Tackling the Current Global Economic and Financial
Crisis:
Government Intervention has to go Beyond Demand
Management
Arun Kumar
CESP, SSS, JNU.
Published in Economic and Political Weekly, March
28, 2009. Vol. XLIV No. 13. Pp. 151-7.
The Downturn: Some
Facts
The world is currently witness to unprecedented almost daily
adverse economic news. The US
budget deficit is set to triple to $1.75 trillion, the largest ever, from last
year’s figure of $450 billion. Bank of England has fixed the lowest interest
rates since it came into being in 1634. Toyota
has announced its first ever losses in its
history. The largest housing mortgage companies, Freddie Mac and Fannie
Mae, the largest insurance company, AIG and banks like Citibank exist because
they were rescued with hundreds of billions of dollars pumped in by the US government.
Major world economies are in recession or their rates of
growth have plunged. In the last quarter of 2008, the US economy declined at more that 6% per annum,
Euro zone contracted by 1.5% and Japan contracted at an
unprecedented 12% per annum. Britain Russia and Canada are in recession while the
Chinese, Brazilian, S Korean and the Indian economies have slowed down rapidly.
Smaller economies like Spain ,
Mexico , Ireland , Iceland ,
Singapore , Greece , Ecuador ,
Hungary , Latvia , Pakistan ,
Ukraine ,
etc., are in deep trouble. This is happening in spite of the massive bail out
packages put together by various governments. The US alone according to one estimate
has put together a package of more than $8.8 trillions and already spent $ 2
trillion (NYT, 2009). The total commitment (not all spent) by all governments
is in excess of $ 11 trillion.
Companies like AIG that got $150 billion and Citibank that
got $300 billion of bail out up to November 2008 are now asking for more funds
(Lorr, 2009). In spite of the massive bail out, AIG has now posted the largest quarterly
loss ever ($62 billion) by any US
corporation. These were entities that were considered `too big to fail’ up
until June 2008 but now they are failing rapidly. The speed is startling.
Companies of their size would have earlier collapsed over many years but they
are now failing in months and weeks. Supposedly healthy companies like the
Japanese bank Mitsubishi needed more capital within months of trying to rescue
Morgan Stanley. Before Obama’s bailout strategy has got going, its assumptions
about the extent of collapse are proving to be incorrect (Goodman, 2009).
Analysts are stunned by what they are witnessing. Most of
them are constantly behind the curve. The IMF for a long time did not admit
that a recession is around the corner and finally pronounced that that was
indeed the case in November 2008. The US Fed Chief after suggesting that things
were not too bad admitted that there was a deep systemic crisis in September
2008 and even then hoped that things would turn around soon. On February 23,
2009 in the Senate hearings of the Banking Committee, he has accepted that 2009
will not see the end of the recession and a recovery may occur in 2010 (even
this is conditional on the assumptions being right) (Rampell and Healy, 2009).
Even economists like, Joseph Stiglitz and Paul Krugman who
were skeptical of what was going on in the financial markets had not
anticipated the speed of the collapse. While now in hind sight it seems obvious
given the size of the financial bubble that a collapse was inevitable but no
one had worked out what needed to be done if the collapse started. Today,
analysts are groping in the dark to work out an explanation and a possible
solution to the growing problem. Stiglitz (2009b) states:
"We are moving in unchartered
waters. No one can be sure what will work. But long-standing economic
principles can help guide us. Incentives matter. The long-run fiscal position
of the U.S.
matters."
The main question is whether the ongoing crisis of
capitalism is basic and requires a fundamental change in the system or is it merely
a financial crisis which can be tackled by the government even if with some
difficulty? Most analysts, some of the well known ones being Stiglitz and
Krugman, fall into the latter category. While Stiglitz believes that a better
designed package is necessary (Stiglitz, 2009b), Krugman (2009) argues, it
needs to be large enough to have an effect. Both think there will be pain but
the economy will turn around. Bhaduri (2009) also argues for a massive
Keynesian intervention on employment but is uncertain whether this is going to
happen.
Kumar (2009) argues that the crisis is a fundamental one
because of the flawed financial system in which restoration of faith is
difficult. Since the financial system is fundamental to the functioning of the
capitalist system, the current crisis will bring down the capitalist system as
we have known it. In this paper we analyse the fiscal and monetary policies
that have been adopted by the various governments the world over and why they
are not having the effect they were expected to have. The governments have
exhausted the tools of economic intervention available to them but the situation
is worsening rapidly.
Krugman and Stiglitz are arguing that during the depression
of 1929-30s, we learnt how to overcome such downturns so the crisis can be
overcome. Stiglitz has said that today no one can afford to not be a Keynesian
just as till 2007 no one could afford to be seen to be a Keynesian. Businesses who
have been votaries of markets and minimum government intervention till recently
are unashamedly demanding massive help from governments and cannot anymore
oppose Keynesian policies. However, socialism remains a dirty word and therefore
government intervention has tended to be half hearted (See Krugman, 2008). Most
policy makers are from the world of finance for whom saving the real companies
is less important than saving the financial world.
Theoretical aspects
of Demand and Downturn.
This is not the first major crisis faced by capitalism so
that many believe that just like the earlier crises were weathered by
capitalism, it has the resilience to overcome this one also. Capitalism has
gone through many business and trade cycles which cause output in the economy
to fluctuate, perhaps, not in text book fashion.
Economic theory uses the multiplier-accelerator interaction to
explain fluctuations. Since there are other accompanying factors/changes, the
cycles are not regular. Since the understanding of Keynesian economics
developed in the mid-thirties, the down turns have been moderated with counter
cyclical interventions by governments. Rapid technological changes taking place
in the last century led to investment booms and changes in productivity so that
modified the cycles.
Given the practical difficulties, it is hard to identify a
pure recession or a depression in an economy. Ideally, recession should imply output
level falling below the trend (average) level and a depression when it falls
considerably below that level. However, given the difficulty in identifying
these clearly, a recession is now defined as two or more consecutive periods of
decline of output (negative growth, even if the output is at a high level).
A precise definition of these terms in terms of investment
and capital stock in an economy is possible (Kalecki, 1971:11). It is pointed
out that there is a crucial difference between investment decisions and
delivery of plant and equipment. The latter is what results in a rise in
capital stock. He argued that there is a time lag between the two and this
leads to a cycle in a capitalist economy. In the early part of a depression,
investment decisions move towards a low while capital stock is falling but is still
above its average level (in a cycle). In a recession, the investment decisions
fall rapidly but because delivery of equipment is still above the average
level, capital stock keeps rising and thereby depresses investment decisions
even faster and slows down the economy rapidly. These changes reflect in
changes in output to give the cycle. Consequently, in a recession, the level of
output is at an average but falling rapidly while in a depression the output
level is low but falling or rising gradually.
The functioning of cycles is based on what Domar (1946) described
as the `dual nature of investment’. Namely, investment not only raises output
through the multiplier it lowers potential opportunities for investment by
creating additional capacity. As output (O) rises, through the accelerator,
investment (I) rises but as capital stock (K) rises, I falls. It maybe written
as,
I = a. O
- b. K. Where a and b are both positive constants.
Different time lags between the three variables lead to different kinds of
cycles.
Domar suggested that technological obsolescence leads to demand
problem along the steady state path of a capitalist economy and makes the path unstable.
Kaldor (1960) in a simplified model of cycles introduced expectations of
capitalists into the analysis. He suggested that the economy goes from high to
low levels of activities due to cumulative changes in expectations. Keynes (1973)
suggested that counter cyclical fiscal intervention would help overcome the
downturn. However, Kaldor pointed out that once a down turn starts, then even
government intervention cannot prevent its occurrence. He argued that
government intervention is needed in the early part of the cycle but even then eventually,
the down turn would take place.
In the Keynesian framework, the down turn is a result of
shortage of demand. In this context Rosa Luxemburg had argued that the
existence of an export market can mitigate the demand shortage in a capitalist
economy. Tugan Baranovsky had argued that if investment takes place for the
sake of investment, then demand in a capitalist economy can be maintained.
Kalecki critiqued these arguments (Kalecki, 1971: 146-155). He argued that Rosa
Luxemburg’s argument is flawed since it is not the export market that causes an
expansion of market but the export surplus. Regarding Tugan-Baranovsky’s
argument, he argued that investment is an unstable process and the demand
problem cannot be escaped (similar to Domar’s argument). Kalecki suggested that
creating a war machine is a possibility to make machines for the sake of
machines because they can be periodically destroyed (like, in Orwell, 1990).
Hence rising defense expenditures could keep up demand even if it invariably
results in imperialism and the military industrial complex. This also overcomes
the problem raised by Domar (1946) of rising capital stock raising productive
capacity which then depresses investment.
Kalecki (1971) argued that it is the budget deficit of the
government that adds demand to the economy and not just government
expenditures. This was also Keynes’s understanding. A down turn in a capitalist
economy may also be formulated in terms of Marxist notion of overproduction.
Namely, a rise in the potential production above what is demanded so that spare
capacity appears and this then makes the accelerator to stop working and
investment declines pulling down the output level with it. This is basic to
capitalism and cannot be overcome for all times.
In brief, the various ways of understanding down turn in
capitalist economies and their management by governments through demand
creation explain some aspects of what happened during the earlier down turns.
Question is whether they adequately explain what is going on currently since
2006.
Lessons from the
Depression
The current crisis is also different from the great
depression of 1929-33 (See, also, Mankiw, 2008). The economies then were less
integrated that they are today. Mobility was much less and agriculture and
primary goods production was the mainstay of most economies in the world. A
large part of the work force was employed in agriculture. Finance was important
but to a lesser extent than at present because a substantial amount of
production was still in the local economies in small or family units. MNCs were
growing but had not become the behemoths that they have become today with
global reach. The stock markets were important but their reach was much more
limited and only a tiny per cent of the population was involved in them.
In the great depression, the stock markets, output and
employment all collapsed as business confidence declined and investments froze.
Banks failed in large numbers as businesses collapsed. That was due to the
shortage of demand. The problem was compounded by the conservative monetarist
stance of the policy makers. This is also a problem today where the world of
finance has dominated over policy making for the last 30 years.
To meet the challenge, it was considered appropriate that
the budget be balanced by the government. Thus, as the crisis deepened and
revenues fell, government expenditures were curtailed rather than raised to
counter the demand fall. As a consequence, demand fell even further and the
depression became deeper. Further, it was thought that investment is inadequate
because of lack of profitability so that wage cut was propounded as a measure
of boosting profitability. This only resulted in the further fall in demand. Investment
which always comes with a time lag never materialized because of excess
capacity. Thus, employment and wage rate both fell leading to the further decline
in demand (Kalecki, 1971: 26-34). It is only the New Deal and the rapid rise in
the public expenditures irrespective of the deficit in the budget that helped
the economy out of the depression.
Downturn in the US
Rising disparities in a capitalist economy lead to a
shortage of demand (over production) and to a down turn. In the recent past,
the tendency for over production has been countered by the wealth effect due to
rising asset prices. This has been especially true in the US where the
savings propensity has dropped sharply since the mid Eighties to almost zero in
the middle of the present decade (See Kumar, 2009). The US could do this due to
the dollarization of the world economy which enabled it to export its deficits
(in trade and the budget) since the rest of the world was willing to lend to
it. It became the largest debtor nation of the world.
While the earlier downturns were a result of the slow down
in demand, the crisis of 2008 has a different basis. It originated not in a
slowdown in demand but a financial crisis which triggered a crisis of trust
between borrowers and lenders and therefore a fall in asset prices. This led to
massive bankruptcies in various financial and production units. Thus, it is a
supply side created crisis unlike the earlier ones. Subsequently, it has also
manifested itself as a demand side problem as unemployment and housing
foreclosures rose in the US .
Other economies, dependent on exports to the US , it have experienced a fall in
demand. Given this sequence, can the crisis be overcome by boosting demand?
This is unlikely, since the supply side collapse is
continuing. Hence, this downturn is different from the earlier ones since the
great depression and perhaps including it. While countries, like, China and
Germany which depended to a large extent on exports or countries, like, Britain
and Iceland which were involved in the same kind of financial leveraging as the
US, this may not work, for a few countries which do not face either of the
above two problems, domestic demand may be boosted to partly mitigate the
problem. However, today, it is not so easy to boost domestic demand quickly
since the structures of most economies are now outward oriented and these
structures cannot be changed quickly.
In 2008, the rate of growth of the world economy and of the
US was positive till almost the middle of 2008 and its fall is not as sharp as
in 1929. The decline in the stock markets was gradual to begin with and picked
up speed later (See, Kumar, 2009). Unemployment has risen but not so
precipitously. The policy makers and analysts have been surprised because they
were in a denial mode. This time around, the fiscal deficits all around have
been allowed to soar to unprecedented levels. This may have temporarily slowed
down the down turn but the decline is continuing. This is the other surprise.
It may be argued that the stimulus is inadequate (Krugman, 2008) or that there
is a lag effect and that matters will improve. But, the signs are that the collapse
is deepening. That there is a difference from the earlier down turns or from
the depression of the 1929-33 needs to be understood. For this a better
understanding of the current crisis is needed.
Explaining the Origins
of the Current Crisis
It is generally argued that the crisis has originated in the
financial sector due to the failure of the sub-prime assets, especially in the
housing mortgage markets. But the question arises, why did the sub-prime assets
get created? Further, if the capital gains had continued to be positive, then
these assets would not have collapsed so why did capital gains start declining?
There is also another explanation of the financial crisis which suggests that
there was a Ponzi scheme that has now failed (Sen, 2008). This implies fraud.
While a certain amount of fraud is likely (like, in the Madoff affair and the
failure of the Stanford Group or the Satyam affair closer home), this cannot be
the total explanation of the collapse of the financial system and alternative
explanations are possible
Kumar (2009) has shown that the present crisis originated in
the interaction between the real and financial sectors and that it is linked to
the architecture of the financial sector and the world economy. It is argued
that over the last thirty years, disparities in a large number of countries
(US, China , India , UK , etc.) have risen (George, 2008)
and led to a tendency for overproduction.
In the US economy, in particular, this has been countered by
the increased demand through wealth effect (Bhaduri, 2009) due to the massive amounts
of capital gains in the financial markets. Consequently, the savings rate in
the US
has been declining (Economic Report of
the President, 2008). The US
could do this because of the dollarization of the world economy and the
willingness of the world to hold the surplus dollars and give loans to the US economy
(Kumar, 2008).
However, this also set into motion a counter tendency of increasing
amount of the surplus generated in the US economy accruing to foreigners who
owned progressively more and more of the capital in the US. Further, the huge
profits of the owners of financial capital were siphoned out through tax havens
(See the recent admissions by the UBS bank of Switzerland and the news of MNC
banks having a large number of subsidiaries in Tax havens). These factors along
with the rising war effort and internal security expenditures since 2001 led to
the reduction in the funds available for generating of more and more of financial
assets in the US .
The growing deregulation of the financial markets resulted
in the runaway speculation in financial assets and the build up of the
financial bubble by allowing very high degrees of leveraging. As argued in
Kumar (2009), the tendency for the leakage of the surplus of the economy
(pointed to above) was countering this tendency. Thus, it has been argued that the financial bubble suffers from knife
edge instability. Since the rate of return on financial assets is largely dependent
on the capital gains (or losses) it can either grow or collapse. It is pointed
out that there is an asymmetry in this so that the bubble grows slowly but
collapses quickly. The reason is that the returns on financial instruments are
a multiple of the capital gains due to the leveraging. Higher the leveraging,
higher the rates of return. That is why the entire real economy becomes
inadequate to pay the profits on the financial assets and the bubble can only
survive if the profits are reinvested into the financial assets for the bubble
to grow.
Further, as the capital gains fall, the returns also fall precipitously
and funds begin to move out to other assets (like, speculation in commodities,
etc.). At this point the bubble starts to collapse and returns turn negative so
that a vicious cycle of withdrawal of funds is set up and the collapse is
rapid. Consequently, investors in these markets (most people and companies with
surpluses) suffer large losses.
Capital gains started falling in 2006. Even before that happened,
to boost the financial markets the sub prime assets were created. These posed
no problem as long as the capital gains were positive but as soon as they
turned negative, these assets started to collapse and aggravated the decline in
capital gains which then fed back into the loop of decline. That is why it was
suggested earlier that the crisis starts in 2006.
Leveraged buying also involves borrowing and lending across
institutions. Thus, the balance sheets of most institutions get interlined and
this is referred to the `interlocking of balance sheets’. If one institution
suffers losses and is not able to repay its creditor then it adversely effects
the latter and that effects others, etc. A chain of failures is set up. Since
the entire financial system (Investment banks, auditors, credit rating
agencies, etc.) operated with the same model and the investors (individuals or
firms) followed their advice, the collapse has become systemic and not remained
confined to a few entities.
The problem is compounded by the requirement of `mark to market’. That is, losses have to be
brought on to the balance sheet of the companies. Since leveraging leads to
large amounts of financial exposure, even small per cent losses in capital
values lead to large losses in relation to own capital. Hence, the own capital
of any company resorting to high leveraging gets wiped out and they become
bankrupted and need fresh infusion of capital.
In brief, the interlocked balance sheets of companies and
the requirement of `mark to market’ has turned a large number of companies bankrupt.
It is a different matter that the losses may not be recorded all at the same
time and the losses keep appearing in the balance sheets quarter after quarter.
The problem is further aggravated due to the decline in the stock markets and
the decline in the value of stocks of companies. This reduces the capacity to
raise fresh capital. All this is visible in the case of the financial
institutions and other companies that have been provided bail out packages in
the last year or so. Huge packages given to them have disappeared in weeks and
months, into black holes, with no trace at all.
This has vitiated the situation for the entire system because
no one knows which company will fail next. Consequently, trust has evaporated and
the financial institutions do not know who to lend to. If they lend to a
company which has a lot of toxic assets (assets that have lost value and are
continuing to lose value) it may not be able to repay and then the lender will
be the next one to fail. However, this lack of trust has also led to the
difficulty in raising working capital and therefore to difficulty in paying
salaries, etc., and to running down of output and employment.
The financial crisis has triggered massive foreclosures in
housing and to a decline in the stock markets. This has set the wealth effect boosting
demand into reverse gear and it is now driving consumption down and aggravating
the demand problem. Thus, the demand
problem has come after the financial crisis was triggered off by problems in
the real economy in the US
With the decline in the financial markets leading to the
decline in the stock markets, even healthy companies that were not involved in
the financial markets have suffered losses in valuation. They have also faced
working capital problems so that good assets have turned toxic. Further, as US markets
declined it has had an affect globally on all financial markets so that the
problem has become a global one.
Ineffectiveness of Government
Policies
Since early 2008, when the crisis was perceived by the
policy makers to have begun (prior to that for quite sometime, they were in a
state of denial, see NYT, Interactive, 2008.) governments have tried many kinds
of measures. They may broadly be classified as monetarist and fiscal. Among the
monetarist measures, we have seen cuts in cash reserve ratio, lowering of
interest rates, lending of money by Central Banks, providing loan guarantees,
etc. Fiscal measures include investments in companies, cutting taxes, giving
support to social sectors and increasing expenditures on things, like, Science
(See NYT, 2009 for a break up of the proposed interventions in the US amounting to
$ 8.8 trillion).
In spite of cuts in interest rates to unprecedented low
rates and massive infusion of liquidity all over the world, the various
economies are not only not showing signs
of revival, the crisis is deepening. Monetary policy cannot do more because
interest rates cannot be cut any further. There seems to be a liquidity trap.
Since risk is perceived to be very high, lending at almost any reasonable
interest rate will perhaps not cover the risk of the lender. Further, for the
borrower, since demand has fallen and as a consequence, profitability has
sharply declined, a slight fall in interest rates (which is all that is
possible in today’s regime of low interest rates) is inadequate to boost
profits to a point where investment demand can revive.
Increased liquidity being made available seems to be unable
to get credit flowing because of a lack of trust (as argued above). It is being
used by the entities who are getting the funds to protect their own balance
sheets. Hence there are complaints that credit has frozen (Goodman, 2008). In
Kumar (2009) this has been captured as the fall in the money multiplier and
transactions velocity of money to unity and the economy entering a liquidity
trap.
Tax cuts in today’s situation of difficulties will not lead
to increased spending but to increased savings (Domar, 1946 has also argued similarly
in the context of his growth model and shortage of demand). Further, to the
extent the tax cuts go to the well off sections, since their savings propensity
is high, this will not boost demand much. The underlying idea of tax cuts is
that it will also provide incentive to invest more. However, since the crisis
is also in the financial sector and risk and uncertainty are very high, expecting
investments to pick up is a non-starter.
The question is, can fiscal policies work under this
situation. Kaldor (1960) has argued that government intervention can only work
if the cumulative expectations have not turned negative. Thus government can
prevent a down turn only if it intervenes early. In the present situation since
the policy makers have been in a state of denial, they have been behind the
curve and intervening timidly hence the problem has gone beyond their control.
Today, there is a fall in investment, consumption and exports
for most economies. The only boost is through rising fiscal deficit. But this
cannot overcome the fall in demand in the private sector. Unfortunately, if the
fiscal deficit is a result of transfers to the capitalists, the effect is
lowered (Kumar, 1999).
Beyond Demand
Management
Further, given that there is a deep crisis in the financial
sector, the little bit of demand boost due to the fiscal deficit cannot
overcome the rising bankruptcy in major sectors of the economy. Even if demand
is created, production maybe difficult to revive since many companies are going
bankrupt. In this context, it is important to remember that Kaldor (1960) suggested
that eventually, after enough plant and equipment has been depreciated away,
cumulative expectations turn again and an upturn does occur completing the
cycle. However, in the present circumstances, the implication of the above
argument of bankruptcy of large number of companies is that even this may not
happen without a major rearchitecturing of the entire production and finance
system.
As pointed out in Kumar (2009), while the asset side of most
businesses has collapsed, the liability side remains as it is. The peculiarity
is that in a book keeping sense, most businesses maybe bankrupt while the real
asset base of the economy is intact. The issue is who owns these assets? Few
would do so any more since most of those who owned them are now bankrupt
because of their paper losses. Further, these losses are legally covered by
contracts with someone else, hence they are not fictitious. The problem is then
systemic and a resolution difficult.
Can some agency retrace each of the steps in the creation of
the financial assets and reverse this process so that the debts to each other
can be cancelled? As pointed out in Kumar (2009), this is improbable if not impossible
due to the process being akin to random walk where there is micro reversibility
but macro irreversibility. Some fundamental changes in the system would be
required, namely, property rights would have to be derecognized. This would be
akin to nationalization of the entire economy. Today, when infusion of simple
equity by government in financial institutions is resisted on grounds of
`nationalization’ how much more resistance would there be to elimination of
property rights even if it is a one shot affair. Capitalists would fear that this
would become a precedence for all times to come and could happen later also
without benefit to them.
The logic of the argument presented above is that most
businesses as we know them would close down as losses come on to their balance
sheets. In some cases this would occur rapidly while in other cases this may
take time. High degree of leveraging and capital losses on assets implies that
losses on the books of most businesses are far greater than their owned asset
base.
The implication also is that apart from the government who
else would buy these companies with losses on balance sheets. Further, as the
stock markets continue to decline, capital losses would only grow. In the
event, at the current market prices, buyers would be few and prices can only
fall so that markets would remain bearish for the foreseeable future.
However, it also needs to be asked, even if the government
and Central Bank guarantees and bail outs are spread to all companies, would their
resources be adequate to the task. Since the size of the financial collapse is
a multiple of the capital base of the real economy, even the government after
nationalizing all the assets in the economy cannot put in the resources to take
over all the businesses.
Conclusion
The paper points to the depth of the crisis confronting the
global economy. It points to how cycles originate and how recession and
depression can be more precisely defined in terms of investment decisions and
capital stock rather than the current definitions in terms of output. It also presents
the various ways of understanding demand deficiency which was the underlying
feature of the earlier downturns in the capitalist economies. A resolution of
the problems faced then was possible with demand management using Keynesian
tools. This paper argues that the current global economic crisis is different
from the other crises experienced by capitalism in the past. Hence the lessons
learnt from the past may not be applicable to solving the current crisis. The
arguments presented in the paper imply that capitalism faces a basic crisis so
demand management alone will not work. Even more radical solutions, like, by
George (2008) based on tackling poverty and environmental degradation, etc.,
will not work. What we do in the future is not the issue. Question is what do
we do now? For instance, one implication
of this paper is that we need redistribution but that is not on anyone’s agenda
today.
The present problem is a culmination of the trends in the
real economy over the last few decades which have resulted in the emergence of
the financial bubble that turned into a financial crisis since 2006 and reacted
back on the real economy, affecting it more and more since mid 2007. Thus, it
is argued here that fiscal policies (or monetary policies) would have worked in
the present crisis if demand was the problem. But, since that is not the crux
of the problem, these policies are not producing the results expected and are
unlikely to be successful.
This is because of the current inter-relationship between
the real and the financial capital which is leading to all around bankruptcy of
businesses. Real assets exist but their current owners are mostly bankrupt due
to paper losses. Further, there is loss of trust in the system and the
financial sectors have lost their capacity to facilitate production. Productive
capacity exists but the arrangements that allow it to function fully are increasingly
breaking down. The breakdown in the financial arrangements cannot be reversed
in an orderly manner. It is suggested that it might require the dismantling of
the entire system of property rights to correct it – that would pose a
fundamental challenge which at present would be unacceptable to the capitalists
and therefore, the resolution of the present problem seems difficult if not
impossible.
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