By Johan Galtung and - -
TOKYO, Apr 1 2008 (IPS)

Every day we hear what sounds like old news about the economic crisis, and as usual the crisis is for the rich and involves the \”economy\” as an impersonal system; there is no mention of the misery that exists at the bottom of that \”system\”, writes Johan Galtung, Professor of Peace Studies, is Founder of TRANSCEND, a global peace and development network. In this article, the author writes that underlying most of the current financial crisis is speculation, another expression of a sick economy that drives wealth upward so that people founder at the bottom but swim in liquidity at the top. When the real economy is sluggish, the wealthy turn to sectors that are growing quickly, flooding them with money and creating bubbles – the housing market today, just as it was the dot-com world a few years ago. People have poured money into housing partly to live, partly to speculate, only to see the bubble burst and lose money and their houses. The banks, in contrast, which have in cases acted criminally, are rewarded with bail-outs. The people, most of whom are honest, are punished for the misdeeds of the banks. This is abominable. Where is the outrage? Where are Obama and Clinton? But the name of the system is capital-ism, not human-ism. Capitalists benefits, not humans. Time to change that system.

Moreover, the crisis is given names like “credit squeeze”, “lack of liquidity”, and “investor crisis”, which are merely symptoms. A doctor working by a similar logic would diagnose people suffering from severe cardiovascular disease with ”swollen ankle syndrome”, for example, avoiding any reference to the underlying condition.

Of course, there is a credit squeeze, because those in the world of finance know better than anybody else how shaky the financial economy has become. They know how various forms of debt, including mortgages, are packaged and then sold and resold, at prices that reflect the likelihood of repayment. Before long the original debt is unrecognisable.

Many of the mortgages securitised included very steep interest rate increases after expiration of the initial low teaser rates used to lure the gullible.

The financial world also knows that the ratings agencies that certify the soundness of financial instruments are owned by the financial institutions they certify, which means their AAA rating – the highest, which was given to the mortgage-backed securities at the centre of the sub-prime mortgage crisis – is worthless, serving only to lure gullible municipalities from around the world into financial positions that will be devastating for them.

Why does the world of finance do this? Greed and unscrupulousness are part of the answer, but there is another motive. It is an attempt to protect itself before the real crisis breaks.

Financial institutions have good reason to be worried. They were already reeling from a high rate of loan payment delinquency, which had a domino effect throughout the banking sector, impacting other financial instruments, including insurance. The response then was to repackage this shaky debt as securities and sell it while there were still willing investors – and while regulation was flimsy.

Of course, the situation was further complicated by the fact that there was cheating and juggling on the part of some debtors as well, who cited non-existent assets as collateral for their loans, hoping they could pay the banks back before the teaser rates expired, using credit cards, for instance. This was typical of a whole culture that has emerged, like a snake that devours its own tail.

The two major fears today are bank runs and an even steeper drop of the dollar.

There was a run on a bank in England recently: at Northern Rock bank -something of a misnomer- people lined up to withdraw their savings because they did not trust the bank. Northern Rock was then bailed out by the Bank of England. The same is happening in the US: hoping to nip the crisis in the bud, the US government has stepped in to organise a bail-out of banks with both private and federal (semi-private) funds.

It was the bank run of the 1930s, not the 1929 stock exchange crash, that was the root of the depression. The banks may or may not survive.

But there is worse to come. The cash people withdraw may crash even before the banks do, for at least three reasons.

First, the total amount of money in circulation is kept secret by the government, a sure sign that the US Treasury presses are running around the clock printing dollars, which sooner or later will result in rampant inflation.

Second, the cost of the Iraq war, now estimated at 3 trillion dollars, is a sizable portion of the US GDP. But even more important is the servicing of that colossal debt, which was taken on because the US did not want the taxpayers to pay for the war directly.

Third, that debt is held as US bonds by foreigners that are eager to get rid of it. When they begin to unload these bonds, the market will then be flooded with dollars, which -in addition to the freshly printed ones- will further erode the value of bonds, the dollar, and the US itself.

Underlying most of the current financial crisis is “speculation”. Speculation is another expression of a sick economy that drives wealth upward so that people founder at the bottom but swim in liquidity at the top. When the real economy is sluggish, the wealthy turn to sectors that are growing quickly, flooding them with money and creating bubbles – the housing market today, just as it was the dot-com world a few years ago.

But there is a fundamental difference between these two. Housing is a basic need, unlike the dot-com sector. People have poured money into housing partly to live, partly to speculate, only to see the bubble burst. As a result they lose money, and their houses, and end up living with relatives or in mobile homes. The banks, in contrast, which have in cases acted criminally, are rewarded with bail-outs. The people, most of whom are honest, are punished for the misdeeds of the banks. This is abominable. Any money provided to ease the crisis should at least be used to pay off the mortgages, which would benefit both debtors and creditors.

Where is the outrage? Where are Obama and Clinton?

But the name of the system is capital-ism, not human-ism. Capitalists benefits, not humans. Time to change that system.(END/COPYRIGHT IPS)

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