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The Looming Mother of all Economic and Social Crisis

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The Looming Mother of all Economic and Social Crisis
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imf“Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff," --- Hyman Minsky.

On Thursday, May 6, 2010, ninety minutes before the end of the trading day, the U.S. stock market almost melted down. The Dow Jones Industrial Average dropped nearly 1,000 points. The market recovered before the end and closed down 348 points, or 3.2%, like a giant 747 narrowly averting a crash landing, but the questions of the day are: What happened? And what does it mean?

Said Robert Reich on his blog on May 6, “at this point no one knows why. Some say it was a sudden burst of worries about Greece's debt and the increasing possibility of a default that might cause a run by global investors. Others point to a "trading error." Giant high-speed computers generate millions in trade based on instructions embedded in computer programs designed to move fast enough to beat everyone else.”

Again on Friday, May 7, Dow fell another 140 points in a wild trading day. The decline wiped out US market gains for the year. The Dow closed down to 10,380!

World's capital markets: an out-of-control computerized Casino!

“Regardless of why it happened, it's further evidence that the nation's and the world's capital markets have become a vast out-of-control casino in which fortunes can be made or lost in an instant—which would be fine except for the fact that most of us have put our life savings there. Pension funds, mutual funds, school endowments—the value of all of this depends on a mechanism that can lose a trillion dollars in minutes without anyone having a clear idea why. So much of the market now depends on computer programs and mathematical models that no one fully understands, so much trading is in the hands of a few people whose fat thumbs or momentary carelessness might sink the economy, so much of global wealth now depends on who can move their money quickest at the slightest provocation—that we are toying with financial disaster every day. The luck or foolishness of a few traders, and inside knowledge and information that some possess and others don't, combined with ultra high-speed computers, put us all at the whim of a system whose risk is way out of proportion to any public benefits,” concluded Reich.

Greek Sickness Infects EU -PIGS to Slaughter

The austerity plans and the bailout packet for Greece which have adversely dented the ruling coalition of Chancellor Angela Merkel’s party in the just concluded regional elections in Germany, because Berlin has to foot the bill, would spread around Europe and beyond. It believed that the debt of five EU members Portugal, Ireland, Greece and Spain (PIGS) totals around $3.9 trillion. Britain’s debt is larger than any one of them.

Well-known US economist and political activist Lyndon H. LaRouche, Jr. voiced strong condemnation “the British swine have once again imposed a 1923-style hyperinflationary collapse on modern Germany, with the trillions-dollar bailout scheme imposed on the Euro zone this past weekend. Only the immediate enactment of a Glass-Steagall law could prevent the United States itself from falling into the same fate now destined for continental European victims such as, above all other targets for total destruction, the Federal Republic of Germany.”

Bank of England Chief King paints a disastrous future for the country

London’s financially precarious position, which has been known for quite some time, was further unveiled by Edmund Conway, the Economics Editor of the Telegraph, UK. Conway revealed that US economist David Hale, who recently met with Mervyn King, Bank of England boss, was told by the latter that, "whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be."

Edmund Conway went on to further expose the untenable crisis awaiting UK:

"…no one yet comprehends just how tough the next five years will be. For obvious reasons: we have not experienced anything like it in our lifetimes. We have been insulated from the full pain of the financial/economic crisis so far by unprecedented low interest rates and by the bank bailouts. At some point, the anaesthetic will wear off and we will face a period of austerity that may well make the ruling party so unpopular that it effectively becomes unelectable for decades. There will be strikes; there will be stagnation; there will probably be a double dip of some variety. But this time the pain will be unmistakably imposed by the politicians."

This analysis was further strengthened by former British minister, Michael Portillo, who said that the "financial crisis ravaging Britain would take 20 years to resolve, but the next five years would be critical!"

The Institute for Fiscal Studies had earlier warned that all three parties were hiding the full details of their plans to cut the deficit from voters. It said that the scale of cuts following the election could be the deepest since comparable records began just after World War II.

“Instability is an inherent and inescapable flaw of capitalism."

Hyman Minsky, a hitherto obscure macroeconomist, who saw what was coming, predicted, decades ago, almost exactly the kind of meltdown that is hammering the global economy.

Minsky believed in capitalism, but he also believed it had almost a genetic weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

Minsky's vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises.

In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes--that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel--Minsky had no interest in what he and a handful of other dissident economists came to call "bastard Keynesianism."

Instead, Minsky drew his own far darker lessons from Keynes's landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

Minsky’s "Financial Instability Hypothesis"

In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, "Success breeds a disregard of the possibility of failure."

As people forget that failure is a possibility, a "euphoric economy" eventually develops, fueled by the rise of far riskier borrowers--what he called speculative borrowers, whose income would cover interest payments but not the principal; and those he called "Ponzi borrowers," whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit. Once that kind of economy developed, any panic could crash the market. The failure of a single firm, for example, or the revelation of a staggering fraud, could trigger fear and a sudden economy-wide attempt to shed debt.

"Minsky Moment"

This watershed moment - later dubbed the "Minsky moment" - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the "real" economy that depended on the now-collapsing financial system. (Note: the write up on Minsky has been extracted from “Why Capitalism Fails“by Stephen Mihm in the Boston Globe of 14 September, 2009.)

”Humanity faces the most serious crisis in modern history.”

In a book titled “The Global Economic Crisis, the Great Depression of the XXI Century,” edited by Prof Michel Chossudovsky and Andrew Gavin Marshall (to be released by end May), over a dozen distinguished economists and writers, Ellen Brown, Tom Burghardt, Michel Chossudovsky, Richard C. Cook, Shamus Cooke, John Bellamy Foster, Michael Hudson, Tanya Cariina Hsu, Fred Magdoff, Andrew Gavin Marshall, James Petras, Peter Phillips, Peter Dale Scott, Bill Van Auken, Claudia von Werlhof and Mike Whitney look under the glittering facade of western Capitalism and reveal a complex web of deceit and media distortion which serves to conceal the workings of the global economic system and its devastating impact on people's lives.

Despite the diversity of viewpoints and perspectives presented within this volume, all of the contributors ultimately come to the same conclusion: humanity is at the crossroads of the most serious economic and social crisis in modern history.

The economic recession is deep-seated in all major regions of the world, resulting in mass unemployment, the collapse of state social programs and the impoverishment of millions of people. The crisis—in tandem with a worldwide process of militarization, a "war without borders" led by Washington and its NATO allies—is intimately related to the restructuring of the global economy. The global financial architecture sustains strategic and national security objectives of the US-led West and their powerful business elites which control and dominate the functions of civilian government.

This book explains how the Federal Reserve (a private body), the Council on Foreign Relations, the Bank for International Settlements, and corporate boardrooms on Wall Street take far-reaching financial transactions routinely from computer terminals linked up to major stock markets, at the touch of a mouse button.

“The meltdown of financial markets in 2008-2009 was the result of institutionalized fraud and financial manipulation. The "bank bailouts" were implemented on the instructions of Wall Street, leading to the largest transfer of money wealth in recorded history, while simultaneously creating an insurmountable public debt.”

This process of economic decline is cumulative. The payments system of money transactions is in disarray. Payments of wages are no longer implemented, credit is disrupted and capital investments are at a standstill. Meanwhile, in Western countries, the "social safety net" inherited from the welfare state, which protects the unemployed during an economic downturn, is also in jeopardy.

The Myth of Economic Recovery

While the existence of a "Great Depression" on the scale of the 1930s is often acknowledged, it is veiled by false claims: "The economy is on the road to recovery". (The US recovered from the 1930s depression by the booming economic industrial production during and posts WWII, when it had a vibrant and expanding industrial economy with European powers dependent on it–a process carried on after the War’s end, which shifted the financial centre from London to Wall Street.)

The financial meltdown is not simply composed of the housing real estate bubble--which has already burst--but there are many more bubbles, all of which dwarf the housing bubble burst of 2008.

Regarding the so called economic recovery, already in early 2010, the "recovery" of the US economy has been predicted and confirmed through a carefully worded barrage of media disinformation. The social plight of increased unemployment in the US has been scrupulously camouflaged. Economists view bankruptcy as a microeconomic phenomenon. The media reports on bankruptcies fail to provide an overall picture of what is happening at the national and international levels. When all these simultaneous plant closures in towns and cities across the land are added together, a very different picture emerges: entire sectors of a national economy are closing down.

Public opinion continues to be misled as to the causes and consequences of the economic crisis, not to mention the policy solutions. People are led to believe that the economy has a logic of its own which depends on the free interplay of market forces, hiding the role of powerful financial actors who pull the strings in the corporate boardrooms and have willfully influenced the course of economic events.

“The American Dream” morphs into a nightmare for the majority

The relentless and fraudulent appropriation of wealth is upheld as an integral part of "the American dream", a means of spreading the benefits of economic growth. A myth becomes entrenched that "without wealth at the top, there would be nothing to trickle down." This is pure hogwash.

Media disinformation largely serves the interests of a handful of global banks and institutional speculators who use their command over financial and commodity markets to amass vast amounts of wealth. The "bank bailouts", presented to the public as a requisite for economic recovery, have facilitated and legitimized a further process of appropriation of wealth. With inside information and foreknowledge, major financial players, using the instruments of speculative trade, have the ability to fiddle and rig market movements to their advantage, precipitate the collapse of a competitor and wreak havoc on the economies of developing countries. These tools of manipulation have become an integral part of the financial architecture; they are embedded in the system.

The Failure of Mainstream Economics

The economics profession rarely addresses the actual "real world" functioning of markets. Theoretical constructs centered on mathematical models serve to represent an abstract, fictional world far removed from reality. By failing to examine the interplay of powerful economic actors in the "real life" economy, the processes of market rigging, financial manipulation and fraud get overlooked. The concentration and centralization of economic decision-making, the role of the financial elites, the economic thinks tanks, the corporate boardrooms: none of these issues are examined in the universities’ economics programs. The theoretical construct is dysfunctional; it cannot be used to provide an understanding of the economic crisis.

Economic science has become an ideological construct to camouflage and justify the New World Order. The powers of market manipulation which serve to appropriate vast amounts of wealth are rarely addressed. And when they are acknowledged, they are considered to belong to the realm of sociology or political science. This means that the policy and institutional framework behind this global economic system, which has been shaped in the course of the last thirty years, is rarely analyzed by corporate hired economists.



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