Global Financial Crisis_ Five Key Stages 2007-2011 _ Business _ the Guardian

Global financial crisis: five key stages2007-2011From sub-prime mortgages in 2007 to the newly downgraded USdebt status, the latest crisis point is unlikely to be the last

Larry Elliott, Economics editorguardian.co.uk, Sunday 7 August 2011 16.49 BST

Article history

A trader at the New York stock exchange. The last four years have seen five key stages of the global financial crisis,with more likely to come. Photograph: Brendan Mcdermid/Reuters

9 August 2007. 15 September 2008. 2 April 2009. 9 May 2010. 5 August 2011. Fromsub-prime to downgrade, the five stages of the most serious crisis to hit the globaleconomy since the Great Depression can be found in those dates.

Phase one on 9 August 2007 began with the seizure in the banking system precipitatedby BNP Paribas announcing that it was ceasing activity in three hedge funds thatspecialised in US mortgage debt. This was the moment it became clear that there weretens of trillions of dollars worth of dodgy derivatives swilling round which were worth alot less than the bankers had previously imagined.

Nobody knew how big the losses were or how great the exposure of individual banksactually was, so trust evaporated overnight and banks stopped doing business with eachother.

It took a year for the financial crisis to come to a head but it did so on 15 September2008 when the US government allowed the investment bank Lehman Brothers to gobankrupt. Up to that point, it had been assumed that governments would always step into bail out any bank that got into serious trouble: the US had done so by finding a buyerfor Bear Stearns while the UK had nationalised Northern Rock.

When Lehman Brothers went down, the notion that all banks were "too big to fail" nolonger held true, with the result that every bank was deemed to be risky. Within amonth, the threat of a domino effect through the global financial system forced westerngovernments to inject vast sums of capital into their banks to prevent them collapsing.The banks were rescued in the nick of time, but it was too late to prevent the globaleconomy from going into freefall. Credit flows to the private sector were choked off atthe same time as consumer and business confidence collapsed. All this came after a

Global financial crisis: five key stages 2007-2011 | Business | The Guardian http://www.guardian.co.uk/business/2011/aug/07/global-financial-crisis-k...

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period when high oil prices had persuaded central banks that the priority was to keepinterest rates high as a bulwark against inflation rather than to cut them in anticipationof the financial crisis spreading to the real economy.

The winter of 2008-09 saw co-ordinated action by the newly formed G20 group ofdeveloped and developing nations in an attempt to prevent recession turning into aslump. Interest rates were cut to the bone, fiscal stimulus packages of varying sizesannounced, and electronic money created through quantitative easing. At the LondonG20 summit on 2 April 2009, world leaders committed themselves to a $5tn (£3tn)fiscal expansion, an extra $1.1tn of resources to help the International Monetary Fundand other global institutions boost jobs and growth, and to reform of the banks. Fromthis point, when the global economy was on the turn, international co-operation startedto disintegrate as individual countries pursued their own agendas.

9 May 2010 marked the point at which the focus of concern switched from the privatesector to the public sector. By the time the IMF and the European Union announcedthey would provide financial help to Greece, the issue was no longer the solvency ofbanks but the solvency of governments. Budget deficits had ballooned during therecession, mainly as a result of lower tax receipts and higher non-discretionary welfarespending, but also because of the fiscal packages announced in the winter of 2008-09.Greece had unique problems as it covered up the dire state of its public finances andhad difficulties in collecting taxes, but other countries started to become nervous aboutthe size of their budget deficits. Austerity became the new watchword, affecting policydecisions in the UK, the eurozone and, most recently in the US, the country that stuckwith expansionary fiscal policy the longest.

Last Friday, the morphing of a private debt crisis into a sovereign debt crisis wascomplete when the rating agency, S&P, waited for Wall Street to shut up shop for theweekend before announcing that America's debt would no longer be classed astop-notch triple A. This could hardly have come at a worse time, and not just becauselast week saw the biggest sell-off in stock markets since late 2008. Policymakers areconfronted with a slowing global economy and a systemic crisis in one of its componentparts, Europe. To the extent that they are united, they are united in stupidity, wedded toblanket austerity that will make matters worse not better. And they have yet to tacklethe issue that lay behind the 2007 crisis in the first place, the imbalances between thebig creditor nations such as China and Germany, and big debtors like the US.

In the circumstances, it is hard to be wildly optimistic about how events will play out.Markets are bound to remain highly jittery, although it seems unlikely that Americanbond yields will rocket as a result of the S&P downgrade. Japan lost its triple A ratinglong ago and has national debt well in excess of 200% of GDP but its bond yields remainextremely low. The reason for that is simple: Japan's growth prospects are poor.

So are America's, which is why bond yields will remain low in what is still, for the timebeing, the world's biggest economy. The dressing down given to Washington by Beijingfollowing the S&P announcement was, however, telling. Growth rates of close to 10%mean that the moment China overtakes the US is getting closer all the time, and thecommunists in the east now feel bold enough to tell the capitalists in the west how torun their economies. Whatever it means for financial markets this week, 5 August 2011will be remembered as the day when US hegemony was lost.

All this is terrible news for Barack Obama. He has not delivered economic recovery. TheUS is drowning in negative equity and foreclosed homes. No president since Roosevelthas won an election with unemployment as high as it is today. Fiscal policy will betightened over the coming months as tax breaks expire and public spending is cut. TheFederal Reserve only has the blunt instrument of QE with which to stimulate the


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StaffContributor

truthANDbeauty7 August 2011 5:31PM

Obama will now be branded as the president whopresided over the national humiliation of a debtdowngrade. He looks more like Jimmy Carter thanFDR.

Sorry, but it's a bit more complicated than that. Anybody whounderstands the separation of powers in the United States willknow that it is not that black and white. Gridlock often works to

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Comments41 comments, displaying first

economy, and will only be able to deploy it after a softening up process for the marketsthat will take several months. On top of that, Obama will now be branded as thepresident who presided over the national humiliation of a debt downgrade. He looksmore like Jimmy Carter than FDR.

Not that the Europeans should get too smug about this, because what we are witnessingis not just the decline of the US but the decline of the west. One response to last week'smeltdown was the announcement of talks between the G7 – the US, the UK, Germany,Italy, France, Canada and Japan – but while this would have been appropriate 20 yearsago it is not going to calm markets today. Holding a G7 meeting without China today islike expecting the League of Nations without the US to tackle totalitarianism in the1930s.

There is no happy ending to this story. At best there will be a long period of weakgrowth and high unemployment as individuals and banks pay down the excessive levelsof debt accumulated in the bubble years. At worst, the global economy will be plungedback into recession next year as the US goes backwards and the euro comes apart at theseams. The second, gloomier scenario, looks a lot more likely now than it did a weekago.

Why? Because there is no international co-operation. There are plans for austerity butno plans for growth. Even countries that could borrow money for fiscal stimuluspackages reluctant to do so. Europe lacks the political will to force the pace ofintegration necessary to avoid disintegration of the single currency.

Commodity prices are coming down, but that is the only good news. We are less thanhalfway through the crisis that began on 9 August 2007. That crisis has just entered adangerous new phase.


3 of 16 2/6/2012 5:19 PM

America's advantage, but not this time. The Democrats no longercontrol Congress, so they will come out of this better than you.

Obama's poll ratings went down slightly, as expected; the TeaParty's have collapsed. The fear of a GOP extremist will keep alarge chunk on the side of Obama in the time for re-election inNovember 2012.

truthANDbeauty7 August 2011 5:34PM

That should be . . .

"The Democrats no longer control Congress, so they will comeout of this better than you think."

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HansZandvliet7 August 2011 5:53PM

Great and coherent overview of where we are and where wecame from, economically.As for where we are headed, it still fails to take into account thatwe are at or near the peak of oil production. This fact will soontake over as the main driver of the economic downturn, when oilproduction starts its progressive decline.

Indeed: "We are less than halfway through the crisis that beganon 9 August 2007." It's worse than that: we haven't seen nothingyet.

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BombardierWells7 August 2011 6:28PM

Capitalism has collapsed. Even before the current crisis broke in2007 the systemic problems were there. The seeds were sown byReagan and Thatcher with their neo-liberal policies in the 1980s.They launched an agressive attack on working people, smashingtheir trade union organisations, destroying the manufacturingbase of the economy, using high unemployment to weaken anddemoralise working people, driving down real wages, privatisingpublic services, deregulating the international banking andfinancial system and generally rolling back the frontiers of thestate to give capitalism free reign to do whatever it liked.

The gap between rich and poor increased, real wages anddisposable income declined, those lucky enough to keep theirjobs had to rely upon credit to maintain their standard of living.This was fueled by the increased availability of credit and by theboost given to the housing market by the introduction of theright to buy for council tenants. Everyone was encouraged tospend money they didn't have. The banks became increasinglyconfident that they could lend money they didn't have to peoplewho couldn't afford to pay it back. They reasoned that theincrease in property prices would allow them to recover theirmoney in the event of any default.

The problem now is that real wages have fallen so far behindprices that the economy can only sustain itself and grow ifpeople continue to supplement their spending power with debt.But people don't want to borrow and banks don't want to lend.The engine is bust. Furthermore, capitalism is using the crisis todrive wages down further and austerity measures are leading tohigher unemployment. In typical textbook fashion capitalism, bycutting wages also takes money out of the pockets of its

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customers. It is a viscious circle.

We need international co-operation, coordinated action, unity ofpurpose, effective planning. None of these things can beprovided by the anarchy of the market. We need an economicsystem which is organised and planned, a system that meets theneeds of the many and not just the few. We need a society that isrun in the interests of the billions and not the billionaires.

HisHoliness7 August 2011 6:55PM

This is as good a place to repost my comment.

Money parked in US treasuries is money China doesn't need forcurrent accounts. The interest is paltry so its not there for themoney. A $500 billion in US treasuries is more than enough toback the Yuan as well as facilitate all her external tradingaccounts. There are dire consequences should the currentmonetary dynamics be disturbed from its current equilibrium.To repatriate humongous sums like $2 trillion into China willcreate rampant inflation in China. To over invest in othercountries will bring online mineral and natural resources noteven China can digest fully. It will cause a glut and a crash inresource valuations. That won't do. Any wild gyration inanything is bad for the global economy and very bad for allsocieties. China is prudent enough not to exploit her financialadvantage.

There are very few places China can park that large an amountof earnings. So China is pretty much stuck with putting them intoUS treasuries. As you all agree, for China to stop buying themwill be disastrous for the US and the global economy. You betterrealize how sensitive the US is to any little change in thisequation. It just takes a few tens of billions of dollars diverted tobuy Eurobonds (which can yield as much a 6% compared to nearzero for US bonds) to cause a nervous twitch in Wall Street andWashington. And Europe is hoping for more where it came from.The only other recourse is to create (print) more money throughthe European Central Bank and the Fed. Printing money maybackstop further deterioration of the state finances of thechronic debtor countries but will not in any way create wealthwith which to regain financial health. I say 'may' because it isalready apparent that quantitative easing is not working for theUS or the EU/UK

In arguments about your (US and EU) state debts and yourwoeful inability to mitigate the problems be very clear that Chinais the only global economy that is keeping the global economicengine running. Try to gum up that engine and your doom willbe instant. China will suffer of course but not to any great extentnor for any length of time. China is a continental sized countrywith the larger provinces equivalent to a Germany or a France inarea and in economy, and with a larger population. Her internalconsumption (1.3 billions is more than twice the populations ofthe US and EU combined at less than 700 millions) is more thanenough to keep the economy humming along. What counts is notabsolute wealth. What counts is the ability to source andpurchase resources from anywhere in the world. This will keepher internal economy in good shape and with that the ability toproduce a surplus to sell to the rest pf the world. Should thedollar or the Euro go down the toilet it won't affect China muchfor the rest of the world will accept the Yuan to pay for theirexports to China and use the same currency to pay for imports.

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5 of 16 2/6/2012 5:19 PM

These products range from the cheap consumer goods atWalMart you like to sneer at but cannot do without tomega-infrastructure projects such as roads, railways, ports andairports, power stations, dams, office buildings and much more.

Your woes are not caused by China's trade policies. Your woesare caused by your bankers flouting the most fundamentalprinciples of good money management and stweardship. Before2007 Chinese officials were in awe of the ability of Wall Streetand the City to manufacture windfall profits out of nothing. Younow all agree that your bankers, politicians and money peoplewere frauds and tricksters. Now a successful fraudster or atrickster is a much admired person. He's got the loot. Butunfortunately your lot wiped out the wealth of your countriesand many foreign countries as well.

611 comments as I am writing this post with more to come. Thismust be a record. Practically all are criticisms with none offeringa way out. Also note that there is a total absence ofcommentators from the fifty-centers. This implies that the fifty-centers know China has won and there is no need to gloat.

Wyndley18577 August 2011 7:24PM

BombardierWells

We need international co-operation, coordinatedaction, unity of purpose, effective planning. None ofthese things can be provided by the anarchy of themarket. We need an economic system which isorganised and planned, a system that meets theneeds of the many and not just the few. We need asociety that is run in the interests of the billions andnot the billionaires.

Could not agree more with your post.

However, we need to ask ourselves why the Soviet Union wentso off the rails since, presumably, the society you and I both wishfor will have to ensure that sociopaths - like Stalin - don't get tothe top.

One of humanities inbuilt failings is something called'dominance hierarchy' which, very broadly speaking, divides usinto leaders and followers.

Knowing ourselves better might be a good starting point;implementing separation of powers, limited times any oneperson can spend in office, are a start, but as experience in theUS warns us, they have the work-arounds.

Dominance hierarchy is accompanied by tribalism, as currentUK party politics demonstrates only too well.

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SimonWierny7 August 2011 7:28PM

There is no happy ending to this story. At best there will be along period of weak growth and high unemployment asindividuals and banks pay down the excessive levels of debtaccumulated in the bubble years. At worst, the global economywill be plunged back into recession next year as the US goesbackwards and the euro comes apart at the seams. The second,gloomier scenario, looks a lot more likely now than it did a weekago.

Why? Because there is no international co-operation. There areplans for austerity but no plans for growth. Even countries thatcould borrow money for fiscal stimulus packages reluctant to doso. Europe lacks the political will to force the pace of integrationnecessary to avoid disintegration of the single currency.

Commodity prices are coming down, but that is the only goodnews.

What a lot of rubbish written in pure economical contractingjudgements. Get a life Larry and quick! One line you shout aboutausterity being all that is bad now and the next you about theneed for banks to pay down the excessive levels of debts.Remember Larry economy is not as simple as one writer's

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6 of 16 2/6/2012 5:19 PM

opinion so try next time provide a balanced approach to a verycomplex subject. This means that both austerity in some areasand investment in other areas is needed. Falling comodities willboost things back as they are overpriced by a group of fortunemaking greedy muslims, american corporations and others whowithout pumped up price would not be able to find decent job.But back to the case. Germany aim is to get matters a bit moredramatic so they could influence market consolidation to drivetheir vision of economic stability in Eurozone - you think theywant Deutch mark to be back considering that despite Eurobeing in the low zone they have growth??? I seriously doubt that.Math of numbers is clear and as soon numbers get to the positiveafter the slamp then we back to the real life.

chasm7 August 2011 7:53PM

Long period of stagflation ahead. And inflation will suit a lot ofGovernments, as it will reduce the real value of their debts. Somuch easier than making and implementing difficult decisions.

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jericoa7 August 2011 7:53PM

Sustainable growth is an oxymoron.

Without this fantasy growth potential the UK in particular willprobably, over a fairly short time, have to get used to livingstandards more akin to former eastern bloc countries.

There is no escaping this actually, it is already set in stone.

I hope our society has not been eroded to the point where thathardship will cause some form of social collapse.

There is an alternative vision to be had which could bind thenation together again and give a meaning to the suffering tocome. This vision is thoroughly researched and viable but nevergets airtime because the first step is to nationalise all banks andenergy companies.. the very people who, via backroom leverage,not via the ballot box wield a huge amount of power andinfluence in politics and policy.

They are the ones who lobbied for the relaxation in the rulesbrought in after the great depression to stop this miseryhappening again. They are the ones whispering in the ear ofpoliticians to intervene in Libya.. and not Syria.

It is there for all to see. Until that backroom cabal supported bylawyer politicians is broken up we are on a hiding to nothing.

When economies are so advanced techknologically that they canno longer grow, the truth becomes exposed, the politicians,bankers and corporations can be seen naked, desperately tryingto pull the same manipulative levers, but with the physical limitsof growth reached they will be to no effect, the people will seethem, there will be some chaos, followed by deep change.

good luck all descent people, time for you to come together againand form and unstoppable positive force, we are in theoverwhelming majority, peaceful, reasonable, not greedy andproductive people whom the parasites are utterly relient on.

Know it, own it and this thing can be turned around in a decadeand leave apositive legacy for our kids.

If we don't.. im sorry but we will turn upon each other and well..it does not bear thinking about frankly.

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irvingp637 August 2011 8:08PM

There's plenty of room here in Canada, sorry no banksters.

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7 of 16 2/6/2012 5:19 PM

Clip | Linklabourpower7 August 2011 8:13PM

Too late Larry! Do I sense that you still think there is an outsidechance that our economic and political masters might come totheir senses? You need to understand the mentality of thebourgeoise individualist who can't think outside the ideologicalprison of the FREE ENTERPRISE SYSTEM which naturallyguarantees their whole raison d'etre through the eternal right toexploit the rest of us for the accumulation of wealth, regardlessof the consequences!

The rich are like obssessive betting shop punters who gambleever more desperately after every loss in order to retrieve theircapital. What's more, when the've savaged each other to thepoint where most capital is wiped out and the vultures likeGoldman Sachs have cleaned up the remaining assets in firesales. They will then turn nasty and look round for scapegoats.

How does the old music song go!

It's the rich wot gets the gravy

It's the poor what gets the blame!

I'll let you fill in the next line.

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petebro7 August 2011 8:14PM

Cancel the unrecoverable debt and set a realistic ceiling forfuture borrowing , unless we start from a sound financial basewe will not move out of recession .We have got to set the bar at the right height for home borrowingand allow for redevelopment and growth of new industries ,based on the ability to pay .If we have managed to clear our deficit then we are solvent andthis should allow for continued spending . The lessons of havingunregulated banking systems is we can,t see the moneydisappear ? So if we have unrecoverable debt written off andagree to payback what is recoverable then this should allow forcontinued growth.Growth should hit a cieling as should borrowing , this is how thenew regulations should work, market and seasonal trends can beaccommodated .The realistic policies should encouragesustainable growth.

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The energy crisis looming will cause a downturn if we do not actknow and develop new sustainable developments in housing andindustry. The build up or build outpolicy and plan for green living should be given real incentivesand coastal development maybe necessary .The utilisation ofspace for capital development and new industrial developmentcreating employment , investing in future industry and

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8 of 16 2/6/2012 5:19 PM

maintaining a sound industrial base . Attracting investment thatis freed up from world banks.


The new energy can only be made sustainable if we utilise wavepower , wind power or create a global energy commission toimport and export green fuels this should be encouraged byworld investors as the industries of tomorrow .Plan,invest and develop. The is demand to right off third worlddebt and encourage development largely based on the currencystrength or underpin developing countries by surety , ie whatmaterials can be purchased as surety yet sustainable.

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The real emergence of developing nations is being restricted bybad debt .We should have a common policy based on the ability to pay ,righting off bad debt and allowing future developments inindustrial and home markets encouragingexport at supply and demand basis. The world banking systemshould be inline with energy demands borrowing for theemergence of new industries .The uk has not utilised ormaximised its coastlines for development and the futureutilisation ofbuilding high rise is set to grow.Industry has to respond to thatin being able to grow and reach acceptable levels of industrialoutput.The globalisation and greener futures has and can only bemet by sustainable development and zero rated housing , thiscan only be the way forward .The borrowing and deposits onhome ownerships should be a realistic target for young peopleentering the housing market, fixed rates and surety.The housingmarket needs to accomodate population growth , this shouldencourage industrial growth. The need for greener livingdepends on sustainable development of a longerterm powergeneration.The world production of power from space and from the sea . Ifwe are allowed to expand our economies it will be based onsustainable and renewable energy to allow industrial output tostimulate growth.

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If we harness sea power stations and turbines and utilise coastalareas , we need to increase the available land for cropproduction and stabilise food prices to meet the necessity oferadicating starvation. The terra forming of areas of land forfuture energy production of food relies on water and glass whichwe have in abundance.Space stations radiating heat into desert regions around theequator and exporting on demand , storage of energy and theproduction of food.The energy crisis will effect everyone on thisplanet and can be dealt with to stabilise world fuel

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9 of 16 2/6/2012 5:19 PM

shortages.Industrialised nations and new areas of growth need agood energy polict at low costs. The farmland required for carsand haulage can not be met unless we produce and terra formland that is not being utilised. The greener policy should stabiliseoil output and gas and can only be achieved with a one globalenergy policy .The future crop production of fuel sources mayrely on the land not being used put back into production.


The real need for future development in all areas relies on asound financial policy.A sound long term renewable energy policy that is globallyexcepted.Space power production of solar energy and collectionfarms , wave power turbines and dams.Sustainable development of both housing and industry.Industrialoutput for home markets and abroad , sound financial policy forhome ownership with disposable income,setting the bar at theright height.With due regard to national debt inflation cappedinline with interest rates , allowing for seasonal trends andfluctuations bringing stability to the financial markets,preventingcurrency hijacking by proper regulations as regard to exchangerate mechanisms.The steady state economywe all dream of is within our grasp it just needs a determinationon our behalf to become responsible , be able to change. Thesocio economic globalisation and sustainable growth .The rightcooperation from all nations allowing and supporting the rightrate of growth.

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The future relies on space and sea exploration to developsustainable energy sources.The utilisation of existing energysources and phasing in new power plants in line with demand ,growth over longer terms and plan for four times the growthover twenty years of for casting should allow industry to makenecessary transitions in line with demand with the right financialbacking. The future relies on a determination to globalise andhave socio economic harmonisation. The right way of thinking isa pyschological ethos .The one world one god one belief inreligious quarters , the sense of social cohesion and structure.The one world orderand the trust that should be developed soley relies on seeingwere you fit in .Education has to meet the demands oftomorrows world and industrial partnerships built on localemployment being met by locally educated people.The way we think and the way we live . That allows religiousfreedoms and social cohesion ,the global dream being realised,the social harmony .The globalisation is taking place and shouldto build a cohesive society were we all fit in and have got theability to change ,the socio economic revolution , the rightpolicies and forward thinking status quo . The growth ofpopulation accomodated for in sustainable living.

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The global financial crisis can only be solved by righting off debtand recovering over the longer term what is recoverable. Thirdworld markets can modernise and grow with financial backing

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10 of 16 2/6/2012 5:19 PM

underpinned by sound global economics low risk highreturns.Restructuring financially , free the world fromunrecoverable debt .The future relies on a new level playing field with regulatedfinancial base.The fact is we cannot move out of recession if we cannot get outof debt the financial stalemate. The have got to allow growth inindustry to match demand.The investment within new technology and research and goodpolicies meeting the criteria of industry and business.Employment and jobs will emerge as industry is allowed to growthis depends on a good financial base with a recoverable amountof debt and restructuring , allowing growth in emergingeconomies and industry.The energy has got to renewable ,cheap and sustainable .

yohodi7 August 2011 9:06PM

Capitalism works..it just has to be regulated.This whole theatrical financial collapse is due to the sheeple 'us'taking for granted that money didn't need to be earnt....(Just aswe were supposed to do).Economic ineptitude, massive corruption, and a blind eye turnedby the ruling(political) 'elite'?......We borrowed money from the money lenders, who borrowed itin turn from the gangstas....The whole rotten system needs a clear out, starting withparliament....'Ye have sat for to long for any good ye be doing, in the name ofgod go!'Wishful thinking , but we need it to happen.

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gpjcyprus7 August 2011 9:12PM

The sovereign defaults are coming.

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Gico7 August 2011 9:14PM

Obama could've avoided all these by putting forward a reallydecisive stimulus that would've quickly turned around the USeconomy at the onset. But he has played politics instead. He hasreduced the stimulus as a concession to Republican opposition.

The slow recovery of the US economy has caused an electoralbacklash that ironically saw the Democrats losing their majorityto the Republicans in the House of Representatives in thefollowing mid-term election. Having lost this critical majority,Obama seems no longer able do anything more for the USeconomy.

But the Republicans have overplayed their hand in the debtceiling issue. They've have lost favor from a huge majority of theelectorate as recent polls suggest. The US debt is actually amedium-term concern that Republicans have successfully madeurgent. But their arrogance has not found favor with majority ofthe electorate. If elections were held today they would lose boththeir bid for the presidency and their narrow majority in theHouse of Representatives.

Obama now has a chance to put forward a credible secondstimulus. He can also shift the the discourse towards the urgencyof reviving the economy first. He can argue more strongly that arevitalized economy would make it more easier for the US todeal with its debt with more tax revenues forthcoming.

Republicans would have serious difficulty 'refudiating' thisargument on account of the recent dismal outcome of doing toolittle, not to mention, the obvious lessons of past recession

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11 of 16 2/6/2012 5:19 PM

history. Obama could've invoked the lessons of past recessionhistory to justify a more potent economic stimulus in the firstplace. But, for some reason, he hasn't.

This is where the problem really lies. Obama seems unsure of hispriorities. Christina Romer, former Chairperson of Obama'sCouncil of Economic Advisers, has stated on TV recently thatperhaps the stimulus should've been larger but Congress got inthe way. But Obama has majority in the House ofRepresentatives then. He could've forced through a reallysignificant economic stimulus if he wanted to.

Cristi Romer has also stated she's optimistic that anotherstimulus is in store.But Obama is silent. Christi Romer is right that the US economyis never ever going to move forward now without a really bigkick in the behind. Obama should take the chance. He hasnothing more to lose. This is his chance to make a strong comeback.

esotericben7 August 2011 10:10PM

I can't help but think a little less growth is no bad thing. Theglobal ecological footprint of humans already outstrips globalresources (we currently need about another 0.4 of a world); withChina's consumption growing rapidly this is hardly going to getbetter. We need to balance our books with the world, and liveless lavishly - maybe a bit of financial crisis was exactly what weneeded.

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PeterS3787 August 2011 10:41PM

Phase one on 9 August 2007 began with...

If you think the "global financial crisis" started in August 2007then you haven't understood it.

This is a bit like starting an analysis of a plane crash byconsidering what speed it was doing when it hit the ground.

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MercyCroft8 August 2011 1:01AM

Those who have pawned their gold better get back to CashConverters quick. Clip | Link

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MattDrayton8 August 2011 3:03AM

â Crises are, as it were, the irrational rationaliers of an alwaysunstable capitalismâ - David Harvey Clip | Link

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christopherw3038 August 2011 4:46AM

Virtually the entire western world is caught in never-ending debttrap. For as long as our governments are forced to borrow everlarger sums of money to cover our old debts, it is mathematicallyimpossible for society to ever pay all of its bills. Under thecurrent monetary system, there are only two possible outcomes-crushing deflation, or rampant hyperinflation.

A better world is possible- if only the general population were tounderstand the nature of money, and its creation. We mustdemand a system of low-cost, interest-free social credit, issuedon an as-needed basis for the greater public good. Until that daycomes, I believe that gold and silver remain the safest place toinvest your money.

http://superiorbullion.com/news.html

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medbutdin8 August 2011 6:49AM

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12 of 16 2/6/2012 5:19 PM

No mention of China's under-valued currency of last 20 yearsstripping out the manufacturing base and wealth of other nations- not just the West? I'm no economist, but surely this has had arole in the state of nations current finances and economic woes.

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Reportbecarefuloutthere8 August 2011 9:16AM

BombardierWellsYour analysis is, I believe broadly correct, that globalisation hasseen a huge transfer of wealth from employees to shareholders.Those shareholders being inusrance companies and pensionfunds in the main. And that to keep the false measure of GDP incountries with huge trade deficits bouncing along nicely, debthas been made too freely available. But I think your conclusionover capitalism being dead is wide of the mark. Nerely the formthat grew up from the 1980s onwards. The Regan-Thatcherparadigm that low taxes encourages entrepreneurs and everyoneelse benefits from a trickle down effect.The loss of the indutrial unions has seen the public sector onesbecome the main funders of both the Democrats and Labour, soanother paradigm has arisen - that public sector employees aresomehow special and deserving of special treatment, eg.. lack ofcompetition and gold-plated benefits.HisHolinessI think you are too hung up on the numbers and miss the basictruth of economics - it's about people and the way they think, i.e.psychology.With huge balance of trade surpluses neither Germany norChina can be considered drivers of global GDP. Numerically,their figures stand out. But if no one buys then no one sells. AsLarry Elliot points out it is the trade imbalances that lies at thevery heart of this problem. Those trade imblances, in order tocontinue, requiring both personal and sovereign increases indebt. That process has now, more or less, reached the end of theline. The impact of this debt/imbalance issue has hit theEurozone and the USA.So expect China's surplus to dimiish dramatically. Selling tothemselves is an option but that requires Chinese wages to rise,as they are. This combined with quite high inflation in Chinaundermines their competiveness further.IIn addition, history tells us that as people acquire wealth so theydesire political influence. China at the moment cannot permit amild-mannered artiist to collect a Nobel Prize. For some reasonit maintains the dictatorship in N Korea that looks like a veryloose cannon.This is not a nation heading for the first rank. Its size gives itimportance but its political system is a drag on it.Germany's surplus with other Eurozone members will obviouslydiminish. Austerity in Greece, Ireland, Spain, Portugal, Greeceand increasingly in the UK will just lose those markets.Unless German taxpayers are willing to support other Eurozonecountries and their importation of German goods those internalimblances will largely disappear. Remember when the crisis firststruck Germany's GDP fell sharply. It was only the increasingsovereign debt that boosted that GDP. That boost is now over.Something will emerge from all this but it will bear littleresemblence to the last 30 years

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13 of 16 2/6/2012 5:19 PM

bradfudbantam8 August 2011 9:33AM

christopherw303

We must demand a system of low-cost, interest-free socialcredit, issued on an as-needed basis for the greater public good

I need Â£10 million to buy a private plane.

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truthANDbeauty8 August 2011 10:22AM

The rich should cancel the debt of the poor. China could start bycancelling US debt. Clip | Link

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MontyMalachi8 August 2011 11:10AM

It's no longer bankers or investors who decide to buy or sell; it'sincreasingly machines.

- JP Morgan buys supercomputer firm- Computer generated buy/sell orders are three quarters of themarket., with orders being created with microseconds of a stock,bond or currency changing value.

Summarized: the politicians can hold all the press conferencesthey want; announce all the measures they need. It doesn'tmatter. The computers aren't listening to them.

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timbotaxi8 August 2011 11:11AM

I find Larry's analysis bleak yet compelling. There are no easysolutions to this crisis and the world as we know it is in a state offlux. These changes in one country's hegemony are not new, theUK lost it's control in 1945. No doubt there will be otherswitches, its just that this one is happening on our watch.

Capitalism is a bad system, but we're not in a position to replaceit yet. And despite romantic nods to some utopian communistideal we would be better to try and reform what we've got.

On an optimistic note you'll find that humanity works betterwhen its collective back is to the wall. This crisis bad though it is,is not as bad as the Great depression and we came through thatand will come through this when our leaders realise that weneed a co-ordinated response toward it.

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harmonyfuture8 August 2011 12:28PM

The ratings agencies rate worthBanks raid, profit, ruin, create imaginary wealthGovernments are impotent, we lose.

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AliAlgiers8 August 2011 2:08PM

as long as you ignore the debt problem, I feel like you ignore thewhole problemyou can not borrow undefinitely. there is a limit. it's available forboth individuals and STATES

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14 of 16 2/6/2012 5:19 PM

8 August 2011 3:14PM

As Chinese government is reluctant to revalue its currency, thenrest of the world are devaluating theirs. Clip | Link

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Koolio8 August 2011 3:54PM

Each episode is marked by the panic response and theshort-term fix. Yet every time structural reform is dodged.Stimulus plans can buy you time but little more. They need to gowith reform to the underlying economy but this has nothappened.

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bonds8 August 2011 4:02PM

Excellent piece and comments.

Unfortunately real change will only come about by direct actiontaken by millions around the world.

The real power brokers have simply too much power, they'vetotally ignored well informed economics in the past and willcontinue to do so.

The fact that nothing changed and the bankers continued to paythemselves huge bonuses after 2007 proves this.

How do you get junkies to give up smack when the junkies are incharge and have huge standing armies to call upon to protecttheir addiction.

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@ angelito2: 8 August 2011 3:14PM

As Chinese government is reluctant to revalue itscurrency, then rest of the world are devaluatingtheirs.

Doesn't work.The Yuan is pegged to the USD and is allowed tovary only within a very narrow band. Furthermore China is oneof the few countries left that still maintains capital flow randexchange controls. The Yuan is not convertible. You cannot buyand sell Yuan in the open market, not in any significant amount*anyway, and speculate on its movements. Furthermore no hedgefund or bank can attack the Yuan as China has more funds todefend her currency than anyone or any combination of funds.Residents of mainland China cannot speculate in foreigncurrencies either as foreign currency accounts are operated onlyunder very strict rules. Man. One gets to sleep very well whenone is immune from financial speculators.

*[There are practically no restrictions on Yuan transfers to payfor real goods that is the basis of ordinary commerce.]

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@ becarefuloutthere: 8 August 2011 9:16AM

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15 of 16 2/6/2012 5:19 PM

I'll need a bit of time to come up with a good reply. Figuresmatter very much. In the meantime everyone should read thisarticle.

SPENGLEREnd of the road for hedge fundshttp://www.atimes.com/atimes/Global_Economy/MH09Dj02.html

The American government won't go bankrupt, China won't sellits holdings of US Treasuries, and the world's Asian growthepicenter isn't going to roll over and die. The bubble that hasnow been popped represents a liquidity event, not a true crisis inthe mode of 2008, and the end of the road for the overstretchedand overpromised hedge fund industry. (Aug 8, '11)

Selected quotes:1. the reason for the downgrades is that hedge funds havecrippled out. Hedge funds can't earn the 15%-20% returns theypromise investors in a world of 3% bond yields and 2% grossdomestic product (GDP) growth.2. The nearly $2.6 trillion of hedge fund assets constitute thesystem's only real bubble: too much money chasing too fewreturns, with a lot of fingers on the recall button. As of May,equity hedge funds with $1.25 trillion in assets had strongly netbullish positions.They are stampeding to get out. Their overwhelmingly bullishbias left them vulnerable to a wave of redemptions, what hashappened to the real-money investors who require the incomethat only the equity market can provide? No-one can fund aretirement on Treasuries yielding 2.4%, or a corporate bondindex yielding less than 3.5%.3. The US government won't go bankrupt. China won't sell itsTreasuries (who would buy them?).4. The bubble that has popped here is not American governmentdebt, but the overstretched and overpromised hedge fundindustry. It's impossible to tell how long the liquidation willcontinue. But the stock market today does not run off fumes asin the dot-com days of the 1990s, nor off the phony profits ofultra-levered financial companies as in the 2000s. CorporateAmerica is flush with cash, financially sound, and makingbetter money than ever before.

Freshexpress8 August 2011 9:38PM

There seem to be an awful lot of defeatists. Lets get a life andlook forward! Clip | Link

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16 of 16 2/6/2012 5:19 PM

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