Barack Obama in an article
for the Washington Post laid out the economic challenges the world's largest
economy faces: "By now, it's clear to everyone that we have inherited
an economic crisis as deep and dire as any since the days of the Great
Depression. Millions of jobs that Americans relied on just a year ago are gone;
millions more of the nest eggs they worked so hard to build have vanished.
People everywhere are worried about what tomorrow will bring."
The incoming president has
laid the blame for the crisis firmly on the Bush administration and in the run
up to the elections he laid out his recovery plan, which he reiterated again in
the Washington Post: "What Americans expect from Washington is action
that matches the sense of urgency they feel in their daily lives - action
that's swift, bold and wise enough for us to climb out of this crisis. If
nothing is done, this recession might linger for years."
The global credit crisis has
had a variety of bailout packages thrown at it, but it continues to worsen.
Companies which were established in the 19th century are declaring
bankruptcy one after another as well as many high street brands. Why have
Western governments been unable to stop the global economy from sinking into
recession? How are governments attempting to solve the economic crisis? Will
these measures work? Will the recession turn into a depression?
The answers to such
questions require us to understand the nature of capitalist economies:
1. The US economy is driven
almost entirely by consumption. 80% of America's $14 trillion economy is
service based. Wholesale trade, the manufacturing of consumer goods and retail
comprises 65% of the services sector. The US over the last 30 years has become
reliant on consumption and today is the world's largest consumer of many items.
The events of 9/11 and with the prospects of a
recession in the US, the Federal Reserve in cahoots with the White House
reduced interest rates to virtually 0%. This made debt an attractive way to
fund spending with little interest to be repaid. This also meant monthly
mortgage repayments had little interest added to them.
This housing bubble is what drove the US economy
since 9/11 as a large chunk of consumer spending went on the purchase of homes.
Housing in turn fuelled appliance sales, home furnishings and construction. In
1940 44% of US citizens owned their own homes, by 1960 62% of Americans owned
their homes. Currently nearly 70% of all housing is owned by its constituents.
The increase in home ownership resulted in more and more US citizens becoming
indebted where US household debt stood at $11.4 trillion in 2006.
When the housing bubble burst due to the huge
increase in defaults, this essentially brought to an end the engine that drove
the US economy for the last decade. This spread to the rest of the world as the
US is the main engine for economic activity for the world economy. Its huge
level of consumption is responsible for most of the growth being experienced by
China and India. With only 5% of the world's population the US consumes 25% of
the world's oil, and imports 9% of all goods manufactured outside its borders.
2. Britain also faced a similar
problem to the US. The British economy was driven entirely by three sectors -
finance, housing and the public sector. Between them, they employed 33% of the
workforce but accounted for 120% of employment growth. In other words all the
other parts of the British economy have, in aggregate, been shrinking during
those boom years.
Britain's finance sector contributes £344 billion a
year to the economy and is seen as an attractive destination for international
finance due to a mixture of unique institutions, little regulation and a highly
skilled workforce. The influence of the financial sector in the British economy
led to much speculative wealth finding its way to the housing market. Banks
fuelled the housing bubble by making borrowing extremely accessible, due to a
buoyant housing market, lending up to 75% of the value of property in 2003 to
85% in 2007 - at the height of the bubble. Such actions by the banks clearly
show that banks were very confident that prices would continue to rise. The
last decade also saw the public sector grow by an average of 10% dwarfing the
private sector in job creation.
Britain reached a point in 2007 where the total UK
personal debt was £1.4 trillion, 81% of this was mortgage lending. But the
economy was only worth £1.3 trillion. The debt that the nation accumulated was
actually more than what the economy could generate.
By 2008 all three of the British economy's driving
engines ran out of petrol. The losses incurred by UK high street banks due to
the US sub-prime crisis resulted in banks halting lending to each other and
bringing to a halt all lending to the public, effectively bursting the British
housing bubble. It also brought British high street bank Northern Rock to its
knees.
There have been only two approaches to solving the
economic crisis. Firstly, government intervention in the free market by
providing bailouts in the hope of containing the crisis and secondly, through
socialist state intervention where governments nationalised and took ownership
of private companies.
The US government intervened in the economy on an
unprecedented scale in an attempt to shore up the economy in 2008. The
Bush administration presented congress with the economic stabilization plan in
October 2008. The $750 billion bailout package was designed to purchase
distressed assets, especially mortgage-backed securities and make capital
injections into banks who found themselves with huge worthless debt.
Just the month before, the US government
nationalized Fannie Mae and Freddie Mac the large US intermediary which held
over $5 trillion in toxic debt. At the same time in order to halt the shrinking
US economy the Bush administration cut interest rates and gave tax rebates to
encourage spending, hoping this would stimulate the economy.
The US government stood by when Lehman brothers and
Bear Stearns were on the verge of bankruptcy but showed its socialist claws and
took AIG, the world's largest insurer, into public ownership when it could not
find a buyer and it was on the verge of declaring bankruptcy.
All these attempts tried in some way to protect the
banking sector, as any collapse in banking would lead to the second great
depression. All of these measures failed as the crisis began to spread beyond
the financial sector and into the real economy. The US government was forced to
intervene in the free economy as three of America's iconic automotive brands
General Motors, Ford Inc and Chrysler were all on the verge of bankruptcy. The
effect of such companies closing on the US economy and Detroit would have been
almost apocalyptic and after Congress rejected an initial bailout for the
companies President Bush provided them with a bailout package of $17.4 billion.
Obama
Barack Obama's economic
stimulus package of $900 billion is confirmation that all the previous bailouts
have failed to halt the slide in the US economy. Western countries have all
attempted one bailout after another and stimulation package after another to
stimulate the economy. They have continued in their attempts to solve the
problem through the same failed solution, it is the same as throwing fuel on
fire in the hope that it will extinguish. Britain has also attempted, as the US
did, in removing and reducing all obstacles to spending in the hope that the
economy will kick start. However after reducing taxes and further bailouts for
banks, the economy is officially in recession with all signs pointing towards
the recession getting even worse.
Obama in his article for the
Washington post outlined his strategy when attempting to justify his mammoth
economic give away: "This plan is more than a prescription for
short-term spending - it's a strategy for America's long-term growth and
opportunity in areas such as renewable energy, healthcare and education. And
it's a strategy that will be implemented with unprecedented transparency and
accountability, so Americans know where their tax dollars are going and how
they are spent." In essence he will attempt to replace the real
estate bubble that drove the economy for the last decade with another bubble. He
will throw money at renewable energy where much doubts exists about the
applicability of such technology. Health care and education make up such a
small portion of the US economy it is impossible for them to replace the real
estate bubble.
Western governments are in
no way attempting to deal with the underlying problem. They continue to cover
the cracks created by failing banks and high street retailers by throwing more
money at them. The bailouts received by US banks have been used to shore up
their own losses with no plans to lend to the public or other banks. Hence the
various bailouts have been useless.
The fundamental problem is
what Capitalism attempts to achieve with the economy - perpetual economic
growth. Western governments have attempted one after another to stimulate
spending in the hope that the economy will be kick started. But it was consumer
spending through accumulating debt that created the original problem. Western
governments are attempting to cure the patient with the disease itself.
Such measures have already
failed and have had disastrous results. The Northern Europe states of Latvia,
Iceland, Estonia and Ireland were long considered tiger economies, with Latvia
long considered the Baltic tiger. The very policies that allowed the European
tigers to grow at a rate of 12% in 2006 are also causing them to contract
violently by a projected 10% this year. The Latvian, economy has shrunk more
sharply than any other country in the EU, and the government is teetering on
the brink of collapse. For weeks the Latvian capital has been rocked by
protests, including a full-blown, cobblestone-hurling riot on 13 January.
Money, freed of all barriers, flows out as quickly as it flows in, in a free
market economy. This was the painful lessons the Tiger economies of South East
Asia learnt the hard way a decade ago. The Iceland government has already
fallen; it is the first government to have fallen as a result of the credit
crunch.
Global Depression 2
It is difficult to see how
the world economy will be stimulated. The US is finding consumer spending
drastically falling as more and more citizens sit on debt they cannot afford to
repay. In Britain the financial sector, long the symbol of London, is losing
staff almost weekly. There is no sector in Britain remotely large enough to
replace the financial sector. Any British politician with ideas of returning to
Britain's industrial era will find the city, which funds both Labour and the
Conservative parties, standing in their way. They will also find that the
skills necessary for such radical change left the British Isles a generation
ago. This is why it is very likely the recession will turn into a pro-longed
deep recession. The US got out of the great depression by mobilising for World
War II. The US could attempt through rearmament once again to get itself out of
this predicament, however the US is marred in two wars were it continues to
bleed to death, it is difficult to envisage the US expanding its theatre of
war.
Conclusion
As the world economy goes
into recession every Capitalist value has been thrown out of the window in an
attempt to stop the slide of the world economy. Whilst the Western world for
years through the IMF and World Bank imposed unregulated free markets upon the
developing world, when their own economies fell into trouble they have become
even more Socialist and intervened on an unprecedented scale.
Both the US and Britain
actually have no solution to the crisis. This is why each bailout package is labeled
as the last, only for another bailout to then be prepared. They are trying to
cure the patient with the virus itself. As the recession deepens this will lead
to a fall in investment across the economy and a fall in the price of goods and
assets. Once this scenario reaches rock bottom some spending is possible due to
the rock bottom price of goods and assets, this in turn should re-stimulate the
world economy and end the deep and long recession. The problem is until this
point is reached, which is impossible to predict, the world economy will
continue to teeter on the brink of collapse.
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