The Crisis
Alan Greenspan
March, 2010
http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_spring_bpea_papers/spring2010_greenspan.pdf

It was an unexpected medium for a theoretical explanation from he who had been the most powerful economist in the world. In a short, quasi-academic paper titled The Crisis and published by Brookings, Alan Greenspan finally commented on the events to which his name will forever be attached. Neither ringing defense nor melodramatic mea culpa, the paper is instead a brief survey of the "geopolitical" events which led to the "Great Recession", and a series of reform suggestions which are strangely at odds with its analytical premises.

Greenspan's paper was met by a brief firestorm of criticism, and then, instant, contemptuous, dismissal. Greenspan was the monster whose policy suggestions had brought these events into the world. Greenspan was a cynical liar who was merely trying to save what was left of his reputation. Greenspan was a fool, trying to lend an objective skeleton to what was so obviously the result of greed and corruption...

In reality, these responses were mistimed. For perhaps the only time in his career, Greenspan wrote something worth reading. Greenspan's famous instant postmortem before Congress on the banking collapse, "I was wrong", and his simultaneous embrace of Keynesian regulation have been well documented. In The Crisis, Greenspan goes much, much farther... beyond Keynes, beyond Say, beyond Ricardo, to become a full-fledged Marxist. The Great Recession was a crisis of overproduction, pure and simple. They are words that could not be heard from the enfants terrible of the neo-Keynesians... not from Stiglitz nor Krugman nor Rubin. But, Greenspan goes there and without even a hint that any other interpretation is possible.

Of course, Greenspan doesn't remain a Marxist for long. By the time that reform proposals are required, Greenspan easily reverts to his comfort zone. Regulation? Certainly, with an eye to the capital requirements of the banks, a few monetary twists, and... And what? And nothing. There is such a very wide gap between what Greenspan explains as the genesis of the Great Recession and what he now proposes, that nothing whatever is resolved. Had his reforms been in place, could these events have been avoided? The answer is too obviously, "No". And lest the reader miss his point, Greenspan is strangely ambivalent in the last half of The Crisis, one moment talking about the Great Recession as a "once in a century crisis", and the next, implying that it may lend its character to all crises in the foreseeable future. One moment it is bailouts which will never be necessary again, and the next it is bailouts which were the only thing that prevented a truly titanic collapse and may be routinely required as the economy goes forward. The entire premise of the paper is based in the geopolitical "events" that created the Great Recession, but there is not a single mention of how those events have now been solved, reconciled or tamed.

This thing is worth reading. That Greenspan is a major, MAJOR tool, is a foregone conclusion. The Crisis is a reminder that even tools have their day... before quietly, inevitably, fading away.


*******

In a terse, no nonsense style, Greenspan lays out the crisis in the following terms: The fall of the Soviet Union and the collapse of the Socialist Bloc (and the dismantling of the protected Socialist trading zone which partially buffered the Chinese and Indian economies, among others) added hundreds of millions of highly productive workers to the world economy. While this massive addition was as productive as the workers in the advanced capitalist countries, it did not consume nearly as much. The result was a discontinuim between between production and markets, particularly domestic markets. The increase in productive capacity without markets meant an increase in the production of commodities for export. A massive overproduction of commodities was the inevitable result. Greenspan does not use this exact terminology, but makes his case in a way which defies any other conclusion.

From the overproduction of commodities, the next stage in the escalation of "the crisis" was the overproduction of Capital. Greenspan plots this as an unprecedented fall in the general rate of interest, in all major economies, regardless of their specific policies. With the fall in interest rates, a general rise in the price of fixed assets, particularly real estate, follows. It is here that the advent of derivative securities and the rest play their part. Greenspan does not deny that these instruments, and the rampant speculation they produced, were the immediate cause of the "bubble" and the following crisis. He does imply, however, that the great mass of Capital trapped by falling interest rates would have created a similar crisis through some other medium if real-estate derivatives had not been available. Once again, he points to the onset of the very same crisis in economies which, for one reason or another, did not participate in the real-estate securities bubble.

What Greenspan is describing, to the consternation of his critics, is not a crisis of greed, speculation, policy, deregulation, politics or institutional inertia. What he is describing is a fundamental crisis of capitalism. Worse, while he is very specific as to the cause of the "Crisis", he is anything but clear as to how it has in any way been resolved... even partially.


The bankruptcy of Lehman Brothers in September 2008 precipitated what, in retrospect, is likely to be judged the most virulent global financial crisis ever. To be sure, the contraction in economic activity that followed in its wake has fallen far short of the depression of the 1930s. But the virtual withdrawal, on so global a scale, of private short term credit, the leading edge of financial crisis, is not readily evident in our financial history.


It was the global proliferation of securitized, toxic U.S. subprime mortgages that was the immediate trigger of the current crisis. But the roots of the crisis reach back, as best I can judge, to the aftermath of the Cold War. The fall of the Berlin Wall exposed the economic ruin produced by the Soviet bloc’s economic system. In response, competitive markets quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Soviet bloc and the then Third World.

A large segment of the erstwhile Third World nations, especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers: fairly well educated low-cost workforces joined with developed-world technology, protected by an increasing rule of law, unleashed explosive economic growth. The IMF estimated that in 2005 more than 800 million members of the world’s labor force were engaged in export-oriented and therefore competitive markets, an increase of 500 million since the fall of the Berlin Wall. Additional hundreds of millions of workers became subject to domestic competitive forces, especially in the former Soviet Union. As a consequence, between 2000 and 2007, the real GDP growth of the developing world was more than double that of the developed world.

The red-bashing is minimal by Greenspanian standards and largely ironic considering the near instant cataclysm following on the elimination of "discredited central planning" (the "erstwhile Third World nations" described by Greenspan are all socialist or formerly socialist economies). Much more important is the sheer magnitude of the number Greenspan quotes: the number of workers producing for export went to 300 million between 1750 and 1989. Between 1989 and 2005, that number nearly tripled, from 300 to over 800 million. A vast increase in the production of commodities for export was the result.

A secondary point worth noticing is that everywhere in the paper, the former Socialist world and the "Developing World" are one and the same for Greenspan - no doubt a disappointment for those who thought that globalization meant a vast new middle-class market for Nike and Starbucks developing in Paraguay.


The consequence was a pronounced fall from 2000 to 2005 in both global real long-term interest rates and nominal long-term rates (exhibit 1) which indicated that global saving intentions, of necessity, had chronically exceeded global intentions to invest. In the developing world, consumption restrained by culture and inadequate consumer finance could not keep up with the surge of income and, as a consequence, the savings rate of the developing world soared from 24% of nominal GDP in 1999 to 34% by 2007, far outstripping its investment rate.

The capitalism-ation of the former-socialist world unleashed its productive capacity in the form of the production of commodities for export, but not in the markets to consume them. The result translated into an over-production of commodities which became an overproduction of Capital.


Yet the ex post global saving – investment rate in 2007, overall, was only modestly higher than in 1999, suggesting that the uptrend in the saving intentions of developing economies tempered declining investment intentions in the developed world. That weakened global investment was the major determinant in the decline of global real long-term interest rates was also the conclusion of the March 2007 Bank of Canada study. Of course, whether it was a glut of excess intended saving or a shortfall of investment intentions, the conclusion is the same: lower real long-term interest rates.

The capital accumulated by this process added to a "glut" already evident in the capitalist countries, leading to a fall of worldwide interest rates - the best indication of a fall in the rate of profit and the overproduction of capital.

The reader should also note the phrase: "whether it was a glut of excess intended saving or a shortfall of investment intentions, the conclusion is the same: lower real long-term interest rates". In this short fragment, the Marxist Greenspan, dismisses the entire supply-side/demand-side "debate" of the Libertarian Greenspan and the complete host of Austrians and Randians and assorted ninnies.


Inflation and long-term rates in all developed economies and major developing economies by 2006 had converged to single digits, I believe for the first time ever. The path of the convergence is evident in the unweighted variance of interest rates on ten-year sovereign debt of 15 countries that declined markedly from 2000 to 2005 (exhibit 2). Equity and real-estate capitalization rates were inevitably arbitraged lower by the fall in global long-term real interest rates. Asset prices, particularly house prices, accordingly moved dramatically higher.


The Economist's surveys document the remarkable convergence of nearly 20 individual nations' house price rises during the past decade. Japan, Germany, and Switzerland (for differing reasons) being the only important exceptions. U.S. price gains, at their peak, were no more than the global peak average. In short, geo-political events ultimately led to a fall in long-term mortgage interest rates that in turn led, with a lag, to the unsustainable boom in house prices globally.

Various critics interpreted these passages as a defense by Greenspan of his own policies: "It happened everywhere, even where my policies were not in effect, so it couldn't have been me."

In truth, Greenspan is saying something much more transcendent: that the crisis was fundamental, far exceeding the impacts of any "policy". A glut of capital plus a reduction of investment opportunities produces a fall in the rate of interest. The inevitable deflation/devaluation begins, expressed as an inflation in the prices of fixed assets, real-estate foremost among them. This is the virtual "bubble" looking for an outlet.


Subprime mortgages in the United States for years had been a small appendage to the broader U.S. home mortgage market, comprising only 7% of total originations as recently as 2002. Most such loans were fixed-rate mortgages, and only a modest amount had been securitized. With the price of homes having risen at a quickening pace since 1997 (exhibit 3), such subprime lending was seen as increasingly profitable to investors.

Belatedly drawn to this market, financial firms, starting in late 2003, began to accelerate the pooling and packaging of subprime home mortgages into securities (exhibit 4). The firms clearly had found receptive buyers. Both domestic and foreign investors, largely European, were drawn to the above average yield on these securities and a foreclosure rate on the underlying mortgages that had been in decline for two years.

It is not greed, speculation and corruption which causes a crisis of capitalism but a fundamental crisis of capitalism which causes the inevitable increase in greed, speculation and corruption. The only unresolved issue is where it will all come to a head.

But, don't the participants see it coming? On the contrary...


Clearly with such experiences in mind, financial firms were fearful that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. Their fears were formalized by Citigroup’s Charles Prince’s now famous remark in 2007, just prior to the onset of the crisis, that “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

From this clear-headed description of the crisis, Greenspan's paper becomes more and more muddled. It is now time to propose "reforms" and it is in this mode that the analysis becomes increasingly tentative and ambiguous. From Greenspan the monetarist, no obvious monetary prescriptions are forthcoming. From Greenspan, the libertarian, a change of heart is evident. Greater government requirements for increased capital reserves are proposed, while all testimonials to the "self-correcting" nature of "free capital markets" are entirely dispensed with. Still, what Greenspan proposes would have had little or no effect on the crisis he himself describes. Greenspan senses this in a series of standalone commentaries on the failures of economic forecasting, regulation, and the banking system as a whole.


It is in such circumstances that we depend on our highly sophisticated global system of financial risk management to contain market breakdowns. How could it have failed on so broad a scale? The paradigm that spawned Nobel Prize winners in economics was so thoroughly embraced by academia, central banks, and regulators that by 2006 it became the core of global regulatory standards (Basel II). Many quantitative firms whose number crunching sought to expose profitable market trading principles were successful so long as risk aversion moved incrementally (which it did much of the time). But crunching data that covered only the last 2 or 3 decades prior to the current crisis did not yield a model that could anticipate a crisis.


U.S. commercial and savings banks are extensively regulated, and even though for years our largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still were able to take on toxic assets that brought them to their knees. The heavily praised U.K. Financial Services Authority was unable to anticipate, and prevent, the bank run that threatened Northern Rock. The venerated credit rating agencies bestowed ratings that implied AAA smooth-sailing for many a highly toxic derivative product. The Basel Committee on Banking Supervision, representing regulatory authorities from the world’s major financial systems, promulgated a set of capital rules that failed to foresee the need that arose at the height of the crisis for much larger capital and liquidity buffers.


The ultimate goal of financial structure and regulation in a market economy is to direct a nation’s saving, plus any saving borrowed from abroad (the current account deficit), towards investments in plant, equipment and human capital that offer the greatest increases in a nation’s output per hour. Nonfinancial output per hour, on average, rises when obsolescent facilities (with low output per hour) are replaced with facilities that embody cutting-edge technologies (with high output per hour). This process improves (average) overall standards of living for a nation as a whole. The evident success of finance for decades prior to the onset of this crisis in directing our scarce savings into real productive capital investments appears to explain the extent nonfinancial market participants had been compensating U.S. financial services.

The share of U.S. gross domestic income accruing to finance and insurance, according to the Bureau of Economic Analysis, had risen fairly steadily from 2.3% in 1947 to 7.9% in 2006 (exhibit 8). Only a small part of the rise was the result of an increase in net foreign demand for U.S. financial and insurance services. The decline in the share to 7.4% in 2008 reflects write-offs of previously presumed productively employed saving.

In the end, it is left entirely unclear as to whether Greenspan believes that the larger crisis is over. At one turn Greenspan calls his crisis, "a once in a hundred year" event while at the next he wonders whether each succeeding crisis will not be similar... a once in a hundred year crisis occurring every 10 to 15 years. So too with massive government intervention. While Greenspan clearly attributes the forestalling of another Great Depression to that immediate governmental bailout, he offers no hope that it won't be required each time that the crisis reasserts itself.

It is this last point that should concern Greenspan's critics. While there are debatable proposals for moderating the breakdown of credit in future crises, there is no proposal whatever for resolving the underlying dynamic that Greenspan himself lays out. What is it that prevents Greenspan's crisis from immediately reasserting itself once the immediate impacts of this recession pass?

This is the analysis of the current economic crisis from an "unlikely source" which I promised - my so-called "teaser". It is properly paired with the extended discussion contained in the On Economic Crisis thread:

http://www.progressiveindependent.com/dc/dcboard.php?az=show_topic&forum=104&topic_id=103035

In particular, it is worth comparing the Marxist-for-a-moment Greenspan's account to that of the real Marxist, Patrick Bond's, at the end of that thread. It is hard to believe that Bond's narrative was general, theoretical and forward looking, written 4 years before the crisis, while Greenspan's is retrospective, practical, and enjoys the advantage of 20-20 hindsight. In that context, I reproduce Bond's summary of the underlying crisis - something the momentary Marxist, Greenspan, fails to achieve:

When an economy reaches a decisive stage of overaccumulation, then it becomes difficult to bring together all these resources in a profitable way to meet social needs. How does the system respond? There are many ways to move an overaccumulation crisis around through time and space. But the only real "solution" to overaccumulation--the only response to the crisis capable of reestablishing the conditions for a new round of accumulation--is widespread devaluation. Devaluation entails the scrapping of the economic deadwood, which takes forms as diverse as depressions, banking crashes, inflation, plant shutdowns, and, as Schumpeter called it, the sometimes "creative destruction" of physical and human capital (though sometimes the uncreative solution of war). The process of devaluation happens continuously, as outmoded machines and superfluous workers are made redundant, as waste (including state expenditure on armaments) becomes an acceptable form of mopping up overaccumulation, and as inflation eats away at buying power. This continual, incremental devaluation does not, however, mean capitalism has learned to equilibrate, thus avoiding more serious, system-threatening crises.

Devaluation of a fully cathartic nature (of which the last Great Depression and World War are spectacular examples) is periodically required to destroy sufficient economic deadwood to permit a new process of accumulation to begin. When overaccumulation becomes widespread, extreme forms of devaluation are invariably resisted (or deflected) by whatever local, regional, national or international alliances exist or are formed in specific areas under pressure. Hence overaccumulation has very important geographical and geopolitical implications in the uneven development of capitalism, as attempts are made to transfer the costs and burden of devaluation to different regions and nations or to push overaccumulated capital into the buildings (especially commercial real estate), infrastructure and other features of the "built environment" as a last-ditch speculative venture.

Thus economics becomes politics when capitalist depression becomes war... That is the final implication of what is being described.

Not an easy piece to analyze, but its import is hard to deny or mistake. I personally felt combing through the entire Greenspan article was beyond me, but it shocked me that there was so little chatter or commentary regarding it. (To be fair I do remember a few people taking stabs at it)

As for Bond, I've thought about posting his stuff before but I've always fretted that it would be too arcane/confusing/detached.

He has written the same thing as quoted above on countless occasions on Marxmail in the last few years.

... but not on the crisis of overproduction. That is fairly rare, as you yourself have pointed out. Truthfully, we covered exactly the same points on that thread, with much more relevant detail, but not in the concentrated form of Bond's summary.

You and I talked about the meaning of all this on PopIndy too, some while back. They have created the ability to forestall the great unraveling, but in such a way as to not be able to prevent it the next time or the time after that. Nothing is resolved by this crisis.

I am more certain than ever that this evolves into a political expression - they break up once again into armed camps because there is no possibility of them reconciling the "problem" except at the expense of each other.

The history matches, too... doesn't it?

In any case, this recession ends - next year if not this one - but nothing is resolved... and, it has nothing whatever to do with "Wall Street returning to its old tricks".

was oddly one paragraph ABOVE the Summary


However we never had a sufficiently strong conviction about the risks that could
lie ahead. As I noted earlier, we had been lulled into a state of complacency by the only
modestly negative economic aftermaths of the stock market crash of 1987 and the dotcom
boom. Given history, we believed that any declines in home prices would be
gradual. Destabilizing debt problems were not perceived to arise under those conditions.
For guidance, we looked to policy in response to the unprecedented one-day
stock-bubble bust of October 19, 1987 and 2000 bear market. Contrary to any prior
experience,78 large injections of Federal Reserve liquidity apparently did help stabilize
the economy.
Unless there is a societal choice to abandon dynamic markets and leverage for
some form of central planning, I fear that preventing bubbles will in the end turn out to be
infeasible. Assuaging their aftermath seems the best we can hope for. Policies, both
private and public, should focus on ameliorating the extent of deprivation and hardship
caused by deflationary crises. But if an effective way to defuse leveraged bubbles
without a major impact on economic growth is discovered, it would be a major step
forward in organizing our market economies.

[div class="excerpt"]The IMF estimated that in 2005 more than 800 million members of the world’s labor force were engaged in export-oriented and therefore competitive markets, an increase of 500 million since the fall of the Berlin Wall.[/quote]

:wow:

Wow. I've never seen those figures before.

Interesting article. Thanks for posting this.

Kid,
You know so much more than I do about this stuff. This is what I get out of anaxarchos"s post:

1) Greenspan recognizes The Crisis as a function of the excess production required by capitalism.

2) He agrees that technology leads to explosive production, that exceeds domestic needs.

3) He states that formerly socialist countries turned on their heads and began producing for export, rather than for domestic needs.

4) That Greenspan agrees that capital had to flow into the real estate market, because depressed interest rates lead to higher real estate prices.

5) Once, capital is invested in inflated real estate prices, the only way to continue expansion is to create derivative markets. Thus, financial entities become the vehicle for growth.

I have no idea whether this is unique to Greenspan, but it's telling that that his analysis is pretty close to ours.

But the two things I would emphasize are that

1. "technology" is not really in the driver's seat but rather a lagging indicator of the insatiable demand of Capital for expansion/improved efficiency

2. The socialist countries had a very high standard of living but made for poor "domestic markets" because they weren't based around the type of consumer goods that get exported (its more transparent today in the form of iPods etc I guess) and wages were not commensurate with that kind of "middle class" lifestyle

Also, it wasn't only socialist countries because you have to factor in India. India, however, may have well under the aegis of the socialist bloc (lower case) but it didn't enjoy the enormous jumps in standards and quality of living that accompanied those socialist regimes. That has quite a bit to do with the disaster that is modern India.

Finally, to say that "depressed interest rates = higher real estate prices" is a truism that Marx would have a field day ripping into. While you can create models and formulae to quantify such a relationship, what is really going on is the fact that once overproduction (and with it the attendant overaccumulation) reaches some critical mass you are going to get massive deflation. If you think about it, this is by definition. Its not quite correct to say it is a case of "same value, more shit" but instead we can say "ceiling to value, constant influx of more shit". That is a subtle difference that Bond writes about extensively, and also the reason that "overproduction" and "underconsumption" can't be treated interchangeably.

Anyway, real estate then becomes the immediate outlet for that deflationary impetus as sort of a release valve. Or, rather, one outlet since as Patrick Bond reminds us above, another way to get value off the books is to atomize it.

...this is of such immense consequence that it is worth getting it exactly right. This potentially defines our era, in the same way as Imperialism, the highest stage of capitalism (the actual stage, not Lenin's book), defined a previous era.

At the beginning of the Communist Manifesto, written 162 years ago in 1848, is this passage:


It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

What Marx is describing is the "business cycle", which results from the fact that markets tend to grow more slowly than Capital. Capital only remains Capital as long as it is reinvested for the purpose of producing commodities for those very same markets. In these crises, the overproduction of commodities is "solved", temporarily, only by the creation and conquest of new markets and by the destruction of a portion of the existing Capital.

In Marx's time, this was mainly a national phenomenon (happening in each capitalist country separately) and against a backdrop in which only a small portion of the world was encompassed by capitalist markets. The resolution of the crisis was inevitably a function of the increasing exploitation of the colonies and the competition between the capitalist empires. The crisis of each of the capitalist powers was alleviated by passing it on to the others. Eventually, this "dynamic" resulted in two World Wars, the ruination of a good part of the Capital in competition and the creation of a perfect hierarchy organized around one capitalist superpower, encompassing two thirds of the World. Within that world, virtually nothing was left out of capitalist relations. Still, by the 1970s, this "order" was already lapsing into the same crisis, as opportunities for investment fell short of the total Capital available.

The collapse of the socialist bloc "solved" this dilemma, but only for two decades. In truth, these events not only created new markets but accelerated the accumulation of Capital, with the latter being far more important than the former. The number of workers producing for export nearly tripled while markets only increased by 20%. The renewal of the crisis in 2007 is now defined by a genuine "world market", defined not in relative but absolute terms. There is no way out.

Now consider your points with my editing:

1) Greenspan recognizes The Crisis as a function of the excess production of commodities produced by the business cycle of capitalism.

2) He agrees that the production of commodities, worldwide, exceeded the ability of domestic markets to consume them. (it has nothing to do with "needs", but is a statement of "buying power").

3) He states that formerly socialist countries had a larger productive capacity for producing commodities than they had the domestic ability to buy them.

3a) The result was an overproduction of commodities and an over production of capital precisely as Marx had written about 162 years earlier. Since Capital which is hoarded ceases to be Capital and since the rate of return was increasingly depressed during these events, Capital flowed into a speculative bubble, in this case private real-estate.

4) That Greenspan agrees that capital had to flow into the real estate market, because depressed interest rates lead to higher real estate prices.

5) Once, capital is invested in inflated real estate prices, the only way to continue expansion is to create derivative markets. Thus, financial entities become the vehicle for, first, the investment of "surplus" Capital, and, eventually, the vehicle for its collapse.

This analysis is completely unique to Greenspan (among bourgeois economists), even as it is identical to ours. The more important question, though, is what happens now?

There is nothing like it in all of human history...

Hooh boy... this is just starting.

Greenspan's commentary is better than the dismissive aristocratic prescription of Keynes that all that is required is to "socialize investment". Isn't that what "defusing" a bubble amounts to? But the irony is that Greenspan just got done with his story of how it was "impossible" to stop dancing while the music was still playing. How is it to be decided which capitalist is deemed the loser and which one the winner, without resorting to the actual contest?

The essential product of their economic madness is their politics... and that politics completely defies such abstract rationalism.

"We had to do it because we were afraid that the world was ending..."

"Well, maybe the next guy won't be such a chicken-shit."

Greenspan's writing and terminology seem to be harking back to a past that most of his bourgeoisie counterparts barely care to acknowledge at all other than as a theoretical basis/lineage (similar to how mathematics reveres Euler, Newton, Euclid, and so on)

It's hard to miss, really. The "Great Recession" was worldwide, yet most of the postmortem on the economic crisis has focused on causes which, if not unique to the United States, were of an entirely different magnitude in other national economies. This is in fact Greenspan's point: that the universality of the recession defies policy explanations. As the retrospective data appears, it is difficult for even Krugman to ignore this fact.

Yet, what is a neo-Keynsian, neo-Ricardan reformer to do? Greenspan skirts dangerously close to pointing to a fundamental flaw in capitalism itself. In turn, that is not really solid ground for a regulation minded Democrat. The dilemma must be reconciled - it will be reconciled.

In a New York Times column, titled The Irish Mirror, Krugman shows that he is aware of the evidence...


We can also look at countries whose financial institutions and policies seemed very different from those in the United States, yet which cracked up just as badly, and try to discern common causes.

So let’s talk about Ireland.

As a new research paper by the Irish economists Gregory Connor, Thomas Flavin and Brian O’Kelly points out, “Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case,” and vice versa. Yet the shape of Ireland’s crisis was very similar: a huge real estate bubble — prices rose more in Dublin than in Los Angeles or Miami — followed by a severe banking bust that was contained only via an expensive bailout.

Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.

So what did we have in common? The authors of the new study suggest four “ ‘deep’ causal factors.”

First, there was irrational exuberance: in both countries buyers and lenders convinced themselves that real estate prices, although sky-high by historical standards, would continue to rise.

Second, there was a huge inflow of cheap money. In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter.

Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs. In Ireland, regulators looked the other way in part because the country was trying to attract foreign business, in part because of cronyism: bankers and property developers had close ties to the ruling party.

http://www.nytimes.com/2010/03/08/opinion/08krugman.html?dbk

In truth, the Irish paper is fairly light-weight. In the traditional "publish or perish" style, it appends to a fairly small piece of research, the popular keywords of the month. When someone starts talking about "irrational exuberance", "moral hazards", and “regulatory imprudence”, it is time to put one's hand firmly on one's wallet. It doesn't take an economist to figure out that these purely subjective factors have just as much significance as the authors want to lend them. And to the extent that the Irish economists can make the subjective case at all, they once again point to the vast differences between the content of these made-up categories in the United States and Ireland. There are no "striking similarities", unless one moves to such a level of abstraction that all "greed" or "enthusiasm" appears the same. The Irish economists don't make that mistake:


In summary, it is clear with hindsight that both the US and Ireland experienced bouts
of irrational exuberance in the periods prior to their crises (additional evidence will be
presented in the following sections). Asset price increases, for housing indices,
national equity market indices, and financial services sector sub-indices, are
substantially more extreme in the case Ireland; in the case of the US the evidence for
asset pricing bubbles, as opposed to irrational exuberance in the form of excessive
risk-taking, is somewhat less compelling.

In summary, moral hazard problems played a big role in both crises, but in
surprisingly different forms. The moral hazard problem in the originate-and-distribute
mortgage system played a central role in setting the stage for the US crisis. This
market feature was almost entirely absent in Ireland where an originate-and-hold loan
generation system was dominant. The moral hazard in performance-related-pay had a
role in both the US and Irish crises. Weak law enforcement was another source of
moral hazard in Ireland, but this does not apply in the USA where the enforcement of
corporate and financial regulatory law and personal bankruptcy law is unusually strict
by international standards. Whether the moral hazard problems associated with
financial firm bailouts had a role in the two crises is difficult to discern with any
confidence.

In summary, regulators and policymakers in both countries made erroneous decisions
in response to political pressures. The specific nature of the errors, and the types of
pernicious political influences, differ substantially in the two cases. Another notable
distinction is in the nature of the regulatory policy errors in the two jurisdictions. US
regulators (along with a substantial proportion of the economics research community)
failed to appreciate the dangerous fragility of the extremely complex interactions
linking several technically sophisticated US financial markets. The economic research
community is now building theoretical models which explain the ensuing creditliquidity
gridlock. In contrast, in Ireland, the regulatory mistakes were simple
misjudgements, obviously flawed relative to standard regulatory procedures widely
available at the time.


Not so with category #2, however. The Irish economists actually document the only objectively quantifiable item on their list. While the source of capital in-flows were once again "different", the result was a striking build-up of surplus capital in Irish Banks, concurrent with a fall of interest rates:


In the case of Ireland, the capital bonanza was mediated by the Irish commercial
banks. In 1999, Irish banks were funded primarily from domestic sources; see Table 1.
By 2008, Irish customer deposits provided just 22% of domestic bank funding. Over
37% of the funding was obtained in the form of deposits and securities from the
international capital markets. Directly in response to this capital inflow, the balance
sheets of the Irish banks increased more than six-fold in the period 1999 to 2008.
Lending to the non-financial private sector had grown to more than 200% of GDP by
end of the period, approximately twice the European average.
These are Greenspanian numbers. In less than 10 years, the capital deposited in Irish Banks grew by a factor of six while foreign deposits grew to twice the size of Irish deposits.


In addition to the distortionary effect of too-low interest rates, there was also the large
flow of credit into Ireland associated with this distortion. Kelly (2009) argues that this
enormous inflow of credit into Ireland, rather than the low level of interest rates,
better explains the housing and construction bubble.
http://www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf

All of this somehow escapes Krugman, who plows on, unruffled:


There was a lot of that ("“regulatory imprudence”) here too, but the bigger issue was ideology. Actually, the authors of the Irish paper get this wrong, stressing the way U.S. politicians celebrated the ideal of homeownership; yes, they made speeches along those lines, but this didn’t have much effect on lenders’ incentives.

What really mattered was free-market fundamentalism. This is what led Ronald Reagan to declare that deregulation would solve the problems of thrift institutions — the actual result was huge losses, followed by a gigantic taxpayer bailout — and Alan Greenspan to insist that the proliferation of derivatives had actually strengthened the financial system. It was largely thanks to this ideology that regulators ignored the mounting risks.

So what can we learn from the way Ireland had a U.S.-type financial crisis with very different institutions? Mainly, that we have to focus as much on the regulators as on the regulations. By all means, let’s limit both leverage and the use of securitization — which were part of what Canada did right. But such measures won’t matter unless they’re enforced by people who see it as their duty to say no to powerful bankers.

There is not even a hint of concern about the huge 800 pound steaming pile of "surplus" capital that sat in the middle of the room. If Greenspan is ambiguous, Krugman is downright blind. It is all about "ideology"... and the "attitudes" of regulators.

Maybe, they can be taught yoga...

90,000,000 - That is approximately the same as the number of deaths caused by World War 2 or Chattel Slavery in the Americas. It is five times the number who have died from AIDS, worldwide.

Quote

Ngozi Okonjo-Iweala, managing director of the World Bank, is urging G20 leaders to use the London summit in less than a fortnight's time to help protect the developing world against the worst effects of the financial crisis.

"We have to look at the impact of this on low income countries. Otherwise, without wanting to sound alarmist, social unrest and political crisis could be the result. It's in the self-interest of everyone to prevent that," she told the Observer

Her stark warning came as a new report from the Overseas Development Institute (ODI) said the collapse of the global economy would cost 90 million lives, lead to an increase to nearly a billion in the number of people going hungry and cost developing countries $750bn in lost growth.

"Tens of millions of people will be forced back below the poverty line. There will be irreversible effects on the very poorest," said Simon Maxwell, the ODI's director.

http://www.guardian.co.uk/business/2009/mar/22/g20-global-economy

The most astonishing thing is that the "left" press article that this is embedded in is actually entitled: G20 warned unrest will sweep globe

"Unrest"? My, that is a serious problem...

http://socialistindependent.org/board/index.php?topic=141.msg2006#msg2006

I can only say Thank You for your work. I was reviewing some 2006 posts in PI the other day. What else can I say? Again, only Thank You.

I will see if I can find it. It argues that the death toll will "only" be 5 to 10 million, mainly because the capitalist powers moved so quickly to arrest this recession. The economic downturn did not match the collapse of credit. The former scared the shit out of them, and it had been 70 years since they had been here before.

Of course, by arresting the crisis, they just made it more difficult to stop it the next time... just as Marx wrote. They come out of the "Great Recession" without having destroyed nearly the surplus capital that they needed to... and without either the economic means nor the political will to arrest it again in the same way. Not to worry, then. They will kill 100 million or more the next time.

As far as thanking me goes, I genuinely appreciate it... but I can't help but remember the immortal words of Rodney King: "Don't thank me... HELP ME!"

Chlamor said something similar to me once, too.

Hey, come to think of it, I've never seen Chlamor and Rodney together...

Is it possible?

Likely.

Brothers in arms:

http://24.media.tumblr.com/tumblr_kq5q2qL60n1qzvqipo1_500.jpg

This is the great liberal, John Maynard Keynes his-self, on "communism":


How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of human advancement? Even if we need a religion, how can we find it in the turbid rubbish of Red bookshops? It is hard for an intelligent, decent, educated son of western Europe to find his ideals here, unless he has first undergone some strange and horrid process of conversion which has changed all his values.

Yeah, well... don't know nothin' about "values"... just know that in the eyes of the "fishes", we end up as "mud people" every time.

http://www.smh.com.au/ffximage/2007/07/29/miners30707_wideweb__470x314,0.jpg

Boorish? Boo... fish.

every one of our liberal/progressive enemies. In everything they say and do they emote this sentiment, these "values". Don't know anything about "values" either, but these boo-fish will one day evolve into piranhas and I am really looking forward to that...

There were 2 commie book stores(that I know of) in Baltimore on Mulberry St between Abe Sherman's book store and the central library, one I think Trot and the other CPUSA. They were rather forbidding to this young punk, dour and serious, seriously uninviting. Sos I went to Abe Sherman's and ripped off Abbie Hoffman's book from the cranky old putz.

Well, it is the most serious of business, but shit, mighten' there have been some 'youth outreach'(insert eyeroll) or somethin'?

Super Swine's Left-wing Bookshop, Hookha Bar and Reptile Emporium

You know.... for kids!

if a rather rather volatile combination. I've done the hookha/reptile combo, it can be exciting but sometimes doesn't end so well. The left-wing/hookha combo we have seen, that is easily overdone. The left wing/reptile combo is still under construction...

hooka and reptiles not ending well..

Recession puts brakes on globalization
High costs causing globalization rethink

March. 5, 2009 at 12:48 PM
UPI
http://www.upi.com/Business_News/2009/03/05/Recession-puts-brakes-on-globalization/UPI-12681236275335/


SINGAPORE, March 5 (UPI) -- Hard times are pushing nations to retreat from globalization, U.S. economist Jeffery Sachs said.

"Nationalism is rising and our political systems are inward looking, the more so in times of crisis," Sachs said.

A retreat in international trade is visible in the harbor at Singapore, where a shipping executive said space to park ships is hard to find, The Washington Post reported Thursday.

"We're running out of space to park them," Ron Widdows, chief executive officer of shipping giant NOL told the Post.

The stalled ships are a visible sign that globalization has begun to reverse itself. Many ports report sharp declines in business in recent months, the newspaper said.

Exports from Singapore plummeted 35 percent in January and economists predict 200,000 out of work foreigners will leave the country by 2011.

Policy makers from Malaysia to France to the United States have pushed for protectionist measures recently.

In Malaysia, a new hiring policy meant the expulsion of 100,000 Indonesians. In France, help for automakers included the call for car companies to relocate outsourced production back to France. In the United States, President Obama's budget calls for limiting tax incentives for companies that ship work overseas, the newspaper said.




Globalization: After the recession
Justin Lin,
Times of India
Dec 28, 2009, 03.25am IST
http://timesofindia.indiatimes.com/biz/international-business/Globalization-After-the-recession/articleshow/5386218.cms

The world economy has just been through a severe recession marked by financial turmoil, large-scale destruction of wealth, and declines in industrial production and global trade. According to the International Labor Organization, continued labor-market deterioration in 2009 may lead to an estimated increase in global unemployment of 39-61 million workers relative to 2007. By the end of this year, the worldwide ranks of the unemployed may range from 219-241 million — the highest number on record.

Meanwhile, global growth in real wages, which slowed dramatically in 2008, is expected to have dropped even further in 2009, despite signs of a possible economic recovery. In a sample of 53 countries for which data are available, median growth in real average wages had declined from 4.3% in 2007 to 1.4% in 2008. The World Bank warns that 89 million more people may be trapped in poverty in the wake of the crisis, adding to the 1.4 billion people estimated in 2005 to be living below the international poverty line of $1.25 a day.

In this climate, globalization has come under heavy criticism, including from leaders of developing countries that could strongly benefit from it. President Yoweri Museveni, who is widely credited for integrating Uganda into world markets, has said that globalization is "the same old order with new means of control, new means of oppression, new means of marginalization" by rich countries seeking to secure access to developing country markets...

In the current crisis, China, India, and certain other emerging-market countries are coping fairly well. These countries all had strong external balance sheets and ample room for fiscal maneuver before the crisis, which allowed them to apply countercyclical policies to combat external shocks.

They have also nurtured industries in line with their comparative advantage, which has helped them weather the storm. Indeed, comparative advantage — determined by the relative abundance of labor, natural resources, and capital endowments — is the foundation for competitiveness, which in turn underpins dynamic growth and strong fiscal and external positions.

By contrast, if a country attempts to defy its comparative advantage, such as by adopting an import-substitution strategy to pursue the development of capital-intensive or high-tech industries in a capital-scarce economy, the government may resort to distortional subsidies and protections that dampen economic performance. In turn, this risks weakening both the government's fiscal position and the economy's external account. Without the ability to take timely countercyclical measures, such countries fare poorly when crises hit...

In today's competitive global marketplace, countries need to upgrade and diversify their industries continuously according to their changing endowments. A pioneering firm's success or failure in upgrading and/or diversifying will influence whether other firms follow or not. Government compensation for such pioneering firms can speed the process.

Industrial progress also requires coordination of related investments among firms. In Ecuador, a country that is now a successful exporter of cut flowers, farmers would not grow flowers decades ago because there was no modern cooling facility near the airport, and private firms would not invest in such facilities without a supply of flowers for export.

In such chicken-and-egg situations, in which the market alone fails to overcome externalities and essential investments go lacking, the government can play a vital facilitating role. This may be one of the reasons why the Growth Commission Report also found that successful economies all have committed, credible, and capable governments.


Justin Yifu Lin is World Bank chief economist and senior vice-president for development economics[i]




Updated World Bank Analysis: Crisis, Finance, and Growth
As World Economy Slowly Recovers, Developing World Faces Scarce Financing, Says World Bank
January 21, 2010
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,contentMDK:22446906~pagePK:64165401~piPK:64165026~theSitePK:469372,00.html


[i]"The crisis has deeply impacted virtually every economy in the world, and although growth has returned, much progress in the fight against poverty has been lost. More difficult international conditions in the years to come will mean that developing countries will have to place even more emphasis on improving domestic economic conditions to achieve the kind of growth that can durably eradicate poverty." - Justin Lin, World Bank Chief Economist

Globally, GDP growth is improving, but it will be a long road to full recovery

The strength of the recovery will depend on private-sector demand and the pace of withdrawal of fiscal and monetary stimulus

An estimated 64 million more people may be living in extreme poverty by the end of 2010 due to the crisis

Developing countries need to anticipate scarcer and more expensive capital

--------------------------------------------------------------------------------

January 21, 2010—Nit Ponpaengpa, a widowed grandmother who works as a massage therapist in Bangkok, had her wages cut by a third at one of the city’s spas last year. After a difficult search, she found a new job and things have improved. She is on call to work three times a week for a former client, in return for which she earns a decent retainer fee, school tuition for her grandson, and the flexibility to take on other clients.

“It was really hard to live on 200 baht (approximately 6 USD) a day when I had to buy food and milk for a child, and still had to pay rent as well as other expenses,” said the 50-year-old grandmother, recalling the difficulties of reduced wages before she found her new job. “I never had any money left back then. Now I can relax a little bit and save a little bit every month.”

Unfortunately, this situation is not permanent. Nit’s new employer says she will soon have to cut down on Nit’s services and wages. When that happens, Nit’s income will fall significantly. At age fifty, Nit is no longer competitive in the job market, yet a full ten years away from qualifying for senior benefits. She faces a perilous future for herself and her young grandson.

Rising poverty, shrinking funds

Across the world, there are tens of millions of stories such as Nit’s—and some far worse—each echoing the pain of a historically deep and synchronized recession, in which virtually no country has remained untouched by the bursting of a global financial bubble, and the poorest remain the most vulnerable.

A new World Bank report, “Global Economic Prospects 2010: Crisis, Finance, and Growth,” notes that the crisis is having serious cumulative impacts on poverty, with 64 million more people expected to be living in extreme poverty by the end of 2010 than would have been the case without the crisis, according to updated analysis.

“An increase in poverty has serious implications for the governments of poor countries, who face shrinking revenues at the very time when demands on them are growing,” said Andrew Burns, the report’s lead author. “Just when a bigger effort is needed to protect vulnerable people, some governments may be forced to scale back existing programs.”

In fact, the poorest countries—those that rely on grants or subsidized lending—may require an additional $35 billion to $50 billion in funding just to maintain pre-crisis programs, according to World Bank chief economist and senior vice-president for development economics, Justin Lin.

The tragic human cost of the financial crisis is already becoming painfully apparent. Researchers Jed Friedman and Norbert Schady estimate, for instance, that between 30,000 and 50,000 additional children may have died of malnutrition in Africa in 2009 because of the crisis.

Recovery underway, but a long road ahead

While the world economy is now emerging from the crisis, and GDP growth rates are starting to improve, the report warns that growth may in fact slow later this year as the growth impact of stimulus packages wanes, and that it will be years before jobs are restored and spare industrial capacity reabsorbed.

Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent in 2010 and 3.2 percent in 2011 . World trade volumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in 2011, according to the report.

“The strength of the recovery will depend on consumer and business-sector demand picking up and the pace at which governments withdraw fiscal and monetary stimulus,” said Burns. “If this is done too soon, it might kill the recovery; yet waiting too long might re-inflate some of the bubbles that precipitated the crisis.”

Developing countries are expected to make a relatively robust recovery, with 5.2 percent GDP growth in 2010 and 5.8 percent in 2011—up from 1.2 percent in 2009. Rich countries, which declined by 3.3 percent in 2009, are expected to grow less quickly—by 1.8 and 2.3 percent in 2010 and 2011.

Performance across the developing world has been varied. The recession has been severe in Europe and Central Asia, while, in contrast, growth continues to be relatively strong in East Asia and the Pacific. South Asia and the Middle East and North Africa have escaped the worst effects of the crisis, while Sub-Saharan Africa has been hard hit, with the outlook for the region remaining uncertain.

In Latin America and the Caribbean, where stronger fundamentals have helped the region to weather this crisis much better than past ones, the devastating earthquake in Haiti is bound to have a huge economic cost for that country, although it is too early to make specific estimates.

Boom, crisis, and beyond: implications for developing countries

The report finds that very relaxed international financial conditions from 2003 to 2007 contributed to the boom in developing country finance and growth seen just before the crisis. With inexpensive capital, developing countries were able to sustain high growth without generating significant inflation.

However, these conditions were clearly unsustainable in the long run, the report notes, and it is neither desirable nor feasible to recreate them after the crisis. International capital costs will therefore be higher and investment rates lower over the next several years when compared with the pre-crisis boom period.

Foreign direct investment (FDI) inflows are projected to decline from recent peaks of 3.9 percent of developing country GDP in 2007 to around 2.8 to 3 percent over the medium term. This has serious implications, as FDI represents as much as 20 percent of total investment in Sub-Saharan Africa, Europe and Central Asia, and Latin America.

And Upper One Percent Politboro controlled societies as well, that the creation of endless wars was one way to prevent too much "over accumulation."

At least, it is a way to prevent the average working person from over accumulation, as they have no voice in the government and thus must end up paying 40% of their earnings to taxes. (Social Security alone takes 15% from any independent contractor) Local taxes in my state amount to 8.15% on each purchase (and higher) and then there is the state and the Federal income taxes.

They are the "nation" stand in for Lehman Bros this time around.

each other(war) or us in general. Hard time coming, either way.

Germany, France and the first generation Euro-small fry are co-exploiters, quietly trying to sneak out from underneath the American umbrella... while continuing to make money off of it.

Southern Europe (Spain, Portugal, and Greece in particular) and Eastern Europe - particularly the new members who were scheduled for Euro conversion? I agree with you. They will be allowed to "fail". They are the new Lehman.

It was a very near thing on Greece. There is a "recovery" of sorts and the Euro didn't need the pressure so they agreed to the "bailout"... just... maybe.

And then there is the United Kingdom....

...they invented three new major powers out of literally nothing (Germany, Japan, Italy). They woke up three, nearly dead, old feudal empires just in time to get dismembered (Russia, Austria, and the Ottomans).

How may "Iron Chancellors" sit brooding over their coffee at the Starbucks in Buenos Aires or Lagos?

http://3.bp.blogspot.com/_VC2oa3GRhX4/TU2ec0YGmQI/AAAAAAAAA9k/b_gD_reUVlM/s1600/bismarck2.jpg

Hmm, Capital cannot retreat for long, ain't no money in that. Nation state could be endangered or could retrench, depending on how crazy they want to get.

I can't see any war along the lines of the last two big ones. On the other hand, these assholes have risked blowing us to atoms before....But killing the 'other' works best, and always appears cost efficient, on first take.

I was seeing a young guy hunched over his table... dreaming of a Greater Platte-ovia, where today only the humiliated elements of his soon-to be great empire are looking like mere outlets for global private equity funds... quietly cursing George Bush and Bono... with the fence spike duct-taped firmly to his head.

I suppose, modern times call for modern methods.

No Willy this time... somethin' different.

http://symonsez.files.wordpress.com/2010/01/kaiser_wilhelm_ii.jpg

This piece is from 2006.

[div class="excerpt"]
“The world is investing too little,” according to one prominent economist. “The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, such as the Japanese asset bubble, the crises in Emerging Asia and Latin America, and most recently, the IT bubble. Investment has fallen off sharply since, with only very cautious recovery.”

These are not the words of a Marxist economist describing the crisis of overproduction but those of Raghuram Rajan, the new chief economist of the International Monetary Fund (IMF). His analysis, now over a year old, continues to be accurate. Global overcapacity has made further investment simply unprofitable, which significantly dampens global economic growth. In Europe, for instance, GDP growth has averaged only 1.45% in the last few years. Global demand has not kept up with global productive capacity. And if countries are not investing in their economic futures, then growth will continue to stagnate and possibly lead to a global recession.

China and the United States, however, appear to be bucking the trend. But rather than signs of health, growth in these two economies—and their ever more symbiotic relationship with each other—may actually be indicators of crisis. The centrality of the United States to both global growth and global crisis is well known. What is new is China's critical role. Once regarded as the greatest achievement of this era of globalization, China's integration into the global economy is, according to an excellent analysis by political economist Ho-Fung Hung, emerging as a central cause of global capitalism's crisis of overproduction.1


China and the Crisis of Overproduction

China's 8-10% annual growth rate has probably been the principal stimulus of growth in the world economy in the last decade. Chinese imports, for instance, helped to end Japan's decade-long stagnation in 2003. To satisfy China's thirst for capital and technology-intensive goods, Japanese exports shot up by a record 44%, or $60 billion. Indeed, China became the main destination for Asia's exports, accounting for 31% while Japan's share dropped from 20% to 10%. China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.

At the same time, China became a central contributor to the crisis of global overcapacity. Even as investment declined sharply in many economies in response to the surfeit of productive capacity, particularly in Japan and other East Asian economies, it increased at a breakneck pace in China. Investment in China was not just the obverse of disinvestment elsewhere, although the shutting down of facilities and sloughing off of labor was significant not only in Japan and the United States but in the countries on China's periphery like the Philippines, Thailand, and Malaysia. China was significantly beefing up its industrial capacity and not simply absorbing capacity eliminated elsewhere. At the same time, the ability of the Chinese market to absorb its own industrial output was limited.


Agents of Overinvestment

A major actor in overinvestment was transnational capital. In the late 1980s and 90s, transnational corporations (TNCs) saw China as the last frontier, the unlimited market that could endlessly absorb investment and endlessly throw off profitable returns. However, China's restrictive rules on trade and investment forced TNCs to locate most of their production processes in the country instead of outsourcing only selected numbers of them. Analysts termed such TNC production activities “excessive internalization.” By playing according to China's rules, TNCs ended up overinvesting in the country and building up a manufacturing base that produced more than China or even the rest of the world could consume.

By the turn of the millennium, the dream of exploiting a limitless market had vanished. Foreign companies headed for China not so much to sell to millions of newly prosperous Chinese customers but rather to make China a manufacturing base for global markets and take advantage of its inexhaustible supply of cheap labor. Typical of companies that found themselves in this quandary was Philips, the Dutch electronics manufacturer. Philips operates 23 factories in China and produces about $5 billion worth of goods, but two-thirds of their production is exported to other countries.

The other set of actors promoting overcapacity were local governments investing in and building up key industries. While these efforts are often “well planned and executed at the local level,” notes Ho-Fung Hung, “the totality of these efforts combined … entail anarchic competition among localities, resulting in uncoordinated construction of redundant production capacity and infrastructure.”

As a result, idle capacity in such key sectors as steel, automobile, cement, aluminum, and real estate has been soaring since the mid-1990s, with estimates that over 75% of China's industries are currently plagued by overcapacity and that fixed asset investments in industries already experiencing overinvestment account for 40-50% of China's GDP growth in 2005. China's State Development and Reform Commission projects that the automobile industry will produce double what the market can absorb by 2010. The impact on profitability is not to be underestimated if we are to believe government statistics: at the end of 2005, Hung points out, the average annual profit growth rate of all major enterprises had plunged by half and the total deficit of losing enterprises had increased sharply by 57.6%.


The Low-Wage Strategy

The Chinese government can mitigate excess capacity by expanding people's purchasing power via a policy of income and asset redistribution. Doing so would probably mean slower growth but more domestic and global stability. This is what China's so-called New Left intellectuals and policy analysts have been advising. China's authorities, however, have apparently chosen to continue the old strategy of dominating world markets by exploiting the country's cheap labor. Although China's population is 1.3 billion, 700 million people—or over half—live in the countryside and earn an average of just $285 a year, according to some estimates. This reserve army of rural poor has enabled manufacturers, both foreign and local, to keep wages down.

Aside from the potentially destabilizing political effects of regressive income distribution, this low-wage strategy, as Hung points out, “impedes the growth of consumption relative to the phenomenal economic expansion and great leap of investment.” In other words, the global crisis of overproduction will worsen as China continues to dump its industrial production on global markets constrained by slow growth.


Vicious Cycle

Chinese production and American consumption are like the proverbial prisoners who seek to break free from one another but can't because they're chained together. This relationship is increasingly taking the form of a vicious cycle. On the one hand, China's breakneck growth has increasingly depended on the ability of American consumers to continue their consumption of much of the output of China's production brought about by excessive investment. On the other hand, America's high consumption rate depends on Beijing's lending the U.S. private and public sectors a significant portion of the trillion-plus dollars it has accumulated over the last decade from its yawning trade surplus with Washington.

This chain-gang relationship, says the IMF's Rajan, is “unsustainable.” Both the United States and the IMF have decried what they call “global macroeconomic imbalances” and called on China to revalue the renminbi to reduce its trade surplus with the United States. Yet China can't really abandon its cheap currency policy. Along with cheap labor, cheap currency is part of China's successful formula of export-oriented production. And the United States really can't afford to be too tough on China since it depends on that open line of credit to Beijing to continue feeding the middle-class spending that sustains its own economic growth.

The IMF ascribes this state of affairs to “macroeconomic imbalances.” But it's really a crisis of overproduction. Thanks to Chinese factories and American consumers, the crisis is likely to get worse.

http://www.globalpolitician.com/22270-china[/quote]

http://www.thenation.com/blog/secret-erik-prince-tape-exposed

Hell, they loves them some privatization anyway, and a great place to put capital too. Cut out the middleman, none of that pesky oversight. Might could have 'generals' contract directly to corporations or cartels. And after that Thirty Years War example, they could charge the 'occupied' for their upkeep, good for the bottom line.

Or it might be something completely different.

but I do remember reading something like this on more than one occasion. 2006 is sort of a good point to go back to because after that you get the speculation boom ($4 gas, predictions of $500 gasoline, Peak Oil yaddda yadda) which distorts all commentary and observation.

That is an ancient idea, too... even more so. Eric Prince as the Doge? Nothing but hired guns living in a walled city? I suppose it would be a "gated community". Don't let autorank hear you mention Venice.

http://upload.wikimedia.org/wikipedia/commons/thumb/0/00/Bellini.doge.600pix.jpg/220px-Bellini.doge.600pix.jpg

Nah... No Willy, but no Genoa or Bruges this time either. Those clowns lived in the cracks of very weak feudal societies.

Can't live without population. Who to draft? Who to tax? The French Revolution changed all that and they may well curse it to their grave.

I'm sure you had this guy in mind, right?

http://www.eternalidol.com/wp-content/uploads/2008/11/machiavelli.jpg

Did some one order weasels?

Kinda guy ya can trust as far as ya can throw. Old Nicolo would consider that a compliment.

Other than historical interest the guy is pathetic, nothin' but sour grapes with a big side order of weasel, as you say.
http://lakbima.files.wordpress.com/2009/01/weasel.jpg