Prayers as 'the great unwinding' claims another casualty

Guests on last night’s Newsnight (BBC2) talked about a ‘crumbling house of cards built by the capitalist financial system’. They weren’t talking about our book A House of Cards, from fantasy finance to global crash but they might as well have been. Instead, they were discussing the latest bankruptcy of a major financial group.

This time it is Carlyle Capital Corporation (CCC), a $22bn mortgage-backed securities fund. As the Financial Times put it, “CCC represents one of the most dramatic casualties of the great unwinding that is occurring in the financial markets as lenders pull back from risk. The fund, which had $31 of debt for every $1 of its own, had hoped to use its massive borrowings to generate higher returns from investments in highly rated mortgage securities.”

This latest collapse panicked the stock market, led to further falls in the dollar, drove commodities to new records and delivered a sharp blow to chancellor Alistair Darling’s belief that slowing growth and increasing inflation are only temporary – the naïve reassurance at the heart of his first budget. If anything was clear from Wednesday’s speech, it was a tacit admission that there aren’t any measures New Labour can propose to match up to the severity of the escalating global financial and economic crisis.

Its scale and spread renders any national government incapable of defending its economy against global storms. The world’s central banks have thrown at least $100bn at the markets this week – all to no avail.

Darling’s speech was peppered with phrases which passed the buck – there’s a “slowdown in the global economy”, “turbulence in global financial markets”, “significant disruption across many credit markets: with a number of them barely functioning at all”, and falling global stock markets pose “a major risk to the world economy”. Despite this, he remains confident about the relative strength of a British economy which is utterly dependent on the fate of the global financial system.

Later that day, the International Monetary Fund’s first deputy managing director, John Lipsky told it how it really was. Things are bad, and are going to get worse. “Policy actions worldwide, so far, "may not prove to be adequate" to deal with the "low probability but high impact events" that may materialise and undermine global financial stability. Policymakers as a matter of course need to `think the unthinkable,” and to consider how they would plan to react if contingencies arise. The need to prepare systematically for potential risks has been demonstrated amply during the past few months." This was hours before CCC hit the headlines. He must have known.

In a stark admission of the failure of the IMF’s policy of unregulated, free markets Lipsky said: “I fully recognise an appropriate role for public sector intervention after market solutions have been exhausted.” Some support there, then for Darling’s Northern Rock rescue, and a strong indication that further vast sums of public sector money will have to be diverted into more ill-fated attempts to shore up the global capitalist economy.

Perhaps most worrying is the way Darling proposes to deal with the threat of climate change. “There will be catastrophic economic and social consequences if we fail to act,” he says. But, in a move hardly noticed by green critics, and certain to negate the other wholly inadequate measures he announced, Darling is going to offset the arrival of Peak Oil by reforming “the North Sea fiscal regime to help incentivise investment and support production”. This will maximise the “economic recovery of the UK’s oil and gas reserves”, he says.

More profits from more fossil fuel? Maybe the FT’s Martin Wolf was right in his conclusion to Tuesday’s column about the financial crisis: “We must pray.”

Gerry Gold
Economics editor