Tuesday, 21 October 2008

Libor drops and the economic focus shifts

Massive injections of liquidity, the latest being $540 billion offered to US money market funds by the Federal authorities, plus the $2.5 trillion in bank bail out programmes, are gradually bringing down interbank lending (libor) rates. As the graph below shows 3 month dollar libor has dropped from a peak of 4.82 per cent on 10 October to 3.83 per cent on 21 October. The immediate threat of a cessation of interbank lending, which would in fact mean the disintegration of the financial system, is slowly receding at least at present.
Although this is very early days in the economic downturn that is to come this trend so far confirms the analysis in SEB that the likely outcome of this financial crisis is a major recession, accompanied by a significant realignment of the weights of different economies internationally, rather than a real long term economic depression of the 1930s type.
If financial disintegration can be avoided then the centre of attention will shift to who will pay for the huge bailout packages that have been used to stabilise the financial system. The present trajectory is that the cost of the financial crisis will be born by the majority of the population. Increased unemployment, stagnant or declining wages, and possible losses in the direct bank bail out programmes themselves, will transfer income away from the population to recreate profitability in the banks. Financial stabilisation will be gained at the expense of economic and social hardship for the population and political discontent. Unnecessary luxury consumption and military expenditure will remain at high levels while the population suffers. The possibility of socialists in the economically advanced countries is to insist that, on the contrary, the living standards of the mass of the population is maintained and instead luxury and military consumption is cut - which will also require the state intervening more into the investment process to attempt to limit recession.
The main international shifts are evident. The US will be weakened, China and India will be strengthened. The leftward shift in Latin America will be placed in an economic situation in which compromise is harder - shifts to the right and to the left may be expected. Significant financial destabilisation will occur in some economically exposed countries - merely within Europe to the financial crisis in Iceland has now been added significant problems in Hungary and Ukraine. Overshadowing all this will be the issue of shifts in alignment between the major economic centres in the US, Europe and Asia. And the depth of the recession itself.
The economic process unleashed by the financial crisis is only at its beginning - not at its end.

1 comment:

Alun Griffiths said...

An article by a colleague in Germany, one of the mainstays of the alter globalisation networks on Housing, Land, Money and the Environment

More Political Economy and Activism than pure Economics, but then didn't Marx have something to say about that?

Housing, Finance, The Crisis and Political Action.

« What Should We Do »


The global financial crisis. Challenges and chances for international
housing struggles.

by Knut Unger.

Currently, world capitalism is experiencing the deepest financial crisis
since 1929. High sums of capital already had been burnt during the months after the outbreak of the sub-prime crisis. Millions of people lost their homes or pensions.
Meanwhile, the whole fragile financial architecture collapsed and is
causing a general economic crisis. Investment-banks and "innovative"
financial products that, by politicians and economists, had been
announced as engines of economic success just some 18 months before, do
not exist any more. States react with measures like the nationalisation
of banks, unbelievably high guarantees and bailouts that hardly anybody
would have seen as a realistic option only a few months before.
After thirty years of neo-liberal hegemony the so far established forms
of financial market driven globalisation seem to come to an end. Now,
the whole framework of "global governance" and the balance of economic
powers will be remixed.
This implies a lot of horrible risks, including raising interest rates
or inflation, further shortage of social expenditure, public poverty,
repression against the impoverished, increasing frictions between the
world powers, military tendencies..
But, are there even chances for social change? What can be the
standpoints, the strategies, the policies of urban social movements and
organisations towards and within this rapid process?

Governments do not promote a solution of the crisis – Will
inhabitants have to pay the prize?

After the past weeks' rapid series of shocks within the international
banking sector it seems that the leading governments have agreed on some
general strategy of managing the crisis. Unbelievable high parts of the
national GDP get invested in nationalizations, bailouts and guarantees.
Governments spend money, which in the end has to be paid by the people,
by ordinary taxpayers and pensioners and by all those who will suffer
from the shortage of social state expenditure, privatisations or
inflation that will be the necessary consequences of using the state as
a rescue haven for the speculative economy.

Although recently public debates have opened a couple of doors for
questions regarding necessary new forms of regulation the ruling forces
are hardly doing more than socializing the costs and risks in order to
stabilize the framework for the continuation of an over-capitalized
financial sector.

This strategy in the best case may reduce the number of banks going
bankrupt and the degree of economic decrease in nearer future. In no
case it will lead to a long-term solution.
First, because the financial over-accumulation of fictive capital is a
necessary consequence of capitalist development and any consequent
strategy had to find ways out of the capitalist cycles.
Further more, because during the past thirty years deregulation,
privatisation of pensions and services, wage reduction and
redistribution of wealth into the hands of few, automation and new
technologies… created a global environment which does not allow a simple
recyling of the old Keynesian recipes.
And finally, because the current balance of powers does not allow a
radical break with Neo-liberalism.

Consequently, it is more likely that the current strategy, besides the
socialisation of costs, will just prepare the situation for a speeded up
next speculation bubble, accompanied by growing disparities and
frictions within the global balance of powers.

Housing and urban movements should overcome their absence in the
crisis debate

Only a much stronger standing of global social movements and left
forces, including a much clearer alternative programme, could have had
impacts on the policies using the situation in order to achieve some
pro-poor and more social measures.
The alter-mondialisation forces however, besides some principal debate
and few protests, so far are rather absent in the public crisis
discourses. (Probably that will change very soon. ATTAC Germany however
just starts campaigning.)
This is even more true for the urban social movements, the housing and
land rights movements; – in spite of the fact that housing and real
estate speculation played such an important role in the development of
this crisis; - in spite of the fact that housing losses were one of the
firsts consequences of the credit crunch; - and even in spite of the
fact that the given situation could offer chances to enlarge the basis
of arguments and allies calling for a strengthen the social housing
sector, which for the housing rights movements since long is a
pre-requisite for realizing the right to housing and to overcome the
current housing crisis.
However, a weakness we can address may allow us to do better in near
future. And movements like DAL/No Vox in France are already going to
point the finger on the context and link it with direct action at the
occasion of the French EU presidency.

Housing speculation and the current crisis

As you know, the current crisis started with the collapse of
in-transparent mortgage derivates in the U.S: which included a lot of
bad "sub-prime" mortgage for individual home owners who under normal
conditions never could afford property ownership (which means: there
partly was a real need behind the bubble, a need which could not be
satisfied because of poverty and because of the missing promotion of
social housing).
The totally intransparent and not controlled character of the mortgage
securities, which at a large degree were traded internationally allowed
the fast development of a huge housing bubble which was fed not only by
private investors, but mainly by the huge amount of capital collected in
private pension funds, insurances, private equity funds and even by the
pro-cyclic policies of the Federal Reserve.
Within this frame profitable investments into in-transparent real estate
assets became a global preference of many institutions, not only the
investment banks but even ordinary banks, public banks, municipalities
and all types of share holders, who all together – favoured by a more
and more globalized and liberalized international financial market and
bad mass income - supported the further extension of the financial and
housing bubble. With regard to housing Britain, France, Spain,
Australia, Germany (with a specific focus on rental housing), East Asia,
India and many more became part of the game.
No later than 2004 it was totally clear that this situation could not
last and that a burst of the bubble had to follow soon, and even at
international levels. However, this expectation at least partly
motivated another speeding up of speculation.
The whole interconnected financial system at least in Northern America
and Europe became infected. When it came to mortgage crunch it wasn't
possible to reduce the consequences to real estate business. Later it
could not be limited to the specialized funds and banks, and finally not
to the investment banks.

Discussing the principal role of real estate in speculation and
capitalist development

Although financial speculation principally can focus on diverse assets
(the "new economy" bubble before, the possible food or oil bubbles which
may come next) real estates plaid a prominent role in this cycle, and it
wasn't the first time if you remember the U.S. and Japan.
In the light of this experience, it would be one of the tasks of urban
and housing networks to analyse the reasons for the specific role of
real estate in modern speculative bubbles. Understanding these factors
may help us to develop specific strategies and policies, which could
protect real estates from becoming speculative assets.
Among the factors for the specific role of real estate are: the limited
character of usable land; land being a basic factor of any production
and reproduction; the basic social and economic needs for land, housing,
building; the scarcity of land as a result and consequently it's role
for private accumulation and trade resulting in possibly rising prizes;
the long-term character of investments in the built environment – both
because of the long term value of use and the high costs of production;
consequently the need for credit if it comes to building investments,
necessarily creating it's own markets, including rent, as long as the
state or communities do not provide other solutions; the agglomeration
and concentration of building investments creating specific high cost
markets which are an ideal focus for speculation since a long time; the
concentration of economic and political powers creating another reason
for focussing; the development of global cities of the financial capital

By analysing such factors in the light of the current crisis we may
become able to identify principal strategies which could reduce the
affinity of housing and real estate with financial speculation, how
social needs and usage of housing and land can be defended against
financial speculation, how the financial systems must be controlled in
order to allow a social, rights based and sustainable development of
settlements and territorial patterns.

Five prior questions for the development of a housing-against-crisis

While the above-mentioned points build a very fundamental complex of
questions there are a couple of issues and chances to intervene, we had
to discuss with high priority:

What are – from the grass roots' view – the consequences of this crisis
for the inhabitants? Which strategies can we develop to react to these
consequences at international levels?

I think it is a big weakness of alter-globalisation that hardly anybody
had been able to organize some international exchange and debate on the
obvious consequences and reactions on the subprime crisis in the U.S.
But the picture of consequences is much larger if you refer to the
situation in Britain, France, Spain… There of course isn't "one" type of
consequence. While in the U.S. the mortgage crisis lead to massive
housing losses for poorer families it slowed down the process of sell
out of rental housing in Germany, at the same time causing other
problems like the financing of services and maintenance in the housing
stock already under private equity control and – further more – the
general consequences for housing investments if credits become expensive.

Which role can a social/public/non-for-profit housing sector play in the
light of the crisis, - for the protection of housing rights as well as
for the social economy and the stabilization of economic development and
How – after all the liberalizations and beyond the defensive – could an
international (i.e. European) frame work for a non-for-profit housing
sector be re-established? With which priorities and regulations?
Resulting in which consequences for the general (i.e. EU-) frame on
competitions rules, taxation, subsidies, trade…? With which money
(national, EU funds..)?

After Socialists and Social Democrats at EU levels already are going to
ask such questions it really could be time to lunch a broader debate on
the benefits of social housing, which would build a general alternative
to the free market, and consequently could even influence that markets
or build a sustainable heaven for those housing units which will be
without management after bankruptcy.
To be even clearer: In this situation, it is not enough to defend the
still existing public housing structures in Sweden or England. It is not
enough to demand provisional or low cost housing for the homeless and
the people in extraordinary need. We should shift from defensive to
offensive, calling for a fundamentally strengthened, really important
and influential non-for-profit housing sector for all types of ordinary
people in all countries (at least of Europe). Only that would be more
than some social assistance for parts of the excluded. Only that would
put public housing into the centre of social economy again.

At the same time it is necessary to specify demands and policies for a
re-regulation of the financial markets with special regard to housing
and real estate business. This at least includes the following two

a. Which general regulations are necessary after the lessons we've
learned in the current crisis cycle?
Answers will include many of the demands other movements as trade unions
and Attac put on the agenda, like: closing of tax islands, ban of
speculative products (i.e. Mortgage Backed Securities) and of Hedge
Funds, rating and bank control by the state, real influence on supported
banks, tobin tax, public investment programme…)

See ATTAC positions at:
(French) http://www.france.attac.org/spip.php?rubrique1061
(German campaign page) http://www.casino-schliessen.de/
(Austrian attac page) http://www.attac.at/6031.html

b. Which special regulations should be introduced for housing investments?
This could include standards on transparency about shareholders and the
business model, minimum capital stock, minimum standards for
reinvestment, accountability towards tenants and customers etc.


Besides the financial market questions we of course should not forget to
re-articulate the important role of legal rights (of inhabitants,
tenants etc.) protecting living and housing standards against the
consequences of the crisis and the speculation.

While it can become important to call for new EU treaty which explicitly
includes the right to housing it is also important to become more
specific and focus on real standards for legislation, like: improved
legal rights of tenants to enforce maintenance and renovation;
information rights; rent control; protection against evictions; the
right to squat empty houses..
Even in this case we should shift from a defensive approach towards
minimum protection standards to an offensive approach, which leads to
elements of social control of inhabitants over the property. I.e.
tenants in cases of bad / missing repair should have the right to stop
paying rent in favour of self controlled funds for investments..


Finally, we urgently should think how to improve shared knowledge on
transnational housing and real estate corporations in order to develop
capacities for targeted corporate campaigning. This very well can be
combined with demands on accountability, transparency and regulation of
the business.


Within the next months there are a couple of important occasions to
address demands politically. End of November European urban/housing
ministers will meet in Marseille and French organizations are already
preparing protest. The coming EP elections could offer a chance to
address demands to candidates and parties. Various networks prepare
action challenging the EU neo-liberal policies. In March the huge
international real estate faire MIPIM in Cannes could build another

While the launching of political demands may be the task of more
organized forces (I try to do something), I think this is a very good
space to discuss principal views and diverse political options.

Thus, please send your related papers, views and proposals!

As soon as a real debate develops or if one or two persons assist I even
can open up a specific blog "Crisis & Housing" for improved and focused
exchange and discussion.

all the best
Knut Unger


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