Global Recession !

May 1, 2012

Re http://www.irisheconomy.ie/index.php/2012/04/30/fiscal-causes-and-consequences/#comment-275254

I think John McHale is misdiagnosing both the euro zone crisis and the Irish property bubble crisis eg “think most of us can agree that the Irish crisis was predominantly the result of an interacting property and credit bubble”. This is a fairly common mistake. Unfortunately, with misdiagnosis comes the cure based error of a wrong prescription from both euro zone and Ireland leading to the imminent financial death of both the euro zone and the Irish economy. The prescription of austerity is killing the patient?

For an answer to the conundrum we’ve no further to look to our esteemed President, Michael D Higgins, affectionately known as Michael D. In speeches in New York and Boston last night, he used the phrase, referring to the Irish economic crisis, “self located in a global recession based on speculation’. In fact, John McHale’s use of the word ‘credit bubble’ may also be brought into the equation providing an answer.

http://www.irishtimes.com/newspaper/breaking/2012/0501/breaking6.html

So what has really caused the European and Irish economic crisis? One word, speculation.

Since the dollars floatation in the 1970’s with the easing of regulatory controls in the global financial system combined with the rise of shadow banking, there has been a phenomenal growth in the financial services industry spurred by the creation of a host of financial credit instruments aiding speculation in a vast array of financial instruments promising amazing returns on OTC’s, derivatives, CDS, the list goes on with variants of these custom made to the imagination of Enron’s Berni Madoff; unlimited to Goldmann Sach’s CEO Lloyd Craig Blankfein and former CEO Henry Paulson; helped by the growing power of a small number of Wall street banks and the disappearance or takeover of the competition.

Lured by opportunities provided by a vast array of new financial instruments offering returns far in excess of what could be gained by business in the real economy of food, pharmaceuticals, motor industry, manufacturing, business enterprise, investment banks and institutions have redirected their investments into this new matrix virtual economy. The consequence of this in economic terms has been to make the relationship between speculation based on new financial instruments and the real economy increasingly less fungible( A good or asset’s interchangeability with other individual goods/assets of the same type ).

This has led to a number of bubbles. We had the internet bubble and crash. We had the 1929, October 24, Black Thursday threatened mirror in mid September 2008 on foot of an ignored $8trn housing bubble. We’ve had housing bubbles in Spain and Ireland.

The financialisation of loose credit instruments feeding upon the inward flow of investment in US Treasury bonds feeding into loose regulation of the financial services industry, the financial services industry tapped into a revenue source for large private banking conglomerates in the US that enabled it to trip wire the economic system itself.

Speculation injected and fueled with the means to produce vast quantities of new financial paper instruments in a low regulatory environment has given rise to similar conditions that existed pre 1929. At that time, vast profits were offered to the American middle class to cash in on loose credit and investment returns based on ponzi economics, profits to first in used to gather in the lates who would pay for the collapse. From wiki,

“The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan,[17] more than the entire amount of currency circulating in the U.S. at the time.”

President Higgins is exactly right. We are being sucked upward into a tornado of global speculation. Debt levels are rising to astronomical levels to feed the global economic system infected by a a new virtual speculative environment fed by debt and its proxy, the financial services industry. Connectivity between the real and the virtual is becoming more and more fragile. The passing around of toxic derivatives, OTC’s based on subprime in 2008 among the banks before the collapse of Lehman’s in 2008, was a mere symptom of an ailing global financial system based on speculation.

There are a number of remedies to bring the global economy back to reality based on a fairer system of market economics.

1. Bring back the gold standard. Its abandonment has led to the destruction of manufacturing in the US and the destruction of the US middle class who’ve been ransacked under financialisation in a manner similar to the way european taxpayers are being hoovered of their resources to pay the profits of the 1% of speculators gaining from the above.

2. Break up the large investment banks across the world into smaller banks mandated to support business and communities on policies similar to the independent and public state banks in the US, eg The Bank of North Dakota

3. Sterilise financial instruments of economic destruction. Reduce the amount of speculation that can occur around these instruments.

4. Impose strict auditing and rules for accountability, registration and transparency on financial instruments and all financial bodies (especially toxic institutions eg NAMA)

5. Oppose the troika Goldman Sachs policies of unlimited fuel for financial institutions paid for by taxpayers.

6.Oppose the troika European directives on SIFI (Systemically Important Financial Institutions). Banks made toxic by speculation need to be closed.

7. “Keep You Hands Off Our Constitution” Do not let the financial institutions and their unelected ESM minions control your children’s future and your country’s budget.

Create a financial system built to serve the needs of the people whose lifeblood has not been vampired into to provide unlimited profit for financial speculators, unelected bank officials and political cronies.

So, lets not blame entirely Irish banks, property developers, property speculators, lack of Regulation at DoF or Irish Central Bank, or ECB level for the credit bubble. It is rather more wisely put by President Higgins, as “self located in a global recession based on speculation’ . That speculation continues to be unaddressed at global and european level. Current responses based on austerity and more QE and LTRO fuel for the banks, is more fuel to burn down the global economic system.

ends

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