"No one can measure the extent of the losses because there is no agreement whatsoever over the value of these numerous innovations. Most of the players who have stakes in the countless arcane investment instruments are utterly ignorant. But the sums are enormous.
"We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. In the opinion of many informed observers, especially the Financial Times, the entire financial system and the way it operates will have to be reconstructed-radically-and that is unlikely to occur. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.
"All central banks are wracked by dilemmas. They have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of "moral hazards." Is the Federal Reserve's responsibility to save financial adventurers from their own follies? Their dilemma is that if they do not attempt to save these politically powerful speculators the entire financial system may capsize, and so they have increasingly been forced to attempt to bail them out-thereby making it possible for them to survive and endanger the entire system in the future.
"...Central banks' efforts succeeded only very partially but, in the aggregate, they failed: banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma: they simply don't know what to do.
"But this scarcely touches the real problem, which is structural and impinges wholly on the way the world financial structure has evolved over the past two decades. As in the past, there is a critical split in the banking and finance world and each has political leverage along with clashing interests. More important, central banks were not designed to cope with today's realities and have neither the legal powers nor knowledge to control them.
"In this context, central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy-even less today than in the past because there is no international mechanism to do so. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.
"The global financial system is now out of control. Greed is rampant. Existing international institutions cannot change this reality. We are on the verge of a serious crisis-if not now, then in the near future."
http://www.zmag.org/sustainers/content/2007-10/16kolko.cfm
Doug Henwood wrote:
> ...
> There are some parallels to today, but you could have said the same
> about the late 1980s and late 1990s. The major differences now are
> that government is big, providing a floor under spending, and central
> bankers are a lot better at their jobs than they were 80 years ago.
>