Global Financial Crisis
While many talk of a lost decade, it is worth remembering that similar austerity programs imposed on most of the developing world in the form of Structural Adjustment Programs amounted to a loss of 2 decades. Interestingly, and perhaps the sign of the times, while Europe and US consider more socialist-like policies, such as some form of nationalization, China seems to be contemplating more capitalist ideas , such as some notion of land reform, to stimulate and develop its internal market. While this of course is better than nothing it signifies that many leading nations have not had the political will to go further and aim for more ambitious targets, but are willing to find far more to save their own banks, for example. Some are also against government-based stimulus packages, arguing instead that tax cuts alone should do the job; individuals make better choices on consumption than governments. But the US must regain its financial footing and the extent to which it does so will also determine its military capacity. This band of greedy oligarchs have used their economic power to persuade themselves and most others that we will all be better off if they are in no way restrained—and if they cannot persuade, they have used that same economic power to override any opposition.
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If you are unable to see the video, or, for further details, the next two sections go into this further. The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others.
For banks, millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer gets regular payments from all those mortgages; the banker off loads the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century. Banks and How to Break Them January 14, , rating agencies were paid to rate these products risking a conflict of interest and invariably got good ratings, encouraging people to take them up.
Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise. High street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling and trading risk, got into home loans, mortgages, etc without the right controls and management. Many banks were taking on huge risks increasing their exposure to problems.
Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much. When people did eventually start to see problems, confidence fell quickly. Lending slowed, in some cases ceased for a while and even now, there is a crisis of confidence.
Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to take their money back. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically.
The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. New capital was injected into banks to, in effect, allow them to lose more money without going bust. Some think it may take years for confidence to return. Shrinking banks suck money out of the economy as they try to build their capital and are nervous about loaning.
Meanwhile businesses and individuals that rely on credit find it harder to get. A spiral of problems result. As Evan Davies described it, banks had somehow taken what seemed to be a magic bullet of securitization and fired it on themselves. Securitization was an attempt at managing risk.
There have been a number of attempts to mitigate risk, or insure against problems. While these are legitimate things to do, the instruments that allowed this to happen helped cause the current problems, too. In essence, what had happened was that banks, hedge funds and others had become over-confident as they all thought they had figured out how to take on risk and make money more effectively.
As they initially made more money taking more risks, they reinforced their own view that they had it figured out. They thought they had spread all their risks effectively and yet when it really went wrong, it all went wrong.
In a follow-up documentary, Davis interviewed Naseem Taleb, once an options trader himself, who argued that many hedge fund managers and bankers fool themselves into thinking they are safe and on high ground.
It was a result of a system heavily grounded in bad theories, bad statistics, misunderstanding of probability and, ultimately, greed, he said. What allowed this to happen? As Davis explained, a look for way to manage, or insure against, risk actually led to the rise of instruments that accelerated problems:. Derivatives, financial futures, credit default swaps, and related instruments came out of the turmoil from the s.
The finance industry flourished as more people started looking into how to insure against the downsides when investing in something. To find out how to price this insurance, economists came up with options, a derivative that gives you the right to buy something in the future at a price agreed now. Mathematical and economic geniuses believed they had come up with a formula of how to price an option, the Black-Scholes model.
This was a hit; once options could be priced, it became easier to trade. A whole new market in risk was born. Combined with the growth of telecoms and computing, the derivatives market exploded making buying and selling of risk on the open market possible in ways never seen before.
As people became successful quickly, they used derivatives not to reduce their risk, but to take on more risk to make more money. Greed started to kick in. Businesses started to go into areas that was not necessarily part of their underlying business. Hedge funds, credit default swaps, can be legitimate instruments when trying to insure against whether someone will default or not, but the problem came about when the market became more speculative in nature.
As Nick Leeson of the famous Barings Bank collapse explained in the same documentary, each loss resulted in more betting and more risk taking hoping to recoup the earlier losses, much like gambling. Derivatives caused the destruction of that bank. Hedge funds have received a lot of criticism for betting on things going badly. In the recent crisis they were criticized for shorting on banks, driving down their prices.
Some countries temporarily banned shorting on banks. On the other hand the more it continued the more they could profit. It was also poorly regulated. A lot of exposure with little regulation. The trade in these swaps created a whole web of interlinked dependencies; a chain only as strong as the weakest link.
Any problem, such as risk or actual significant loss could spread quickly. Derivatives revolutionized the financial markets and will likely be here to stay because there is such a demand for insurance and mitigating risk. The challenge now, Davis summarized, is to reign in the wilder excesses of derivatives to avoid those incredibly expensive disasters and prevent more AIGs happening. This will be very hard to do. Despite the benefits of a market system, as all have admitted for many years, it is far from perfect.
Amongst other things, experts such as economists and psychologists say that markets suffer from a few human frailties, such as confirmation bias always looking for facts that support your view, rather than just facts and superiority bias the belief that one is better than the others, or better than the average and can make good decisions all the time. Trying to reign in these facets of human nature seems like a tall order and in the meanwhile the costs are skyrocketing.
Others have been bought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions.
The total amounts that governments have spent on bailouts have skyrocketed. The downturn after four years of relatively fast growth is due to a number of factors: As more and more evidence is gathered and as the lag effects are showing up, we are seeing more and more countries around the world being affected by this rather profound and persistent negative effects from the reversal of housing booms in various countries.
Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of socializing the costs while privatizing the profits. The bail-outs appear to help the financial institutions that got into trouble many of whom pushed for the kind of lax policies that allowed this to happen in the first place. Some governments have moved to make it harder to manipulate the markets by shorting during the financial crisis blaming them for worsening an already bad situation.
It should be noted that during the debilitating Asian financial crisis in the late s, Asian nations affected by short-selling complained, without success that currency speculators—operating through hedge funds or through the currency operations of commercial banks and other financial institutions—were attacking their currencies through short selling and in doing so, bringing the rates of the local currencies far below their real economic levels.
However, when they complained to the Western governments and International Monetary Fund IMF , they dismissed the claims of the Asian governments, blaming it on their own economic mismanagement instead. Other governments have moved to try and reassure investors and savers that their money is safe.
In other cases, banks have been nationalized socializing profits as well as costs, potentially. In the meanwhile, smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis. Although in raw dollar terms the huge pay rises and bonuses are small compared to the magnitude of the problem, the encouragement such practices have given in the past, as well as the type of culture it creates, is what has angered so many people.
In the case of subprime mortgages, it is also argued that those who took on the risky loans are to blame; they should not have borrowed so much money when they knew they would not have the means to repay.
While there is truth to this, and our culture of expecting easy money, consuming beyond our means, etc is something that needs urgent attention, in the case of subprime mortgages, it seems easy to forget the predicament of people living in relative poverty.
Financial advisors that irresponsibly pushed these loans with no interest or care of the borrower in mind were generally aggressive as they had a lot to gain from these loans. For people living in poverty even in wealthy countries life can be desperate and miserable. Concerns will range from crime in the neighborhood, to good schooling, to getting by week by week on very little, and ensuring a job lasts.
The hope of being able to escape it for a while was, in effect, exploited. When in poverty, long term thinking is not always going to enter the realm of immediate concern. Furthermore, it is likely that those lower down the social strata are not going to be as financially savvy as those further up.
Hence there is usually more trust placed in a bank or financial advisor. It is often forgotten these days that banks and financial institutions have changed in nature; there is less concern about the people they serve, but more about how they can sell products from which they can make profit.
To some extent risky borrowers bear some responsibility, but overall they have lost out; lenders are being bailed out, while those taking out risky loans either have lost their homes, or face a real threat of losing their home in the near future. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
How was this possible? Because he also feared that this form of finance capitalism could have serious negative effects as well as the positive effects being seen back then, he of course was ignored and somewhat ridiculed at the time , because it was at the height of the economic boom.
Because of the critical role banks play in the current market system, when the larger banks show signs of crisis, it is not just the wealthy that suffer, but potentially everyone. With a globalized system, a credit crunch can ripple through the entire real economy very quickly turning a global financial crisis into a global economic crisis. For example, an entire banking system that lacks confidence in lending as it faces massive losses will try to shore up reserves and may reduce access to credit, or make it more difficult and expensive to obtain.
In the wider economy, this credit crunch and higher costs of borrowing will affect many sectors, leading to job cuts. People may find their mortgages harder to pay, or remortgaging could become expensive. For any recent home buyers, the value of their homes are likely to fall in value leaving them in negative equity. As people cut back on consumption to try and weather this economic storm, more businesses will struggle to survive leading to further further job losses.
As the above has played out, the situation has been bad enough that the International Labor Organization ILO has described this crisis as a global job crisis. And so, many nations, whether wealthy and industrialized, or poor and developing, are sliding into recession if they are not already there.
Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks, institutions and ideologues that pushed for the policies that caused the problems are found. This bailout package was controversial because it was unpopular with the public, seen as a bailout for the culprits while the ordinary person would be left to pay for their folly.
The US House of Representatives initial rejected the package as a result, sending shock waves around the world. It took a second attempt to pass the plan, but with add-ons to the bill to get the additional congressmen and women to accept the plan.
However, as former Nobel prize winner for Economics, former Chief Economist of the World Bank and university professor at Columbia University, Joseph Stiglitz , argued, the plan remains a very bad bill: I think it remains a very bad bill. It is a disappointment, but not a surprise, that the administration came up with a bill that is again based on trickle-down economics.
You throw enough money at Wall Street, and some of it will trickle down to the rest of the economy. But that having been said, it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it. Americans have lost faith not only in the [Bush] administration, but in its economic philosophy: The very assumption that the rescue plan has to help is suspect.
This time, it is American taxpayers who are being asked to pick up the tab. In environmental economics, there is a basic concept called the polluter pays principle. It is a matter of fairness, but also of efficiency. Wall Street has polluted our economy with toxic mortgages.
It should now pay for the cleanup. In Europe, starting with Britain, a number of nations decided to nationalize, or part-nationalize, some failing banks to try and restore confidence. The US resisted this approach at first, as it goes against the rigid free market view the US has taken for a few decades now.
Eventually, the US capitulated and the Bush Administration announced that the US government would buy shares in troubled banks. This illustrates how serious this problem is for such an ardent follower of free market ideology to do this although free market theories were not originally intended to be applied to finance, which could be part of a deeper root cause of the problem. Perhaps fearing an ideological backlash, Bush was quick to say that buying stakes in banks is not intended to take over the free market, but to preserve it.
Professor Ha-Joon Chang of Cambridge University suggests that historically America has been more pragmatic about free markets than their recent ideological rhetoric suggests , a charge by many in developing countries that rich countries are often quite protectionist themselves but demand free markets from others at all times.
For example, former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal , Paul Craig Roberts also argues that the bailout should have been to help people with failing mortgages, not banks: The problem, according to the government, is the defaulting mortgages, so the money should be directed at refinancing the mortgages and paying off the foreclosed ones.
And that would restore the value of the mortgage-backed securities that are threatening the financial institutions [and] the crisis would be over. Interestingly, and perhaps the sign of the times, while Europe and US consider more socialist-like policies, such as some form of nationalization, China seems to be contemplating more capitalist ideas , such as some notion of land reform, to stimulate and develop its internal market.
This, China hopes, could be one way to try and help insulate the country from some of the impacts of the global financial crisis. This also reflects how the crisis has spread from the financial markets to the real economy and consumer spending. And for many months concern has been growing about where the US bailout money is actually going. It seems that there has been a bit of tension between the US Treasury and Congress. The office surveyed banks that received Treasury bailout funds and found that almost all were using the money in ways other than to lend — which was the intent of the program.
The banks used some of the funds to lend, but also to purchase other banks, to pay off debts and to simply hold in reserve should they need the funds in the future. TARP [Troubled Asset Relief Program] has become a program in which taxpayers are not being told what most of the TARP recipients are doing with their money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested, Barofsky said.
Even before this global financial crisis took hold, some commentators were writing that the US was in decline, evidenced by its challenges in Iraq and Afghanistan, and its declining image in Europe, Asia and elsewhere. On the practical level, the US is already stretched militarily, in Afghanistan and Iraq, and is now stretched financially. On the philosophical level, it will be harder for it to argue in favor of its free market ideas, if its own markets have collapsed.
The era of American global leadership, reaching back to the Second World War, is over… The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. The director of a leading British think-tank Chatham House, Dr Robin Niblett … argues that we should wait a bit before coming to a judgment and that structurally the United States is still strong.
America is still immensely attractive to skilled immigrants and is still capable of producing a Microsoft or a Google, he went on. It has enormous resilience economically at a local and entrepreneurial level.
China is in a desperate race for growth to feed its population and avert unrest in 15 to 20 years. Russia is not exactly a paper tiger but it is stretching its own limits with a new strategy built on a flimsy base. India has huge internal contradictions.
Europe has usually proved unable to jump out of the doldrums as dynamically as the US. But the US must regain its financial footing and the extent to which it does so will also determine its military capacity.
If it has less money, it will have fewer forces. In Iceland, where the economy was very dependent on the finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy.
In the end, public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell.
A number of European countries have attempted different measures as they seemed to have failed to come up with a united response. For example, some nations have stepped in to nationalize or in some way attempt to provide assurance for people.
The plan is supposed to help restore consumer and business confidence, shore up employment, getting the banks lending again, and promoting green technologies. For decades, structural adjustment policies in the developing nations often strongly encouraged by the wealthy nations has created poverty or made things worse.
Now, with such a severe financial crisis industrialized nations from Greece, to UK and others are contemplating strong austerity measures and cutbacks on public services — much like the structural adjustment the developing world had to endure for as much as 2 decades. As such, the new Conservative government has insisted that because of high spending of the past government, they have no alternative but to cut back on all manner of social spending all while various bankers get ready to be rewarded with more bonuses!
Yet, as Professor Ha Joon Chang noted at the end of , the fall in tax revenues has made the deficit hard to sustain , not government spending per se: Companies and individuals have been unable to earn as much as before the recession so the fall in that revenue for governments leaves their previously high spending look like immense bureaucratic waste holes.
Excessive cuts, he warns, can even push a country further into recession if it is not addressing the core causes of the crisis in the first place. Stories of strikes and protests are increasingly commonplace, and if the experience of developing nations are anything to go by in previous decades , similar protests are likely in the future in industrialized nations. One such example is in Ireland that has recently seen a bailout package from the EU, IMF and others require an austerity budget, much like the harmful structural adjustment policies the developing world went through.
Other Eurozone countries such as Portugal, Italy, Greece and Spain are also facing potential problems, while Iceland has gone through many in the past. So, in effect, actions by banks and others have left the nation in recession, with the public bailing them out, while taking on the effects to their economy; a double-whammy so to speak.
As Krugman ends, punishing the Irish population for the mistakes of the banks and others is a terrible mistake.
Other measures including temporary capital controls also helped. In the US, the Democracy Now! Some have contributes hundreds of millions of dollars to push Congress to cut Social Security, Medicare and Medicaid — while providing tax breaks for corporations and the wealthy. Campaigns such as Fix the Debt are portrayed as a citizen-led effort, while critics find them to be fronts for business groups. And of course, special interests and ideology are at play as John Nicols, part of a group who exposed some of these findings, noted:.
What they are really arguing for is a systematized austerity, one where you have very, very wealthy people deciding what sort of fixes we will have for our economy. And at the end of the day, invariably, the fix will be to lower their tax rates while at the same time taking deep cuts out of the earned benefit programs that Americans desperately need.
In his own article in the Nation magazine John Nichols added. The Fix the Debt project, financed by corporations and billionaires, seeks to buy that influence after its proposals were rejected by the voters.
That comes from his article, The Austerity Agenda: In that article he also describes how some of the phony campaigns work in a 2-minute video:. As prominent economist Ha Joon Chang has written many times, the UK's problems go far deeper than the cuts agenda. British debate on economic policy is getting nowhere. The coalition government keeps repeating that it has to cut spending in order to cut deficits, no matter what. The opposition has been at pains to explain … that trying to cut deficits by cutting spending in a stagnant economy is a largely self-defeating exercise, as it reduces growth and thus tax revenue.
In reality, though, the coalition government isn't as stupid or stubborn as it appears. It is sticking to its plan A because spending cuts are not about deficits but about rolling back the welfare state. So no amount of evidence is going to change its position on cuts. And history seems to show that austerity has never worked and has always led to recession. Or maybe put another way, it has typically worked for the elite looking to maintain a system from which they benefit.
For UK in particular, as Chang continues, despite a huge devaluation in the sterling currency, it has still been unable to generate a trade surplus. And as manufacturing shows mixed signals, luxury goods show a general healthy sign and exports of raw resources are doing better than finished manufacturing products, these all hint to growing inequality and potential growing poverty and stagnation. Or as Chang puts it, putting all this in context, since the crisis the British economy has been moving backwards in terms of its sophistication as a producer.
In the middle of , the United Nations also warned that the problems in European were bad not just for Europe, but for the world economy too. The policy of austerity was criticized by the UN as heading in the wrong direction. The fiscal austerity programs implemented in several European countries are ineffective to help the economy emerge from crisis, it said, according to Inter Press Service.
A few are now suggesting that some European countries may be facing a lost decade or a lost youth generation. A Nobel laureate in economics, Joseph Stiglitz, writes,. The problem is that the prescriptions imposed are leading to massive under-utilisation of these resources. Whatever Europe's problem, a response that entails waste on this scale cannot be the solution. While many talk of a lost decade, it is worth remembering that similar austerity programs imposed on most of the developing world in the form of Structural Adjustment Programs amounted to a loss of 2 decades.
Given … recent [reform] changes in the IMF, it is ironic to see the European governments inflicting an old-IMF-style program on their own populations. It is one thing to tell the citizens of some faraway country to go to hell but it is another to do the same to your own citizens, who are supposedly your ultimate sovereigns. Indeed, the European governments are out-IMF-ing the IMF in its austerity drive so much that now the fund itself frequently issues the warning that Europe is going too far, too fast.
Democracy is neutered in the process and the protests against the cuts are dismissed. The description of the externally imposed Greek and Italian governments as technocratic is the ultimate proof of the attempt to make the radical rewriting of the social contract more acceptable by pretending that it isn't really a political change.
The danger is not only that these austerity measures are killing the European economies but also that they threaten the very legitimacy of European democracies — not just directly by threatening the livelihoods of so many people and pushing the economy into a downward spiral, but also indirectly by undermining the legitimacy of the political system through this backdoor rewriting of the social contract. It is not because people condoned defaulting per se that they came to introduce the corporate bankruptcy law.
It was because they recognized that in the long run, creditors — and the broader economy, too — are likely to benefit more from reducing the debt burdens of companies in trouble, so that they can get a fresh start, than by letting them disintegrate in a disorderly way.
It is high time that we applied the same principles to countries and introduced a sovereign bankruptcy law. For the developing world, the rise in food prices as well as the knock-on effects from the financial instability and uncertainty in industrialized nations are having a compounding effect.
High fuel costs, soaring commodity prices together with fears of global recession are worrying many developing country analysts. Summarizing a United Nations Conference on Trade and Development report, the Third World Network notes the impacts the crisis could have around the world, especially on developing countries that are dependent on commodities for import or export:.
Uncertainty and instability in international financial, currency and commodity markets, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and could present considerable risks for the developing world, the UN Conference on Trade and Development UNCTAD said Thursday.
Market liberalization and privatization in the commodity sector have not resulted in greater stability of international commodity prices. There is widespread dissatisfaction with the outcomes of unregulated financial and commodity markets, which fail to transmit reliable price signals for commodity producers. In recent years, the global economic policy environment seems to have become more favorable to fresh thinking about the need for multilateral actions against the negative impacts of large commodity price fluctuations on development and macroeconomic stability in the world economy.
Countries in Asia are increasingly worried about what is happening in the West. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy, as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world.
Many believed Asia was sufficiently decoupled from the Western financial systems. Asia has not had a subprime mortgage crisis like many nations in the West have, for example.
Many Asian nations have witnessed rapid growth and wealth creation in recent years. This lead to enormous investment in Western countries. In addition, there was increased foreign investment in Asia, mostly from the West. However, this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result, Asia has had more exposure to problems stemming from the West. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend.
Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest. Much of it is fueled by its domestic market. Although this is a very impressive growth figure even in good times, the speed at which it has dropped—the sharp slowdown—is what is concerning.
However, China also has a growing crisis of unrest over job losses. Both have poured billions into recovery packages. With China concerned about its economy, it has been trying to encourage its companies to invest more overseas , hoping it will reduce the upward pressure on its currency, the Yuan. China has also raised concerns about the world relying on mostly one foreign currency reserve, and called for the dollar to be replaced by a world reserve currency run by the IMF.
Of course, the US has defended the dollar as a global currency reserve , which is to be expected given it is one of its main sources of global economic dominance. Whether a change like this would actually happen remains to be seen, but it is likely the US and its allies will be very resistant to the idea.
Japan, which has suffered its own crisis in the s also faces trouble now. While their banks seem more secure compared to their Western counterparts, it is very dependent on exports.
A rise in industrial output in April was expected, but was positively more than initially estimated. However, with high unemployment and general lack of confidence, optimism for recovery has been dampened.
Towards the end of October , a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis.
This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade, finance and investment talks. This time, however, Asian countries are potentially trying to flex their muscle, maybe because they see an opportunity in this crisis, which at the moment mostly affects the rich West. Asian leaders had called for effective and comprehensive reform of the international monetary and financial systems. For example, as IPS also noted in the same report, one of the Chinese state-controlled media outlets demanded that We want the U.
Whether this will happen is hard to know. Similar calls by other developing countries and civil society around the world, for years, have come to no avail. This time however, the financial crisis could mean the US is less influential than before. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch. It would of course be too early to see China somehow using this opportunity to decimate the US, economically, as it has its own internal issues.
China has, however, used this opportunity to attempt to attract neighboring nations into its orbit by attempting to foster better economic ties. According to an IPS analysis, this has been a goal for a while, but the recent financial crisis has provided more opportunities for China to step up to this. An improved investment deal between China and Taiwan maybe one example of this improving engagement in the region.
The economic crisis may also be encouraging greater ties in this manner, as it would be important for Taiwan in particular as it has been in recession since the end of Asian nations are mulling over the creation of an alternative Asia foreign exchange fund, but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit.
What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena, which would be good for other developing regions, too.
The wealthier ones who do have some exposure to the rest of the world, however, may face some problems. In recent years, there has been more interest in Africa from Asian countries such as China.
As the financial crisis is hitting the Western nations the hardest, Africa may yet enjoy increased trade for a while. These earlier hopes for Africa, above, may be short lived, unfortunately. The IMF has promised more aid to the region, importantly with looser conditions, which in the past have been very detrimental to Africa. Many will likely remain skeptical of IMF loans given this past, as Stiglitz and others have already voiced concerns about see further below.
In the long run, it can be expected that foreign investment in Africa will reduce as the credit squeeze takes hold. Furthermore, foreign aid , which is important for a number of African countries, is likely to diminish. Effectiveness of aid is a separate issue which the previous link details.
African countries could face increasing pressure for debt repayment, however. As the crisis gets deeper and the international institutions and western banks that have lent money to Africa need to shore up their reserves more, one way could be to demand debt repayment.
This could cause further cuts in social services such as health and education, which have already been reduced due to crises and policies from previous eras. Much of the debts owed by African nations are odious, or unjust debts, as detailed further below, which would make any more aggressive demands of repayment all the more worrisome.
Some African countries have already started to cut their health and HIV budgets due to the economic crisis. Their health budgets and resources have been constrained for many years already, so this crisis makes a bad situation worse. Already, large percentages of households in Sub-Saharan Africa are poor, and the large number of people on treatment means ever-increasing treatment program costs.
Yet, Sub-Saharan Africa only accounts for one percent of global health expenditure and two percent of the global health workforce.
IPS adds that even international donor organizations have started to feel the financial crunch:. As such Latin America will also feel the effect of the US financial crisis and slower growth in Latin America is expected. Due to its proximity to the US and its close relationship via the NAFTA and other agreements, Mexico is expected to have one of the lowest growth rates for the region next year at 1.
A number of countries in the region have come together in the form of the Latin American Pacific Arc and are hoping to improve trade and investment with Asia. Diversifying in this way might be good for the region and help provide some stability against future crises.
For the moment, the integration is going ahead , despite concerns about the financial crisis. However, the problems of a regional blocs, Mercosur the Southern Common Market , shows that not all is well.
While Mercosur is its relevance being questioned, an IPS overview of its recent challenges also highlights that a number of South American countries are raising trade barriers against their neighbors as the crisis starts to bite more. Rather than regional integration and a unified position to present to the rest of the world, concerns of fragmentation are increasing. This also affects Brazil, as the regional economic superpower; more bickering within its sphere means distraction from the global scene.
While much mainstream media attention is on the details of the financial crisis, and some of its causes, it also needs to be put into context though not diminishing its severity. Taxpayers will be bailing out their banks and financial institutions with large amounts of money. Even the high military spending figures are dwarfed by the bailout plans to date. Almost daily, some half of humanity or more, suffer a daily financial, social and emotional, crisis of poverty.
In poorer countries, poverty is not always the fault of the individual alone, but a combination of personal, regional, national, and—importantly—international influences. There is little in the way of bail out for these people, many of whom are not to blame for their own predicament, unlike with the financial crisis.
There are some grand strategies to try and address global poverty, such as the UN Millennium Development Goals, but these are not only lofty ideals and under threat from the effects of the financial crisis which would reduce funds available for the goals , but they only aim to halve poverty and other problems. While this of course is better than nothing it signifies that many leading nations have not had the political will to go further and aim for more ambitious targets, but are willing to find far more to save their own banks, for example.
The two are in fact inter-related issues, both have their causes rooted in the fundamental problems associated with a neoliberal, one-size-fits-all, economic agenda imposed on virtually the entire world. Human rights has long been a concern. Recent years have seen increasing acknowledgment that human rights and economic issues such as development go hand in hand.
Long before the global financial crisis took hold, human rights concerns were high the world over, as annual reports from Amnesty International and other human rights organizations repeatedly warned about. The global financial crisis has led to an economic crisis which in turn has led to a human rights crisis, says Amnesty in their report. They find that as millions more slide into poverty as a result of the current crisis, social unrest increases resulting in more protests. These protests are sometimes met with a lot of suppression.
Other times, people are exploited further. The World Bank agrees. When the G20 held a summit in UK in April , much was made by local media about the apparent use of excessive force by police against protesters , and even led to the death of a passer by mistaken as a protester a small minority of whom were also violent. George Monbiot also raises concerns about how campaigners and protesters are being rebranding as domestic extremists. But as a news article accompanying the report from Amnesty summarizes, many nations have seen protests against economic decline and social conditions which have been met by violence, arrests and detentions without charge:.
Across Africa, people demonstrated against desperate social and economic situations and sharp rises in living costs. Social tensions and economic disparities led to thousands of protests throughout China. In the Middle East and North Africa, the economic and social insecurity was highlighted by strikes and protests in several countries, including Egypt.
In Tunisia, strikes and protests were put down with force, causing two deaths, many injuries and more than 2, prosecutions of alleged organizers, some culminating in long prison sentences. The poorer countries do get foreign aid from richer nations, but it cannot be expected that current levels of aid low as they actually are can be maintained as donor nations themselves go through financial crisis. As such the Millennium Development Goals to address many concerns such as halving poverty and hunger around the world, will be affected.
Almost an aside, the issue of tax havens is important for many poor countries. Tax havens result in capital moving out of poor countries into havens. A UN-sponsored conference slated for November to address this issue is unlikely to get much attention or be successful due to the recession fears and the financial crisis. This lost tax revenue is significant for poor countries.
It could reduce, or eliminate the need for foreign aid which many in rich countries do not like giving, anyway , could help poor countries pay off legitimate debts, and also help themselves become more independent from the influence of wealthy creditor nations.
Politically, it may be this latter point that prevents many rich countries doing more to help the poor, when monetarily it would be so easy to do so.
But public pressure has had an effect. Governments of the US, UK and others are slowly increasing pressure on tax havens, though with mixed results, and some tax havens are on the defensive, some trying to justify themselves.
Some havens, such as Jersey have been pressured into signing agreements that will increase their transparency. Whether it will work, or if it is just a token gesture is hard to say at this time, however. Crippling third world debt has been hampering development of the developing countries for decades. These debts are small in comparison to the bailout the US alone was prepared to give its banks, but enormous for the poor countries that bear those burdens, having affected many millions of lives for many, many years.
Many of these debts were incurred not just by irresponsible government borrowers such as corrupt third world dictators, many of whom had come to power with Western backing and support , but irresponsible lending also a moral hazard from Western banks and institutions they heavily influenced, such as the IMF and World Bank.
Despite enormous protest and public pressure for odious debt relief or write-off, hardly any has occurred, and when it does grand promises of debt relief for poor countries often turn out to be exaggerated. To achieve even this amount required much campaigning and pressuring of the mainstream media to cover these issues. The money then seemed easy to find. Talk of increasing health or education budgets in rich countries typically meets resistance.
Massive military spending , or now, financial sector bail out, however, can be done extremely quickly. And, a common view in many countries seems to be how financial sector leaders get away with it.
For example, a hungry person stealing bread is likely to get thrown into jail. A financial sector leader, or an ideologue pushing for policies that are going to lead to corruption or weaknesses like this, face almost no such consequence for their action other than resigning from their jobs and perhaps public humiliation for a while.
This problem could have been averted in theory as people had been pointing to these issues for decades. Yet, of course, during periods of boom no-one let alone the financial institutions and their supporting ideologues and politicians largely believed to be responsible for the bulk of the problems would want to hear of caution and even thoughts of the kind of regulation that many are now advocating.
To suggest anything would be anti-capitalism or socialism or some other label that could effectively shut up even the most prominent of economists raising concerns. Of course, the irony that those same institutions would now themselves agree that those anti-capitalist regulations are required is of course barely noted. Such options now being considered are not anti-capitalist. However, they could be described as more regulatory or managed rather than completely free or laissez faire capitalism, which critics of regulation have often preferred.
But a regulatory capitalist economy is very different to a state-based command economy, the style of which the Soviet Union was known for. The points is that there are various forms of capitalism, not just the black-and-white capitalism and communism. And at the same time, the most extreme forms of capitalism can also lead to the bigger bubbles and the bigger busts. We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures — yet when trouble strikes, all of a sudden they demand state intervention: The industry as a whole has not been doing what it should be doing … and it must now face change in its regulatory structures.
Regrettably, many of the worst elements of the US financial system … were exported to the rest of the world. Some of these regulatory measures have been easy to get around for various reasons.