January 25, 2008

House of cards, built on sand

Filed under: Politics/News — 4fooey @ 1:13 am

The American economy is facing a very tough time and the rest of the world feels the pain. The crisis in the US housing market, caused by bad loans in the so-called “sub-prime” market, has pricipitated a crisis in financial markets and the ripple effects are now being seen throughout the world. Over the past few weeks, large banks and other financial institutions have reported losses or write-downs of over $100 billion (amongst the losses are Citigroup’s eye-watering $9.8bn loss in the last quarter of 2007 alone – similar amounts have been lost by other US and international banks). The UK government has had to put-up an estimated £55bn to support the Northern Rock. All these problems have been caused largely by a lack of regulation, and to some extent people’s willingness to take on too much debt. All western economies are now too reliant on unsustainable levels of consumer spending, propped up by high and unsustainable levels of debt.

Given the problems in the US and the threat of a full-blown recession, what does the American administration do? Their so-called “rescue package” is to give $150 billion back to US tax payers, hoping that they go out and spend it. In the US they are hoping the measures will stave off defaults on mortgages, will pump millions into the consumer market, and will to a lesser extent help businesses to invest – all these are forms of spending. The NY Times (requires login) quotes: “At the center of the plan is an effort to spur consumers, whose spending makes up 70 percent of the American economy. The plan leans heavily on cash payments for all but the wealthiest Americans, assuming that money put in pockets will swiftly find its way into cash registers, generating jobs at restaurants, retail outlets and banks and on the factory floor.” It’s strange, that in a crisis, and after a period of many years of over-consumption, we are encouraged to spend even more money; ultimately, it seems we can only save our economies and way of life by shopping, by consuming even more.

The rescue package is a huge amount of money (but is in fact only about 1% of US GDP). Imagine what you could do with that money? According to WaterAid: “To reach the Millennium Development Goal (MDG) of halving the proportion of people without access to safe water or sanitation by 2015 some £16.25 billion needs to be spent annually.” Currently only around £7 billion is spent trying to improve water and sanitation for the poorest in the world – so about 2/3 of the US rescue package would supply enough money to achieve this MDG. Instead it is being given away for Americans to go out and spend, to try to keep their economy afloat.

The world needs strong economies, especially if we are going to solve many of the problems we face – not least poverty, climate change, international terrorism. But it seems that we in the developed world are living well beyond our means, as individuals and as countries. Our economies are based on consumption (of natural resources and energy) and their success is based on continual growth. This week we have seen stock markets crash, but they can recover, and the values they represent are to an extent paper values. But it seems some of the foundations of our economies, of our societies, are in the longer term unsustainable. People are talking about “bursting bubbles” (and wondering whether we have any more bubbles left to burst), but now we are in danger of the “whole house of cards” crashing down.


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