Sunday, October 12, 2008

Next World War is already here: It's financial

Peter Boone and Simon Johnson, of a group called Effective Intervention, has a disturbing op-ed in the Outlook section of The Washington Post today, with “The Next World War? It Could Be Financial”. The link is here. (Newspaper links often require registration to see content.) The home page of the EI site emphasizes reducing child mortality in developing countries.

Much of the article focuses on Iceland, whose bank assets are 10 times its GDP. The irony is that Iceland, among all countries, is among the best prepared to become and remain self-sufficient in energy and without carbon dioxide emissions. Obvious step: start selling its innovations, even if is lucky to have geothermal power. Other countries are trying to retrieve funds frozen in Icelandic banks.

There are concerns that some governments will, for example, not insure bank deposits of foreigners.

The US stock market crashed in slow but jagged motion all week, even after the passing of the bailout, once it became apparent that the problem had been exported to Europe (which had bought so many toxic assets related to mortgages and repeated some of the same mortgage folly in the US), with a political climate that is, whatever the political problems here, more difficult to resolve quickly amount different European national banks.

The bigger problem now seems to be the underwhelming result from Saturday’s G20 meetings in Washington, in the Farragut/GW area of the city, some of which was roped off even from pedestrians to prevent a “Battle in Seattle” type confrontation. Investors overseas, as in the Asian markets tonight, may react negatively to the appearance of floundering. Countries have agreed in principle to cooperate but lack the specificity that it takes to get international lending moving again (and reduce the Libor rate and Ted spread).

A bigger problem is conceptual. Western countries are perceived as living beyond their means, relative to the resources and finite capacity of a relatively small planet (in astronomical terms), and exploiting almost slave-like manufacturing labor in developing countries. From a moral point of view, this makes people who “sit” on assets appear to be vulnerable to expropriation. That does make it seem to me that oil prices are unlikely to tumble forever, and may well go back up again.

One wonders, could short sellers who attacked companies with heavy "credit detault swap" obligations (and bought swaps while shorting the companies) have intended to bring on global financial war, or perhaps a change in power? There are some likely and some unlikely suspects, as in any Clue game.

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