Author: Douglas Knight

For a gentle introduction to the financial crisis, see Ann Pettifor‘s The Week that changed Everything and Why the Bail-Out would not Work.

For longer-term reasons for the crisis see Spengler‘s US Shrinking wealth

Why didn’t these overseas investors buy mortgages in their own countries, instead of scraping the bottom of the credit barrel in the United States? It is because there aren’t enough Germans, or Italians, or Frenchmen or Japanese starting families and buying homes. The aging pensioners of Europe and Asia must find young people to pay interest into their pensions, and they do not have enough young people at home.

There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

The monster is not the financial system, crooked and stupid as it may have been. The monster is the burgeoning horde of pensioners in Germany and other industrial countries. It is easy to change the financial system. The central banks can assemble on any Tuesday morning and announce tougher lending standards. But it is impossible to fix the financial problems that arise from Europe’s senescence.

For more views, here are Becker & Posner, and here are the FT economists’ blogs. On the earth’s impending Sabbath see Andrew Simms Final Countdown – One Hundred Months to a climate change tipping-point and there’s more on the link between other people’s poverty and our carbon expenditure at the New Economics Foundation.

It looks as though our bishop has got some more fasting to do. In fact it looks as though we may all be about to join him. Come, friendly Poverty.

The reason why the Lehman Brothers collapse is historic is that this institution expected until a very late stage to be saved by the state-run Korea Development Bank (KDP). But Seoul looked at the books and had other ideas: on 9 September 2008 – to the astonishment of Lehman’s shareholders and investors – this ever-so-reliable ally of Washington refused to fund a bail-out.

The fact that such sovereign wealth funds as the KDP are no longer willing to finance reckless US institutions is of itself of the greatest significance. It implies a lack of confidence in the solvency of US financial institutions, and indeed of the United States as a whole. This will lead to a fall in the dollar, which will have profound economic implications for the global economy, and for globalisation as a whole.

The billionaire investor Warren Buffett wrote a letter to shareholders in March 2005, in which he predicted that by 2015 the net ownership of the US by outsiders would amount to $11 trillion. “Americans … would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an ‘ownership society’ will not find happiness in – and I’ll use hyperbole here for emphasis – a ‘sharecropper’s society’.”

Buffett was and is right. The collapse of banks and investment funds, and of the international financial system – a consequence of the unpardonable folly of the powerful – is serious and dangerous enough. But what is even more to be feared is the emergence of a sharecropper society, angry at its downfall. Thus will America’s problem become the world’s.

Ann Pettifor America’s financial meltdown
And see Pettifor The coming first world debt crisis (2003)

We now know that on 9 August 2007 central bankers and regulators finally woke up to the scale of bad debts on the balance-sheets of banks and other financial institutions. On that day blindfolds were removed and scales fell from the eyes – of at least some of the key players in the finance sector. The “guardians of the nation’s and the world’s finances” finally began to emerge from a long period of stupid and unforgivable denial of the havoc wrought on the international economy by the privatised, deregulated and globally integrated finance sector.

But it has taken more than a year for the wider public to realise that “debtonation day” was but the prelude to a terrifying prospect: large-scale and prolonged economic failure of a globalised, highly integrated economy, built on a financial house of cards… The demand is that losses be socialised or nationalised. The alternative, they warn, is global financial armageddon.

Until recently the vast bubble of debt these private institutions created was regarded by orthodox economists, regulators, politicians and investors as representing real, and possibly eternal wealth. Their delusions fed on the economic mantra that asset prices (such as property, commodities, works of art, racehorses, or commercial brands) were rising because of a shortage of supply and an excess of demand for assets: not because they were being powered upwards by the availability of “easy money” or credit.

Ann Pettifor Global financial mess: blaming the victims