Dispersion of risk in an already opaque world of globalized finance creates a vast space of uncertainty or rather a global minefield where nobody knows when a mine will explode. This is the peculiarity of the current situation: nobody knows if his or her partner is insolvent or how big will be the losses from the current sub-prime related imbroglio. For this reason the superfund of $75 billion advanced by Citigroup, Bank of America and JP Morgan Chase to buy assets from cash-strapped structured investment vehicles (SIVs) finds difficulties to attract more backers as skepticism prevails among Wall Street investment banks and European lenders. [8]

".we have no idea", Roubini stresses, "of what the sub-prime and other mortgages losses will be: $50 billion, $100 billion, and $200 billion? They could be as $500 billion if the US enters in a recession and we have a systemic banking and financial crisis. The uncertainty of these losses depends on the fact that we have no idea of how deep and protracted the housing recession will be and how much will home prices will fall[.] So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex credit derivatives(CDOs of CDOs of CDOs and the entire alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing". [9]

The credit crunch led to interest rates cuts but the result was an acceleration of the fall of the dollar, a huge rise of the oil price and a coming slowdown in the US, in Europe and Japan.

All predictions on growth rates have been revised downwards. The decision by the Federal Reserve to lower the federal funds rate by half a percentage point to 4.75%, on September 18 and the expected new interest rate cut until the end of 2007 is intended to arrest a recession in the United States in 2008.

As the Global Market Brief of the US-based Stratfor stresses: "The United States is not the only country facing a slowdown. The Japanese Cabinet Office announced early September that it has revised estimates of Japan's economic growth for the second quarter down from an increase of 0.5% to a-1.2 % contraction at an annualized rate. European statistics released in August revealed low growth rates fro Europe's largest economies- Germany, France and Italy- along with the slowest growth rates the eurozone has seen since the fourth quarter of 2004. In short, the world's major economies are looking at a slowdown. The downturn will not be limited to these economies, however. For instance, forecast released September 17 by the Asian Development Bank predict China will see 11.2% GDP growth in 2007; however, China's economy depends heavily on exports to the countries now facing economic downturns." [10] On this basis, as it was expected both the IMF and the G7 meetings on October 20-21, 2007 had to issue serious warnings about future developments in world economy.

II

4. The question, then, comes: who, what is responsible for the credit bubble and so for the credit squeeze and its nasty international complications?

To answer we have to look beyond the micro-level of the US house market to macroeconomic and international dimensions of the problem and of its genesis.

Wolfgang Münchau in his column in Financial Times [11] rejected the monetary policy establishment consensus on the causes: "the complexity of some of the instruments, shortcomings in the mathematical models [for structured finance], weakness in risk management and, of course, the role of the ratings agencies". While accepting that these factors played a contributive role, Münchau ironically and rightly points out that "to blame ratings agencies is like blaming shopkeepers for inflation". And he adds: "I believe that the explosive growth in credit derivatives and collateralized debts obligations between 2004 and 2006 was caused by global monetary policy between 2002 and 2004. In parts of 2002-04, both the US and Europe experienced negative real interest rates- nominal rates adjusted for expectations for future inflation. From 2003 until 2004, the Fed funds rate stood at 1%. In Europe, short-term nominal interest rates reached a low of 2% between 2003 and 2005".

Lowering of interests rates and credit expansion in that period was a necessary reaction to hind a systemic crisis: the international financial crisis that started in 1997 with the crash centered in the Asian -Pacific region and expanded world wide, provoking Russia' default in 1998, the collapse of the Long Term Capital Management hedge fund, the crisis in l Brazil and Turkey, the burst of the "dot.com" economy in the US in 2000 followed by a recession, the Enron debacle, the bankruptcy of Argentina- the success story and "jewel in the crown" of international neo-liberalism! - in 2001.

In this context credit expansion was not an option among many others but a strategic answer for management of a precipitating crisis.

The relative upturn of the world economy in 2002-2006 was based on the credit supported US consumers' boom and above all the US huge deficits combined with the trade surpluses in Asia, first of all in China, now the industrial workshop of the world, which could finance US deficits by pegging the yuan with the weakening dollar and buying US Treasury bills. The flood of cheap commodities could counter-act relatively the inflationary pressures from the weakness of the American currency.

This way out from the financial hurricane of 1997-2001, as it is proven now, was a temporary solution that accumulated new problems and sharpened all systemic contradictions. It is not a mere coincidence the fact that the US sub-prime mortgage crisis emerges in February and May 2007 while the overheated Shanghai stockmarket plunges in February 27 and in May 30 of the same year. The American-Chinese axis of the post-2002 world economic recovery starts cracking. The Chinese "workshop of the world" cannot give a temporary way out to the world economy by increasing demand of raw materials and easing inflationary pressures by flooding the world market with cheap exports. Apart from the already mentioned fact that the expected slowdown in the world's major economies will affect the export-oriented Chinese economy, its own specific internal social economic contradictions, particularly the growing gap between the impoverishing agrarian heartlands and the booming Coast Zones, over-investment, over-speculation in the financial sector, a brewing crisis in the banking system and the State sector as a whole, posit quite new challenges to the Asian giant.

"In China", Stratfor's Global Market Brief, bluntly points out, "growth rates regularly top 10% annually. But this growth is not healthy, as it is predicated on throughput and exports, not profit and local demand. As global growth slows, demand for Chinese goods likely will stagnate. Put simply, since Chinese growth is export-led, it cannot trigger resurgences elsewhere. China is no the solution but an inseparable part of the world problem.

5. Many analysts are worrying that the ghost of the 1997-2001international crisis returns.

"Is the recent episode of market turmoil" Nouriel Roubini was asking on August 2, 2007 a temporary shock or the beginning of a systemic risk episode?" [12] As examples of strategic risks consider "the LTCM episode at the peak of the Asian and emerging markets financial crisis and the bust of the tech bubble in 2000-2001". These were one single major systemic danger episode at the time. Now, when "the extent of eventual losses is unknown and the number of financial institutions that will go belly up is also unknown and likely to surprise on the upside" a multitude of dramatic episodes can occur. "Systemic risk episodes often occur with a death through 1000 cuts rather than one single major- à la LTCM- blow". [13]

"Is 2007 another 1998?" asks also Focus, the weekly Financial Digest [14], referring, of course to the collapse and bailout of the over-exposed, after Russia's default, LTCM in 1998- a bailout made necessary because, precisely of the systemic danger presented by the collapse of the biggest US hedge fund. The conclusion of the author of the Focus article Michael Gregory, CFA Senior economist is formulated in the following rather pessimistic terms: "However, the current crisis is likely more severe than 1998's in terms of the price discovery process for subprime-tainted securities, which could take months to correct. With subprime and Alt-A origination peaking at around 40% of mortgage activity during 2006 (before the housing bubble burst) and with the majority of these mortgages the '2/28' type, delinquency and house price deflation trends will likely deteriorate well into next year. Consequently, investors could treat subprime-tainted securities as toxic for along time, keeping credit markets on edge". [15]

6. There is a great difference between the previous international financial upheaval -the 1997 Asian crisis, Russia's default in 1998, LCTM, the high tech shares crash in 2000- and now. The British Economist pays attention on the following fact: "At that time, much of the developing world was in recession and the American economy was the mainstay of global growth. The Fed could rely on the deflationary impulse from abroad to contain price pressures. Today the world economy is growing strongly, despite the weakness in America." [16]

The previous international maelstrom started in Asia in 1997; in 2007 started in the United States of America. America is the center of the current international financial turmoil.

The bursting of the property bubble in the US "triggered a sequence in which, slowly, banking and financial operators became aware that the foundation of the debt pyramid was quicksand" [17].

But the over-inflated house market bubble was only the prominent tip of the iceberg, sustained by the ever-growing US total debt: "At the end of 2005 there was $33 trillion in outstanding debt (Federal, state, local, corporate, personal) in the US economy, three times GDP.( No one knows how much is tied up in the international hedge funds and derivatives, and the estimated $7-8 trillion in federal debt does not include trillions more in commitments fro Social Security and Medicare) The state( including Federal, state and local levels) consumes 40% of GDP. The net US debt abroad is between $3 and $4 trillion (at least $11 trillion held by foreigners minus $8 trillion in US assets abroad) i.e. it's is comparable (at 30% of GDP) to the situation of crisis-ridden Third World countries. That amount is growing by $800 billion a year at current rates. Ominously, in late 2005, foreign income from investment in the US exceeded US income from overseas investment (the one remaining strong pillar of the US international position) for the first time." [18]

The erosion of the economic position of the US, its historical decline while remaining relatively the strongest economic power in the world, becomes the driving force for expansion, for the re-assertion of its supremacy. Michael Hudson has called this contradiction "managing empire through bankruptcy".

Take the case of the growing debt economy. The ratio of total US debt to GDP went from 240% in 1990 to 340% in 2006. This rising ratio fuelled US growth in the past several decades. Since the early 1980s, with only one short interruption, the US has been running an increasing federal and current-account deficit. From the heat days of Reaganomics, it was transformed from the biggest exporter to the biggest importer of capital in the world.

In other words, the building up of the pyramid of debt producing all kinds of bubbles and culminating to the current bursting of the house property bubble with all its international implications has a starting point the turn to finance de-regulation in early 1980s, to what has been hence called finance globalization and neo-liberalism. If seen from this vantage point the current international financial turmoil can be understood as a decisive turning point in the historical course of finance globalization, a point of collision with its own inherent limits.

7. In previous occasions we had presented a periodization of the internationalization of economic life in our epoch, where finance globalization occupies the position of a third phase following the end of the second, post World War II phase of expansion and internationalization based on the Bretton Woods Agreement and the dollar-gold stable convertibility. This long period nicknamed the 'Thirty Glorious Years" of unprecedented expansion led to an unprecedented crisis of capital overproduction, the break up of the Bretton Woods Keynesian framework and of the international monetary system based on the dollar-gold exchange standard. Together with major social political upheavals internationally in the period 1968-75, uncontrolled inflation and recession, "stagflation" became driving forces to find a way out to surplus capital by de-regulating and globalizing the financial markets and by de-constructing the Keynesian edifice and applying a neo-liberal agenda of privatizations, cost-efficiency policies in social services etc.

While a relative economic and especially political re-stabilization returned in the main metropolitan countries of the center - in the periphery, in the Third World as well as in the former Soviet bloc and China the situation has developed quite differently.- and despite all the illusions and mainstream ideological justifications, Globalization did not marked the initiation of a new era neither of peace and prosperity nor of unhindered economic development.

On the economic level, finance deregulation and over-expansion of fictitious capital with the proliferation of all kinds of exotic instruments created the illusion of a casino- or turbo-Capitalism liberated both from the constraints of "real economy" as well as from commodity-based money.

There is difference, remoteness, contradictory relation but no ontological dichotomy between the financial sphere and the determining, at the last instance, productive sphere. And, from the other side, floating exchange rates, new symbolic forms of money, the ever-expanding credit pyramid cannot substitute, in the framework of the dominant system of social economic relations, the historical function of commodity- based money. The current dangers from a free fall of the US dollar are a warning for the still active implications from the end of the dollar-gold exchange standard international monetary system in 1971.

Finance Globalization cannot eliminate systemic contradictions, it globalizes them. Major financial shocks recurring constantly, apparently every decade- the 1987 Crash, the 1997 Asian crisis, the 2007 international financial turmoil- act as reminders for the unresolved contradictions of the capital system and of their explosive potential.

In this broader view, the end of the cycle 2002-2006 marked by the recent events in the international credit markets opens a new period in world economy and world politics- including Russia- full of unexpected surprises.

Athens October 22-24, 2007

Viitteet:

[1] See Debtonation Day by Ann Pettifor, 15 August 2007

[2] See The Moral hazard Effects of Recent Central Banks' Liquidity Injections by Nouriel Roubini, August 13, 2007

[3] See Waiting for the 'Big One' by William Greider, The Nation, September 10, 2007.

[4] See The financial crisis: burst bubble, frayed model, by Robert Wade www.opendemocracy.net October 1, 2007)

[5] Op. cit.

[6] Nouriel Roubini, Current market Turmoil: Non-Priceable Knightian 'Uncertainty' rather Than Priceable Market 'Risk', August 15, 2007

[7] Quoted by Roubini in the above mentioned article.

[8] "Superfund seeks more backers" Financial Times October 19, 2007

[9] Nouriel Roubini op. cit.

[10] Global Market Brief: Major Economies Recession-Fighting Tools, Stratfor.com, 20 September 2007

[11] "Boring central bankers got us into this mess" by Wolfgang Münchau, Financial Times, 15 October 2007

[12] "Is the recent episode of market turmoil a temporary shock or the beginning of a systemic risk episode, August 2, 2007

[13] Op. cit.

[14] Focus, August 24, 2007

[15] Op. cit p.7.

[16] The credit squeeze. Abandon ship", The Economist August 4th, 2007

[17] The financial crisis: burst bubble, frayed model opendemocracy.net op. cit.

[18] "1973 Redux? Continuity and Discontinuity in the Decline of Dollar-Centered World Accumulation" by Loren Goldner

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