Contradictions now wrack the world’s financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis-if not now, then in the near future.
The International Monetary Fund (IMF), the Bank for International Settlements, the British Financial Services Authority, the Financial Times, and innumerable mainstream commentators were increasingly worried and publicly warned against many of the financial innovations that have now imploded. Warren Buffett, whom Forbes ranks the second richest man in the world, last year called credit derivatives-only one of the many new banking inventions-“financial weapons of mass destruction.” Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.
The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world’s economic stability. Events have confirmed its prognostication that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations, will cause a flight to security that will dry up much of the liquidity of banking. “…Financial innovation itself,” as a Financial Times columnist put it, “is the problem”. The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.
It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous.
Only a few of the many measures give us a rough estimate:
The present crisis began-it has scarcely ended there–with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. We can ignore the impact of this crisis on U.S. housing prices, but some projections are of a 10 percent decline-another trillion or so. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.
What the subprime market did was unleash a far greater maelstrom involving banks in Germany, France, Asia, and throughout the world, calling into question much of the world financial system as it has developed over the past decade.
Investment banks hold about $300 billion in private equity debts they planned to place-mainly in leveraged buy-outs. They will be forced to sell them at discounts or keep them on their balance sheets-either way they will lose.
The near-failure of the German Sachsen LB bank, which had to be saved from bankruptcy with 17.3 billion euros in credit, revealed that European banks hold over half-trillion dollars in so-called asset backed commercial paper, much of it in the U. S. and subprime mortgages. A failure in America caused Europe too to face a crisis. The problem is scarcely isolated.
The leading victim of this upheaval are the hedge funds. What are hedge funds? There are about 10,000 and, all told, they do everything. Some hedge funds, however, provided companies with capital and successfully competed with commercial banks because they took much greater risks. A substantial proportion is simple gamblers; some even bet on the weather–hunches. Many look to their computers and mathematics for models to guide their investments, and these have lost the most money, but funds based on other strategies also lost during August. The spectacular Long-term Capital Management 1998 failure was also due to its reliance on ingenious mathematical propositions, yet no one learned any lessons from it, proving that appeals to reason as well as experience fall on deaf ears if there is money to be made.
Ua loaʻa kekahi i ka wā pilikia o ʻAukake akā ʻoi aku ka nui o ka nalowale, a ma ka hui pū ʻana o nā kālā pā i nalowale nui loa-ua pau ko lākou hoihoi i ka waiwai wikiwiki. Aia kekahi mau panakalupa kupaianaha a me nā bailouts, me kekahi o nā ʻoihana waiwai nui. Ua ʻike nā mea hoʻolale kālā i loaʻa nā wāwae anu ʻaʻole hiki ke wehe i ke kālā mai ke kālā pā. ʻO ka waiwai maoli o kā lākou paʻa ʻana e hoʻopaʻapaʻa nui ʻia, a ʻokoʻa nā kumukūʻai. ʻO ka ʻoiaʻiʻo, ʻaʻohe ala e loiloi iā lākou me ka ʻoiaʻiʻo - hilinaʻi nui lākou a pau i ka mea a ka poʻe e manaʻoʻiʻo ai a e lawe ai, a i ʻole ka mākeke.
We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today’s turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.
All central banks are wracked by dilemmas. They have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of “moral hazards.” Is the Federal Reserve’s responsibility to save financial adventurers from their own follies? Throughout August the American and European central banks plunged about a half-trillion dollars into the banking system in an attempt to unfreeze blocked credit and loans that followed the subprime crisis-an event which triggered a “flight to safety” which greatly reduced banks’ willingness to loan. In effect, the Federal Reserve relied on banks to restore confidence in the financial system, subsidizing their efforts.
Ua lanakila wale nā hana a nā panakō waena akā, i ka hōʻuluʻulu ʻana, ua hāʻule lākou: ʻimi nā panakō a me nā mea hoʻopukapuka i ka palekana ma mua o ka pilikia, a e noho lākou ma kā lākou kālā. Hoʻomaopopo pilikino ka Federal Reserve i kona hiki ʻole ke hoʻokō i kahi hoʻolālā kālā paʻakikī. Aia ka poʻe panakō waena o ʻEulopa i ka pilikia like: ʻaʻole maopopo lākou i ka mea e hana ai.
Akā ʻaʻole paʻa kēia i ka pilikia maoli, ʻo ia ke ʻano a hoʻopili piha i ke ʻano o ka ulu ʻana o ke ʻano kālā o ka honua i nā makahiki ʻelua i hala. E like me ka wā ma mua, aia kahi māhele koʻikoʻi i ka honua panakō a me ke kālā a loaʻa i kēlā me kēia me ka leverage politika me ka hakakā ʻana. ʻO ka mea nui aʻe, ʻaʻole i hoʻolālā ʻia nā panakō waena e hoʻokō i nā mea ʻoiaʻiʻo o kēia mau lā a ʻaʻohe mana kānāwai a ʻike ʻole e hoʻokele iā lākou.
Ma kēia pōʻaiapili, e piʻi nui ana nā pilikia o nā panakō waena a ʻo nā hoʻonā a lākou e manaʻo ai, e like me ka wā ma mua, ʻaʻole lawa loa, ʻaʻole no ka hewa o ko lākou manaʻo akā no ka mea hiki ʻole ke hoʻoponopono i kahi ʻoihana nui a paʻakikī - ʻoi aku ka liʻiliʻi i kēia lā ma mua o i ka wā ma mua no ka mea ʻaʻohe mea hana honua e hana pēlā. 'O ke 'ano o ka ho'oponopono 'ana i ke kālā, 'a'ole i 'oi aku ka maika'i o ka ho'oponopono 'ana ma mua o ka 'āina.
Not only leftists are naïve but so too are those conservatives who think they can speak truth to power and change the course of events. Greed’s only bounds are what makes money. Existing international institutions-of which the IMF is the most important–or well-intentioned advice will not change this reality.