Re: [OPE-L] Lapavitsas on the financial crisis

From: Costas Lapavitsas (Cl5@SOAS.AC.UK)
Date: Tue Jan 22 2008 - 04:57:33 EST

Dear Jurriaan,

You are probably underestimating the extent and significance of what is happening at the moment. The initial problem is bad debt associated with real estate lending, but bad debt problems do not remain static for long, especially if they are given time. In the course of 2008 it could well turn out that consumer debt is also problematic, the further repercussions of which no-one can tell. 

It is also interesting to observe the pattern of crisis - real estate problems led to bad debt held by banks and produced a money market shock. Liquidity injections relaxed the tightness, but only for a stock market collapse to emerge. The stock market collapse will probably exacerbate the difficulties of banks, if nothing else because their capital will take a knock. This has a long way to run, I suspect, and at the heart of it will be recession and financial institution bad debts. The similarities with Japan are strong, though the central banks have learnt from the Japanese experience. 


-----Original Message-----
From: Jurriaan Bendien <adsl675281@TISCALI.NL>
Date: Mon, 21 Jan 2008 20:30:58 +0100
Subject: [OPE-L] Lapavitsas on the financial crisis

Hi Costas, 

Fair enough, I'm sure you know much more about it than me, but I took you to be saying that due to subprime fright, the total trading volume of the money markets had gone into reverse gear. But the data I looked at, for example ECB and Fed data on the money markets, do not indicate any such thing yet. I wasn't talking about exchange rates per se, I was talking about an enormous and growing mass of money globally chasing higher interest rates (or alternatively seeking out relatively riskfree placements), as a longterm trend. On the whole, there seems to be much more "panic" now than the situation really warrants, if anything overreaction to events makes everything worse. The IMF gives a polite explanation of the fracas here:

The FT commented Sunday "The hot ticket at Davos last year was the "dialogue in the dark" event, when delegates at the World Economic Forum were plunged into complete darkness to experience the loss of sight. This seems an apt metaphor for the blindness of the world's elite to the fragility of the global financial system." (Chris Giles and Gillian Tett, "Economic uncertainty to dominate Davos", FT January 20 2008).

Well I'm sure they aren't blind, but the real point is that deregulated capital and money markets have created a situation where you simply CANNOT know lots of things about the markets, and therefore there CANNOT be any "transparency", no matter how bright you are, or how much information access you have. As you note yourself, nobody really knows how much bad debt there is in total, and who holds it, yet this is highly important for market confidence. I don't think the ECB really plans to shell out 500 billion euro, it is more a gesture to restore faith in the markets.

In another context, John Eatwell once expressed the situation as follows: 

"Since the markets are driven by average opinion about what average opinion will be, an enormous premium is placed on any information or signals that might provide a guide to the swings in average opinion and as to how average opinion will react to changing events. (...) The main purpose of insisting on [a] government commitment to financial targeting is to aid average opinion in guessing how average opinion will expect the government to respond to changing economic circumstances and how average opinion will react when the government fails to meet its goals. So "the markets" are basically a collection of overexcited young men and women, desperate to make money by guessing what everyone else in the market will do. Many have no more claim to economic rationality than tipsters at the local racetrack and probably rather less specialist knowledge."

So yeah, maybe no rocket science there. But anyhow I don't think capitalism is about to collapse, I think the medium-term prospect is just more conservative financial policies, and slower growth. Most likely, it's more a case of a protracted haemorrhaging downwards, and a simultaneous attempt to make adjustments to forestall these things from happening again.  But I would certainly agree with you that financial crises are a permanent feature of contemporary capitalism. The only way to prevent them, would be very strict regulation of investment, but that is very difficult or impossible to achieve internationally, politically or technically, although some individual countries (e.g. Chile, Malaysia) apply investment strictures with some success. 

The most difficult, challenging part is where you say "that credit and monetary policy constitute a legitimate field of criticism, inquiry, public debate, class struggle and radical demands". Most of us as yet lack sufficient knowledge to do that comprehensively. If the bankers themselves have difficulty understanding the bigger picture, it is not easy for anybody else to understand it either. What I would say in the first instance, is that the contemporary financial uncertainty is a human creation, it did not exist on that scale before, an it does not have to exist. You can learn a lot about it, and do something. The objectionable thing to me though is that they expect you to plan your life under conditions where you cannot plan very much anyhow, apart from a few basic things (had my life gone diferently, I would have known much more already). I'm sure that, in a sense, security or certainty is between your ears, a mental state, but it isn't just between your ears, is it.


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