Global Financial Crisis

Spare a few change, Sir? While 2 and 3 digit billion dollar amounts are being thrown around at banks in Europe and America these days, many people in “third world” countries, like Nepal here, are still struggling to get a few rupees for a daily meal.

(Second part of my naïve investigation of “global issues”)

What the heck’s going on here? It seems that all markets in all parts of the world are plummeting now. The global financial crisis wasn’t entirely global before, now it is. Iceland’s economy is heading towards bankruptcy. Governments are desperately trying to turn the tides, pumping money into bad markets and slashing interest rates. It seemed to work for a while this week, but the negative tendency has picked up again.

Let me just try and get a fix on some of the facts here:

US came up with a 700 billion dollar rescue package, following 200b$ in March and an 85b$ “loan” to AIG in September. UK an 88b$ package and an additional 692b$ on stand-by. ECB first tried with 95 billion (9/8 last year), BeNeLux countries poured in 11b$ (28/9’08) and Germany has presented a 50b$ bank rescue package. Australia cut interest rates with 1 percent point, (from 7 to 6, actually 14%!) US and European national banks slashed 0.5% points. All this after previous interest rates cuts since the credit crunch started. The Iceland currency is down 23% in a few days. All Asian stocks seem to be loosing 5-10% of their value each day this week. Think it’s a similar picture in Europe and on Wall Street. And that’s not even all of it, just the main headlines. Hope I got it somewhat right.

Clearly, something isn’t right here!

I think (the Danish economist of sorts) Ross Jackson is on to something when he says that there are some inherent problems in the way the global financial market work. Some of the problems he mentions are the free flow of capital across borders and the domination of short term speculations. He also warns of an even worse economic crisis coming when we start running out of oil. Or more exactly: When we can no-longer produce enough of the stuff to keep up with demand. Historical evidence is that a 5% drop in supply gives a 400% increase in prices (there’s an interesting article on it here). Think everybody agrees on this point, the question is more of a “When?” than an “If?”. It could be as soon as in 5 years time! Are you ready?

I know what it’s like – from living in Kathmandu where fuel and electricity are in constant short supply. Drives me nuts at times…

So, what’s going to happen now? Long-term effects?

I actually doubt Americans will learn the lesson here. Instead of fixing inherently flawed market mechanisms, they’ll probably invade some more countries. China, perhaps! Just over the Himalayan hills from here in Kathmandu, the Chinese banks don’t seem to be bleeding so much. They could do with some better quality control though. And they also seem to be needing more and more energy.

Well, maybe it’ll be China who takes over America. One way or the other. Of course, no-matter what happens in the US election next month, I think it’ll be a political improvement. But how much is the American president actually capable of deciding? I mean, a lot is decided by lobbyists and those financial interests in the USA, isn’t it? Clearly, the current president (and the VP) is closely tied in with oil interests.

If they wanted to stem those short term speculations, they could have implemented the Tobin Tax, as suggested in the 1970’s. If you’re not familiar with it, it’s worth taking a look at. It’s simply a small tax, a 0.1% surcharge or so, on financial transactions. Currency trade, primarily, but why not stock trade as well. The effect? Theoretically at least, it should have little impact on normal peoples money transactions and put a huge damper on speculations aimed at making short term profits. Markets would be more stable, an extremely desirable trait, and a good amount of money would still be generated by the surcharge. They could go into a fund and be used for economic “bail-outs”, easing economic difficulties, perhaps even primarily for poor countries. Making funds available to be used for providing opportunities for the world’s poorest to make a decent living for themselves. I’ve always liked this idea, instead of nationalizing, making new trade barriers, closing down borders and such. If you’re more interested, have a look at the “Association for the Taxation of financial Transactions to Aid Citizens”, in short: ATTAC! - an organization trying to get it implemented.

Year of Global Crisis

Some Nepalese rupees and 20 US Dollars. Which one's worth most next year? Photo copyright by Morten Svenningsen.

We’ve had the global oil crisis, the global food crisis and now the global financial crisis. Next to that we have the global warming issue and a global war on terrorism. Well, at least a fairly international war on terrorism.

One crisis after another, I’d like to investigate this further so I’ve hereby created this new ‘tag’ on my blog: ‘Global issues’. So let’s begin with a little look at the current crisis, the financial one. (Please give me this chance to demonstrate my ignorance!)

It’s been an expensive week for our friend, George Bush. From what I’ve heard, he’s had to dig out well over 300 billion dollars the last couple of weeks. The thing I’m wondering, they’ve got this huge deficit on the state funds. Obviously they must be loaning all this money. And for what? To loan money to the banks! Anyone else here see the irony? Are they loaning money to each other? Is that sustainable? What if it isn’t? Is the American economy going to crash? And what effect will it have on ordinary people who don’t own a bank, like myself?

Well, maybe it’s a coincidence, but this week I’ve had two high-profile assignments canceled from two renowned American magazines - without explanation. In the big picture, of course, my fees don’t amount to much. But as consumers and advertisers are running out of credit sources, circulations are likely to decrease.

Note that I say credit, not cash. Americans love their credit cards, at least they did when I was there around 1999-2001. They bought everything on credit. Buy now, pay later. Don’t worry. And that, I suppose, is a large contributing factor to the current circumstances. Together with their hopeless war in Iraq. It’s interesting to note how the renowned economist and Nobel laureate, Joseph Stiglitz, explains the crisis: The war has cost the American society around 3 Trillion dollars, roughly 2.9 trillion more than first estimated. Simply stated, it led to rising interest rates and suddenly people couldn’t pay their loans any longer. (update: From 2004 to 2006, US interest rates increased from 1% to 5.35%! source: BBC.) One after another, family houses were foreclosed and businesses didn’t do so well anymore.

And now, as an effect, financial institutions a in ruins.

So where does that leave us, the world at large? Honestly, I don’t really know. There’s a lot of aspects here. The future of capitalism, market economy and speculations? Is money still a tool for us humans or has it become a force we have to obey? Will it become a battle of rich nations against poor ones?

I think I’ll look a bit more into this from now on. It’s feels quite interesting and important. And I’ll blog a bit about my thoughts and realizations. Follow me here if you like...