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The emperor has no clothes

In the four months since the advent of the credit crunch in the global financial markets caught Northern Rock with its pants down, the chorus of ritual assurances about the soundness of the economic fundamentals has given way to doom-laden panic. A recent “emperor-has-no-clothes” statement from former US Treasury Secretary Lawrence Summers opened the floodgates on admissions about the depth and breadth of the worsening crisis, together with dire predictions and warnings about its damaging effects.

Summers says that even if “necessary changes” in policy were implemented, the “odds now favour a US recession that slows growth significantly on a global basis”. He also believes that without stronger policy responses than have been observed to date, “there is the risk that the adverse impacts will be felt for the rest of this decade and beyond”. His assessment of the US housing market brings into the open predictions which had so far only been muted murmurs on the sidelines. Summers says that “indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago” and predicts prices could fall by as much as 25%.

In a shocking admission of the uselessness of the economic models used by forecasters, Summers is concerned that “we do not have comparable experiences on which to base predictions about what this will mean for the overall economy”. Put another way, the people who supposedly run the economy have no idea what the future holds.

Meanwhile, in Britain the Financial Services Authority (FSA) says there is "a very real prospect" that financial conditions will worsen next year because of the global credit crunch. The implication is that a number of smaller mortgage companies could go under because of difficulties in raising cash. An key indicator of the crisis is the soaring inter-bank lending rate, which is far higher than the official bank rate.

As for debt-laden “home owners”, prospects are bleak indeed. Clive Briault, the FSA's retail managing director, says that more than 1.4 million borrowers on fixed-rate, short-term mortgages are due to come off their favourable terms next year. Many of them will have to pay higher interest rates as a result, which will contribute to the pressure on consumer spending. Other may not be so fortunate. Briault said that at the bottom end of market, the so-called sub-prime sector that focused on people with poor or non-existent credit histories, many borrowers "may not have access to the market at any price". Bluntly, they face losing their homes.

A House of Cards, our new publication, lays bare the intimate, mutually-dependent connection between the emergence of a web of transnational corporations during the uneven period of global growth, and the vast clouds of credit and debt needed to make it happen. There’s no pleasure in history proving us right, but it does mean that we’re able to see beyond the current crisis. A House of Cards offers the outlines of solutions based on collective ownership, self-management and replacing the profit motive with production for need. Get yourself a copy!

Gerry Gold
Economics editor
5 December 2007

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