From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sun Sep 09 2007 - 09:09:56 EDT
Credit crunch? What credit crunch? Obviously for people who get the repo-man at the door, there is a "credit crunch", but for the capitalist world economy, the big credit crunch has yet to come. What we are seeing now in the US I think is relatively speaking a tremor, involving real losses probably only in the hundreds of billions of dollars (sub-prime mortgage lending is about 10% of the market). Nowadays, in specific conditions, a trillion dollars of financial asset values can disappear into thin air, without making much of a real dent in the world economy though. The problem for any "good article" is that the total ramifications of credit defaults, and how market-actors will respond, are very difficult things to predict specifically, there are just too many interactions between many different variables to consider, and therefore you just get a lot of speculative analyses. All you can be sure of, is that at some point the bubbles must pop, but what the total effect will be (beyond lowering production and demand growth) is not easy to say. A BIS researcher puts it this way: "While robustness tests indicate that the [econometric] models might be able to correctly predict whether or not contagion [owing to exposures in the interbank loan market] could be an issue and, possibly, also identify critical institutions, they are less suited for stress testing or for the analysis of policy options in crises, primarily due to their lack of behavioural foundations. Going forward, more work is needed on how to attach probabilities to the individual scenarios and on the microfoundations of the models." http://www.bis.org/publ/work234.htm Nick Beams of the WSWS claims "Now the bursting of the bubble has set in motion economic forces that could bring a recession not only in the US, but in the world economy as a whole." http://www.wsws.org/articles/2007/aug2007/cred-a24.shtml Well that could be true or it could be false, it is a vague statement, not an analysis. Obviously every boom is followed by a bust, but saying that tells us nothing new. Much more significant perhaps are the social relations of "credit culture", i.e. a culture based on the ability to pay, rather than on the ability to produce, in which the creditworthiness of individuals and groups is judged by the propertied class, something which gets mimicked in popular culture. The best economic analyses I think come from people who have actually investigated statistically and empirically the real quantitative proportions of the credit market, i.e. who owes how much to whom, over what period, by asset type, and what the trends are. See e.g. a stab made in that direction by Dean Baker's paper http://www.cepr.net/documents/publications/meltdown_2007_08.pdf Maybe it's also worth having a look at aggregate data estimates such as in the IMF Global Financial Stability Report http://www.imf.org/external/pubs/ft/gfsr/2007/01/index.htm - at the end of 2005, the world's total stock of financial assets were estimated at roughly 3.7 times world GDP. - the notional amount of total derivatives was judged about 11 times world GDP. - at the world level (and in the EU), bank loans (loan capital) account for about half of total financial "assets", but in the US and Japan, the ratio is much lower. - In the US, just 1 dollar out of five is borrowed from a bank, the rest from finance companies and other financial institutions of various types. - While the ratio of government bonds (i.e. risk-free assets) to total debt securities at the world level is roughly 50%, in Europe it is 35% and in North America it is 26%, with a downward trend, i.e. household portfolios increasingly comprise securities bearing both market and credit risk. In my own writing I have referred to all this as a situation of "surplus capital" or "excess capital" vis-a-vis actual investment in production, i.e. in the real world, empirically, the amount of capital assets which exist external to production (both physical and financial) exceeds the amount of capital assets directly tied up in production. In that case, is is unsurprising to find that top private-equity and hedge fund managers earn more money in 10 minutes than the average US production worker earns in a year. The other thing to do, is look at cases where large-scale credit defaults have actually occurred, and see what happens. Mark Weisbrot notes for example: "Argentina was one of the IMF's most publicized "successes" turned-crushing-failure at the end of the last century. (...) At the end of 2001 the whole experiment fell apart, with the country defaulting on more than $100 billion of debt - the largest ever debt default by a government. The currency collapsed soon thereafter, and the majority of people fell below the poverty line in a country that had previously been one of the richest in Latin America. The Argentine press began to report stories of children fainting in school for lack of adequate nutrition, and of people hunting down cats, dogs, rats, and horses in order to survive. In 2002, when the country was flat on its face, the IMF offered no help. Instead, together with other international financial institutions, they took a net $4 billion - 4 percent of the country's GDP - out of the economy that year. (...) But just three months after the country's record default, the Argentine economy began to grow. Despite the continuous nay-saying of the IMF and the business press -- it hasn't stopped." http://www.cepr.net/index.php?option=com_content&task=view&id=1130&Itemid=45hL (The economy of Argentina is about the size of Michigan, in GDP terms - Argentina's population is about 36 million, Michigan has about 10 million). So anyway capitalism can collapse through credit defaults, but it can also revive (with the aid of new credit) - capitalism is destroyed, only if the specifically capitalist private property relations are abolished or become unworkable, whether through political upheavals, or natural disasters. Jurriaan
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