Wednesday, October 08, 2008
The authors of this report, well worth reading in its entirety, are Peter Boone, an associate at the Centre for Economic Performance, London School of Economics, and Simon Johnson, a former chief economist of the International Monetary Fund, currently a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics. One doubts that the US, Europe and Japan are capable of taking the kind of concerted action that Boone and Johnson describe as essential elsewhere in the article.
First, there are worrying signs that the credibility of the US authorities is on the decline. Despite passing the $700bn TARP program last Friday, and the Fed announcing it will potentially purchase even more in unsecured commercial paper, plus the provision of $450bn of additional liquidity to banks, credit and equity markets continue to decline. This pattern is reminiscent of the Asian crisis in 1998, when successive IMF programs provided briefer and briefer respite from market routs in emerging economies. . . .
Second, the ramifications of Iceland’s misery are probably more serious than people realize. With bank assets in the country at ten times GDP, and the banks obviously insolvent, the country clearly cannot afford to bail them out. This is going to be a large default, with many counterparties impacted. . . .
There is a broader concern here. When the Icelandic Prime Minister returned empty-handed from Europe on Monday, he commented that it was “now every nation for itself.” This smacks of the financial autarchy that characterized defaulters in the 1998 crisis. When Argentina defaulted on its debt in 2001-2002, the politicians faced enormous pressure to change the rule of law to benefit domestic property holders over foreigners, and they changed the bankruptcy law to give local debtors the upper hand. In Indonesia and Russia, local enterprises and banks took advantage of the confusion during default to grab property, and then found ways to ensure that courts sided with them. . . .
Our third concern is that we seem likely now to see substantially more defaults and credit panics in smaller countries and emerging markets. . . . Much of Eastern Europe, Turkey, and parts of Latin America are obvious risks. The difficulties in Russia show that seemingly solvent countries can be high risk: while the central bank has reserves of $556bn, the non-public sector has recently built up an estimated $450bn of debt. Creditors don’t want to roll over this debt, so the government is using its reserves to do this. The government has already ordered $200bn to be channelled through state banks to companies repaying debt. If the oil price falls further, a seemingly highly solvent country could quickly look near insolvent. Some other rising stars, such as Brazil, and even India, may have similar problems.
Even if these countries prove themselves capable of it, Boone and Johnson acknowledge that the immediate economic future remains gloomy:
No wonder several members of OPEC are concerned:
Finally, it is important for everyone to recognize that we are well past the days where even dramatic steps could have stopped the repercussions of the panic and prevented a major recession. A successful program will not prevent recession, and we will still see many personal, corporate and perhaps even national bankruptcies.
Purchasers may also be having difficulty accessing short term credit to pay for their oil supplies.
Almost half the members of the Opec oil cartel are considering an emergency meeting in Vienna next month as oil prices dropped to their lowest level in nearly a year.
Almost half the members of cartel have in the past few days called on the group to act to halt the slide before their next official meeting scheduled to take place in Algeria in late December.
Iran, Libya, Nigeria, Iraq, Venezuela and Ecuador, whose economies tend to be most dependent on high oil prices and whose ministers are among the most hawkish of the 13-member group, have all lobbied for the cartel to drop output.
While Boone and Johnson are mainstream economists, we should not summarily dismiss their insistence upon the urgency of collective action. Instead, as leftists, we should incorporate such a perspective into our own approach to social and political action. Accordingly, we should think seriously about how we are going to work together to help those in immediate need, and how to reach the people that this crisis has only begun to victimize,
Johnson and Boone, as economists, are focusing upon the financial institutions upon which the global economy is financially grounded. We need to emphasize the people that are going to suffer because of the greed and arrogance of the neoliberal generation. Otherwise, this crisis will consolidate the power of the most privileged members of it, subjecting the rest of us to even more insecurity, more impoverishment, more sharply curtailed liberties and political irrelevance. Or, to put it more starkly, a lot of people around the world are going to be pushed to precipice of starvation and death.