DEVOTEES of classic detective stories will recognise the pattern: with each chapter, another character gets killed off who is – seemingly – unrelated to the previous murders. Eventually, in the final chapter, Miss Marple or Hercule Poirot explain who dunnit.
This plot line bears a startling resemblance to the unfolding global economic crisis. Every day there is a new development. First, US subprime mortgages go belly up, collapsing the American housing market. Suspects: the Wall Street investment banks w
ho bet their shirts on complicated financial instruments even they did not understand. The FBI is investigating 14 US financial corporations as a result.
Then came the Northern Rock fiasco, which saw the first run on a British bank for 160 years and shredded the credibility of both the government and the Bank of England.
The European financial world watched these goings-on with a self-satisfied "I told you so" expression. But then it transpired a major French bank, Société Générale, had lost a staggering £3.7 billion after a junior member of staff "concealed" rogue trading operations from his bosses. This is the biggest fraud in banking history and suggests the rot in the global financial edifice is deep.
Who is guilty? Is it grasping Wall Street banks foisting impossible loans on poor black Americans? Is it the culture of greed in the financial markets – driven by the lust for insane bonuses – that creates rogue traders? Is it complacent politicians who allowed absurdly cheap credit to continue for too long because it gave consumers the illusion of prosperity? Or is it a conspiracy of all three?
As in any good detective story, the various strands of the crisis are interrelated. However, unlike a good Agatha Christie, there is no single villain waiting to be unveiled at the end of the piece. Instead, as in Murder on the Orient Express, everyone is implicated.
It works like this. Before 1997, the booming Asian economies borrowed too much to fund their development (and subsidise corrupt local politicians along the way). Eventually, the world's savers (you and me) began to worry whether these economies would be able to pay back the money they owed. In the resulting panic, cash drained out of the developing Asian countries (plus Russia and Latin America), their currencies collapsed and their economies went into recession.
As a result, the Asian countries changed tack. They stopped borrowing, fixed their currencies against the US dollar, and used the fact that these currencies were now ultra-cheap to start a renewed export drive. But they did something else that was very clever – they converted their export earnings into US dollars and banked them in the United States. This allowed American consumers to borrow these dollars and so buy cheap goods exported from China and the rest of Asia.
The global banking system then grew fat on orchestrating this financial merry-go-round. And the politicians got on board, ensuring interest rates stayed stupidly low so American and British consumers could keep borrowing and spending.
This system is like a gigantic game of pyramid selling. As long as it expands, everyone thinks they are a winner. The problem is that it can't go on expanding indefinitely. US and British consumers are now up to their necks in personal debt and can't take much more. In other words, we can't go on absorbing the savings coming from Asia.
Meanwhile, the Asian tigers are beginning to realise they might not get their money back. That has undermined confidence in the dollar which has lost a third of its value in recent years – and the value of Chinese deposits in the US with it. But the Asian lenders are in a bind – if they dump their dollar hoards, the price of the US currency will drop even faster. Besides, if the Chinese don't lend to the US, who is going to buy their exports?
It gets worse: as the dollar falls, the value of Asian currencies also falls because they are still fixed to the US greenback. So what? Well, as the Chinese yuan has dropped in value, inflation has spread through China like a virus, causing massive political unrest. There is already internet chatter in China that the US has deliberately hoodwinked ordinary Chinese out of their hard-earned savings. That is stirring Chinese nationalism.
At the moment, we in the US and Britain are focused on domestic matters – an economic slowdown caused by credit drying up as a result of the subprime crisis. The solution being offered is to slash interest rates to boost consumer confidence. But think: lower interest rates will encourage even more unsustainable consumer debt. Lower rates might be a temporary fix to avoid short-term recession, but they actually keep us chained to the rickety system of recycling Asian savings while getting deeper into debt ourselves.
A radical alternative solution is now being propounded by economists such as Dominique Strauss-Kahn of the IMF. He wants to reverse the conventional wisdom since the Reagan-Thatcher era, and use public borrowing and spending (rather than interest rates) to keep the global economy out of recession. That is good news for Gordon Brown, as UK public finances are in deep trouble at the moment and being given international sanction to borrow and spend could help the government buy its way out of trouble.
There is no point in looking for someone to blame in this crisis – we need to fix the entire international economic system. Mr Strauss-Kahn is correct to argue that the rest of the world – Europe in particular – has to start buying more, and give some relief to indebted US and UK consumers. One way of doing that (and head off a recession) is to invest in western technology designed to decarbonise the Chinese and Indian economies. And you thought this was just about mortgages.
The full article contains 984 words and appears in The Scotsman newspaper.
