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The next financial crisis

Written By: - Date published: 8:15 am, September 11th, 2010 - 42 comments
Categories: capitalism, Economy, International - Tags: ,

If you have some time to spare this Saturday morning, check out the documentary “Overdose”. Here’s a description:

Overdose

This is the story of the greatest financial crisis we will ever see… The one that is on the way.

Have you maxed out your credit card? Bought shares with borrowed money? Taken out a large home loan believing that prices always go up? Then you may be living on borrowed time. Filmmaker Martin Borgs takes a provocative look at the events leading up the Global Financial Crisis and asks if the attempts to avoid a ruinous collapse of banks and other major finance houses may set the world on the path to an even bigger meltdown.

When the world’s financial bubble blew, the solution was to lower interest rates and pump trillions of dollars into the sick banking system. On the face of it this seemed the only way to deal with impending disaster, but was it?

“The solution is the problem, that’s why we had a problem in the first place,” Economics Nobel laureate Vernon Smith says. For him, the Catch 22 is self-evident. Interest rates have been at rock bottom for years, and governments are running out of fuel to feed the economy. He asks:

“The governments can save the banks, but who can save the governments?”

I found it irritating in some respects, but also a useful overview of what many of us expect is likely to happen next. You can view the video (in three parts) at the link above, or they may be below (odd things seem to be happening to video embedding just now):
http://www.youtube.com/watch?v=jr5F22j9A_E&feature=player_embedded
http://www.youtube.com/watch?v=vYiRMHi_mF0&feature=player_embedded
http://www.youtube.com/watch?v=_17ck3Vti8A&feature=player_embedded

42 comments on “The next financial crisis ”

  1. RedLogix 1

    Thanks for posting these Rob. Nobel laureates like Vernon Smith are all very well pontificating in hindsight, but an entire class of conventional thinking economists totally failed to predict the GFC.

    Failure to predict is a basic failure of a science. On that basis almost the entire profession should be sacked as incompetent.

    By contrast a small group of non-conventional economists, Steven Keen being my long time favourite, did predict the GFC… formally and in considerable detail. Of course as the global warming debacle has taught us, correct science, correct modelling and correct predictions mean nothing when up against powerful vested interests with vast sums of money to spend protecting their privileges.

    • nzfp 1.1

      Hey RL

      “By contrast a small group of non-conventional economists, Steven Keen being my long time favourite, did predict the GFC”

      Keen most certainly did – he’s one of my favourite too. Not only did Keen predict it but he won an award recognising that he was the earliest and most accurate economist to predict the GFC. See the details of his award here. Keen shares great compnay as 2nd and 3rd place finishers include Nouriel Roubini (New York University) and Dean Baker (Center for Economic and Policy Research).

      • ZB 1.1.1

        Nonsense. The whole point of universities is to have alternative views ready when the main branch of the subject falls flat on its face. There was always going to be a Keen waiting in the wings. Hell we even have a ‘waiting in the wings’.

        The simple fact is economics is not a science when its purely a theoretical practice, and when its practical engineering implementation it suffers from being too close to the big money.

        Only in economics can an economist implement their bridge by building from the mid point of the gorge out,
        with enough money and their fad theory being all the rage in the market at the time.

        Physically, you remember how we’re fixed to reality, specifies that energy is conserved. That not only are oil stocks limited, but that the quality of the oil wells are nonuniform, some costing more to get at, some of lower quality.
        But all crude oil is a high density energy source, and basic physics tells us that if horsepower and coal ran the
        pre-automobile era, then alternatives, coal and nuclear will run the post-petrol era.

        So its fairly safe to estimate the size of the economy and the amount of growth possible. And
        easy to do a wavey hand estimation of the effect of peak oil, that is if the economy was boosted
        by increasing cheap oil due to new oil wells and better techniques to get more oil out of
        existing oil wells, then its fair to say the economy needs a new driver or the ability of
        the global economy to expand into new oil driven territory is denied it.

        So here’s the rub, the massive uptake in projected value, money, in the global economy
        is never going to be realized. Economies around the world are filled with people who
        can see this, and will do everything to minimise the harm to themselves whilst waiting
        for the money to either vanish back from whence it came, inflate itself to manageable
        size, or crash into a hyperinflationary hell.

        Personally giving the dithering of western governments to take the rich back to
        some nominal level, I believe we’re heading for hell. And I welcome it, its
        about time we cleaned out the elites who really have nothing to do with the
        future and everything to do with our past mistakes.

        • nzfp 1.1.1.1

          Hey ZB

          “The simple fact is economics is not a science when its purely a theoretical practice”

          well remember that Scientific theory follows two models – theories based on observable and historical facts as well as on reproduceable experiments with predictable outcomes.

          In the case of economics we have thousands of years of empirical researchable data. There is a very good book on the subject of monetary policy and its effects on nations politics and economics from the ancient Greeks, Romans and Chinese, through the Venetian, Dutch (Bank of Amsterdam) and British (Bank of England) empires to the American colonies right up to the modern US and EU monetary and economic structures.

          I recommend you find and read Stephen Zarlenga’s book “The Lost Science of Money” of the American Monetary Institute. I have and I certainly recommend it to anybody. The point of the book is that the GFC is completely predictable. The events leading to as well as the results of the current GFC were predicted centuries ago by economists such as David Ricardo and Alexander Del Mar – and many many others – based on their study of the empirical historical facts of monetary history as far back as 300 BC.

          The data is there, it has been analysed by many economists including Zarlenga.

          • Loota 1.1.1.1.1

            Anytime people want to make huge bucks in a short amount of time without generating commensurate productive, economic and social value you get the conditions for a massive financial crisis. So yeah, that should’ve been pretty predictable and why were those in charge looking so surprised when it started all coming down?

            • nzfp 1.1.1.1.1.1

              Hey Loota

              “why were those in charge looking so surprised when it started all coming down?”

              Hah hah hah that’s easy – cos they didn’t get out with the loot before it happened on their watch 😉

          • ZB 1.1.1.1.2

            “”Scientific theory follows two models – theories based on observable and historical facts as well as on reproduceable experiments with predictable outcomes.””

            Tosh.

            Economics, historical based, has yet to capture the full picture of an economy at any instant of time.
            Economics is a cult, designed to suit the current necessity.
            After the 70s oil crisis, the world was flushed with cheap middle east oil and year on year
            new oil finds across the globe. The world western economies expanded their economies
            by loosening financial regulation, rather than pick winners and direct the economy to get
            us to mars, or build broadband, or build sustainable economies.

            Patterns will always be found in human activities, but those patterns owe more to
            the underlying reality of energy, industrial production techniques, than psuedo
            economic laws. Therein lies the bait and switch, economics are like mathematians
            who dodgely track physicists and engineers so they can write abstract mathematical
            contortions. But nobody actually has found zero, or one, or pie. Its just another
            preisthood. Now personally Engineers I put my life in their hands, Physics I bet on,
            and Mathematics I absorb while I sit on the bog using Economics as toilet paper.

          • Herodotus 1.1.1.1.3

            Is this only available from the interne?.
            Search re Borders , Whitcouls was not successful. Perhaps you could point myself to where in JAFAland this could be sourced from as from link below it was sold out. Some out here must follow your recommendations 😉
            http://shopping.nzherald.co.nz/the-lost-science-of-money.aspx?prod=cl5DboacXWs%3D
            I found this on history channel very interesting, should my tatses be worth anything.
            http://www.niallferguson.com/site/FERG/Templates/General.aspx?pageid=194

            • nzfp 1.1.1.1.3.1

              Hey Herodotus,
              I had whitcouls order it in for me, it didn’t cost $199.07 though – but it was still pricey for me, from whitcouls at $165. However it is printed on 300 year paper. The author had the misfortune of books crumbling in his hands (Alexander Del Mar) while researching the content, so in order to preserve the concepts developed by the many political economists he quoted he had the book printed on 300 year paper.

              I’ve attempted to get my public library to order a copy. They didn’t have the budget when I last tried so I’ll try again. I may donate my copy when I’ve finished with it although it is a great book to go back to for references.

              You can sometimes get it from fishpond HERE.

              The Ascent of Money by Scottish historian Niall Ferguson looks interesting. I’ve seen it at Borders and it’s on my “to read” list. However Ferguson does seem to have close ties to “Big Money” as he has done biographies of the Rothchildes and Goldman Sachs.

        • RedLogix 1.1.1.2

          Nonsense. The whole point of universities is to have alternative views ready when the main branch of the subject falls flat on its face. There was always going to be a Keen waiting in the wings. Hell we even have a ‘waiting in the wings’.

          OK so by your own admission the main branch of economics has ‘fallen flat on it’s face’. Rather than airily dismissing Keen as just ‘someone waiting in the wings’… how about giving the man credit for being correct, learning why he is correct and advocating for the changes needed.

          Keen was not just right because of ideological punditry or hand-waving attention seeking. He got it right on rigorous theoretical grounds that he has documented in numerous papers for almost a decade now. Papers based on sound dymanic mathematics and proper accounting of money flows.

          But allow me to indulge in a relatively long quote from one of his recent essays.

          That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.

          Ignoring this growth in debt—championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme—was the greatest failing of the Federal Reserve and its many counterparts around the world.

          Though this might beggar belief, there is nothing sinister in Bernanke’s failure to realize this: it’s a failing that he shares in common with the vast majority of economists. His problem is the theory he learnt in high school and university that he thought was simply “economics”—as if it was the only way one could think about how the economy operated. In reality, it was “Neoclassical economics”, which is just one of the many schools of thought within economics. In the same way that Christianity is not the only religion in the world, there are other schools of thought in economics. And just as different religions have different beliefs, so too do schools of thought within economics—only economists tend to call their beliefs “assumptions” because this sounds more scientific than “beliefs”.

          Let’s call a spade a spade: two of the key beliefs of the Neoclassical school of thought are now coming to haunt Bernanke—because they are false. These are that the economy is (almost) always in equilibrium, and that private debt doesn’t matter.

          One of Bernanke’s predecessors who also once believed these two things was Irving Fisher, and just like Bernanke, he was originally utterly flummoxed when the US economy collapsed from prosperity to Depression back in 1930. But ultimately he came around to a different way of thinking that he christened “The Debt Deflation Theory of Great Depressions” (Fisher 1933).

          You would think Bernanke, as the alleged expert on the Great Depression—after all, that’s one of the main reasons he got the job as Chairman of the Federal Reserve—had read Fisher’s papers. And you’d be right. But the problem is that he didn’t understand them—and here we come back to the belief problem. The Great Depression forced Fisher—who was also a Neoclassical economist—to realize that the belief that the economy was always in equilibrium was false. When Bernanke read Fisher, he completely failed to grasp this point. Just as a religious scholar from, for example, the Hindu tradition might completely miss the key points in the Christian Bible, Bernanke didn’t even register how important abandoning the belief in equilibrium was to Fisher.

          In other words neo-classical economics is a flawed belief system that has failed the people of the world repeatedly. The only real beneficiaries have been a tiny elite of uber-wealthy … a few thouands of individuals who now control over 50% of the world’s wealth.

          • ZB 1.1.1.2.1

            Keens wasn’t listen too at the time, so it pretty much picking winners to me. Because
            every year there are economists writing shit that never happens – some are eventually
            to be found half and half right. Marx perdicted capitalist would get too greedy,
            its hardly controversial to rehash in ‘new terms’ an old master.

            • RedLogix 1.1.1.2.1.1

              Keens wasn’t listen too at the time, so it pretty much picking winners to me.

              Another one from the ‘no-one knows anything anymore, so who cares?’ school of thought.

              That’s fine, no-one has to pretend to be all-knowing, but on the other hand don’t expect anyone here to be impressed by tired cynicism posing as worldliness.

            • nzfp 1.1.1.2.1.2

              Hey ZB,
              Don’t be soo cynical, I’ve listened to Steve Keen, looks like RL has too. You should take a few minutes and listen to him too. He has a great seven part podcast called “The Debtwatch Report with Steve Keen”. He is also frequently interviewed on “The Renegade Economists” radioshow and podcast wth a noteable interview titled “Debt Saturation” where he freely admits he doesn’t agree with everything the Georgists (named after political economist Henry George) follow and gives fair reason why.

              Have a listen to his podcast – maybe start with the interview I’ve linked to above. The point is you have options, you can learn about them and make your representative aware of them too.

          • Loota 1.1.1.2.2

            And who created the debt in order to create the cash to slosh around? The banks/financial sector of course. You create a trillion new dollars in debt, that’s an extra trillion dollars you have sloshing around to be hoovered up by people in the know, but now the people/companies/govts who are in debt need to pay that debt back plus interest.

            And where is the money going to come from to do that?

            Why with more debt of course.

  2. Mr Magoo 2

    I very good documentary but it completely missed one point: What exactly are they proposing is the solution?

    I mean he ends by saying “we can do it”, but they never once mention what “it” is. And as is typical in the US spectrum it quite often means “good for the US” at the expense of others.

  3. happynz 3

    “Have you maxed out your credit card?”
    No, I haven’t. I’m actually a whole NZ$1.51 in credit!
    “Bought shares with borrowed money?”
    Nope, can’t say that I have.
    “Taken out a large home loan believing that prices always go up?”
    Yet again, no.
    “Then you may be living on borrowed time.”
    Oh great. Live modestly and end up with nothing. Live large and have the pleasure of having had a hell of a ride and end up with nothing. I guess the saving grace for me is when the collapse comes the fall to the bottom won’t feel so truamatic.

    • ZB 3.1

      The tramua of discovering that their ability to make money was all a big fad.

      The success stories are those who didn’t believe the hype. Who borrowed
      and brought homes, then sold them to buy more homes, and then got
      out at the top of the market – paying back all the borrowed money. And
      then brought into companies and homes that are good prospects in
      the new thrift economy.

      The sad stories are the young people who could buy a house, get drunk,
      drive noisy cars and basically lose their best economic years. Y-gen
      whose parents lost their homes to the rightwing fraud years.

  4. Loota 4

    I found it irritating in some respects,

    Interesting, like what?

  5. Draco T Bastard 5

    Bubbles and financial crises are the natural effect of treating money as a resource.

    • Loota 5.1

      Hmmmmm…actual money is a resource though, isn’t it? In that it is supposed to help represent or unlock human time and energy. Financial derivatives of money and the creation of money not backed by actual productivity from human time and energy…that’s where it starts becoming unstuck.

      • nzfp 5.1.1

        Well money should not be treated like a commodity, as soon as it becomes a commodity it takes on properties which allow it to be traded in speculative financial markets and consequently cornered – c.f. gold, silver, oil.

        Instead it should be a measure of accounting for facilitating the trade of goods and services without easily comparable value. This definition of money is the basis for the 700 year long tally stick currency used in England before the Bank of England as well as throughout the roman empire where money was defiined by stamp and not weight – where leather straps stamped with a roman seal by fiat were successfully used as currency (such as paper money) instead of gold by weight (commodity). It was when gold (commodity) by weight – ponderata – endorsed by Adam Smith by the way – was used as currency that the Roman Empire went into decline. It’s all in Stephen Zarlenga’s book “The Lost Science of Money”

      • Draco T Bastard 5.1.2

        Well, put it this way. When the Chch earthquake happened the bill was estimated as $2b then it jumped to $4b and we were assured by Jonkey that we had the money but what no one has asked yet is are the resources actually available to rebuild Chch? Not a single person in government or the MSM it’s merely assumed that, because we have the money, then we have the resources but there’s no guarantee of the latter. In fact, I’d won’t be surprised if that $4b estimate climbs to $8b. Russia, in a similar situation due to the heatwave, stopped exports of grain but we haven’t stopped exports of construction materials such as raw timber going to China and there’s no indication that their demand will decrease.

        Another example is the mining the Gerry “Sexy Coal” Brownlee wants. Dig up the minerals, sell them to someone else and then we’ll be rich and be able to do any thing we want except for the minor technicality that we won’t have any resources to do anything with.

        This is what I mean by “treating money as a resource” and when it gets to that point, as our government, and probably most of society, has then what happens is that we start accumulating money and finding interesting ways to turn money into more money (otherwise known as the financialisation of the economy) rather than watching what we’re doing with our real resources. And then, of course,we end up money rich, resource poor and unable to support a high-tech, high standard of living society.

        • nzfp 5.1.2.1

          Hey DTB,
          “we end up money rich, resource poor and unable to support a high-tech” maybe or maybe that is the result of applying the principles of the debt based society we currently live in with the historical observable outcome being what you stated.

          However we – including you in previous posts – are advocating for an economy based on public credit. I’m willing to bet a billion (nah scratch that five billion, no ten billion) new RBNZ interest free dollars on developing new energy systems, chemical science and building materials that we can use to overcome those obstacles.

          Especially if the money we create as pure credit (no debt) for our government is put to use developing the infrastructure we need – even if developing that infrastructure requires first principles converting our renuable resources into the materials we need to build our society.

          We could have a scientific boom creating technologies that we could give/sell around the world. Free energy, renewable resources, socially and environmentally sustainable and responsible. It’s cheap and easy to do as long as we are not in debt to a bankrupt foreign private (City of London and Wall Street) banking cartel. Makes for an exciting and inspiring future for our mokopuna.

  6. nzfp 6

    Hey Mr Magoo,
    There have been a few good solutions proposed.

    One solution can be viewed in the great British monetary documentary “Why are we all in debt” by Tarek El Diwany. El Diwany proposes a solution based on Islamic banking principles.

    Another great documentary by author and former federal government analyst “Richard C. Cook” titled “Credit as a Public Utility: The Solution to the Economic Crisis” proposes a similar solution to the Islamic banking model which also defines money as a public instead of private utility. Cooks solution draws heavily on banking proposals endorsed by Milton Friedman (before he founded monetarism) and also draws on concepts developed by Major Clifford H. Douglas the founder of Social Credit.

    • RedLogix 6.1

      It’s worth noting that when you examine all of the actual teachings of the great religions, in the words of their founders, that in general they have remarkably little to say about how man should order his economic affairs. With one exception.

      They all either prohibit or place strict limits on the practise of usury.

      • nzfp 6.1.1

        Yeah it’s crazy isn’t it – ALL of the religions proscribe against it. The documentary “Why are we all in Debt” about Islamic banking also includes Christian and other religous writings against Usury. The Catholics had an institution called the scholastics who had a very solid understanding of economic theory. The scholastics influence on Catholic society kept usury out of christian culture up unti it (usury) was endorsed by Jean Calvin (Calvinism) and Martin Luther during the reformation…

        • Vicky32 6.1.1.1

          “The scholastics influence on Catholic society kept usury out of christian culture up unti it (usury) was endorsed by Jean Calvin (Calvinism) and Martin Luther during the reformation…”
          Interesting news, nzfp…. Score 1 for Catholics… 😀
          Deb

    • Loota 6.2

      Just watched the first 4 parts of “Credit as a Public Utility”.

      Excellent, thanks for the link.

      • nzfp 6.2.1

        My pleasure – make sure you share it around – buy his book too or even better get the public library in your area to buy it 😉

  7. RedLogix 7

    The fundamental challenge is not that we do not know the solution to the problem, but that we are unable to implement any alternatives to the status quo….because vested interests will prevent us from doing so.

    Lets be real for a moment. The world is essentially being held hostage by the US Federal govt, which in turn is the captive, for all important purposes, of major corporate and financial interests… who have become more powerful than any single sovereign government.

    Breaking this death-grip is not easy. No single government can afford to confront them directly because they simply transfer their point of vulnerability to another less pesky nation.

    • nzfp 7.1

      “No single government can afford to confront them directly” … and maybe no single government will.

      FT Aug 26, 2010 “Banks back switch to renminbi for trade”

      PTI Aug 14, 2010 “Will retaliate if offended by US, warns China Gen”

      SA Feb 18, 2008 “Iranian Oil Bourse Starts Trading, Sans Dollar Contracts”

      There’s a lot more like this out there …

      Bear in mind that the more NZ’rs that are aware of concrete solutions means more grass roots pressure on new canditates to implement them.

      • Loota 7.1.1

        Quite right. The people must force their politicians to do the right thing.

        An aware, educated, active citizenry.

      • Draco T Bastard 7.1.2

        If the world had responded correctly in 1971 when he US unilaterally dropped the Bretton Woods agreement and floated the US$ then the US would not have continued as the reserve currency and US power would have waned. Unfortunately the US managed to get the US$ set as the default currency to buy oil which maintained the strength of the US$. This is slowly changing as the US prints money to inflate away it’s debt. Sooner or later countries are going to realise that they can’t buy anything with US$ and, more importantly, some countries are going to realise that they actually want to keep their oil and won’t sell it at any price. When those two reach some sort of critical mass you’ll see the collapse of the US as a viable state.

  8. RedLogix 8

    Nothing new to you nzfp, but fun all the same:

    • nzfp 8.1

      Yeah it’s always an eye opener watching/listening to Tarpley. What a day it is for the USA to be watching a Russian news channel to get intelligent political commentary about the US.

  9. jcuknz 9

    Anybody remembering that today is the nineth anniversary of an event in New York?

  10. Kleefer 10

    While a handful of economists and economic commentators did predict the financial crisis, most of them only predicted it a year or two beforehand and gave the wrong reasons for it happening. Steve Keen, for example, made his prediction using the theories of Hyman Minsky, who suggested that capitalism is inherently unstable (which it isn’t).

    Only economists trained in the Austrian school of economic thought consistently predicted the financial crisis and not just a year or two beforehand but back in 2001 when Alan Greenspan made the decision that caused the financial crisis, his lowering of interest rates down to record levels. The Austrians have identified artificially low interest rates and their market-distorting effects as being responsible for the boom and bust cycle but idiotic politicians and central bankers treat them as the cure for our economic ills.

    And RedLogix, I can’t let your comments on “usury” go unchallenged. Religious restrictions on “usury” (the charging of interest) held economic development back by centuries by retarding capital formation. However, a loophole in the rules meant that Christians couldn’t charge each other interest but Jews could charge Christians and vice versa.

    This loophole is why the Jews got their centuries-old reputation as money lenders and it allowed the savings and capital investment that brought us out of the middle ages and into the industrial revolution. Islamic finance is a huge con job; Islamic countries have ridden on the coat-tails of wealthy Western nations and rely on oil money for prosperity.

    Only someone with a previously uncharted depth of economic ignorance would attribute the world’s economic problems to the charging of interest. As the Austrians have identified, it is actually the manipulation of interest rates by government entities in collusion with large financial institutions that causes the damage and it’s the boom, rather than the bust, when the real harm is done.

    • ZBB 10.1

      So the only good economist to quote is a long dead one?

      What’s the branch of economics that uses fundamentals like energy in to predict markets?
      I mean if the US oil production hit peak in the 70s, bring about the oil crisis.
      Then the Middle East oil production hit peak about 2002, with the invasion of Iraq.
      Basically if it takes energy to move frieght around, and if the fuel is less energy
      dense and harder to get out then the size of the economy will be proportional
      to the amount and cost of the raw energy flowing into it.

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