Friday, 3 April 2009

G20: The IMF consolation prize isn't enough


Graham Turner (Graham will be speaking at the LEAP Conference 'Capitalism Isn't Working' on 25th April)

In the end, Brown and Obama could not get the Europeans to agree on yet another fiscal boost at the G20 meeting. But the consolation prize – an infusion of $500bn into IMF coffers – gave the Anglo Saxon leaders something to trumpet.

Their brand of casino capitalism may have spawned multiple credit bubbles across a wide swathe of emerging market economies. But as eastern Europe and many other countries slide towards depression, their governments can rest assured. The global cop of last resort, the IMF, will come to the rescue.

Many will shudder at the thought. When the SE Asian bubble burst in 1997, IMF staffers were sent to Bangkok, Seoul, Kuala Lumpur and Jakarta to impose tough conditions for loans that still failed to prevent exchange rates from collapsing.

In return for emergency loans, they demanded a draconian and anti-Keynesian tightening of fiscal policy that drove the Asian economies deeper into recession.

We wait to see if similar terms and conditions will be applied today. Judging from the myriad bailouts launched by the IMF since last year, nothing has changed since 1997. It is still one rule for the west, another for the rest.

Indeed, it was the IMF intervention in 1997 that persuaded central banks across developing countries never to be left so dependent upon the west again. They vowed to drive their foreign exchange reserves higher, to provide a cushion against financial crises. But that merely aggravated trade imbalances and provided the fuel for the global credit bubble of 2004-2008.

When it all came crashing down, record reserves were still unable to cushion these countries from the incompetence of western governments.

And trebling the IMF's kitty will not resolve the core immediate problem facing the world economy – a collapsing US housing market. Ironically, the Bank of England's rapid fire rate cuts are gaining traction, with some signs of a stabiliation in the UK housing market.

Obama can only dream. The US took the world into recession, and it may take many countries into depression yet. The collapse of the US housing market is accelerating because, for ideological reasons, the Obama administration will not nationalise its banks and intervene to stabilise its housing market. Obama's plans are little different from those seen in the final months of the Bush administration.

February saw a record decline in house prices across 20 major US cities, because banks are unable and unwilling to pass on rate cuts to homeowners. Average property values are now 30% below their peak, but they could easily fall that far again.

Unemployment in the US is soaring. March could be the worst month yet for job losses, as the wider "U6" unemployment rate, including discouraged and involuntary part-time workers, soars to 20% and beyond.

One in eight homeowners with a mortgage will have been in arrears or in default by the end of March. That could climb to one in seven or one in six over the summer. Obama is not facing up to the scale of economic and social catastrophe facing his country.

And not even a bigger IMF will be able to fix that.

3 comments:

Renegade Eye said...

Really good blog, and smart analysis.

purple said...

The root of the problem is people can't afford their mortgages. And middle class speculators, of whom I know plenty (I live in California), bought houses thinking they would go up 10% annually forever. They had no intention of paying them off fully - just using them for 5-10 years , usually on some B.S. teaser rate, and selling for a massive profit. Oh yeah, and many times they bought 2 or 3 homes.

Rewriting mortgages so people can afford them, based on current values,(hard to do since they were spliced up) bankrupts every major bank in the U.S. The entire U.S. financial system is a sham and based on lies.

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