The financial world turned upside down

by Salil  Sarkar

Article published on the 2008-10-24 Latest update 2008-11-01 15:24 TU

Former Federal Reserve Chairman Alan Greenspan
(Photo: Federal Reserve)

International finance institutions are plunged in gloom and neoliberal guru Alan Greenspan admits that he may have been "partially wrong" in his hands-off approach to banks when he ran the US's Federal Reserve. So is the world heading for recession ... or, worse still, a 1930s-style depression?

Dire predictions are emanating from the International Monetary Fund (IMF). Turmoil in financial markets has reached crisis proportions in recent weeks, it says in its most recent report on Europe.

Governments in the United States and Europe have nationalised some giant financial institutions. But more banks might go belly up.

Borrowing costs and credit defaults in Europe have reached historically high levels. Growth of credit to businesses and households is down. Stock prices are falling in the region because investors are afraid of taking risks.

"The stock market collapse is a sideshow compared to the credit crunch," says Didier Marteau, a professor of finance at Paris's Ecole supérieure de commerce.  "Nobody trusts anybody. In the interbank money markets, you have very few transactions."

He believes regulatory change must be made.

"If banks cannot borrow from other banks, they cannot lend to corporates or to people. So one must restore confidence on the money markets. Therefore there must be a change in the regulations, in the international regulatory standards in managing risks."

The story from the United States makes even bleaker reading. Critical economists, those that refuse the dominant neo-liberal dogmas, have been suspecting recession was on its way since early 2008.

The R-word is now accepted among establishment economists, though sometimes with euphemistic trimmings.

If things get worse, “recession” may have to make way for “depression”, a term that immediately raises the spectre of economic devastation, a repeat of the giant crisis of 1929-30, the political strife and the World War Two that followed.

For now, the consensus from leading economic think-tanks worldwide is that the crisis will bottom out in mid-2009 and things should look up after that. Government intervention in rich countries, and attempts to repair the international financial system are expected to help.