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Global financial crisis: stage two.

Article Excerpt
There was always going to be a second round to the financial crisis that has enveloped global markets over the last nine months. The first stage, which ended in March, was followed by a period of consolidation, often interpreted as a sign that the worst was over. The logic of the first stage was countered by the intervention of Central Banks, especially the US Federal Reserve, ensuring that short-term liquidity was shored up by securing huge amounts of bank debt. Even the investment banks have been brought under the umbrella of the Reserve for the first time.

However the success of the US Reserve strategy may be judged, that first stage was serious enough to puncture some core illusions of the system of global markets taken for granted since the explosion of global financial institutions in the 1980s, set in train by the silicon revolution of the 1970s. The new financial markets, drawing on the powers of high-tech, created an avalanche of cheap money for over twenty years. The idea that there could be an endless expansion of wealth, demonstrating the genius of neo-liberalism, had become a commonplace, but now it is an embarrassment. Credit, once shoved down the throats of anyone who moved, is suddenly scarce, and there are growing concerns for the 'real' economy. What has happened to this unstoppable revolution? Obviously, a lot more than simply a sub-prime crisis.

We do have answers of a kind from investigations into previous credit crises--in Adam Smith's comments about markets and their limits, what he called 'animal spirits', or George Soros calls the 'madness of crowds', or as contained in Robert Shiller's notion of 'irrational exhuberance'. Karl Marx, with more analytical insight, found the problem of credit crises in the social nature of the market itself. But the social character of global finance also calls into...