In today's Guardian, Jill Treanor asks: "How did the banks get off so
lightly?" and "Will the City's day of reckoning ever come?"
The short answers to these questions are, respectively: "Because government
regulators are trying to deal with a multitude of financial processes (both
new ones and those which inevitably will be invented) that are far too
complex for any single entity to understand, never mind control"; and:
"Because banks and other financial intermediaries (hedge funds, private
investment funds, pensions funds) now operate on a world-wide basis, not
just within a small cluster of industrialized countries centred in the
'City of London' or even 'New York' ".
In many ways, the present post-credit-crunch is similar to the period after
the Wall Street Crash of 1929 when President Hoover and then President
Roosevelt started to inject large dollops of printed money into the
American economy. This didn't succeed because the great production chain of
affordable iconic consumer goods -- the car, the fridge, radio, telephone,
television, central heating -- had not yet reached down into the masses.
These products were still at early, relatively high-priced stages, which
only the rich and the upper-end of the middle classes could afford.
If Hoover and Roosevelt could have injected many times more dollars into
the economy, and most of it very astutely into precise manufacturing
sectors rather than, initially, to consumers only via dubious "employment"
schemes, then the Keynesian ploy might have succeeded. In fact, it did
succeed later when inflation was magnified -- but safely absorbed -- by the
massive rearmament effort of World War 2. By the time the war ended in
1945, the unemployment of the 1930s had been almost mopped up in America.
Today, the American government (that is, the US Treasury which really rules
the roost) is thinking about another bout of money printing (QE2) -- and
might well have already started it in all sort of surreptitious ways that
have been talked about in the press recently. The UK government (that is,
the UK Treasury and its more public side-kick, the Bank of England) is
apparently thinking about another go of £50b. The European Monetary Union,
formally, is not having a second go just yet while it is waiting to see
whether the Chinese are going to help out Spain, Portugal, Ireland, etc in
the same way as they have been helping Greece lately -- but buying its
bonds when no-one else was doing so.
The financial sector in advanced countries has become so huge (about 10-20%
of their economies in many cases) for two reasons: (a) because it is not
only concerned with their countries of origin but of many other countries
all round the world that are trying to bootstrap themselves to Western
levels of prosperity; (b) because it is having to devise and operate
astronomical quantities of inter-linked derivatives (essentially insurance
policies which, in total, have a formal value many times more than the
assets they insure) to safeguard themselves from the seesawing devaluations
of currencies by which governments are trying to artificially boost their
own exports (and conveniently reduce the value of their debts).
Because governments have invented their own paper currencies and are
constantly printing more of them, then the financial sector, in
self-defence, have invented and expanded their own paper documents. At the
end of the day all these derivatives cancel out one another but in the
interim they act like money. And if governments try to regulate some of
these derivatives -- insofar as they understand them, which is doubtful --
then the financial sector will invent even more complex ones that only they
can understand. Or, rather, what only specialist groups within banks, etc,
can understand. Amusingly, the credit-crunch revealed that the formal
bosses of banks, etc, have little idea of what their underlings are doing.
The bosses are merely the (well-paid) public relations fronts for their
entities.
However, the banks themselves know that they are in a horrible mess. This
is why, a few days ago, 340 of them from all around the world were calling
for a dependable world currency. As have China, India, Russia, Brazil,
Saudi Arabia and several more. America, still thinking that it is the
predominant power in the world, has scorned this suggestion so far and is
now supporting an IMF-led initiative which will be discussed by the
forthcoming G20 Summit.
Under international law (such as it is) the IMF should actually no longer
exist because it was foisted upon the world by America as part of the
Bretton Woods 'Agreement' in 1944 when the dollar, and the dollar only, was
tied to gold. But as President Nixon revoked the principal role of the
dollar in 1971 (by de-linking it from gold) then the rest of Bretton Woods
no longer has any legal meaning. But there we are, the world of money ever
since has been that of bluff and fluff, and it's probable that the G20
won't produce anything that the developing nations will agree to.
It's probable that the present sort of sotto voce chaos will have to
continue until real chaos erupts. With us and our "animal spirits", as
Keynes used to say, this seems to be the only way that sensible reforms
ever get done.
Keith
Keith Hudson, Saltford, England
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