Who Pays for the Global Credit Crunch?

By Andrew Rens · 19 Aug 2008

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Picture: www.bmivault.org
Picture: www.bmivault.org

Time to Take Another Look at Jospeh Stiglitz’s ‘Globalisation and its Discontents’

How does the International Monetary Fund (IMF) respond to liquidity crises? How does this affect people in developing countries? Joseph Stiglitz wrote Globalisation and its Discontents in 2002 to address these questions, questions that are more urgent than ever today, in the current global liquidity crises.

Appropriate responses to these crises is a central theme of the book, which makes it extremely relevant to the present moment as the global financial system suffers from the worst liquidity crisis since the Great Depression.

According to Stiglitz, the Washington based IMF has historically told developing countries to endure the pain of such crises by allowing large-scale job losses. This has been accompanied by loans intended primarily to ensure that investments by corporations from developed countries are not lost. Inflation must be reduced at all costs. Pain and cost are no mere metaphors; the IMF insists that job losses, bankruptcies, foreclosures even starvation are all necessary, at least in developing countries.  

Stiglitz explains that this is due to a faith in market fundamentalism, the belief that governments are not entitled to intervene in failing markets. It’s a rather ironic creed for an organisation formed with the express purpose of collective international action to preserve global economic stability, by providing loans to countries whose economies are threatened by liquidity crises. In other words, the justification for the existence of the IMF is that markets can fail, and in particular that global financial markets can fail.

Liquidity crises occur due to the mutual dependence of banks, in a world in which credit granting corporations rely on each other for credit. If there is a sufficiently large failure of one bank, or fund, then that has a negative impact on all the others which they have loaned funds to, which in turn has a negative impact on yet others, so that a failure spreads throughout the system. Many of the banks and funds involved, will need funds to pay their debts so they recall loans and raise interest rates with sound businesses, which often cause the sound businesses to fail. 

Stiglitz’s alternative strategy is for government to retain or employ expansionary monetary and fiscal policy, provide for re-structuring in the economy, but do so by having quick relief for bankruptcy, along the lines of Chapter 11 of the United States Code. This would enable enterprises to change ownership, have title assured quickly, and be able to access credit without the enterprise being liquidated i.e. destroyed. This approach avoids destruction to the economy of large-scale bankruptcies caused not by individual business failure but liquidity crises.

The book also examines the history of the privatization of the Soviet bloc and development efforts across the world but focuses most on responses to liquidity crises such as the 'Asian crises' of the late 1990's. Stiglitz contends that IMF policies, which have attempted to serve Wall Street, have failed not only developing countries, but the global economy and so the United States.

International finance, the World Bank, The IMF, seem to be remote from the daily struggle for survival of working class South Africans. How and why they affect the lives and livelihoods of people is obscured by the technical jargon used by professional economists. Though he is a professional economist, Stiglitz has written an accessible book based on first hand experience as Chief Economist at the World Bank, and formidable academic expertise. 

The explanations of the economics are clear, and easy to follow. This is all the more remarkable since Stiglitz is a professional economist, recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2001, rather than a journalist or trade author.  Even though it is primarily concerned with global financial governance, Globalisation and Its Discontents has far deeper insights into globalisation than journalistic efforts like the World is Flat. The narrative assumes a great deal of recent world history, so that someone without knowledge of that history may not follow it that well.

Stigliz argues his case forcefully and leaves the impression that he is sure of the answers, or most of the answers. However these answers, in dramatic contrast to the IMF’s answers involve consulting the political and economic leaders of developing countries.

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22 Aug

Developed World, of Course, Needn't Suffer Quite the Same

"...that governments are not entitled to intervene in failing markets."

And yet they have no problem intervening in their own markets, as witnessed during the sub-prime crisis.

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