April 2011 - Centre for Civil Society - University of KwaZulu-Natal

2009, Bernanke not only pumped $3 trillion into the US economy as
emergency liquidity, but also secretly lent $9 trillion to bail out 18
financial institutions deemed ‘too big to fail’. Citigroup, Merrill
Lynch and Morgan Stanley were in such bad shape that they approached
Bernanke for cheap loans on more than 100 occasions. Even Goldman Sachs
went 84 times.
It was not only the US taxpayer and all holders of dollars who lose in
the process. As Sanders continued, ordinary homeowners are victims:
“Banks are foreclosing on untold numbers of families who have never
missed a payment, because rushing to foreclosure generates lucrative
fees for the banks, whatever the costs to families and investors.”
According to leading New York research analyst Meredith Whitney,
municipal and state debt has reached $2 trillion. “Next to housing this
is the single most important issue in the US and certainly the biggest
threat to the US economy. There’s not a doubt on my mind that you will
see a spate of municipal bond defaults. You can see fifty to a hundred
sizeable defaults – more. This will amount to hundreds of billions of
dollars’ worth of defaults.”
It’s not just Detroit, but also great European cities – Madrid,
Florence, Barcelona, Lisbon, Naples, Budapest and Istanbul – which are
now sinking in debt to the level of junk-bond status.
The worsening balance sheets demonstrate the limits not only of creditor
wisdom but also of the mainstream economic theory which endorses
liberalized finance. “A few economists challenged the assumption of
rational behavior, questioned the belief that financial markets can be
trusted and pointed to the long history of financial crises that had
devastating economic consequences,” wrote Nobel Prize laureate Paul
Krugman in his New York Times column. “But they were swimming against
the tide, unable to make much headway against a pervasive and, in
retrospect, foolish complacency.”
University of Texas professor James K. Galbraith had an even harsher
reaction, calling his colleagues’ mindset “a kind of Politburo for
correct economic thinking. As a general rule, as one might generally
expect from a gentleman’s club, this has placed them on the wrong side
of every important policy issue, and not just recently but for decades.”
Galbraith continued, “They oppose the most basic, decent and sensible
reforms, while offering placebos instead. They are always surprised when
something untoward, like a recession, actually occurs. And when finally
they sense that some position cannot be sustained, they do not reexamine
their ideas. They do not consider the possibility of a flaw in logic or
theory. Rather, they simply change the subject.”
These are the people still guiding the US Treasury, International
Monetary Fund, Fed and nearly all other finance ministries and central
banks, including Pretoria's. Until economists are given the same
professional respect accorded to quack AIDS-denialists, and until global
financial volatility is resisted by imposition of strong exchange
controls, the problems caused by neoliberals and bankers will worsen.
Finance minister Pravin Gordhan and SA Reserve Bank governor Gill Marcus
are, however, going with mainstream wisdom and policies, so most of us
can expect 2011 to be economically miserable.