2 Sep 2011
Michael Greenberger, Professor at University of Maryland, School of Law, contends that the world is in a dangerous moment. Greenberger talks about the risk of a global recession, arguing that we are in a 50/50 proposition of whether we are going to go into a second steep recession or worse.
Greenberger provides a fascinating account of the root causes of the current crisis, talks about where we are in the current moment and what the best remedy would be to overcome the full blown crisis of another global recession. To sum up what he says:
There were lots of problems that caused the 2008 meltdown but the foremost one was that wealthy investors decided they wanted to figure out how to bet that poor people in the sub-prime mortgage market were not going to pay off their loans. They, of course, found ingenious and deceptive ways to do this, which caused the 2008 global financial crash. Thus, the problem started with bets that were placed by big banks, big hedge funds, big private equity firms, and wealthy investors between 2006-2008.
Since the 2008 financial crash, America's Dodd Frank BIll has introduced rules to stop these kinds of financial bets, but Wall Street is spending millions lobbying the American Congress to fight the promulgation of these new rules in the rule making process - so corrections are not being made.
In the meantime, bank bailouts were meant to shore up banks, but the banks still do not have enough capital. This is also true of the European banks that lent money to Greece, Ireland, Portugal and Spain.
For example, the Greek government got into the EU using clever derivatives sold to them by Goldman Sachs, which made it appear that their debt was one half of what it actually was. They got admitted to the EU and a decade later they have serious debt problems that were masked by financial "phoniness." This is also true of Ireland, Spain and other countries.
We now find that these countries do not have the funds to sustain themselves.
At the same time, there is a great belief that the EU has not developed a plan to avoid defaults of a large number of their countries -- and if they default, the banks who lent them money will default and the US banks who are interconnected with European banks will be in trouble too.
Tragically, there are now bets by speculators on whether these countries will also fail to pay their loans. These are the so-called "naked short bets" on Greece and Ireland.
As things stand, there just isn't enough money to go around and the old remedy of printing money has been stopped. Those in power are saying, we are not going to print money, we are going to make people give up their social benefits. Thus, poor people are getting hurt and there are riots on the streets.
If the European banks default, we are headed for a situation worse than the 1930's.
In terms of a policy response to stem the problem, economies need to be stimulated.
Speaking specifically about America, Greenberger says, presently, there is a bipartisan agreement among reasonable minds that there needs to be short term stimulus around the world.
He acknowledges that there are serious deficit problems across the world. Those issues need to be dealt with in the long term, i.e., growth and dealing with debt. But in the short term, what is needed is stimulus to put people back to work.
Greenberger concludes that the Western world has lost its commitment to job growth, manufacturing growth and science growth due to a pre-occupation with investments in purely financial products. The only thing that is growing is banks generating paper that represents betting.
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