World financial crisis - where to from here?

Correction in the housing market especially has become necessary but such is the nature of the system that it will inevitably be painful.

In the US, the property bubble was burst with an increase in interest rates, and as upward speculation in the market was reaching its limits.

In the aftermath, Glenn Dyer, writing for Crikey supposes that foreclosures will surpass 2 million by the end of the year 2008: hundreds of thousands driven from their homes with nowhere to turn. And the flow-on effect of defaults on credit has led to despair and uncertainty.

The natural consequence of these events, then, was a crisis of consumer and investor confidence. Following a surge in bad debts, the gears of liquidity for the world financial system threatened seizure. This in turn is leading to global recession. World finance centres were exposed in their relations with US finance; and looming recession in the US has spread worldwide.

Neither Australia, nor Europe nor China are immune. Such are integrated markets in the age of “globalisation”.

Other symptoms of the crisis

Many economic commentators believe that current economic circumstances are symptomatic of a deeper crisis in the broader capitalist world economic system. For others it is merely capitalism’s “neo-liberal variant”.

Most immediately, the initial reaction to the crisis for some is to return to Keynes. In reality, both the Marxist and Keynesian traditions have much to say on the current crisis: and there is no need to pursue one line of criticism to the exclusion of the other. Keynesian policies of demand management and counter-cyclical expenditure have now found their way back into the economic policies of governments all over the world.

Thirty years of crude Thatcherite neo-liberal ideology have been “put on hold” in an astounding display of practical thinking. Counter-cyclical expenditure and socialisation of failing financial interests deemed “too important to fail” seem to be the best world governments have at their disposal to limit the decline in investor and consumer confidence.

And without public intervention in the broader credit system: the alternative is collapse.

In Australia particularly, there is a clear need to invest in education and training and in infrastructure which will overcome “capacity constraints”. Rudd Labor is intent on stimulating the Australian economy even, in the process, bringing the Budget into deficit.

The recessionary spiral must be cut short - lest it know no end.

But not all aspects of the Keynesian compromise would sit well with today’s dominant economic elite.