Wednesday, 22 October 2008

Martin Wolf's analysis

A large amount of what appears in the media about the financial crisis is pure nonesense. To ascribe a financial crash of this magnitude to 'lack of confidence', 'financial spivs', 'short sellers' etc is merely ridiculous. But there are number of commentators whose views are extremely serious. Appearance of these here, and their criticism on SEB, is not a sign of disrespect but on the contrary a compliment. It means that such a viewpoint has serious analysis behind it.
Martin Wolf, chief economics commentator of the Financial Times, is in a sense the doyen of economic journalists. His articles are marked by superb in depth research and tackling the most serious issues with a clear ability to articulate their own presuppositions. Suffice it to say that anything written by him should be read immediately by socialists - although Martin Wolf is, as he clearly states, a liberal who is hostile to socialism. SEB will be looking at some of Martin Wolf's views - his blindspot on China, his understimation of the distortion inherent in markets, but meanwhile SEB readers will find his articles in the FT one of the best possible sources to follow current events.
The latest, in the FT today, considers the process of debt deflation which SEB has looked at in several posts. Wolf notes: 'while the US government (and those of other western countries) are committed to saving the core banking system, the non-bank financial system, including the hedge-fund sector, looks set to implode as financing dries up, with inevitable forced sales of financial assets and further insolvencies.
'This is the reality behind the euphemism, “deleveraging”. This occurs via mass bankruptcy, unless bad private debt is shifted on to the public sector’s balance sheet. “Debt destruction” is a better name. In the US and elsewhere, asset prices, particularly of housing, also continue to fall. Who is going to borrow to purchase such assets? What lender would use such assets as collateral, unless they are protected by generous equity cushions? The credit mechanism is broken. This must be so when spreads on riskier credits are shooting up (see charts). If banks cannot borrow easily, few can.'
Read his article here.

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