Economic crisis may be worse than Depression

by Michael Smith

The global economy may be deteriorating even faster than it did during the Great Depression, Paul Volcker, a top adviser to President Barack Obama, said recently.

Mr. Volcker noted that industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.

"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker told a luncheon of economists and investors at Columbia University.

But still the likes of the head of the Federal Reserve is trying to con people into believing that the turnround will be with us before the turn of the year. Those with a proper link to reality are all aware that we are in a Depression and that it is NOT going to be over in a few months. We have seen nothing yet.

Given the extent of the damage, financial regulations must be improved and enhanced to prevent future debacles, although policy-makers must be cautious not disrupt things further while the turmoil is ongoing.

Had the old rules of banking been followed, that is to say that a bank would not; nay could not, was not allowed to, lend more that 80% of its deposit base. But what did they do? Yes, the exact opposite and anyone who has ever seen what happens in a financial trading room with dollars being sent to there spot overnight on 10% interest the night or pounds to some other places at 7% interest for the night will understand how quickly things could go wrong. The money that is transferred is only done so virtually and often it does not physically exist with the bank that is sending it either.

Volcker, a former chairman of the Federal Reserve famed for breaking the back of inflation in the early 1980s, mocked the argument that "financial innovation," a code word for risky securities, brought any great benefits to society. For most people, he said, the advent of the ATM machine was more crucial than any asset-backed bond.

"There is little correlation between sophistication of a banking system and productivity growth," he said.

He stressed the importance of preventing financial institutions large enough to pose a threat to the entire system from engaging in risky behavior such as running hedge funds or trading for its own accounts.

I would like to interject here that, maybe, we should curb the activities of such banks by cutting them down to size and making them, once again, more or less local banks, dealing with more or less local activities. Time for a change in economics and time for a new way which is not new at all.

The current crisis had its beginning in global imbalances like a lack of savings in the United States, but policy-makers around the world were too reticent to take action until it was too late, Volcker said.

And despite the fact that there was a lack of savings in the USA, and Britain, I would hasten to add, the banks still dealt as if they had all the world having savings in their institutions.

Now that the crisis had erupted, it was important to take decisive actions, including a more effective regulatory structure and some movement toward uniform accounting systems, Volcker said.

He said all financial institutions that are deemed too large to fail should be subject to increased scrutiny, echoing the findings of the Group of 30, a panel of policy-makers and influential economists, which he leads.

One could use a slogan from a movie that was “Houston, we have a problem” for we indeed have a problem. While Houston will not be able to change anything there the fact is that we have a problem and this problem is not simply going to go away.

As I have indicated in a previous article, I believe that it is time that we looked at a new way of doing things; a way that is not that new at all. One of those is the economy itself, then the way we, the people, do things and then also the governments also.

© M Smith (Veshengro), 2009