World financial crisis - where to from here?

Origins of the crisis

Now, as the world teeters on the brink of what might turn out to be the most profound economic crisis since the depression of 1929, a reappraisal is necessary in the face of neo-liberal shibboleths.

Around the world massive stimulatory packages and financial guarantees, even nationalisations, are in the process of implementation, to buoy consumer confidence and demand and also to encourage liquidity and fortify investor confidence.

Amongst Keynesians, and the Marxist and radical Left, there is an aura of vindication.

Most immediately, the crisis has been traced to the sub-prime mortgage debacle in the United States.

To summarise, overly-complex financial instruments were devised with the aim of minimising risk. According to John Bellamy Foster, writing for The Monthly Review, the idea was:

… that geographical and sector dispersion of the loan portfolio and the “slicing and dicing” of risk would convert all but the very lowest of the tranches of these investment vehicles into safe bets.

The efficacy of such instruments, however, proved to be illusory.

Those most vulnerable - including millions of working class Americans - were encouraged into the market through a variety of mechanisms regardless of their credit history, income or wealth. Such “mechanisms” included low interest rates as well as “teaser” rates which were only temporary. Other devices included low reserve requirements.

This sector of the mortgage market became known as the “sub-prime”.

In a scenario which should be familiar to Australians, these circumstances led to an extraordinary “housing bubble”: a process which has been referred to as “speculative mania” and “hyper-speculation”.

According to Australian blogger, Sean Carmody, between 2004 and 2006 more than 20 per cent of new US mortgages were taken out by “sub-prime” borrowers. Enormous amounts of money were diverted into the housing sector, in wave after wave, under the assumption that asset appreciation would somehow continue forever.

In Australia, a housing bubble had the effect of enriching existing home owners on paper, while making home ownership impossible for many younger investors. Efforts to help first-home-buyers in Australia were simply exploited and fed into the vicious logic of the property bubble. The appreciative effect was particularly great under Australia’s specific circumstances of undersupply. Regardless of low interest rates, the Australian housing bubble ensured that “over the past 10 years” houses became “nearly twice as expensive relative to income”.