Lead Story
Issue No. 46 - April/May 2009
No credit to anyone
by and and and
The global financial crisis is really two crises rolled into one:
• a global financial crisis affecting the provision of credit and equity to businesses and households; and
• an ensuing global economic crisis, affecting the production of goods and services generally.
The financial crisis is concentrated in the world’s dominant financial centres in America and Europe, with spillover effects to other countries. The economic crisis has spread throughout the world. In thinking about solutions, it is important to understand that people’s incomes, employment and living standards depend on production. Real solutions to the crisis must promote production.
Increased government spending, for example, is only a solution if it leads to increased production, directly or indirectly. Financial system reconstruction must lead to increased production – as must regulatory change.
Some actions may be useful to increase production now, but may impede production in the future. A different set of measures may not increase production now, but would help boost production, incomes and employment long-term. Some balancing of impacts needs to occur.
The present crisis has followed a traditional pattern, but on a grand scale: banks and other financial institutions, particularly global institutions in America and Europe, lent a very great deal of money to borrowers who could not readily meet their debts when called upon. Efforts to repay these debts en masse led market values of their underlying collateral assets - housing, buildings, infrastructure and businesses – to crash, to the extent that major financial institutions’ solvency came into question as their bad and doubtful debts rose. The asset price collapse triggered widespread collateral value losses, and still more asset sales to meet additional borrowers’ loan obligations in a downward spiral of values. The consequent fall in household wealth in housing and equities (reflected part...
