Monday, November 24, 2008

Tackling the creeping global depression

IT is true that the present global financial crisis 'has its roots in the biggest housing and credit bubble in history', or the so-called 'junk' credits; the overshooting of credit facility limits and granting of loans or mortgage facilities without adequate collateral securities by many American banks and other loan agencies, and of course similar abuses and cover-ups by some of their investment and auditing firms.

But the obvious large number of persons who did not actually merit these facilities in the first place and the eventual large percentage of loan and mortgage defaults point to a deeper reason for the rupture. They underscore the existing level of poverty and widening income inequality in the system, and the consequent enervating impact of these on the financial system. They also indicate that without the junk credits, the level of consumption in the United States would have dropped so drastically as to induce a recession anyway.

The plausibility of rising income inequality in the United States, the epicentre of the current global financial crisis, is backed by quantitative analysis. The Gini Coefficients (GC) of income distribution in the United States have shown growing concentration or inequality over the years. (Gini Coefficient measures the degree of concentration of a distribution. It ranges from 0 per cent when incomes are equal to 100 per cent at the other extreme when incomes are absolutely concentrated hence the higher the GC, the higher the level of concentration or inequality). American researchers show that the lowest level of inequality was achieved in the United States in 1947 with the Gini Coefficient of income distribution at 59 per cent. The Gini Coefficient or level of concentration of incomes in the United States however rose to 70 per cent in 1951, and 86 per cent in 2001, showing increasing inequality. You can well imagine how much the Coefficient may have risen and the poverty level worsened since 2007 when the United States mortgage crisis began with the attendant job losses, bankruptcies and closures.

So, junk credits have actually delayed the coming of a recession. They are not the primary cause of the present rupture and are in fact only symptomatic of the deeper mess in the system; the growing concentration of wealth and incomes, or mass impoverishment (in the US). This is a throwback to the crisis of the twenties when this same problem of mass poverty and concentration of wealth lowered the purchasing power of the masses and the public's capacity to consume or buy goods, leading to the stockpiling of unsold inventory in factory warehouses that precipitated the Stock Market crash of 1929 and the Great Depression that followed.

It is now history that the Great Depression was combated through a combination of welfarism and the credit economy that have been used to greatly increase consumption and therefore to sustain a commensurate level of productivity and employment - to say nothing about the contribution of the Second World War in the achievement of recovery from the Depression.

But it now appears that the capacity of these changes to arrest the tendency towards concentration of incomes and wealth has been impaired from the fifties causing a great percentage of the citizenry to depend on credit for even their most basic needs, thereby putting undue pressure on the financial system. Emoluments of corporate managers/CEOs are, for instance, being bloated to as much as US$ 20M-70M per annum, while those of the rank and file stagnate, with business organisations exploiting the persistent glut in the labour market in every conceivable manner that cannot be cushioned by mere moral preachment and appeals to conscience. The main problem really is that there is little openness in the modern corporate culture and management or corporate managers wield far-reaching power over shareholders and employees, and constantly make decisions that affect the public interest without any clearly defined responsibility to the public. This encourages all forms of duplicity that distort the markets and pollute government and society at large, with their bogus pretences at egalitarianism. This had brought us back to square one; the cache 1928/9 situation, which could degenerate into a global depression by 2009 and beyond.

Of course, it is imperative that new junk credits will be curtailed. But cutting back on the issuance of junk credits will drastically curtail purchasing power and consumption, to produce a recession. Therefore, even as nations scramble to bailout or recapitalise sick banks and stabilise complex financial systems, adroit measures to reduce the widening income inequality and boost purchasing power especially for the needy, must be provided as an antidote to the impending global depression. The measures must also be able to moderate the overbearing power of corporate managers and infuse openness in the running of corporate organisations. To achieve this, government must: