Wednesday, October 22, 2008

Central Europe joins the finance crisis


Early advise by ‘experts’ that the banking crisis would not affect Poland and other countries in the region too badly is looking a little shaky.

The central bank in Hungary has put interest rates up by a whopping 3 percent to try and prop up the collapsing forint; Hungary, Belarus and Ukraine are currently in talks with the IMF in the hope of a massive injection of funds to stave off serious economic trouble; Poland’s currency, the zloty, is depreciating against major currencies - so economy minister, Wladamar Pawlak better forget about his call, earlier this month, for rate cuts.

The central bank in Warsaw has got together a “confidence package” to get banks here to start lending to each other again. Despite the fact that these banks do not have the structure of debt that lenders do in the US and much of western Europe, a crisis of confidence has made bankers over- cautious even here in Poland.

And the foreign parents of Poland’s banks - as much as 71 percent of the banking system here is owned by foreign banks - are in trouble. ING has had a bail out from the Dutch government, Fortis and Unicredito look vulnerable, too. Talk is of a sell off of Polish assets to offset massive losses elsewhere.

Getting a home-loan has become very difficult. The housing market is taking a whack.

Suddenly the finance crisis - which was a bit of a spectator sport for the average Pole, as they watched the rich bankers of America and Europe take a spanking - has got a little too close for comfort.

Poland has a deposits guarantee system that promises to cover any losses should a bank fall. Getting confidence in banks is a priority in a country where folk simply didn't have bank accounts until not so long ago. Recently banks have risen the upper limit to calm any lasting fears of losing money overnight. But as the stock market in Warsaw tumbles - the Top 20 index lost over 7 percent of its value today - investors are taking money out of the bourses and putting them in government bonds - a move that one economist recently described to me as the equivalent of sticking all your money under the bed, as the interest you will make on that investment in minimal.

Is this the end of…well, what, actually?

Of course, in the wake of the finance crisis, the commentariat have rushed out to announce the end of Thatcherism, or neo-liberalism, or the free market, is nigh. Some have blamed the “greed” of bankers who lived off the never-never for too long.

But I don’t get the impression that any ideology has ended. Neither do I think the greed of bankers is to blame. Greed thrives in certain circumstances, and those circumstances were the rancid, sluggish nature of modern day capitalism in the highly developed countries in western Europe and the US.

Even though everyone for years has talked about a “boom” in western capitalism, when you look at the growth rates - 2, 3 percent, mostly - they are not that impressive at all. The recent long period of growth in the UK, for instance - 16 years of continuous growth - was a lot less spectacular than many think. In fact, its been a long, slow growth - not a “boom”. What has boomed in those countries is the housing sector. That fooled people into thinking they were getting richer and richer, when they weren’t.

As Asia, much of South America and this part of Europe have been experiencing a high growth rate boom, with real growth in productive forces and manufacturing base, the western capitalist countries have destroyed their manufacturing bases, failed to make real investments in developing infrastructure, and relied on the finance sector - and a weird web of loans and debts between customer and bank, and bank and bank - to keep their economies chugging along.
And that chug has now ground to a shuddering halt.

So it’s not greed that's responsible for this mess, but advanced capitalism itself. That doesn’t mean a socialist revolution is around the corner, because there isn’t really a socialist movement to take advantage of the situation anymore. Capitalism is not in its death-throws. But it does mean that our rulers are going to have to ask themselves some tough questions and come up with some tough and radical remedies.

But I wouldn’t be waiting for those remedies to emerge anytime soon. Our leaders are a fearful, disorientated bunch at the best of times. So expect some kind of tinkering to try to get through and out the other side. But they will still have to ask themselves this: how can western capitalism maintain decent growth rates without a manufacturing base and no other way to keep things going than a system of borrowing that even they don’t understand?

I know! Maybe environmentalism will come to their rescue. Green capitalism!

Carbon credit bond, anyone?

22 comments:

Anonymous said...

How exactly will the greens 'save capitalism'.

beatroot said...

I didn;t say capitalism needs saving I just said that advanced capitalism is not the dynamic animal it thinks it is.

As for the greens...that kind of thinking is orthodox these days. They pose as radicals but most of the time just spout what the elites are saying too.

How ainti-establishment is that?

But environmentalism does give lots of new oppotunities. Firstly, the carbob credit con...this is a market and a nice one to get in to. Second, and more importantly, it gives an oppotunity for re-branding their products. Any of the coffee chains are indulging themselves "helping the planet....". We get lectures about not taking more than one paper towel or something as you munch your sandwhich - as if that is going to make any difference at all except for cutting their costs on paper towels. But if you can reinvent your product as 'eco-friendly' then this gives a chancew to seel the same product, only with added brand extra!

and so we will go back to the same old problem...instead of developing products they develop brands...financed by a dodgy credit.

this is capitalism not melting into air, this is hot-air capitalism, period!

Henry Grodsk said...

Going for Government bonds may be like sticking your money under the matress because the interest rate paid on them is so low, but it means the state gets a low-interest loan, which can then be invested in the infrastructure, rather than blown on, say, tulips or gated apartment complexes.

Henry Grodsk

roman said...

The silver lining in this financial debacle is that oil prices have plummetted and the huge transfer of wealth to the petro states has slowed considerably. Putin, Chavez and the Iranian mullahs are having to "budget" expenditures.
Just the thought of them rushing to emergency meetings gets me up (hopefully not for more than 4 hours or I'll have to seek medical attention) :)

YouNotSneaky! said...

"when you look at the growth rates - 2, 3 percent, mostly - they are not that impressive at all."

Growth rates between 2 and 3 percent for developed economies are actually pretty good. You can't just compare that to the growth rates of successful "developing" countries like you do here:

"As Asia, much of South America and this part of Europe have been experiencing a high growth rate boom"

That part of Asia and the rest have higher growth rates simply because they are starting off at a lower level. If there is diminishing returns to capital (factories and all that stuff) then poorer countries should grow several points faster than rich countries (provided they don't screw it up in some other way).

beatroot said...

Viagra helps.

You say that oil price slump is a good thing...is it? Those countries that you mention are fragile...there may be trouble ahead there. Which is not in anyone's interests.

Point taken. But would you give money to this or any other Polish government voluntarily? Me not...they are chucking away too much of my taxes on nonsense as it is...

And the state is going to have a tax shortfall next year as compared to estimates made when they were drawing up original 2009 budget...so this will not transfer into an increase in spending where we need it most - health system, infrastructure projects...etc...

beatroot said...

Viagra helps.

You say that oil price slump is a good thing...is it? Those countries that you mention are fragile...there may be trouble ahead there. Which is not in anyone's interests.

Henryk

Point taken. But would you give money to this or any other Polish government voluntarily? Me not...they are chucking away too much of my taxes on nonsense as it is...

And the state is going to have a tax shortfall next year as compared to estimates made when they were drawing up original 2009 budget...so this will not transfer into an increase in spending where we need it most - health system, infrastructure projects...etc...

roman said...

Beatroot,
I would be more than happy to give money to the state or local municipality if they could itemize in layman's terms (so that everyone can understand) what it is they intend to spend that money on and be "accountable" if it's misspent. A quarterly pamphlet fully explaining all expenditures to be audited, approved and issued by non-government experts with facts that can be validated by anyone. The old "hide-and-seek" pork-barrel spending is a visible and universally "accepted" practice of corruption and a betrayal of the people's trust in their elected reps. Sadly, the practice is so ubiquitous that they have stealthily "trained" their constituents, like cattle, into a state of surrender, malaise and ultimately acceptance. It's thievery but no one seems to care.
As far as the petro money transfer slow down, I believe it can only help. Iran, Russia and Venezuela will have less extra money to spend on their various mischievous trouble-making ventures.

Henry Grodsk said...

No one ever gives money willingly to the government. That's why tax evasion is a crime.

hugo said...

Let the world quake at Venezuala's might. We will still push aside the US and control the world.

beatroot said...

pork-barrel spending ...

Roman

Where did this expression about pork in barrels come from?

As far as the petro money transfer slow down, I believe it can only help. Iran, Russia and Venezuela will have less extra money to spend on their various mischievous trouble-making ventures.

No, they will maintain spending on those - they always do. What WILL happen is that the countries modernization will slow down and that will help conservative, authoritarian forces.

Hugo...are you being...um...satirical?

Sneaky...I think somehow I lost your comment....this moderation thing is a bit strange to operate. But it does email me then text me when someone comments. Loads of people seem to comment on very old posts. Interesting.

jannowak57 said...

hugo said...”Let the world quake at Venezuala's might. We will still push aside the US and control the world.”

No doubt your are joking, but they look like they will be the source of a new torrent of refugees heading for the safety of the US in the near future.

Back to the topic at hand.

With governments coming out with huge bailout schemes were is this money coming from? With respect to the US, which is in deep deficit on all it’s account and refusing to tax in accordance to the level of spending, are they just resorting to printing money? Unless I’m missing something isn’t this a formula for hyperinflation down the not so distant road?

YouNotSneaky! said...

"With respect to the US, which is in deep deficit on all it’s account and refusing to tax in accordance to the level of spending, are they just resorting to printing money?"

As of now, they're borrowing it. Mostly from Asia.

John said...

The US economy is fundamentally sound.

beatroot said...

That's what good old BcCain's chips said...and then what heppned to his presidential campaign? It went down the toilet quicker than a lead balloon...

ge'ez said...

Din the BR himself write, in effect, a few mainposts down that the US and world economy is fundy sound, too? Stock market goes down, stock market goes up. Down, up. Down, up. Sorta like being at Mass.

roman said...

beatroot,

Where did this expression about pork in barrels come from?

Besides what Wikipedia has, I can't find a solid historical derivation for this term. Think heavily salted pork in a community barrel before the days of refrigeration.

ge'ez said...

Try:

http://dictionary.reference.com/browse/pork%20barrel

This expression alludes to the fatness of pork, equated with political largesse since the mid-1800s. [c. 1900]

Toronto life insurance broker said...

I think Hungary and Poland had their banking systems exposed to risk even before the main part of the crisis. When you check World Economic Forum's survey, you can see they were in the second half in bank soundness ratings (not to say about Hungary's tragical fiscal irresponsibility...). But I still think that the Central Europe has a healthy core - what about the Czech and Slovak Republic?

Lorne

Teff john said...

After major banks and insurance corporations were bailed out by European government, Hungary has become the first member state of the EU the receive a bailout offer from IMF with the support of EU’s Ecofin. Hungary looks to be the most fragile member of the Union in the global financial crisis.
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teffjohn

MLS

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