Welcome to Gerald Silverberg's Global Financial Meltdown Page

 (1 April 2009)


I was prompted to set up this page by Rich Miller's  front page article "Is the Fed running out of options in credit crisis?" in the International Herald Tribune on March 18, 2008. This inspired me to fire off the following letter to the editor that same morning:

As Rich Miller rightly points out, the Fed increasingly seems to be playing "Whac-A-Mole" in the credit crisis, and losing. This should not be surprising except for those who continue to regard the present credit crisis as primarily a domestic financial meltdown due to a few rogue banks and lenders whose imprudent behavior has to be contained to prevent it from contaminating an otherwise sound economy. Unfortunately, this seems to be the position of Bernanke and explains not only why the Fed until now appears to be "pushing on a string" but even unwittingly throwing oil onto the flames.

From a world economic perspective the crisis has a much simpler but more frightening explanation, and that is that, after years of running 6-7% current account deficits and the Bush administration's plunging the Federal government into major structural budget deficits as well, the US economy is essentially bankrupt and has been surviving at the whim (and gullibility) of its foreign creditors. The day of awakening to this unpleasant truth has been postponed by the willingness of creditors such as China to hold larger and larger portfolios of Treasury bonds, and foreign banks and investors to buy collateralized securities that essentially mortgaged American real estate to the world while hiding vast quantities of junk, "subprime" mortgages among creditworthy ones in a rating-agency-abetted shell game. As the dollar tanks and housing foreclosures spiral out of control, the world has finally woken up to the fact that it is holding a bill of goods.

Thus the Fed's standard strategy for containing financial crises - flooding US markets with liquidity and bailing out financial firms too big to be allowed to fail - not only does not address the underlying problem, it may even be inflaming (and inflating) it. And offering $200 billion in Treasuries in exchange for tainted securities, rather than rescuing financial markets, may end up pulling down the remaining creditworthiness of the US government (it hasn't saved the dollar). Perhaps it's finally time to apply the IMF's standard policy for bankrupt countries (which was good enough for Argentina, Mexico, and South Korea) - raising interest rates radically rather than lowering them, raising taxes and cutting government spending, reforming financial markets, in exchange for concerted bailouts in hard currency (the euro, the yen, the yuan?). This will certainly exacerbate the recession already upon us, but does anyone have a credible strategy that will be painless? And finally the frightening bottom line: with the demise of the dollar and US global leadership, who is left to take up the baton to stabilize the world economy and prevent a collapse of world trade and finance such as we witnessed with such devastating effect in the 1930s?

This letter to the editor unfortunately was not printed, undoubtedly because it was too long. Being a terse letter to the editor, on the other hand, made it in other respects too short, with many points being more allusions than fully fleshed out.

On March 21, 2008 the German economist Peter Bofinger, one of the five members of the German government's Council of Economic Advisers, published an article in the Austrian newspaper "der Standard" that also highlighted the grossly neglected international aspects of the current crisis. I can highly recommend this piece for its strongly Keynesian approach to the policy implications of the meltdown. I hope to be able to provide an English translation here soon.

Finally, on March 30 (International Herald Tribune)/March 31 (New York Times), Roger Cohen published an op-ed piece on "Passing the Baton to Asia" that highlighted the fact that the meltdown is not just an isolated economic accident but symptomatic of a radical secular shift in the organization of the world economy.

In this context I think that the seminal works of Charles Kindleberger (The World in Depression 1929-1939 (1974) and The International Economic Order: Essays on Financial Crisis and International Public Goods (1988)) are absolutely essential to making sense of this secular shift. Kindleberger argues that an enlightened hegemon is necessary to allow a reasonably open international trading and financial regime to operate in a world without international government. A necessary precondition for a state to play the role of hegemon is that it disposes of sufficient industrial, military and financial resources to provide the public goods of international lender of last resort and international security, simultaneously reconciling national interests with international stability. This role was played by Great Britain under the Pax Britannica and the gold standard until World War One. The interwar period was one of crisis, with Great Britain being too weak to continue to play this role, and the United States, while possessing the requisite resources, lacked the political will. It was only with the Bretton Woods agreement (1944), the founding of the United Nations, NATO, etc. that the internationalists won out in American foreign policy and established the Pax Americana. With the present financial crisis and the Iraq war we are finally witnessing its demise in a typical pattern of imperial overreach and state bankrupcy.

(c) 2009 by Gerald Silverberg, all rights reserved.

Readers may also be interested in my Saving the Euro web page.

My blog on current events can now be found on my Meltdown Economics and Other Complex Catastrophes page.