The global crisis in dot-point. Part One

** The finance and banking industry is dependent on CHEAP oil. We’re now at peak oil.

"The flow rates from the existing projects are the key. Capacity coming on stream falls fast beyond 2011. On top of that, if the big old fields begin collapsing, the descent in supply will hit the world very hard."[1]

``We can call it an `oil crisis' given the current price, and that it continues to climb even after global efforts to cut consumption.'' ``We see a critical, structural issue in the global oil market, where supply growth isn't catching up with demand.''[2]

** Today’s collapsing financial markets originate with the following: (i) the emergence of the large, modern global corporation; (ii) the concentration of economic and political power encompassed within these TNCs along with their extraordinary (iii) labour-free productive capacities. These developments were intimately linked with the (iv) energy crisis of the 1970s and (v) the continuing and steadily-worsening inequalities in global incomes.

This also marks the recycling of petroleum dollars through the Euromarket and heavy lending to the largest Latin American countries, leading to the debt crisis of the early 1980s. The post-war ‘golden period’ came to a close in the mid 1970s when global productive capacity outran global demand. Inflation also affected the Northen economies, and there was a crisis of import substitution industrialisation in the South.

"corporations that neither have bodies to kick nor souls to damn" Andrew Jackson

** The global financial system is high volume and high velocity. The many coordinated components, are linked rather than regulated. If new measures are made in the context of no other changes, the outcome is likely to be explosive. [Naked Capitalism's interesting post this week.]

** The export of inflation to the rest of the world.

When the US dollar plunged in value due to the US Fed’s easy-money policy the central banks in emerging economies could not tighten monetary policy because it would have led to an appreciation of their currencies as compared to the US dollar. The US Fed thus, defacto, exported rising inflation to these nations. Also consider the Bank of Japan’s low interest rate policy and the rise in the real global cost of oil. This rise occurs when the US dollar deflates due to this currency's monopoly in global oil trades [3]. The globalisation of trade flows is another new transmission mechanism of worldwide inflation. World exports should reach a record of 32.5% of global gross domestic product in 2008, according to the IMF.

** Divergence between the expansive financial global economic crisis, exported economy and the stagnant real economy. This is not accidental.

For example, the Bush Administration "embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from [predatory subprime lending]." [4]

Uncontrolled financial gyrations are an expression of this imbalance.
This ‘disconnect’ stems from stagnationist trends in the real economy such as overcapacity, overproduction. The search for profits is the driving force of capitalism. It evolved in such as way so that profits could only be obtained from financial speculation rather than investment in industry.

** Technology makes it far easier to police an American citizen than an international bank.

** A disconnect between the assessors of risk from those that actually bear the risk

CONTINUED --->



** Fabricated demand for subprime mortgages

“..The subprime mortgage crisis was not a case of supply outrunning real demand. The "demand" was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade…” [5]

** Securitisation

The securitization of standard mortgages was a technique by which Savings and Loans and Mortgage companies originated mortgages which were then packaged as securities for the portfolios of holders such as pension funds, life insurance companies, mutual trusts and various international holders. Because of the way the mortgages were packaged it was possible to sell off a package of mortgages at a premium so that the originator and the investment banking firms walked away from the deal with a net income and no recourse from the holders. The instrument originators and the security underwriters did not hazard any of their wealth on the longer term viability of the underlying projects. Obviously in such packaged financing the selection and supervisory functions of lenders and underwriters are not as well done as they might be when the fortunes of the originators are at hazard over the longer term. All that was required for the originators to earn their stipend was skill avoiding obvious fraud and in structuring the package. Hyman Minsky,1992

** The lifting of controls over capital

The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began being lifted at the onset of the neoliberal [financialisation] era in the early 1980's. [5] Speculative capital then became globalised to take advantage of differentials in foreign exchange and interest rates in disparate capital markets.


[1] Jeremy Leggett, 2008. Author of Half Gone.

[2] Nobuo Tanaka, Executive Director of the International Energy Agency
World Faces `Oil Crisis;' IEA Ready to Tap Reserves. 11th June 2008
http://www.bloomberg.com/apps/news?pid=20601072&refer=energy&sid=a0SE24WXEk5U

[3] Historical Analysis of Real Global Price of Oil: Implications for Future Prices
William D. DeMis, Marathon Oil Company (retired). Houston, TX
www.searchanddiscovery.net/documents/2007/08097demis/images/demis.pdf

[4] Predatory Lenders' Partner in Crime - How the Bush Administration Stopped the States From Stepping In to Help Consumers. By Eliot Spitzer (Governor of New York)
Thursday, February 14, 2008; Page A25
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

[5] Capitalism in an apocalyptic mood. Walden Bello. Focus on the Global South, 20 February 2008
http://www.tni.org/detail_page.phtml?&act_id=17956