Financial crisis: It's a mess for the world to mop-up

It may have started in the US but countries around the world are not immune from the fallout of the US financial crisis as they struggle to save their economies and brace

for the worst.

Adrianne Appel

As leaders of nations around the globe tried frantically to address their ailing economies, British Prime Minister Gordon Brown paused long enough to comment about how Britain may have gotten into this mess.

"Most of this has come out of America and then affected the British banking system," Brown said.

And German Chancellor Angela Merkel said recently that she tried in vain last year to convince the world's G8 wealthiest nations, including the US, to enact tighter regulations on risky hedge fund trading, which she said then could put financial markets in jeopardy.

Many independent economists have no dispute with the leaders' comments, and point the finger of blame for the global economic crisis squarely at the United States, and its climate of deregulation.

"The US Government is completely responsible," Robin Hahnel, Professor Emeritus at the American University in Washington, told IPS.

"The (George W.) Bush administration under-funded the agencies responsible for regulating these institutions. Then people cheated, they violated the laws," he said. The institutions created risky products by bundling together mortgages from all over the US, and then the banks traded them worldwide to other banks, he said.

Robert Johnson, the former Managing Director at Soros Fund Management, said that British, French, German and Swiss banks were most actively involved in trading the risky investments from the US.

"The banks interact intimately with each other through the market. When any segment starts to get in trouble, they start to liquidate assets," and this can cause a chain reaction, he told IPS.

"The problem is they didn't know what they were buying from America," Prime Minister Brown said, adding that there have been abuses within the British system as well, which will be punished.

Brown made his comments just hours before Chancellor Alistair Darling would board a flight to the US to meet with US Treasury Secretary Henry Paulson, and all finance ministers of the G7 group of wealthy nations on October 10. It was unclear if Russia, whose markets have been in severe turmoil, would attend.

Banking systems throughout Europe are ailing, including in France and Germany, Italy and Spain and in Brazil, Iceland, Indonesia and Russia. Iceland seized its largest lending bank, Kaupthing Bank, on October 9, causing confusion to account holders in Europe. According to an International Monetary Fund (IMF) report, the world economy is nearing a recession and global growth is expected to sink to just 3 per cent in 2009. In contrast, the IMF also predicted 9 per cent growth in China, 7 per cent in India and 6 per cent in Africa.

Banking systems around the globe lowered their interest rates in concert on October 8, in an effort to loosen the flow of lending, and Britain announced that it would inject up to $87 billion directly into banks that need it.

Paulson said October 9 that the US would attempt a similar injection of cash into floundering banks, possibly using part of the $700 billion approved by Congress on October 3, to be used by Paulson to buy up the bad mortgage investments from US financial institutions.

Paulson's announcement did nothing to stop stocks from plummeting on October 9. The US Dow Jones industrial average plunged more than 600 points, to close below 8,600.

"The world markets don't believe anybody here has solved the problem," Hahnel said. "We are simply taking bad assets off their hands," he added, and this is not enough to free up credit.

Johnson said that Paulson's idea to send money directly to banks is a good one but should have been done months ago, when financial giant Bear Stearns went bust.

"There was a lot of time to prepare," Johnson said. "They are behind the curve and need to hasten the pace."

On October 8, Paulson gingerly referred to the cause of the global economic crisis as a 'correction' in housing prices, not mentioning the shady mortgage lending that has led to hundreds of thousands of foreclosures and been the subject of congressional hearings.

"US and global financial markets continue to be severely strained," Paulson said. "A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets."

Paulson is a former CEO of Goldman Sachs, as is Neel Kashkari, the right-hand man he has chosen to run the $700-billion-plus effort to bail out US banks, Hahnel said.

"This is a serious conflict of interest," Hahnel said. "He's going to hire on a contract basis people from Wall Street, to buy Wall Street's failed assets."

"It's like contracting out the war in Iraq. The ones from Wall Street will decide who to buy from and what price.

"You're going to have people buying from companies and making them a good price, then after their contract is finished, they will go back to work for those very companies," Hahnel said, adding that "it would be healthy for all parties concerned to launch a legal investigation" into the root causes of the crisis.

Johnson said that banks around the world will be more tightly regulated as a result of the economic crises.

"The severity of this recession will create a huge public outcry, the regulatory environment will be very different in two to three years," Johnson predicted.

-Third World Network Features/IPS