Globalization causes credit crisis

Philosophers think about the origins and connections among basic or fundamental ideas and institutions. It is therefore quite natural for philosophers to think about the origins and connections among two fundamental ideas, which are in the process of altering our lives. The first is a new idea called globalization, which is the rapid integration of all economies. The second is the current credit crisis facing the world. The two are causally connected. Indeed the primary cause for the ongoing credit crisis throughout the world is the globally integrated economy. The evidence for this global connection is that national action by the Fed or The U.S. Treasury or The Central Banks of European and Pacific nations has been ineffective largely because these national institutions lacked the power to create this credit crisis and therefore these national mechanisms lack the power to resolve this crisis.

What caused this crisis is the unregulated, immature global market. Here is how. National economies are shattered by global integration and so a global system must find an answer to “the global riddle.” Here is the riddle “How does one get the nation state to do nothing, while the global economy shatters its national economy?” A less pejorative way of putting this question is “how do you manage the harms associated with economic integration for long enough to shatter a national economy without such economies protecting themselves?” Formerly third world countries now produce and serve most of what was formerly produced and served within national economies. This transformation has been shattering but national protective responses have been anemic at best. Why? The answer is that the global economy found an answer to the global riddle. The global economy gave us something that was unavailable within national economic settings….cheap, irrational credit. Could a minimum wage employee buy a house for 1 percent down and an interest only, adjustable monthly payment? For the first time in financial history, the global answer to this question has been “No Problem!”

Cheap, irrational credit

Such loans are cheap and irrational credit because no rational person would lend money under these terms. But suppose one could bundle these “idiot loans” into packages which superficially masked their irrational nature. Furthermore suppose one could create a “global market” in which one could trade these Ponzi schemes. For a short period of time, these Ponzi schemes could solve the global riddle. A shattered economy could float for a short period of time on Ponzi credit and thereby make globalization seem harmless. No mature national market would legitimize these Ponzi schemes but an immature, and unregulated global market would “go for them.”

From the global perspective what is best about this situation is that national economies, rather than the global system, are left holding the bag? National banks and other financial institutions like Bear Stearns and Merrill Lynch were successful for a short time in buying and selling these Ponzi schemes on the global market. But after a fairly short time, the global market dried up. In our country it is The Fed which holds this Ponzi trash. In Europe, it is The Bank of England and the other central banks. In short, the national economies are left holding the bags of worthless credit resulting from these failed Ponzi schemes. What is new, however, is that since our national economies are now shattered by globalization, taxation cannot make good on the worthless credit. What shall we do?

Two bits of advice are in order. First, there seems to be only one thing that the central banks can do! They must inflate, inflate fast and inflate universally! Because we are at the top of this credit roller coaster, the first bit of advice is to hold on! We are in for a nasty inflationary ride! Second, nation states, through the World Trade Organization, must regulate the global market place so that these kinds of credit scams are internationally outlawed. There is no contradiction in the concept of an integrated and regulated global economy though the task of regulating these markets does present some minor challenges to national sovereignty.

X Brendan Minogue, PhD, is a professor of Philosophy and Religious Studies at Youngstown State University.