BBC explains part of what confuses us all, money down the drains

this is a partial reposting from
http://news.bbc.co.uk/2/hi/business/7874667.stm

"Walden Bello is a university professor, senior analyst at Focus on the Global South, and president of the Freedom from Debt Coalition.

Week after week, we see the global economy contracting at a pace worse than that predicted by the gloomiest analysts.

We are now, it is clear, in no ordinary recession but are headed for a global depression that could last for many years.

The origins of the present crisis lie in the strategies adopted by economic and political elites to resolve the crises of stagflation - the coexistence of low growth with high inflation - which followed rapid growth in the post-World War II era, both in the G8 economies and in the underdeveloped economies.

Stagflation, however, was but a symptom of a deeper problem: the reconstruction of Germany and Japan and the rapid growth of industrialising economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while income inequality within countries and between countries limited the growth of purchasing power and demand, thus eroding profitability.

Dilemma
This produced the dilemma of overproduction.
One "escape route" from the conundrum of overproduction, and for maintaining and raising profitability, was "financialisation".

Unsold Japanese cars in a UK showroom
Overproduction: many cars made, but no-one to sell them to
With investment in industry and agriculture yielding low profits as a result of over-capacity, large amounts of surplus funds have been circulating in or invested and reinvested in the financial sector - that is, the financial sector began turning on itself.

The result has been a divergence between a hyperactive financial economy and a stagnant real economy.

This was not accidental - the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy.
Profits, not value

One indicator of the super-profitability of the financial sector is the fact that 40% of the total profits of US financial and nonfinancial corporations is accounted for by the financial sector although it is responsible for only 5% of US gross domestic product (and even that is likely to be an overestimate).

The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value - only industry, agriculture, trade, and services create new value.

Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value.

Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a "correction", that is, a crash back to real values. The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.

Virus
We are far from over the worst of this crisis.

In the US real-estate sector, millions more mortgages are likely to go into default over the next few years.

Securities with a value of as much as $2 trillion dollars (£1.4 trillion) have already been injected, like a virus, into the global financial system.
Massive injections of taxpayers' cash have failed to kickstart lending again. Not surprisingly, with global capitalism's circulatory system seizing up, it was only a matter of time before the real economy would contract, as it has with frightening speed in the last few weeks.

Globalisation has ensured that economies that went up together in the boom would also go down together, with unparalleled speed, in the bust, the end of which is nowhere to be discerned. [snip]

Discussions at the World Social Forum in Belem focused on many aspects of the financial crisis that are not being publicly discussed at official or business level.
For instance, while strong calls for re-regulation are made, none of these proposals address the fact that the General Agreement on Trade in Services (Gats) - a treaty created under the auspices of the World Trade Organization (WTO) - actually seeks to deregulate trade in services, including financial services.

These liberalising international treaty rules deprive governments of the right to intervene.

The calls for re-regulation would require a dismantling of the whole architecture of treaties agreed over the past 10 years, mainly through the WTO

Governments' hands tied
Under Gats in the EU, governments cannot limit the size or the value of the financial services operations.

This prevents governments from intervening to ensure that a financial service company does not become "too big to fail" or have a destabilising effect on the country that hosts it.

Industrialised countries have gone further by committing themselves to more liberalisation and deregulation under a Gats annex that precludes regulation and opens the way for any new financial service, however speculative
agreements which have been working towards opening up the financial sector, and which were backed by the US and the EU.

Pigeons against backdrop of City of London
The City of London's success was based on deregulation

These were subject to concerted and secretive lobbying of negotiators by financial corporations, resulting in negotiators collaborating closely with the financial industry.

The liberalisation of financial services was included in trade treaties without any guarantee of whether the right regulation and supervision was in place.

In fact, the EU requested many countries to eliminate particular prudential rules, some of which had been put in place after the Asian crisis." [snip]

(C) maryjanie 2009