The warnings about the dangerous state of the global economy are flying thick and fast. Earlier this week, a senior banker told City financiers that capital markets had suffered a heart attack over the summer. “If we stay stuck,” Hans-Jörg Rudloff, chairman of Barclays Capital said, “the patient will die”. Then the half-yearly forecast by the Organisation for Economic Cooperation and Development published on Thursday urged action by the United States Federal Reserve to counter the threat of a recession.
The report makes sober reading. It underlines the reality that the shock-waves on the property and share markets are not a blip or “market correction” but rather the beginning of a protracted and deepening recession. Using the word “ominous”, the organisation’s chief economist, Jean-Philippe Cotis spelled it out: “Our diagnosis is a slow-down. We cannot rule out a recession.” He added that the OECD now expected the US to grow at 1.9%, against an earlier projection of 2.2%, as the housing sector exerted a "longer and more potent-than-expected drag". Cotis admitted that analysts had been taken by surprise by the “spread of this financial risk beyond the boundaries of the US” and called for a more active fight against “"predatory lending", as well as "more pugnacious" rating agencies.
The crash in the US housing market has led to a continuing credit crisis bringing, not only the Fed, but also the Bank of England and the European Central Bank under increasing pressure. Yesterday, the Fed responded by injecting another $31.3bn (£15.5bn) into the banking system and the European Central Bank pumped €42.2bn (£28.5bn) into the money markets. Yet more signs have emerged that the US financial and economic crisis is worsening. The property market is at its weakest since the dip after the 9/11 attacks, the Dow Jones plunged and the dollar fell on foreign exchange markets.
The sharp decline of the US economy and the prospects of a long-term downturn are clearly destabilising the global financial and economic order. It’s also more bad news for the US presidency, which is already in terminal decline as one Bush adviser after another quits the White House. Even if there were solutions to the economic crisis, Bush and his diminishing circle are tied down by a morass of insoluble problems that originate deep within the political and state system in Washington itself.
There is an almost unanimous agreement that the war in Iraq has failed. Even former supporters of Bush and the invasion of Iraq have turned critical. One right-wing commentator, Timothy Garton Ash, has noted that “there are now only about three people in the world (G Bush, R Cheney, D Rumsfeld) who would not acknowledge that US policy over Iraq was deeply flawed and inconsistent”. But the realisation that invasion has been an unmitigated disaster does not translate into an ability to change strategy or learn from errors. Garton Ash points to the strange fact that the failure to build a viable state structure in Iraq is a kind of mirror image of the governmental and constitutional crisis within the American leadership circles themselves, hampered by, he notes, the disproportionate influence of lobbyists and funders, and an absurdly dysfunctional election timetable. One senior military officer, Garton Ash reported, has compared the malfunctioning of the US government to that of the Hapsburg empire as it staggered into the First World War, an event from which, of course, it never recovered.