[Marxism] bracing for a backlash

Rakesh Bhandari bhandari at berkeley.edu
Mon Mar 16 00:02:11 MDT 2009

Again I think it's the political essence of the problem is that financial
capital has become the  object of public backlash, yet the failing is
systematic. In the Financial Times a few days ago Gillian Tett suggests
the that crisis of the financial system is a crisis of globalization and
global balances. The financial centers of the world were called upon to
create safe financial assets given what is called the world's savings
glut. The best the system could come up with is mortgage backed securities
and credit default swaps. Tett helpfully gets to the systemic nature of
the crisis but of course does not far enough:

"The boom and bust in securitised finance was the most extreme part of a
larger global credit bubble that itself partly reflected deeper imbalances
in the world economy, writes Krishna Guha. The financial crisis and global
economic imbalances are “two sides of the same coin”, says Lorenzo Bini
Smaghi, a member of the governing council of the European Central Bank.

Putting the world back on a path to prosperity will thus require not just
reforms to risk management and regulation but big macroeconomic changes at
the global level as well.

Ahead of the crisis, imbalances between savings and investment in national
economies had grown unusually wide, reflected in large trade deficits and
surpluses. Four years ago today, Ben Bernanke, now chairman of the Federal
Reserve, observed that there appeared to be a “global savings glut”,
particularly in fast-growing emerging economies and among oil exporters.

This glut pushed down risk-free rates on government bonds and induced a
hunt for yield by investors. That yield hunt cut risk premiums and
contributed to a collapse of market discipline that reversed with
devastating effect in mid-2007.

Indeed, there is a strong case to be made that the current crisis is in
the strictest sense a crisis of globalisation, fostered and transmitted by
the rapid and deep integration of very different economies. Fast-growing
developing countries with underdeveloped financial systems were exporting
savings to the developed world for packaging and re-export to them in the
form of financial products.

Ken Rogoff, a professor at Harvard University, says the claim that this
was sustainable assumed core financial centres – above all New York and
London – could create the financial products efficiently and without
blowing up. They could not.

The collapse in market discipline and regulatory supervision was most
extreme in securitised markets for US housing finance. Yet it is hard to
see this as simply a crisis of financial innovation when there was
excessive risk-taking in many other areas. At the same time that US and UK
banks were amassing subprime mortgage securities, they were also making
mispriced loans to private equity. Austrian banks were making risky loans
to households in eastern Europe and Japanese banks were buying corporate
equities. This suggests larger economic forces were at work.

Even if global imbalances did not directly cause the crisis, it is the
combination of macroeconomic imbalances with microeconomic market failures
that makes today’s crisis so dangerous. American and British households –
whose borrowing absorbed surplus foreign savings in good times – racked up
debt and found themselves exposed when house prices reversed and access to
credit was suddenly turned off."

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