Joseph E Stiglitz’s concise summary of the causes of worldwide financial failure, which he titled ‘Capitalist Fools’, is well worth reading.

Stiglitz blames:
•    President Ronald Reagan’s decision to replace Alan Greenspan with free-market champion Paul Volcker as head of the US Federal Reserve.
•    The repeal of the Glass-Steagall Act by the US Congress in November 1999, so that (regulated) commercial banks and (pretty much unregulated) investment banks no long had to be separate.
•    The Securities and Exchange Commission’s move, in April 2004, to allow investment banks to increase their debt-to-capital ratio from 12:1 to 30:1 or even more.
•    Interest on loans being made a tax-deductible expense, as part of tax cuts announced in the USA from June 2001.
•    Over the whole period, the problem of executive stock options encouraging boards of directors to do anything to boost the short- and medium-term share price.
•    The lack of independence of ratings agencies, which have been paid by the companies they assess.

The current unpleasant repercussions of the deregulation bonanza show me that unrestrained libertarianism is a good way of damaging the prospects of most people in the world. A few ruthless or very lucky individuals become incredibly rich and powerful, but at the expense of the great majority.

We’ve heard about the ‘credit crunch’ which is really a credit catastrophe, and we know about ‘toxic assets’, the dodgy loans that banks and investment houses parcelled up, relabelled as ‘prime’ and sold on to one another. New commission payments with each repackage, new supposed but illusory strength on balance sheets. Perhaps we haven’t paid enough attention so far to the financial equivalents of casinos, betting shops and lotteries: financial derivatives. The Bank of International Settlements (BIS) keeps a tally of these innocuous-sounding ‘products’. I could not believe the figures when I saw them. BIS’s Quarterly Review for December 2008 showed (Table 19) notional amounts outstanding in what are called ‘over the counter’ financial derivatives, and they were, in June 2008, US$683.725 trillion, or $683,725,000,000,000. That’s $102,048 for every man, woman and child on earth. ‘Over-the-counter’ derivatives are negotiated and traded directly between two parties, without the intervention of an intermediary or an exchange. There are trillions of dollars more in outstanding derivative contracts that have been sold through intermediaries, some $548 trillion at the start of 2008, making a grand total of…. over $1.231 QUADRILLION, in round figures $1,231,000,000,000,000. And that’s now an out of date figure.

While the whole amount is (barring total collapse) not at risk, no one has any clear idea of the proportions that are vulnerable: 10% of the total? 20%? It’s a scary unknown. Even 10% is more than twice the total value of goods and services produced in the whole world, which in 2007 amounted to $54.62 trillion at official exchange rates, according to the CIA World Factbook.

One response to the financial crisis is ‘quantitative easing’, which used to be called ‘printing money’ but is now a matter of staff in a central bank tapping out digits on a computer keyboard and transmitting them electronically, principally to banks and other financial institutions, to buy back government bonds. Theoretically this process puts a (temporary) floor under the price of bonds and enables the sellers  pay off some of their creditors. It is a remedy that caries the risk of igniting an inflationary spiral. Think about Germany’s Weimar Republic in the early 1920s, and the subsequent rise of fascism. Think about Zimbabwe and deluded dictatorship.

‘Quantitative easing’ as a financial practice assumes that increasing the money supply will generate economic growth that in turn will allow borrowers to repay debts. The assumption that economic growth is the answer to our woes, though, is wrong because continuous growth in a finite world is impossible.

When we consider the impacts of climate change and resource depletion, we see food supplies reduced by droughts, floods and storms. We see pressure to cut carbon emissions, and that means using less energy. We see declining availability of oil and gas, and of metals. We see that less ‘economic activity’ means tax shortfalls for governments, and thus fewer public services. Adjustment to the new realities will be painful, but if we do not adjust there is no viable future for us. To help us on the way, I think we need:
•    Effective regulation of all banks and investment houses.
•    Stringent limits on financial derivatives.
•    Tax havens to be phased out.

We should say goodbye to the World Trade Organisation, which is a benefit organisation for international business, and should restore nations’ capacities to manage their own economies. We still need supra-national organisations to provide aid and to help resolve disputes, but they should be under firmer democratic control.

For us to cope with such seismic economic shifts, it will be necessary to forge stronger family units, with greater levels of economic self-sufficiency; to expand national and co-operative savings; and to invest in local agriculture, local manufacturing, energy saving and green technologies. It’s no use expecting the chief executives of global corporations, or indeed anyone else, to do this for us. We have to do it ourselves.