With the collapse last weekend of Fannie Mae and Freddie Mac and this week of Lehman Brothers, the end of the U.S. suzerainty over the world economy has been heralded. This event suggests that within the next year most of the U.S. banking system will be in receivership. Markets are facing the collapse of some of the world’s largest financial institutions, inflation (that might morph into deflation) in basic commodities, collapsing real estate bubbles in many nations, more unequal income distribution than at any time since the 1930s in the U.S. and nearly every other major economy, a multi-dimensional global environmental crisis, multiple wars, and terrorism, the world is beset by a complicated Gordian knot of unstable and unsustainable conditions. At the micro-level, Norwegian towns are bankrupted by the subprime mortgage crisis. The U.S. Federal Reserve and the Bank of England have panicked and the other central banks are gripped by fear. U.S. fiscal and monetary policy is now driven by a need to protect the dysfunctional Wall Street and City of London banks and large global investors by opening their access to national government funds with little regulatory oversight. A moral hazard that is encouraging all in the system to gamble with ever greater abandon.
The scenario has an uncanny resemblance to the early days of the Great Depression, which had increasing unemployment, and environmental catastrophes such as the Dust Bowl that culminated in the rise of fascism and a World War. In contrast to then, when national solutions, often with nationalist socialist overtones, were enacted, today nearly every significant issue is profoundly global. The environmental and financial crisis must spark deeper thought about the current global condition.
Any attempts to address these problems at the national level will be futile. Consider the environment in a globalized world. Increased coal burning in China affects global pollution and warming everywhere; while the SUVs Americans drive do the same. Contaminated food and products are distributed by a global chain of commerce that cannot be monitored by individual nations – there are just too many cargo containers in motion. Mad cow disease in Canada affects U.S. consumers and livestock. Through travelers, SARs in Asia spreads to Toronto and around the world. News, information, and data travel at light speed to every nation, while bacteria spread at nearly the speed of sound.
Consider the financial issues. In the U.S. and the UK, increasing deregulation of financial markets, banks, hedge fund, and a plethora of other intermediaries led to fabulous payouts for their leaders who became increasingly reckless in their investments and in their consumption. The desperate moves by the Federal treasury, such as allowing investment banks to borrow when it has essentially no regulatory power, are eviscerating the last Depression Era safeguards. Joseph Kennedy and FDR would be appalled. Now, the investment banks creating this crisis have a direct pipeline to Federal funds. The payoff for Wall Street “personified” by Goldman Sachs, which has made financial policy for the Clinton and the Bush’s Administration’s financial policy. The ultimate result will be that people around the world will be immiserated.
The U.S. and with it the world economy were, as in the case of the coyote in the Road Runner cartoon, running too fast for the curvy road. Now, the economy is off the cliff and the world’s central banks and treasuries are introducing increasingly panicked measures to avert disaster – measures rewarding those that benefited the most from the profligacy. The forces now in motion are too complicated and powerful to avert a serious recession and possibly a depression. The world will be fortunate if this downturn is only as serious as the one which Japan suffered in the 1990s. Will the world be able to muddle through or will the drop be so serious that muddling will no longer be an option?
Consider the pension funds. The monies with which Wall Street paid itself were provided by U.S. citizens through their pension funds and life’s savings – these are unlikely to ever be paid. The pension funds had long-term obligations, but paid their intermediaries for short-term results. The outcome of this misbegotten system is that the pension fund beneficiaries will discover that their savings have disappeared into the personal fortunes of their supposed “agents” – the corporate executives, hedge fund managers, and others. By the time the crisis ends, U.S. citizens are likely to lose not only their homes, but also their pensions and savings.
The bailout of the global financial giants is likely to fail. Appropriately, an environmental metaphor best describes the difficulty of saving the global financial giants. They are best thought of as the sharks at the top of a food chain. Their size grew rapidly as deregulation allowed them to gorge themselves, but now they are losing their food sources. The Federal government’s actions are analogous to providing chunks of meat to keep them alive. Unfortunately, the true problem is that the plankton at the bottom of the food chain is dying through bankruptcy and foreclosure. The risible stimulus package does nothing to prevent these deaths. Paulson, Bernanke, and Democratic congress have the sharks on life support, but the supply of meat is not infinite – and neither they nor the Presidential candidates appear to have clue as to what is happening.
The financial situation is enough of a crisis. Unfortunately, the Western crusades in Central Asia are increasing global tensions and stoking political chaos in the world’s energy center. Metaphorically speaking, it is not enough that we have chaos at the bank; there is also chaos at the petrol station. The ultimate outcome is already coming into view and it is defeat and retreat. This portends the shattering of U.S. and Western hegemony in the Mideast. Another outcome will be the recognition that massive military intervention is doomed to failure, and the coming severe U.S. budget crisis will result in a massive scaling back of military expenditures. This is no longer a question of if, only when.
The role of the dollar in the global economy is broken, as the U.S. now teeters toward bankruptcy. It benefited from the ability to ship dollars to other nations and import their goods. This cycle is near an end. Not only will Americans feel poorer, but the economic systems and workers in the exporting nations will also experience near depression-like consequences. The disruption of this unstable co-dependency relationship will shake the global economy to its foundation.
The locus of global economic power is shifting to North Asia. There seems little doubt that China and, increasingly, the South Asian nation, India, are economic powers, but internally they will have islands of near first-world wealth in seas of third-world poverty. Given their increased wealth, they will consume ever-greater quantities of resources putting further pressure not only on their local environments, but also the global environment. This shift is likely to continue to depress global wages for most Americans who are only now being fully integrated into a global labor market. For the average American who has consumed on the basis of personal debt and tapping the increasing asset value of their homes, the decrease in wages suggests that their current consumption is unsustainable. It might be possible to substitute a set of social goods such as a single-payer health care system, an improved educational system, and a set of social benefits in compensation for less individual consumption. What is certain that the vast majority of U.S. citizens cannot sustain current consumption regardless of whether a set of social benefits are made available as a trade-off. To return to our metaphor, a new set of customers are demanding service at the local retail operation, while a new group of workers willing to work for less are lining up at the factory. Displacement, difficulties, and nativism are possible outcomes.
Even as the economic system is in crisis, we find that general living conditions are deteriorating. This is the environmental crisis that is subsumed under, but not limited to, global warming. The role of the U.S. in stymieing any response is well-known. And yet, no nation has advanced serious plans to address the global pollution problem. China, which is poisoning itself, is only beginning to take this seriously, while India is proudly touting its rapid population growth rate. There is plenty of irresponsibility for every nation, its leaders, and citizens to claim.
Finally, there is a massive and burgeoning global income inequality. As social safety nets are dismantled in developed and developing nations alike, the poor and the middle classes that are soon to be poor are the victims. None of the social ills from deforestation to women’s rights can be effectively addressed without attacking the massive income inequality plaguing the planet.
The current situation resembles other fundamental crisis points in the global political economy. For the U.S. the choices are stark. If, as a nation, we wish to retain a leadership role, we must lead by example and offer a vision and a project to address this multifaceted set of crises. The outbreak of a generalized financial crisis, which almost certainly will be followed by serious recession, creates an opportunity to bring into the discussion the many other contemporary problems such as the environmental issues epitomized by global warming, domestic and global income inequality, and the other global macro-social problems. Hopefully, it will be possible to move through the denial phase rapidly and begin a serious discussion. Not connecting the dots in this unfolding economic/environmental/social crisis will result in the coming period being nastier and more brutish than it needs to be.
Since September 2008, the index has jumped higher than ever, ashis chart (above) shows, leading Wilmaz to conclude:
