For those who believe that some sort of regulatory control of global capitalism would curb corporate and financial power, the events of the last few weeks are salutary. The international financial system generated by globalisation since the 1970s patently transcends the powers of nation states, as the failure of the central banks to turn the tide amply testifies. Yesterday, America's Federal Reserve Bank pumped another $17 billion into the financial system – all to no avail. Stocks and shares continued to plummet throughout the world. London's FTSE 100 ended the day down 4.1% or 250 points at 5,859. It has not closed below 6,000 since October last year and City traders predict it will fall further still. “Blood is hitting the streets, everyone seems to be panicking, and there’s reason to panic,” said Malaysian asset manager Patrick Chang. “We don’t known when it’s going to end. Liquidity is drying up.” Another fund manager said: “We’re in the eye of a cyclone.”
Over the past week, the Fed has injected a total of $88,000 million (£44.3bn), while the European Central Bank has put up 211bn euros (£142.6bn). But the funds at the disposal of the central banks are tiny compared with the astronomical sums sloshing around the financial system. Taking just the derivatives markets alone – which trade existing contracts through options, futures and even swaptions. By the end of last year, options had reached $286,000 billion – about six times the value of the global gross product. Then there are the foreign exchange markets. In April 2006, overall turnover on the world’s exchanges averaged $2.9 trillion (a thousand billion) a DAY! Now, of course, these levels of speculation are apparently fine when everyone is paying their debts and meeting their financial obligations. Panic sets in when a section of the system defaults. And that’s what the sub-prime crisis located in the US is all about – people unable to pay their mortgages to the tune of $300 billion. And don’t think this is just an American problem. Northern Rock, a British mortgage lender and bank, is reportedly in some difficulties because it holds sub-prime debt.
On the eve of the current crisis, Anthony Hilton, the financial editor of The Evening Standard in London, described the Bank of England as being “in office but not in power”, he added: “It and the other central banks around the world… are having to come to terms with the fact that these days the influence lies elsewhere, in the hands of the investment banks and their similarly driven colleagues in the world financial centres. They have in effect hijacked the world financial system and with it the global economy.” Finance, he explained, used to aid the efficient functioning of what “we used quaintly to call the real economy”. Now it no longer needs a real economy to function, Hilton added, “because it has gone off into hyperspace, operating in a virtual world, using the derivative markets to create its own virtual money”. As to ideas of regulation, don’t even think about it. Hilton concludes: “How do you constrain an industry that is essentially intangible? As big a shock as any coming crash might be the realisation that there are no longer any easy regulatory answers.” Meanwhile, the liquidity crisis in Hilton’s “virtual world” of finance is beginning to take a toll in the real world, threatening jobs, pensions and bringing with it the prospect of a global economic slump.
Paul Feldman, communications editor