Posted: Monday, 27 October 2008

Global capitalism: on the edge of the abyss

Dramatic recent events have thrown into sharp relief some chronic and long-standing problems of our global and national economic system: an over-developed financial sector which has fuelled rampant speculation rather than productive, job-creating investments in the real economy; huge returns for senior executives and corporate insiders while the wages and the incomes of working families have stagnated; rising household debt instead of a fair sharing of productivity gains with workers; over-reliance on the export of raw resources; a deep crisis in our manufacturing and forest industries; and massive global financial imbalances driven by unbalanced and unfair trade.

The global economy is now almost certainly headed for a deep and prolonged recession, even if we manage to avoid a systemic financial meltdown. In 2008 to date, global stock markets have already fallen as far as in the Great Crash of 1929. Grossly inflated housing bubbles have collapsed in the U.S., the U.K., and other countries, with no end yet in sight. Major U.S. and European banks are going under, and even profitable companies, including in Canada, are unable to access credit on reasonable terms. Production is now rapidly slowing in Canada and around the world because of the credit crunch.

The U.S., Europe and Japan, accounting for 55% of the world economy, were already in or on the brink of recession before the latest and most intense phase of the financial crisis. Growth in China, Russia, Brazil and other developing countries are now slowing fast, blowing up the theory that the world could "decouple" from what seemed to begin as a U.S. crisis.

High commodity prices have, as a result of falling global growth and the liquidation of speculative positions, also suddenly collapsed, removing any grounds for the equally false and complacent belief that Canada could be insulated from the U.S. downturn.

The headline-grabbing global financial crisis has clearly spread far beyond a flight from near worthless U.S. sub-prime mortgage securities. The credit crisis, banking crisis, and stock market collapse reflect a panic-driven, but nonetheless plausible, calculation that many financial assets are worth much less than had been supposed. No one can be certain about the staggering scale of the eventual financial losses which the IMF now puts at $1.4 trillion, or whether they will or will not precipitate, not just a recession, but a deep and protracted global slump as happened in the 1930s. The real economy is already slumping and will continue to founder.

The immediate roots of the global crisis lie in deregulated global finance. Banks and, especially, the unregulated shadow banking system of investment banks, hedge funds and private equity funds which should be serving the needs of the real economy developed fiendishly complex, sometimes outright fraudulent, products, and then generated huge purchases of these "assets" by other parts of the financial system through massive extensions of credit.

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