High risk of “severe global Depression”

20
98

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.

Please help to support this blog if you can.

Read the commenting guidlelines for this blog.
Subscribe
Notify of
guest
20 Comments
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
simon li

FEATURE: How the little people got traded into oblivion in HK AFP, HONG KONG Monday, Oct 13, 2008, Page 11 Retired security guard Tam Kai-biu does not like to take risks. The 74-year-old never gambles on the horses or the lottery. When his banks tried to sell him an investment product, he would say: “Please, I don’t need any funds or stocks.” Now he fears he may have lost the HK$2 million (US$260,000) in savings and pension money he and his wife had built up since he arrived penniless in Hong Kong from Guangzhou in 1955. While the global financial… Read more »

karma

Dear Denone What I mean is let the person who can deliver lead. I have Malay friends and relatives in Singapore and they are happy to be Singaporeans. They admire their leaders who are sincere at making tiny Singapore survive. Their leaders are competent, they are accountable and transparency is their trade. They have little to condemn them. What we should learn from them is honesty and sincerity of becoming leaders. The trouble is when leaders talk about faith and race just to win votes then fail the nation, it is better for them to quit. If you cannot lead,… Read more »

alancheong

Rebates aren’t going to do either us or the govt much good. The govt can’t give us that much of rebates without hurting themselves. WE need: a) revision of tax levels/income brackets – personal relief stuck at RM8000 for yonks, whilst even our closest neighbours revise their rates annually to factor inflation b) child relief to be doubled or tripled at least – for goodness’ sake, the prices of infant formulas and diapers have increased by leaps and bounds, to say nothing of other necessities, but not our salaries c) allowances for day care d) raise the tax rate for… Read more »

Rakyat@Work

DAT 4 Mon RPK’s Trial 8am – Court room all full. At least 25 more are outside court yard. This morning more new faces. T-shirts, hot items. Took a peek inside, saw RPK talking to his family and lawyers. Quite noisy inside, can’t get in. 8.30am Ppl still coming in, bright morning as sun was shining bright. Picture session as usual as if like real journalist, talk to a few fellows on last nite vigil. There were special branch ppl there last nite, but they stay clear of the crowd. 9am – What? Postpone?! NEWS: COURT WILL CONTINUE 10,11,12th of… Read more »

denone_permatang pauh

Karma,

And look at the Singaporean Malays, they were effectively (marginalised). That’s what chinese leadership is all about. I’m not being racist, but that’s the reality. Of course, someone will come out in defence of Singapore saying the Malays there are better-off that their counterparts in Malaysia, but to them I would say “Menang Sorak Kampung Tergadai” They are left with nothing. Would any Malays dream to be Singapore Prime Minister? Pretty soon, they will become archaic and only good for archaeological research if not anthropological research.

denone_permatang pauh

“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.” or simply Speculators (George Soros and the likes), isn’t this what what Dr.Mahathir was crying foul in 1987? Only now, the world would admit what Dr.Mahathir said was true. Read Joseph Stiglitz book “Making Globalization Work” to see the failure of IMF. And today, IMF is busy `helping’ to saviour the rich countries. I wonder, what kind of prerequistes they would asked the rich (now bankrupt)countries before the money… Read more »

Rakyat@Work

PJ 12th Oct 08 Candle Vigil RPK 7.30pm Arrived at main Hall of Padang with my partner. Less than 15 of us!? where are the rest? Probably we were too early. Supposed to start at 8pm. Feedback were not that encouraging. No jams on the road, everything was quiet though I saw a police van passed by.Have faith, wait..wait..wait.. 8.00pm Lagi tak ada orang..Emm, never mind, we better go to the field opposite Amcorp Mall. What’s wrong? Mind still wondering, the rain? Sunday? continue walking with a new group of youngster who just join in. 8.05pm Heh Look! Theres a… Read more »

Eagle has landed

The whole bunch of people running the nation economy are morons. These moronic bunch can be found in our politicians as well as the civil servants who are majority apple polishing, sycophants … Given another hundred years Malaysia will remain status quo or degraded into s***.Even someone who is (allegedly) tainted is in the process of taking over the nation, so just ask yourself whether Malaysia deserves to be respected. You may say anything and report everything but who cares. Just like dog barking at the mountain. Can you imagine with the world financial meltdown and expected to hurt our… Read more »

simon li

For a layman’s grasp of the financial crisis. Most people think of money as a ‘Token for Exchange’ but this idea actually blinds us to the host of evil greed behind this game of exchange as it is played and led by America. For a grasp of why the USA’s (and likely, the world’s) financial system is now imploding, money should be understood as nothing less than “Promises by the Financial System” but also nothing more than this. Let me explain. When you render a service or sell a product in direct exchange, it means that you accept the other… Read more »

esgreat

Who caused this crisis? Simple: The Federal Reserve and Government intervention. I get extremely angry every time people praise them for ‘helping to solve the problem’ when they are the source of it! The abandonment of the gold standard was nothing less than a fraud of the highest degree. The federal reserve in the 60’s created more US dollars than they were able to pay in gold reserves so that they could fund the Vietnam war and other welfare schemes. The closed the gold window once they noticed they have not enough gold to pay. Greed is a naturally occurring… Read more »

karma

I would vote for Lim Eng Guan to be the Deputy Prime Minister or Prime Minister. If anything happens to Anwar, Lim is the man. The people of Malaysia should stop looking at race and religion to save them from ‘political and economic disaster’. We have to be open. A Chinese Prime Minister is not going to betray the Malays or Indians. This is my bet.If he does, the people can always decide through the ballot box. The success of Chinese leaders is obvious in Singapore. We have natural resources more than Singapore has but we just don’t have capable… Read more »

Passer by

I was on a short study secondment with Hewlett packard singapore some years back. Singapore was just coming out of a recession and what I learned about how HP dealth with slow demand for their products due to world-wide recession was to spent their way out of a recession. It seems contradictory but HP never fired anyone during that period. What they did was to retool, retrain, restructure and spent resources developing the human and technical resources. These are worthwhile spending that will enable HP to ride the next wave that will surely come. Giving a lot of money to… Read more »

karma

When BN punishes the PR ruled states, then Anwar has all the legitimate reasons to ensure that PR rules the nation. As mentioned, punishing these states will only make the country’s economic situation worse. Vindictive politics of this nature will backfire and the support of the people will be greater for the opposition. If the economy slides and continue sliding for even a year, the country is going to suffer. I see no way that the present team of politicians running the government can come to a rescue.

daryl

I understand the fear but the US House will do the politically correct thing by voting in the 700billion rescue plan soon. The is the strength of the US government when come to saving their corporate and indirectly the people (or what we call rakyat). Ours will save their a**** first than rob form the rakyat. So, just sit back and see the approval of the rescue plan.

Clueless Mom

That’s an easy to understand video about the financial crisis!

Thanks Anil, I understand it more clearly now 🙂

Antares

The whole kit and caboodle of “economic theory” and “financial management” is about to be exposed for what they have always been – a modern-day variation of “ye olde shell game.” Once again, the world-famous designer couturiers have made off with their loot, leaving the emperor stark naked. Money will soon be worth only the recycled tree it’s printed on. So it’s high time our economists re-examined what constitutes WEALTH. It’s not just “liquid and fixed assets” – we have simply forgotten to factor in the human dimension of KNOW-HOW & EXPERIENCE. These forgotten qualities are what will save us… Read more »

koli

the last i remember is when musa hitam was deputy pm that our economy is in recession,that too 2 weeks after the general elections. our govt is in denial mode.just read that malaysia is the no 1 investor in india,pakistan and vietnam.the truth.the truth.the truth is very seldom spoken.all else is spoken except the truth.in our malaysia courts many things are said by lawyers except the truth.can we run away from thetruth.truth unfolds it self and then we will scratch our heads for new directions

shadowmode

i wud favor RPK for PM anyday.

Zahar

Actually we don’t have to look overseas to find people who foresaw this way before it happened. Matthias Chang had already warned us some time back about this financial meltdown and he deserves some credit also besides the usual Mat Sallehs some of us are fond of looking up to.

RitchieLow

I note you have a voting panel on the right as to who we want as the next PM. Please add in Raja Petra Kamarudin. Sure lots will vote for him, even surpassing Anwar as if that is going to happen. One must be in Umno to do that huh.

Okay, Ritchie, done; have also re-set the poll to zero respondent. cheers Anil