By Professor George Irvin, Research Associate at SOAS
The signs stack up: Share prices falling precipitously on world markets; US sovereign debt downgraded; and borrowing costs rising alarmingly in ‘too large to fail’ Italy and Spain. One must ask whether we are headed for another round of financial crisis similar to 2008 followed by a major world recession or depression.
The answer is that we probably are. As Nouriel Roubini notes, there’s a better than average chance of a shipwreck because we’re fast running out of economic tools to deal with the crisis.
Banks already hold too many shaky assets, and bank insolvencies, once started, are like falling dominoes. With interest rates already on the deck, monetary policy cannot be loosened. As for Quantitative Easing – the modern form of printing money - the banks and the public seem ready to hold rather than spend, whatever amount of cash is created. The real problem is lack of demand.
The only big stick—a major round of world-wide fiscal stimulus—is now blocked by the neo-liberal right. Indeed, the media now refer to a ‘debt crisis’ as though government indebtedness was the problem. It is clearly not.
For thirty years after the war, most major governments carried more debt than they do today. They serviced this easily and eventually reduced the burden because they were able to use fiscal policy to boost and maintain growth.
Today, by contrast, the OECD countries have handed the reins of power to the credit rating agencies (CRAs). The irony is of course that these agencies are run by the same grey suits who handed out treble-A ratings to sub-prime mortgage bonds.
But let’s not blame it entirely on the agencies. After all, this round of crisis was created both by the bone-headed actions of Tea-party Republicans in Congress (and Obama’s surrender to them) and by the equally bone-headed inaction of the European centre-right (Merkel has once again refused to strengthen the EFSF).
Financial crises lead to economic crises; ie, to growing unemployment, homelessness and poverty, with spill-over effects into the vulnerable areas of third world economies. At the end of the day, the rich remain well protected—-it is the poor who pay.