High risk of “severe global Depression”

The real cause of the global financial crisis: This may be a comedy clip, but it provides a more accurate analysis – in layperson’s language – of the root causes of the financial meltdown than anything you may read in the mainstream

The big ‘D’ word – that’s D for Depression – is now creeping up on the global economy. What really caused the crisis?

According to economist Nouriel Roubini, who saw all this coming a long time ago, the crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity:

…excessive leveraging and bubbles were not limited to housing in the US but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

How long will the crisis last? At least two years in the US, Roubini warns, perhaps much longer:

…this will be a long and protracted U-shaped recession that may last at least two years in the US and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

I would sum it up by saying all this is the result of pure, unmitigated greed and deception of the highest order by the elite in financial institutions and by speculative investors.

Analyst Mike Whitney, who also predicted the financial crisis, months and months ago when other analysts were painting a more optimistic picture, warns, “The United States is headed into another Great Depression and has probably dragged the rest of the world along with it. The global financial system will look very different by the time we reach the other end of the tunnel.”

In many ways, we are looking at the failure of global capitalism especially neo-liberalism. It was folly to think that a system which encourages everyone to act in their own selfish interests in maximising profits would somehow result in the promotion of the common good. The only way it could have worked is if there had been the strictest market regulations and supervision.

But what we have seen is that greed had no limits – and the corporate elite wanted all obstacles and regulations removed. Neo-liberalists instead promoted the buzzwords of financial services “liberalisation” and “deregulation”. The result was the creation of bubbles, overleveraged financial insitutions and deception (the repackaging of dodgy loans and mortages into ‘sophisticated’ financial instruments).

Now ordinary people around the globe will have to pay for this corporate greed through government (using public funds) bailouts of these huge financial institutions and banks.

Roubini warns that unless radical measures are taken, the crisis “may lead to a market crash, global systemic financial meltdown and to a global depression”.

Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

– another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

– a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

– a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

– massive and unlimited provision of liquidity to solvent financial institutions;

– public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

– a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

– a rapid resolution of the banking problems via triage, public recapitalisation of financial institutions and reduction of the debt burden of distressed households and borrowers;

– an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

Finance Minister Najib should pay attention to Roubini’s proposed measures, in particular his call for “massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government“.

Public works could include spending on affordable housing, general hospitals, public transport, and schools in rural areas. Punishing Pakatan state governments by limiting their financial allocations could hurt local economies and consumer spending – thus proving to be counter-productive to the national economy as a whole.

In Penang, for instance, the federal government should allocate funds to upgrade the ferry services and public transport on the island.

The government should also assist farmers interested in organic farming and sustainable agriculture around the country to promote food security among the local population.