Guardian UK: Maelstrom in the markets

[marmar]

Maelstrom in the markets
Editorial
The Guardian, Tuesday September 16 2008



It is a moment Karl Marx would have relished. From every angle financial capitalism is taking a battering. Late on Sunday one of the world's biggest investment banks, Lehman Brothers, filed for bankruptcy, while another, Merrill Lynch, sold itself off in a hurry to avoid going the same way. Yesterday brought nose-diving shares and a yo-yoing dollar. AIG was once the world's biggest insurer, but its woes today are only making more of a drama out of the crisis. Two pillars of the modern economic temple - greed and prosperity - are trembling in a manner unseen for a very long time. Only a fortnight ago, Alistair Darling attracted derision when he told the Guardian that circumstances were "arguably the worst they've been in 60 years". But events of the past 48 hours suggest that - in terms of finance, at least - 75 years might have been a better benchmark. The weather in the money markets is now bleaker than it has been since the 1930s.

Fortunately, there is more to economic life than high finance. The economy as a whole is not - yet - in the dire condition it fell into in the mid-70s, early-80s or early-90s - still less the late 1920s and early 1930s. The great danger is that this could change. Many lessons must be learned from what is happening, and in time the rules of casino capitalism will need to be rewritten. But the urgent task for the authorities now is to stop the rot from spreading from the money-men to the rest of us.

Origins of a crisis

"This time it's different" are words for which economic historians reserve a special disdain. From the Jenga-like leverage of Wall Street in the 1920s to the pumping-up of the dot-com bubble, irrational exuberance combines greed with gullibility. The sub-prime mortgage crisis was the nemesis of greedy people who thought they could make easy money out of the poor. But it is now accepted among the financial market operators themselves that this crisis was only the trigger for a financial market explosion that was, sooner or later, inevitable.

Once again, this time it was not so different after all. As Wall Street's avaricious investment banking business contracts to the point where the only big names left are Goldman Sachs and Morgan Stanley, the origins of the crisis are all there in JK Galbraith's The Great Crash 1929 (in a chapter ironically entitled In Goldman, Sachs We Trust). When referring to the crash of a forerunner of Lehman Brothers, in 1929, Galbraith observes: "As Kreuger and Toll moved down to its ultimate value of nothing, leverage was also at work - geometric series are equally dramatic in reverse." Until this last weekend, this financial crash, unlike the one in 1929, might have seemed to be occurring in slow motion. Not any more. .......(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/2008/sep/16/creditcrunch.marketturmoil