Global capitalism teeters on the brink

[flashl]

We've moved from a world of risk to a world of uncertainty

The U.S. central bank is slashing interest rates, accepting piles of near-worthless securities from commercial banks as collateral for emergency loans, and pumping hundreds of billions of dollars into the economy. A problem that began last summer in the lowest-grade U.S. mortgage market has spread around the world, moved relentlessly up the quality ladder and sucked credit from the global financial system like oxygen from a flame. Each intervention by U.S., European, Japanese and Canadian central banks to stabilize the situation has been swamped by surprises that have escalated the crisis to a new level.

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The U.S. Federal Reserve's latest efforts may stabilize markets for the time being; stock markets were sharply higher yesterday. But there's reason to believe the crisis is the product of systemic problems in the world's economy.

Three key factors - each operating and gaining momentum over decades - have come together to cause this crisis. The first is the sheer productivity of modern global capitalism. The world's businesses, spurred by global competition and a never-ending race to boost productivity and keep costs down, excel at producing a steadily rising flood of goods and services. To ensure that these goods and services are bought and that factories and businesses keep humming, the global economy needs a constant infusion of liquidity provided by cheap debt.

Second, in the past three decades, a neo-conservative ideology that asserts markets are infallible and, as a result, disparages any kind of state regulation has come to dominate thinking about economic matters, especially in the United States. Alan Greenspan, the long-time Federal Reserve Board chairman until 2006, was an ardent advocate of this view, and it became an article of faith in powerful U.S. political and economic circles - not surprisingly so, since it justified letting economic elites pursue their interests with little government interference.

Third, enormously powerful computers and software, along with fibre-optic communication, have allowed financial wizards to conduct business transactions in the blink of an eye around the world and to create financial instruments - derivatives, swaps, structured investments and the like - of mind-boggling complexity. For all intents and purposes, these new instruments have blurred the boundaries of what we call money. Several decades ago, central bankers could sensibly talk about and, if necessary, control the money supply. Now, what counts as money isn't at all clear, and many things that look and behave like money can't be regulated.
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We do know, however, that we're not dealing with a liquidity problem. We face a massive solvency problem: Banks and investment firms aren't so much worried about financing their next investment; instead, they fear for their survival, because core assets - particularly loans on their books - have been suddenly and dramatically devalued. In this environment, the tools available to central bankers may not work. You can encourage people to borrow by pumping money into the economy, but you can't force people to lend.

Globle And Mail

[Karenina]

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