In this big bad world of the Credit Crunch, powerful central bankers - civil servants all - have bent over backwards to help powerful and rich private bankers.

On one day, ‘debtonation day’, central bankers in Europe and the US pumped an eye-watering $150 billion into the financial system, to keep big banks afloat. According to Bloomberg, the US’s Federal reserve has ‘cycled $2.58 trillion through U.S. money markets since December’. (Bloomberg 8th August, 2008). The UK Treasury and Bank of England found £55 billion of taxpayer-backed funding to bail out Northern Rock, and a similar amount (in the form of a ’swap’) to bail out the Royal Bank of Scotland. The latter was a very generous helping hand for a bank whose chief executive had taken risks, and made massive gains, but who had also taken unwise risks, and now faces massive losses. Sir Fred Goodwin (knighted by Gordon Brown) was quick to take the gains, but declines to swallow the free market price of losses for unwise riks… So the Bank of England has bailed him, and his bank, out.

Is the central Bank as keen to help the ‘little people’? It seems not, if a report in the Times last week is to be believed. (The Times, August 14, 2008). Tensions, it appears, have arisen between the elected Chancellor of the British government, Alastair Darling, and the unelected, and unaccountable governor of the Bank of England, Mervyn King. (Mind you the fact that Mr King is unaccountable, is partly down to this government granting the Bank of England semi ‘independence’ from elected governments.)

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US financial regulators are making the same mistakes as their Latin American equivalents in the debt crisis of the early 1980s, according to Andrés Velasco, Chile’s finance minister, in today’s Financial Times.

Public guarantees for private financial activities had to be coupled with strong regulation, he said, while regulators and credit ratings agencies should have been more vigilant about the risks associated with new financial instruments.

“You learn the hard way,” Mr Velasco told the Financial Times. “This is a more modern and a much bigger version of what we have seen in emerging markets over the last couple of ­decades.”

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The balloon of irresponsible debt on which globalisation floated started to burst in August 2007. A year on from “debtonation day”, Ann Pettifor surveys the wreckage, pinpoints the culprits, and outlines the solutions.

We now know that on 9 August 2007 - which I called “debtonation day“ - central bankers and regulators finally woke up to the scale of bad debts on the balance-sheets of banks and other financial institutions. On that day blindfolds were removed and scales fell from the eyes - of at least some of the key players in the finance sector. The “guardians of the nation’s and the world’s finances” finally began to emerge from a long period of stupid and unforgivable denial of the havoc wrought on the international economy by the privatised, deregulated and globally integrated finance sector.

Read the rest of the article at Open Democracy….

…..see this story on Bloomberg….

Money Market `Plagued’ by Libor That Fed Can’t Reduce

– A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending have had limited success. The London interbank offered rate, the basis for at least $150 trillion of financial products, is within 0.06 percent of the highest since November 1999 compared with the Fed’s benchmark interest rate. The largest financial companies have lost almost $500 billion from subprime-linked securities.

`The key issue that has plagued money markets is the continued high level of borrowing rates,” said George Goncalves, chief Treasury and agency debt strategist in New York at Morgan Stanley, the second-biggest U.S. securities firm. “This time last year no one could have imagined the levels they are at now. We’ve seen a fundamental re-assessment of risk in this new world of tighter credit.”

Have been listening to debates about the conflict in Georgia over the week-end. There has been much wailing and gnashing of teeth about Putin’s disregard for democracy. In a similar vein, western commentary about President Hu Jintao’s Olympic Games is never complete without some tut-tutting about democracy and human rights in China.

Yet these leaders have in reality much in common with Alan Greenspan, former chairman of t he US Federal Reserve, who is held in the greatest esteem by western commentators. He came to London recently to promote his book, and I attended one of his sessions at Chatham House. The deference from the British political and media establishment was nauseating. The Prime Minister had already honoured him with a knighthood, so deferential is he. Yet this is Greenspan on democracy, as expounded in the columns of the Financial Times last week:

“It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces”

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The world is now faced by a terrifying prospect: large scale and systemic economic failure of a globalised, highly integrated economy, caused by the collapse of massive credit and asset bubbles.

This credit bubble, created by the private, de-regulated or ‘liberalised’ finance sector, inflated other bubbles, notably in property, but also in dot.coms, stocks and shares, and more recently, commodities like oil. All these bubbles will burst. The deflation of credit will leave a vast stain of unpayable debt on the global economy which will lead to the deflation of asset, including property, prices and in turn to the deflation of prices of goods and services.

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The World Service invited myself and Jim O’Neill, chief economist at Goldman Sachs on to the Business Daily programme today for what they hoped would be an intellectual punch-up. They were not disappointed. Prof. Jagdish Bhagwati had also been invited, but sadly was stuck in a traffic jam so unable to join us in the discussion, and instead was recorded separately…

O’Neill started by positively mocking the ‘peak oil thesis’. Ho, Ho, Ho… never heard anything so crazy he said… He had just read a book by a Californian - with no geological or economic background - calling for transition economies, and had never read such rubbish! “Don’t tell me you believe that peak oil nonsense!” I explained that I had grown up in a gold mining town, whose inhabitants and owners believed that gold would pay their wages and dividends for ever… Not so, mining there dried up in the mid 1990s and iIt turned out that reserves of gold, like oil, are finite. Today, my home town, Welkom in the Orange Free State, is a ghost town. When I asked him why Saudi oil production numbers seemed stuck, and would not budge even under intense pressure from the US, he looked incredulous.

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Monday 21st July, 2008

Today sees the publication of a report - The Green New Deal - that I co-authored. Much of the analysis in these pages is reflected in the report.

The Green New Deal highlights the fact that ‘easy money’ led to excessive consumption, which in turn led to the uprooting of forests and the burning of emissions to satisfy demands for goods and services. By easing up on excessive credit, and regulating finance we may also give the ecosystem a chance to renew itself, and to recover from this latest period of rapacious consumption.

Published by the new economics foundation (nef) it highlights the similarities between today’s Credit Crunch and the Great Depression of the 1920s. The report draws on lessons learned in the 1930s about the risks of excessively de-regulated finance in causing major recessions, and calls for the kind of intellectual and political leadership shown by Roosevelt and Keynes, and so lacking today. The contempt in which these two great figures are held by most orthodox economists and neoliberal politicians is, in my view, but a reflection of their own analytical failure. It is this analytical failure that explains why central bankers, economists and finance ministers have failed to adequately predict and handle the Credit Crunch .

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Fulfilling my duties as a citizen, I am now confined to the Southwark Crown Court as a juror, so have little time to update the blog. However the effective insolvency of two US government sponsored banks or enterprises (GSEs) - Fannie Mae & Freddie Mac - will now impact not just all those US individuals, institutions and local governments that may have invested in these banks; not just on US taxpayers who are expected to bail them out; but also on you and I (our banks may well hold Fannie and Freddie securities); the central banks of the world that have bought their debt - confident that it will always be repaid.

Their insolvency now threatens a global systemic financial crisis, and their taxpayer-funded bailout of shareholders, bondholders and an incompetent management exposes the hypocrisy of much neo-liberal cant.

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In Ten tactics to brighten the gloom, the Guardian invited ten experts to give advice to the Chancellor and Prime Minister on how to lift the economic gloom - and to do it in just 100 words. Other contributors included Howard Davies, Robert Peston, Irwin Stelzer and Bill Emmot. Here is Ann Pettifor’s contribution:

Don’t crucify the economy on the cross of inflation. In the 1920s, central bankers crucified debt-laden economies on the cross of gold. In the 90s Japan’s finance ministry crucified that economy on the perceived threat of inflation. Ending the creditor-driven policy of inflation targeting frees up the Bank of England to cut interest rates and immediately helps debt-laden banks, companies and consumers. Inflation is feared most by creditors, grown rich on financial deregulation policies. The greater threat to the poor is a debt-deflationary spiral leading to high unemployment - made more certain by high real rates of interest.