. Rather than deal with economic realities, the agencies are concerned with only what is a safe bet, based on little more than hear say, and intuition. Every downgrade leads to more turmoil and more reactive policy making.
The economic realities are bad enough, with many more shocks to the world economy to come, but after the many downgrades recently from credit rating agencies like the downgrade of the US from its triple AAA rating, can we really any longer take them seriously?
We know, until the capitalist system collapses, the US will still be a safe haven for investment as seen by the negligible effect this downgrading has had on the US. This is the difference between real economics and speculation.
Is it time to finally knock the credit rating agencies on the head when it comes to their influence? It is a wonder anyone is willing to listen to what they have to say anyway, after they AAA rated sub-prime mortgages that partly caused the financial crisis in the first place. Perhaps a part of the failure of the capitalist system is that the credit agencies themselves cannot fail. Indeed, at the time they themselves “failed”, and rated sub prime mortgages and the assets of banks so inadequately was the very time that they made the most money. Does this make sense?
At home in the UK, the government has had a narrative of Austerity for the whole of its term so far. The consequence is that people and businesses are scared to spend and invest, and banks are scared to lend, even to businesses with a strong order book. Project Merlin has all but completely failed and the cuts are only just biting.
With a narrative of austerity and fear, along with every whisper on the grapevine of economic expectation being downgraded, it is no wonder that there is a race to the bottom economically. We have effectively been in recession for the last 9 months, and the prospect of economic growth is bleak.
There are systemic problems with our capitalist system, but no politician or mainstream economist is even discussing it. The credit rating agencies, banking system and speculators are all a part of this system that no longer works. Rather than dealing with the real problems, politicians and heads of central banks are chasing their tales with each bit of bad news reported.
FD Roosevelt said
let me assert my firm belief that the only thing we have to fear is fear itself
Although, like any saying, this is simplistic, there is much in this simple statement about the predicament we face. Much of the problems we are encountering on a day to day basis with the economy, is based on fear created by people who have no interest in economic stability, but in making money whatever the cost.
There are real underlying problems, but while speculators; credit rating agencies; the ideological madness in financial institutions like the IMF and World Bank; and the markets continue to have their hold over day to day political decision making, the chances of sorting out our problems are slim. Democracy itself is being subverted by the vested interests of the markets.
We have dark days ahead, but to see the light at the end of the tunnel, we need a radical rethink of how our capitalist system works.