International Reach of Financial Crisis
Jamaica Observer
Here in Britain the television news is dominated by the hurricane of financial bad news which is engulfing America, Britain and Europe. At first it seemed confined to America and concerned financial institutions that most British people had never heard of. Names like Lehman, AIG, Fannie Mac and Fannie Mae mean little to the man in the street. But now the hurricane has gathered speed and hit Britain fair and square. Earlier in the week news bulletins were dominated by the thousands of British employees of American investment banks who were losing their jobs. Now a series of British High St banks are threatened. There is a Halifax building society in every shopping centre. Today it and its parent body the Bank of Scotland have had to submit to a shotgun wedding with Lloyds Bank, otherwise they might have collapsed. Even now thousands of branches will have to close and tens of thousands of people will lose their jobs. These banks are household names. One in three British homeowners has a mortgage with them. So the British public has had to sit up and take notice.
One interesting aspect of the current financial collapse is how closely it resembles the 1929 Wall Street Crash. Just as in 1929, the current crash is based on a property market bubble. Millions of Americans (who as it happens were disproportionately poor and black) were encouraged to take out overpriced mortgages by salesmen who were only interested in getting their bonus, not whether their client could really afford the mortgage. Some of these mortgages were actually called NINJA mortgages i.e. no income no job no assets. Clever financiers then bundled up the mortgage liabilities as securities and sold them on. The idea was that this spread the risk. In any case the financiers did not care, like the mortgage salesmen, they were only interested in their year end bonus. And everyone assumed that property prices would continue to climb. As John Kenneth Galbraith put it in his classic book on the 1929 crash “At some point in the growth of a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price” Meanwhile successive Republican administrations had dismantled the regulations against speculation that were put in place after the original Wall St Crash. So when unemployment rose, the property market crashed and millions of Americans began to default on their mortgages. And the whole pack of cards came tumbling down. Deregulation meant those affected included foreign banks, investment banks and insurance companies
The worry must be that, just like the 1929 crash, this financial collapse will lead to a recession that will throw people out of work, not just in America but all over the world. Interestingly the International Monetary Fund which has so much say about how poor countries mange their economies has been largely silent about America’s gross mismanagement of its own financial systems. As Jamaican politicians struggle to cope with consequences of the collapse of entities like Cash Plus and Olint, maybe it is some small consolation to note that greed, fraudulent practise and weak regulation are not problems confined to little countries like Jamaica. We can only hope that the rising waters of financial crisis, washing around the world from the shores of the United States, do not sweep us all away.
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