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financial turmoil « Previous | |Next »
July 9, 2008

So the economic turmoil in financial markets continues to ripple through global markets and we now understand that we are living the capitalist cycle of boom and bust; one arising from the past policies of unrestrained credit growth and asset price inflation that was fostered by central bankers. The Greenspan legacy if you like.

The annual report of the Bank for International Settlements makes sobering reading: the centre of the global financial system might eventually prove as vulnerable as the periphery.

PennI.jpg Ingram Penn

The drivers of the huge bubbles in equities and housing over the past decade were a long period of easy money, asset price inflation and rapid credit growth. Consequently, central bankers bear part of the blame. The Report says:

The current market turmoil in the world’s main financial centres is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point. These fears are not groundless....the difficulties in the subprime market were a trigger for, rather than a cause of, all the disruptive events that have followed. Moreover, these facts also suggest that the magnitude of the problems yet to be faced could be much greater than many now perceive. Finally, the dominant role played by rapid monetary and credit expansion in this explanation of events is also consistent with the recent rise of global inflation and, potentially, higher inflation expectations.

The policy response by central bankers to this crisis has been flawed. Their judged that their liquidity injections would suffice to deal with what was perceived as largely a liquidity crisis. There was insufficient. Internal governance, and external oversight of financial markets were deficient.

The world economy is now poised between deflationary financial and house-price collapses in several high-income countries and an inflationary global commodity price boom.

| Posted by Gary Sauer-Thompson at 7:47 AM | | Comments (2)


I agree except for one thing. The underlying driver of this siuation is the philosphy of greed, which has underpinned economic policy and governance (or should I say lack thereof) since the 70s. The lazy, myopic neo-liberal mindset of commodity fetishism is at the heart of it all. Granted, people will be greedy to a greater or lesser extent. It is incumbent on our 'leaders' to put in place frameworks to control this tendency through internal (education, grounding, fostering social capital) and external (tax and economic policy) mechanisms. Sadly governments seem to shrug and accept this as a natural course of events.

There is one small problem, the solution is not to cut the money supply, they tried that in 1930.