16 Asia and the Meltdown of American Finance, by R. Taggart Murphy

Asia and the Meltdown of American Finance, by R. Taggart Murphy

R. Taggart Murphy, an American economist based in Japan, writes (item 4):

" ... much of the production capacity that has been steadily transferred to Asia over the last fifty years will have to be repatriated back to the United States so that Americans will have enough factories again in which to go to work to pay off the debts that their politicians and bankers so recklessly ran up. Otherwise, all those dollars Asia holds will quickly be worth very little. What, after all, is a dollar other than a claim on the output of an American? The Americans will have to have the means to create that output if the dollar is to have value."

In article 5, he blames Free Trade for the Financial Cisis. Free Trade, meaning zero or almost-zero tariffs.

Suppose that the US brings its factories home, and pays US wages while Chinese workers earn Yuan and Mexicans earn Pesos. Without a restoration of tariffs, cars from China or Thailand or Mexico will be allowed unimepeded entry, and will undercut any resurgence of US manufacturing.

Eamonn Fingleton wrote, some years ago, that Asia Model countries knew that they might forfeit the financial suplus they had left in Western countries. But losing it mattered less to them than the benefits they gained: building their own manufacting industries while hollowing out the West's.

(1) Ellen Brown on video talking about Bonds, Fed Notes & Colonial scrip
(2) Booming stock market is being pushed up to "keep the banking system from melting down"
(3) Booming stock market is rigged: computerized trading programs generate false signals
(4) Asia and the Meltdown of American Finance, by R. Taggart Murphy
(5) Free Trade caused the Financial Crisis: Bubblenomics, by R. Taggart Murphy

(1) Ellen Brown on video talking about Bonds, Fed Notes & Colonial scrip

Part 2: http://www.youtube.com/watch?v=3_ZbEVfKJ1w&feature=related

{transcript - by Peter Myers} The Government prints Pink pieces of paper called Bonds, and it trades them for Green pieces of paper called Federal Reserve Notes.

Now we taxpayers are on the hock for the face amount of the Bonds, in this case $100, but the Fed gets the Green pieces of paper for the cost of printing them - I think it's up to 6 centa a bill now. So they're getting what's called the Seigniorage, or the benefit of creating this money, not the Government.

So that raises the natural question: why doesn't the Government just print the Green pieces of paper, and skip the Pink pieces of paper? Either way, it's inflationary; either way, you're adding to the money supply. Why not skip the debt and just put it out there into the money supply?

The answer is that at one time we did. In fact, for the first hundred years of our existence, before we were actually a nation, the American colonists came up with this brilliant idea, ... where they didn't have money, they didn't have Gold, and the Governor of Massachessuts had to fight a war, and he didn't have any money to fight it with, so he decided he'd just issue these little paper receipts, and he paid the soldiers and all the other people that he owed money to, and he said, you know, "This is legal tender, go spend it in the community."

And that became their money supply, and it worked really well. It worked better for some colonies than others, because it was all experimental and they diden't, you know, they just started out with this idea. In the northern colonies they tended to just issue money and innue money. They were supposed to tax the people to bring it back, to avoid inflation, but they weren't very good about taxes, so mostly they were just issuing money, and they hyperiflated their money supply.

But in Pennsylvania they had the ideal system, where instead of just printing and spending, and printing and spending, they LENT most of the money. They had a bank, the Pennsylvania Provincial Government owned its own bank, and it lent money to the farmers ... at 5% interest, and the British bankers were lending at 8% interest, so this was a good deal for the farmers. And the money WENT BACK to the Provincial Government, so it was a completely closed system.

And then to avoid the Usury problem where you are always taking back more money than you put out, they printed some extra money for their expenses: roads, bridges, whatever it was they needed in the Government.

So, for example, if you started with $105, you could lend $100 at 5% interest, then spend an additional $5 into the community, then you'd have $105 circulating in the community. That $105 would all come back to the Government as Principal and Interest, and then you could lend the very same $100 again, to someone else, spend the same $5 into the community, and $105 would come back. So you would never have to inflate your money supply ...

{end} More at http://www.youtube.com/watch?v=3_ZbEVfKJ1w&feature=related

Buy Ellen's book Web of Debt: http://www.webofdebt.com/

(2) Booming stock market is being pushed up to "keep the banking system from melting down"
From: Paul de Burgh-Day <pdeburgh@eldersnet.com.au> Date: 16.07.2009 09:09 PM From: "Brasscheck TV" <news@brasschecktv.com>

The stock market is up...investment bank Goldman Sachs reports record profits...things are looking up, right?

Serious traders - not infomercial day traders or financial news hucksters - are worried.

Here's why:

Video:
http://www.brasschecktv.com/page/671.html

Liquidity is gone

The #1 question
Liquidity - it means having an ample supply of ready buyers so that when you bring whatever it is you have to market, there are people with money who are ready, willing and able to buy what you have to sell.

When you invest in stocks, you are entirely dependent on liquidity. If liquidity dries up there is literally no one to buy your shares. Without buyers, prices plummet and only stop when they hit values so low they are "ridiculous."

The #1 stock market question is this: Is there real liquidity in the market? Or to put it more simply, are there real buyers ready, able and wiling to buy stocks?

Rising prices and big volumes alone is not enough information to provide an answer this question.

Here's a reality check

Are investors behind the current market bounce?

I don't think they can be.

Here's why:

1. Private and institutional investors are sitting on 30% to 50% stock losses which they first have to SELL to raise cash to buy more stock.

2. If they're getting cash from stock sales, they have 30 to 50% LESS money to play with then they had a year ago. That is not good for liquidity.

3. If they're bringing in new money, where is it coming from?

Up until very late in 2008, there was very little cash sitting on the sidelines. How then can there be MORE cash available for stock purchases NOW after so much wealth was destroyed in the last several months?

4. If the new money in the market isn't coming from stock sales or from cash reserves, it had to come from somewhere.

It's possible then that stock prices are not being pushed up by legitimate buying but are instead being pushed up by a handful of high volume players who were given mountains of cash by the US government to "keep the banking system from melting down."

5. We know a few things about the trillions of dollars the US gave away in the past year:

a) It went almost exclusively to a handful of banks that maintain very aggressive trading programs

b) A big chunk of it is "missing" - the Obama administration literally can't (or won't) account for it

c) This money sure hasn't shown up in increased credit availability to consumers and businesses. Bread and butter business credit services remain in the doldrums.

The big question

Is is really possible that the trillions given to "the banks" is what's being used to create the illusion of a liquid, rising stock market that's "bouncing back?"

Not only is this a possibility, it's a probability because it's the only scenario that makes sense if you accept the analysis above. They liquidity has to be coming from somewhere and logic says the most likely source are federal government funded financial institutions, not investors who are less willing and certainly less able to play the equity shell game.

The truth about the Crash

If you look at charts of how markets collapse, for example the stock prices of the Depression of the 30s, the fabled "Crash" of 1929 was actually a mild retracement compare to the real collapse that followed.

Don't take my word for it.

Look at the charts from that era and then compare them to the charts from the collapse of the Japanese stock market which started in 20 years ago and still is not even close to recovery.

The next shoe to drop

Who cares if stock market prices collapse? After all, the stock market isn't the whole economy, right?

Here's the big problem:

Stock prices dramatically effect the health of pension funds and pension funds are the biggest holder of private wealth in the US and one of the country's biggest social stabilizers.

If stock prices continue to fall, pension funds will find themselves unable to meet their commitments.

Pension failures will result in more credit card default, more foreclosures, and more personal bankruptcies as people who counted on payments stop receiving them or receive less than they expected. This will lead to ever lower real estate prices, lower demand for all kinds of goods and services, and more business bankruptcies.

This will result in a vicious cycle that will spiral downwards until a true bottom is reached.

When the true bottom is finally reached, history shows that there won't be a vigorous "bounce" from the bottom. Instead there will be a long, slow stabilization period during which the financially wounded recover and rebuild (those who are able to that is.)

The last time this happened, it took over 30 years for stock prices and the economy to recover.

In fact, you can say accurately that the recovery did not take place until those who were 40 years and older during the Crash of the 30s were carried off the playing field and a new group of people sat down at the table to play who didn't bear the scars of their parents.

A key point for understanding what's still possible

The original "Crash" of 1929 that historians moan and groan about was NOTHING compared to what followed in 1931 to 1932.

Again, don't take my word for it. Look at the charts from that era. You'll see that it's impossible to overstate the seriousness of the potential precipice we're standing on - all the worse because "rising stock prices" are lulling people into a sense of false security.

The fact that a professional trader - with access to and an interest in knowing who is actually providing the volume on the "buy side" of this market - says the buying is coming from just a handful of "momentum" players is a sign that we may be in for a much more severe crash in the near future than most people can imagine.

(3) Booming stock market is rigged: computerized trading programs generate false signals

Trader on Bloomberg says markets are maniplulated.

Joe Saluzzi of Themis Trading interviewed 6-30-09: there's no liqiuidity.

http;//www.themistrading.com

Why Institutional Investors Should Be Concerned About High Frequency Traders

By Sal L. Arnuk and Joseph Saluzzi

http://www.themistrading.com/article_files/0000/0475/THEM_--_Why_Institutional_Investors_Should_Be_Concerned_About_High_Frequency_Traders_--_Final.pdf

It is now generally understood that high frequency traders (HFTs) are dominating the equity market, generating as much as 70% of the volume.

HFTs are computerized trading programs that make money two ways, in general. They offer bids in such a way so as to make tiny amounts of money from per share liquidity rebates provided by the exchanges. Or they make tiny per share long or short profits. While this might sound like small change, HFTs collectively execute billions of shares a day, making it an extremely profitable business.

Why should institutional or retail investors care? After all, aren’t HFTs adding liquidity? That’s what they and the exchanges, who court their business, say.

There’s a lot to worry about.

1. HFTs provide low quality liquidity.

In the old days, when NYSE specialists or NASDAQ market makers added liquidity, they were required to maintain a fair and orderly market, and to post a quote that was part of the National Best Bid and Offer a minimum percentage of time. HFTs have no such requirements. They have no minimum shares to provide nor do they have a minimum quote time. And they could turn off their liquidity at any time. When an HFT computer spots a real order, the HFT is not likely to go against it and take the other side. The institution is then faced with a very tough stock to trade.

2. HFT volume can generate false trading signals.

This can cause other investors to buy at a higher price, or sell at a lower price, than they would otherwise. A spike in HFT volume can cause an institutional algorithm order based on a percentage of volume to be too aggressive. A spike can attract momentum investors, further exaggerating price moves. Seeing such a spike, options traders can start to build positions, which, in turn, can attract risk arbitrage traders who believe there’s potential news that could affect the stock.

3. HFT computer servers are faster than other trading systems.

Because most HFT servers are co-located at exchanges, they can beat out institutional or retail orders, causing them to pay more or sell for less than they should have for a stock.

Then there are the "what if" problems that could be created by HFTs.

1. What if a regulation like the uptick rule were enacted?

Volumes could implode and stocks that appeared highly liquid could become extremely difficult to trade with wide spreads and no depth in the quote.

2. What if a "rogue" algorithm entered the market?

Many HFTs are hedge funds that enter their orders into the market through a "sponsored access" arrangement with a broker. Many of these arrangements do not have any pre-trade risk controls since these clients demand the fastest speed. Due to the fully electronic nature of the equity markets today, one keypunch error could wreak havoc. Nothing would be able to stop a market destroying order once the button was pressed.

Gives new meaning to the term "mutually assured destruction?"

(4) Asia and the Meltdown of American Finance, by R. Taggart Murphy

Asia and the Meltdown of American Finance

R. Taggart Murphy

posted at Japan Focus on October 24, 2008

http://www.japanfocus.org/-R__Taggart_Murphy/2931

The boardrooms and finance ministries of Seoul, Bangkok, Jakarta and Kuala Lumpur are today filled with a fair degree of schadenfreude at America's troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as "unanticipated delight in the sufferings of another." But asking Asia's business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear. The spectacle of the politicians, pundits and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. Particularly since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian Financial Crisis were being pooh-poohed for their "crony capitalism," "opaque" banking systems, "incestuous" government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators.

But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked. But because the crisis could conceivably force Asia's elites to engage in the open political discussions they have largely avoided until now– discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks.

The economic and financial dangers to Asia of the crisis need not detain us long for they are obvious. The region's stock markets are caught in the global downdraft. Asia's financial institutions are just as closely linked as those in every other part of the world to Lehman Brothers, AIG, Merrill Lynch and their devil's spawn of credit default swaps and "toxic waste" assets. We have already seen bank runs in Hong Kong and widespread layoffs by some of the regions' leading financial institutions. We are likely to see more of these troubles in Asia before the crisis plays itself out.

The United States appears headed into a recession that may be as bad as anything the country has faced since the 1930s. That in itself will spell trouble for a region that directly or indirectly relies on the United States as the final engine of demand. Japan last month, for example, ran its first trade deficit since 1982, something that is widely attributed to falling demand from the U.S.

But while this is all generally understood and prudent business and financial leaders in the region are already battening down the proverbial hatches, there is more going on here than simply the shrinking of the region's most important external market. For what we are seeing strikes at the heart of the entire process by which the region transformed itself over the past 50 years.

To be sure, Asia had little to do with the "sub-prime" mortgages, the slicing and dicing of rotten credits, the heads-I-win, tails-you-lose ethos on Wall Street that form the immediate causes of this catastrophe. But as Charles Kindleberger pointed out in his classic Manias, Panics, and Crashes, manias of the type that have just ended so spectacularly on Wall Street cannot occur in the absence of rapid credit creation. That credit creation in the present case stems directly from the ability of the United States to pawn off on the rest of the world an endless flood of dollar obligations, obligations that for a good forty years now have never been presented for redemption with anything other than more U.S. government paper. It has been so long now that the United States had to obtain the money to service its debts by the usual means – selling more goods and services abroad than are bought; borrowing in a currency controlled by the lender rather than the borrower – that its politicians no longer have any institutional memory of what it all implies: the hard trade-offs of falling living standards and forced savings.

Like an alcoholic's wife who furtively keeps her husband plied with booze while managing to avoid thinking about exactly what she is doing, Asia has long facilitated the U.S. addiction to drowning its problems in endless dollar cocktails. But the current crisis suggests that the days of cirrhosis of the American liver and delirium tremens are upon us. Without a clear grasp of the ways in which Asia's economic methods have facilitated American political pathologies, without a plan to replace Asia's reflexive reliance on exports to the United States with another economic driver, Asia too will be drawn into the economic and political maelstrom that now engulfs Washington.

Asia did not set out to become America's pusher; it happened through historical accident and the logic of the situation rather than any thought-through strategy. To see this, we have to go back to the circumstances of the late 1940s. The United States had emerged from the Second World War with something over half the intact production capacity of the entire planet. But Washington was haunted by two fears: that the end of the pumped-up demand of the war years would mean the return of the Great Depression. And that a militant, monolithic Communism would capitalize on the war's devastation to bring much of the world under its control. The so-called Iron Curtain had descended to divide Europe and Korea, Mao Zedong's Communist Party had driven the American-allied Guomindang out of mainland China, while Communist-led anti-colonialist insurgencies were emerging in French Indochina and British Malaya.

The U.S. economic response was two-fold. First, at home, the United States adopted the new-fangled tools of Keynesian demand management to keep the country from sliding back into Depression. Meanwhile, abroad, the United States through such measures as the Marshall Plan and aid to Occupied Japan, essentially offered to finance on very easy terms the transfer of production capacity to war-devastated nations. And then agreed to accept the exports manufactured thereby without reciprocal demands for imports of American products. The notion that places like Japan could ever pose a serious economic threat to American industry did not occur to anyone on either side of the Pacific. What Washington cared about was that Japan and Western Europe not follow China and Poland into what was seen then as Moscow's orbit.

But the Keynesian synthesis that so electrified economists and policy makers of the time in the United States seemed to have little relevance to the challenges faced by an Asia emerging from colonialism and war. Keynes had addressed himself to the problems of a highly developed economy finding itself stuck in a trough of structural unemployment and idle production capacity; in 1946, Japan and Korea did not have production capacity to idle. Instead, there were two alternative models of development on offer. One was the Marxist-Leninist; the other went under the rubric of import substitution or dependency theory – i.e., that the goal of development ought to be the freeing of a country from dependence on foreign financing and imported capital equipment. Both called for state-directed capital accumulation and autarkic development, although the latter did allow for market mechanisms to function at the local level. Both boasted an extensive theoretical literature. In early postwar Asia, China would be the champion of the former, India of the latter.

Japan, however, adopted neither. With the United States providing the initial wherewithal to rebuild its economy (albeit at the price of aligning its foreign policy with Washington's and ensuring that leftists were kept away from the levers of power), Japan chose instead to engineer an economic structure that focused on the rapid accumulation of dollars so that it could buy the capital equipment it needed. This meant the deliberate channeling of scarce domestic savings into externally competitive export industries. It is here that we see the origins of the distinctive Asian model of export-led growth. The distinction between this and the import substitution model then being championed by India's Mahatma Gandhi and, subsequently, Jawaharlal Nehru may appear a semantic one in that both called for the development of domestic industry behind protectionist walls. But they differed crucially in their stance towards the existing global financial order. India sought to eliminate its dependence on that order; Japan to accumulate sufficient dollars in order to exploit it for its own domestic needs. Largely for geo-political reasons, the architect and designated care-taker of that order – the United States – was perfectly willing and even happy to see Japan use it to cement postwar recovery and join the ranks of the non-Communist developed nations.

I wrote above that Japan "chose" its postwar path of development, but this is not quite correct. It happened not, as in Beijing or New Delhi, through any deliberate choice of an overarching theoretical model, but because the pressures and opportunities of the time made it seem inevitable to Japan's decision makers. The priority of recovery from the war's devastation was so obvious that it required no political discussion to give it legitimacy. The war years had left Tokyo with an intact institutional apparatus that could be used to channel scarce financing into targeted industries – it was easy enough to redirect the flows from munitions makers to promising export industries. With the fortuitous (for Japan) outbreak of the Korean War, the United States suddenly began placing large orders for Japanese goods needed to equip its military. Thus through a process more akin to biological evolution than conscious political choice, Japan found itself in a niche that functioned well-nigh perfectly for the country in the economic ecology of the era.

The results exceeded anyone's expectations. Between 1955 when the final elements of the postwar Japanese system were put into place and 1969 when its growth began to alter the global economic ecology which had fostered it, Japan boasted the highest growth rates that had ever been recorded by any economy in human history. But the circumstances of its birth – its coming into being without any real debate on the matter or generally accepted theoretical foundation – help explain what is happening today.

The late 1960s provided the first evidence that things could not keep on going as they had without adjustment. The rigid international financial architecture of the time, labeled the Bretton Woods system for the small New Hampshire resort town where it had been hammered out in 1944, could not accommodate the emergence of Japan's export surpluses – joined to a lesser extent by those of West Germany – and their mirror images, the first substantial trade deficits run by the United States for a century or more. Attempts to rework the formal arrangements of the Bretton Woods system collapsed in the political chaos surrounding the Watergate scandals and the American defeat in Vietnam. The world economy limped through the rest of the 1970s until Paul Volcker was appointed Chairman of the Federal Reserve in 1979 with a mandate to do what it took to halt the inflation that threatened to destroy the dollar as a store of value. Japan's vote of confidence in Volcker's policies – snapping up U.S. dollar securities – permitted the rebuilding of the organizing principle of Bretton Woods: the dollar's central role in the international financial system. But instead of Bretton Wood's formal arrangements that required the United States to back the dollar by gold while other participants maintained fixed exchange rates with the dollar, the new system was predicated purely on the willingness and ability of the likes of Japan to continue to accumulate and hold stores of dollars.

Meanwhile, Japan's 25-year sprint from devastation to the front ranks of the world's industrial powers provided an overwhelming example to the region. South Korea, Taiwan and Malaysia all pro-actively adopted export-led growth strategies with concomitant suppression of domestic demand, undervalued currencies, and savings channeled into the development of internationally competitive industries. With the coming to power in 1977 of Deng Xiaoping and Beijing's tacit adoption of the Japanese economic model, the region turned decisively away from autarkic development models. Vietnam would arrive at the party in the late 1980s, and in 2000 India would formally abandon Nehru's legacy of import substitution to join in the scramble to build industries for export.

But not only did most Asian countries emulate Japan in making the highest national priority the building of internationally competitive export industries, they followed Japan in accumulating reserves in dollars – a trend that accelerated after the crisis of a decade ago. Most countries in the region, whether they had suffered badly (Thailand; South Korea), or largely escaped the worst effects (Malaysia; China) resolved they would never again be in a position where emissaries from Washington – or anywhere else, for that matter – would be in a position to dictate their macroeconomic policies or how they ought to structure their banking systems. They redoubled their efforts to build impregnable fortresses of international reserves against the slings and arrows of future balance of payments crises.

That effectively meant accumulating reserves in U.S. dollars. Aggregate two-way trade and investment flows between Europe and Asia are not large enough to permit the Euro to circulate yet in sufficient quantities in the region to see the Euro substitute for the dollar as the region's reserve currency, even if the region's businesses were willing to switch from dollars to Euros as their primary cross-border settlements currency. As for the yen, neither Japan nor China for separate reasons want to see the yen supplant the dollar in the region. China is not prepared to cede that kind of economic leadership to Japan, while the wrenching changes that the emergence of the yen as a major international currency would pose to the Japanese economic and political order insure that Tokyo will move to bring that about only when there is no alternative. (I discuss the reluctance of Japan to see the yen as an international currency here.)

But when a country accumulates reserves in dollars, it is effectively leaving its export earnings inside the American banking system where they can be used, among other things, to finance the building of houses for people who do not earn enough to afford those houses. The result is 7 figure salaries for gamblers with other people's money and tax cuts enacted while spending soars on entitlements and wars of choice.

The latest surge of dollar holdings in Asia on top of a generation of dollar accumulation in countries such as Japan and Korea coincided with the coming to power of the most fiscally irresponsible administration in American history. Not only did Asia's soaring dollar holdings help the George W. Bush administration avoid the usual financial consequences in ripping open the sutures its predecessor had stitched up between America's taxes and government spending. They also facilitated a horrendous asset bubble in American housing while Alan Greenspan's Federal Reserve watched idly from the sidelines.

The era of American "deficits without tears," in the famous phrase of the French economist Jacques Rueff, has ended with the Panic of 2008. The core institutions of American finance are collapsing. The United States is still – and will remain for some time to come – the world's largest and most productive economy. But it can no longer act as the world's engine of demand, no matter how many dollars Asia throws at it. For while those dollars may be "owned" by Asian central banks and businesses, they reside inside a ruined financial system whose panicked participants will not lend to those who need credit to keep their businesses running. As the Japanese can explain from their own experience of the mid 1990s, you can pour all the money you want into tottering banks and brokers, but when they are paralyzed by fear and will do nothing but lend back to the government, it does little for your economy.

The days of export-led growth for Asia are over (at least exports outside the region – intra-regional trade is another matter provided importers in the region can be found to equal exporters – and that the final demand is in Asia; i.e., exports of parts and supplies from one Asian country to another for finished products headed for the U.S. market don't count). As the Koreans and Thais can easily testify given their own recent traumas, the United States cannot recover from the mess it is in without more savings – another way of saying less consumption. That in turn means the U.S. after 40 years of profligacy will have to export more than it imports. For this to happen, much of the production capacity that has been steadily transferred to Asia over the last fifty years will have to be repatriated back to the United States so that Americans will have enough factories again in which to go to work to pay off the debts that their politicians and bankers so recklessly ran up. Otherwise, all those dollars Asia holds will quickly be worth very little. What, after all, is a dollar other than a claim on the output of an American? The Americans will have to have the means to create that output if the dollar is to have value.

Meanwhile, what of Asia? How is Asia going to wean itself from its dependence on the U.S. market? One lesson the world may finally learn from this crisis is that genuine, long-term prosperity comes not from continuously shoveling money at distant foreigners so they can keep buying your stuff. And certainly not from games playing and speculation by would-be plutocrats. But rather from a large, economically secure middle class – a middle class with the means to purchase the output of a nation's factories, farms, and service providers.

Here is where we see a connection between the meltdown of American finance and the political turmoil that has been wracking practically every country in the region. Each specific example has it own local causes and flavors: the struggle in Thailand over former Prime Minister Thaksin's buy-rural-votes-populism; the political insurrection led by Anwar Ibrahim in Malaysia against the entrenched UMNO elite; the seemingly out-of-proportion demonstrations in South Korea over beef imports; the palpable rage in China at the inability of the government to enforce safety standards in construction and food provision; the challenge posed by Japan's first serious, united opposition in 50 years to the Liberal Democratic Party's control of that country's formal political institutions.

But behind these varied struggles one can hear a common theme: a demand for accountable, responsible government that puts the interests of the middle class first. I wrote at the beginning of this piece that the political discussion necessary to restructure the region's economies carries with it all kinds of risks. We have been seeing those played out in the streets of Bangkok and Seoul or on-line behind the firewalls that Beijing builds in its attempts to contain and control discussion of China's future. These struggles threaten, among other things, the workings of essential economic machinery, as Thailand's tourist-related businesses can readily testify. The struggles provide a profound challenge to elites that are accustomed to effecting minor corrections behind closed cockpit doors to national trajectories that have long been taken for granted.

But the meltdown of American finance has closed the destination of an economy humming with industries for export. Whether Asia's economies have the political will and ability to chart a new course will determine how they ride out the present storm.

R. Taggart Murphy, a former investment banker, is Professor in the MBA Program in International Business at the University of Tsukuba's Tokyo campus and a Japan Focus associate. He is the author of The Weight of the Yen (Norton, 1996) and, with Akio Mikuni, of Japan's Policy Trap (Brookings, 2002).

This is a substantially expanded version of an article that appeared in The Brief. Magazine of the British Chamber of Commerce Thailand, Oct 2008, pp. 30-33. It was posted at Japan Focus on October 24, 2008.

(5) Free Trade caused the Financial Crisis: Bubblenomics, by R. Taggart Murphy

Bubblenomics

R. Taggart Murphy

New Left Review 57, May-June 2009

http://www.newleftreview.org/?view=2787

Economic cataclysms such as the Great Depression or today's ongoing collapse of global finance destroy commonly held understandings of political and economic reality. [1] That is one reason why we call them cataclysms; such events occur precisely because no one with the power to do anything about them saw them coming. Icebergs spotted in time do not, after all, sink ships. But once the conventional wisdom has joined prosperity and confidence in the wreckage on the ocean floor of the global economy, we begin to hear of 'the' explanations for what happened. Such proclamations mark the times as surely as collapsed Ponzi schemes, falling governments, ruined banks and suicides among the former nouveaux riches. Thus, in the aftermath of the Depression, there emanated from various quarters announcements that the reasons for the catastrophe lay in policy errors by the Federal Reserve, in the Smoot–Hawley Tariff Acts, in stock trading on the margin, in vengeful treatment of Germany in the Versailles Treaty and so forth.

Similarly, the present-day plunge into the economic abyss has again brought forth a smörgåsbord of assertions about 'the' cause: mad scientists let loose in dealing rooms, squishy liberals dishing out mortgages to the coloured, inscrutable Chinese officials 'manipulating' their yuan, feckless American central bankers throwing the gasoline of low interest rates on a briskly burning fire of asset inflation, Robert Rubin and his cronies in the Clinton White House tearing up regulations, George W. Bush waging wars of choice while cutting taxes on the rich - the discriminating diner can pick and choose what best suits his or her ideological tastes and preconceptions.

In The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis, Graham Turner has placed on the buffet table his own explanation for what has gone wrong, and it is a good deal more appetizing than many. Turner lays the blame for the current crisis squarely at the feet of the holy of holies of conventional economic orthodoxy: the 'unquenchable enthusiasm for raw free trade.' Given the near-total absence of any warning of the crisis from right-thinking academic economists, the distaste of the latter for such an account should provide no grounds for rejecting Turner's offering out of hand.

In 1817, David Ricardo set out the classic case for free trade: that a country can improve its economic well-being by channelling scarce capital into activities in which it enjoys a comparative advantage - that is to say, at which it is relatively more efficient. It then trades the resultant surplus for everything else it needs. The case says nothing about whether the territory in question enjoys a competitive advantage in such activities; i.e., whether it is more efficient than other countries in those activities. It simply states that the territory should specialize in what it does best. If every country follows a free-trade regime, trading what it is best at producing for goods which it makes less efficiently, economic output on both a national and a global level will rise. Yet simple as it may seem, the theory of comparative advantage is not immediately obvious. To this day it is often confused with competitive advantage - invariably so by advocates demanding protection for an industry facing cheaper or higher-quality foreign competition. They react like anyone else whose income is threatened by a given set of facts or chain of reasoning: by resolutely not seeing them.

Turner is not one of those. Nor is he advancing the argument common to economic nationalists - that a global regime in which each country uses static comparative advantage to determine its economic structure locks existing hierarchies of power and wealth among nations in place. (As the nationalists like to note, Japan's comparative advantage in the late 19th century lay in silk and pearls; that of the mid-1940s, in cocktail favours and cheap toys.) Turner instead neatly inverts the economic nationalist argument. It is not that rich countries use free trade to keep poor countries poor, but rather that the rich in rich countries use free trade to make themselves richer, while keeping their own poor poor and eviscerating the basis of middle-class prosperity: stable jobs at high wages. Ricardo was alert to concerns that under a universal free-trade regime, capital would migrate to lower-cost countries, thereby impoverishing English workers. He dismissed these fears, due to the 'difficulty with which capital moves from one country to another.' But of course we live in a vastly different world, where the telegraph, fax, computer and Boeing 747 have progressively eliminated the 'difficulty' that sheer distance had posed to the free movement of capital in the early 1800s. Over the last generation, policy-makers in Washington, London, Basel and Davos embarked on a crusade to dismantle another sort of 'difficulty' hindering the free movement of capital: that posed by laws and regulations. Neo-classical economic doctrine gave this drive the imprimatur of Ricardian orthodoxy, but the real motive was to push down wages. 'Free trade today is no longer driven by comparative advantage', Turner writes, but rather by 'the ability to maximize profits by cutting costs'; elsewhere he notes that 'imports of cheap goods from low-cost countries have been fundamental to the downward pressure on wages for many workers'. Today, then, free trade has little to do with Ricardo's picture of the Portuguese using their comparative advantage in wine-making or the Scots in sheep-shearing to make better lives for themselves. Rather, it has enabled 'large multinationals to control and drive labour costs down ... by moving jobs around from one country to another'. It is in this drive that we find 'the heart of the debt problems facing the West.'

Turner devotes much of his book to an elaboration of how free trade coupled with deregulated capital markets led to 'problems' that have, since he finished writing in the spring of 2008, become full-fledged economic cataclysms. What Turner calls a 'fundamental shift in the balance of power between capital and labour, or companies and workers' led via free trade and deregulation to 'concerted downward pressure on wages', to which the 'asset bubbles that are now bursting all across the industrialized West' are 'indelibly linked'. With the loss of high-paying, stable jobs, middle-class families managed to stave off for a time a downward lurch in living standards by reducing their savings while borrowing against their homes and equity portfolios. They could do so because the countries that were running trade surpluses with the West - the petroleum exporters; emerging markets such as China - were holding the proceeds of their surpluses in Western currencies, mostly the us dollar. By the very fact that they were denominated in such currencies, these surpluses were automatically re-invested in the West. Now it is a truism that too much money causes inflation. But the inflation that inevitably accompanied the rivers of money pouring back into the West from China, Kuwait and so forth did not find its way into goods and services. Free trade and the systematic transfer of production capacity to low-wage countries kept those prices from rising much.

Instead, the money was steered into markets for equities and real estate. It was this asset inflation that enabled the middle class temporarily to sidestep the consequences of the transfer of production capacity abroad, under a global regime of unrestricted free trade. Buffed-up stock portfolios seemed to give many families tacit permission to stop saving from current income; borrowings against the rising value of residences replaced the income lost when good jobs disappeared. Meanwhile, those rising values both induced working people to buy houses they could not afford and encouraged bankers to extend the debt that made the purchases possible. Western governments were loath to step in to break up the party. They kept corporate interests happy by zealously hunting down and eliminating the last remaining barriers to the 'free movement of goods and capital', while treating asset bubbles with benign neglect. By ignoring the bubbles, they ensured that the debt seen as a 'panacea' for falling wages would soar. But bubbles by their very nature blow up. Their defining feature is the divorce of prices from the cash flow the asset can conceivably generate: the dividends from a share of stock; the rents from a house or office building. Prices nonetheless continue to climb because practically everyone has convinced him or herself that the assets' value can only go up, and because lots of money is chasing too few assets. Players enter the market precisely because they can raise the money. But at some point the money dries up - perhaps central banks tighten rates, private banks get cold feet, or, as in the summer of 2007, 'private investors turned against us assets with a vengeance'. They can no longer be sold to a 'greater fool' since said fool can no longer find the money to buy them. The asset prices tumble; the bubble bursts, leaving ruin in its wake.

Turner offers the standard recommendation for what policy makers need to do once asset bubbles burst: cut interest rates fast in order to get money flowing again. This of course is the usual therapy for dealing with impending recessions; only out on the lunatic fringe today can one find exhortations to keep money tight in a slumping economy in order to 'purge the rottenness', as Andrew Mellon, Herbert Hoover's Treasury Secretary, once sweetly urged. Turner warns, however, that the Federal Reserve 'took far too long ... to swing into action'. Elsewhere he observes that 'when housing markets begin to deflate, the timing of rate cuts is critical. Leave it too late and the slide in property values can render rate cuts increasingly ineffective'. Turner concludes that 'only time will tell whether the Federal Reserve, the Bank of England and the European Central Bank can prevent Keynesian liquidity traps taking root. The omens are not encouraging.'

They certainly are not, and the world seems to have landed precisely where Turner feared we were headed when he was writing his book. Once in a liquidity trap, monetary policy becomes useless; no matter how low interest rates are cut (and, as Turner notes, they cannot be cut below zero), no matter how much money the central bank 'prints' - i.e. tries to force into the banking system - banks will not lend, businesses will not borrow and households will not spend. They are all scared; they all hoard cash. Turner does not offer much in the way of specific advice for what policy makers should do once they find themselves stuck in a liquidity trap, other than urging measures to 'prevent debt deflation from taking root', which is begging the question, and issuing calls for a 'more equitable balance of power between capital and labour', which he concedes will be 'no small task'. Instead, he devotes a chapter to discussing what he calls the 'credit bubbles across a wide swathe of developing countries' that are the 'flip side' of the recent housing slump in the West.

Turner maintains that 'the strong economic growth' around the world in recent years was not 'fuelled by free trade, but by rapid credit growth, with bubbles appearing across every continent.' Their source, again, lay in the 'determination of companies to cut labour costs'; it was this that 'underpinned excessive capital inflows, which have proved difficult for central banks ... to manage.' Indeed, 'Eastern Europe has been consumed by a grotesque credit bubble.' Meanwhile, in Asia, a first round of bubbles burst in 1997 with the so-called Asian Financial Crisis. But the lessons learned in its wake - build up a thick wall of international reserves (mostly dollars) as a defence against future speculative attacks on the local currency or sudden withdrawals of capital - were the wrong ones, he says. Those reserves went to fuel such asset bubbles as the us housing market, which have now burst, leaving these countries 'more vulnerable to events in the West'. Turner does not, however, hold them ultimately responsible. 'It was wrong ... of the Federal Reserve to shift the blame for housing bubbles in the West on to governments of so-called developing economies. Their "excess savings" were driven a priori by capital flows in search of cheaper labour, a policy which governments of the West sanctioned and enthusiastically promoted.'

According to his publishers, Turner spent 'the 1990s working for Japanese banks'. He thus presumably lived through the sheer agony of trying to shake free of the liquidity trap Japan seemed to have fallen into in the early part of the decade. His experience lends an extra urgency to his call to do whatever is necessary to avoid it in the us and Britain - a call that, alas, now appears too late. He obviously believes that the pain Japan endured need not have happened; indeed he states quite bluntly that 'deflation could have been avoided'. Turner blames specific policy errors by the Japanese authorities. Since what Japan went through is at least superficially similar to recent events in the us and uk - a housing bubble followed by tumbling asset prices and collapsing financial institutions - Turner maintains that those policy errors should be identified and given the closest study.

Above all, Turner points his finger at the Bank of Japan. Determined to halt the 'astonishing' rise in Japanese asset prices in the late 1980s, the boj 'misread the early warning signs' that housing prices were already set to fall. Instead, it 'started raising interest rates far too late into the boom.' A new boj governor appointed in December 1989 'refused to accept that Japan was on the verge of a credit squeeze'. The boj 'dithered' until 1995 when it 'relented', but by that point it had 'lost the chance to secure a meaningful fall in real borrowing costs'. boj mistakes were compounded by government policy, Turner contends, most particularly by Ministry of Finance attempts to 'cajole' banks to raise lending margins and sell their non-performing loans. This drove many companies into bankruptcy and forced collateral sales into an already plunging market that led to a 'precipitous' collapse in property prices. Ultimately, though, the 'failure to recognize the significance of the money-supply numbers was arguably the single biggest policy blunder committed by the Japanese authorities during the first year of the crash.' Turner is referring to the boj's seeming refusal to appreciate what was happening in 1990 - that the money supply had begun to plummet and that interest rates needed to be cut, and cut fast. Broadly speaking, this is the same mistake Milton Friedman and the monetarists accuse the Federal Reserve of making in 1931, and that Turner maintains Ben Bernanke made last year: not acting quickly enough in the wake of the collapse of an asset bubble.

It is curious that a book that starts out blaming the current catastrophe on the 'unquenchable enthusiasm' for free trade and the 'fundamental shift in the balance of power between capital and labour' essentially ends up alongside Turner's ideological opponents in the monetarist camp. Turner would perhaps respond that the question of how we got ourselves into this jam and the matter of what we do once we are in it are two different issues, which seems fair enough. If the car is in the ditch, even the lousy driver who put it there might have an idea worth listening to on how to get it out. But Turner may have missed an opportunity in this book to draw broader lessons than the proper response of central bankers to sudden contractions of credit in the wake of bursting bubbles. For Japan's experience in the 1990s actually points directly to the flaws in the very architecture of the world's political and economic framework that brought on the catastrophe. Getting a grip on that, however, requires an ability to see political realities and power relations in a multifaceted, three-dimensional way. Alas, the lamentable divorce of economics from politics and the narrow, technical training economists receive today almost guarantees that their wider vision will be blurred. Turner is clearly an experienced economist, and he makes a convincing case that today's crisis is bound up with the assault, over the past three decades, on the institutions in the us and uk that had once provided for the economic security of the middle class. But he might also have used the example of Japan, and perhaps explains why he failed to use Japan to strengthen the fundamentals of what seems to be his argument: that what we are going through today is a systemic political crisis dressed up in financial clothing.

Two cases in point: first, Turner seems to believe that the boj is fundamentally a free agent. Although he would no doubt concede that no central banker anywhere is wholly immune to political pressure, the boj does not enjoy anything like the de facto autonomy of the Federal Reserve, not to mention that of the Bank of England. Even since the passage in 1998 of a law that provides for the de jure independence of the boj, the Ministry of Finance - the most powerful of Japan's bureaucratic fiefdoms - continues to control the boj's budget. The laws that ostensibly govern the Ministry of Finance and the Financial Supervisory Agency contain clauses that directly contradict any assertion of the boj's autonomy. There was certainly no question of it at the time of the policy steps Turner describes. Second, Turner does not seem to understand that there really is no Japanese bond market independent of financial institutions licensed and controlled by the Ministry of Finance, the boj and the Financial Supervisory Agency. Bonds in Japan are not, for the most part, purchased by end-investors but by financial intermediaries, meaning that open-market operations of the type used by the Federal Reserve to push money into the economy do not work in Japan - they simply end up bloating the balance sheets of financial institutions.

If it is any comfort, Turner's mistake is shared by such economists as Paul Krugman and Adam Posen, who both called for explicit inflation targeting by Japan's authorities to pull the country out of the liquidity trap. They did not realize that the boj has few tools to force money into the economy outside the banking system. Turner asserts, in discussing the early 1990s, that 'bondholders were even slower to respond' to the onset of deflation than the boj; that 'had bond yields fallen in line with short-term rates, deflation could have been averted. Japan would never have slipped into a liquidity trap.' But that steeply upward-sloping yield curve was deliberately engineered as part of the attempt Turner describes to bail out banks by raising lending margins; it was not a matter of short-sighted bond investors, in the grip of 'money illusion or liquidity preference', failing to grasp economic realities. These 'investors' were marching to the tune played by the authorities.

This is not to suggest that the policy errors of the 1990s were not in fact errors - interest rates were indeed raised too late in the 1980s boom, and they were not cut quickly enough after asset prices began to tumble. But the picture Turner paints of a policy elite considering a range of tools, and then picking one as opposed to another, is fundamentally flawed; as is his implicit view that there is a private financial sector in Japan overseen by a public sector of disinterested regulators. Banks and other financial institutions in Japan have - at least since 1927, when the Ministry of Finance consolidated its control over the Japanese financial system - functioned as instruments of bureaucratic policy, not as profit-seeking entities on the Western model. That does not mean there has been no discord - Japanese finance has been riven by conflict, and it became very severe in the wake of the collapse of the late 1980s bubble. But it is not the conflict of greedy cowboy bankers trying to pull wool over the dim eyes of regulators, or even the capture of the American regulatory apparatus by private interests that James Galbraith describes so brilliantly in The Predator State. It is the internal conflict of a bureaucratic polity concerned above all with its own survival and ability to achieve pre-determined outcomes.

Understanding policy-making in Japan starts by grasping the central theme of the country's modern history: the right to rule. The absence of any institutionalized means of resolving the matter opened the way to the seizure of power in the 1930s by those with the means of physical coercion at their disposal. The ruin to which they drove themselves and their country led to an American Occupation that in some fundamental ways has never really ended. Japan's policy elite was emasculated by a United States that assumed for Japan those elements by which a state can be most easily identified: security arrangements and the conduct of foreign relations. A truncated remainder of the pre-war elite - the great economic bureaucracies and the cluster of nominally private-sector institutions around them - was left essentially free of any check on its power to undertake the restructuring and reordering of the economy. But it always acted as if its survival and independence hinged upon the preservation of the political and economic arrangements that had been set in place by the Occupation. Because those arrangements were locked into and contingent upon a us-centred global financial and political architecture, the actions taken to preserve them ended up supporting that architecture.

Turner traces the beginnings of today's catastrophe to the elections of Reagan and Thatcher, writing that 'clamping down on wages was central to Reaganomics and Thatcherism'. But it was Japan's response to events earlier in the 1970s that created the financial circumstances that made possible the 'Reagan Revolution' of tax cuts and high defence spending, at a time of draconian anti-inflationary monetary policy in the us. And what Japan did to enable the Reagan Revolution was in turn rooted in the bureaucratic imperative to preserve existing arrangements. To see this, we have to go back to the 1940s and the laying of the foundations of the postwar economic and financial framework. This took place in a context in which fear of working-class power was a far more significant factor than it was to be for Thatcher or Reagan. The us government worried that the end of the war would bring about the return of the Great Depression. Moreover, beginning with the Soviet takeover of Eastern Europe, a string of Communist successes culminating in the 1949 Chinese revolution convinced us power holders that they faced an existential threat from a messianic, monolithic Communism. These fears gave men such as Keynes and George Marshall the political space to design and implement a global economic and political framework that would harness the overwhelming relative American economic power of the time in the service of worldwide growth. The formal financial part of that framework, known as Bretton Woods, placed the us dollar at the centre of the global financial order, and linked to it the currencies of all other participating countries.

Turner is wrong when he writes that 'there were inherent adjustments within the [Bretton Woods] system, to prevent countries running large and persistent trade deficits and surpluses', that 'the system was symmetrical', and that 'pressure to take corrective action applied equally to countries, whether they were in deficit or surplus'. To be sure, that was Keynes's initial vision: a formal set of arrangements that would require surplus countries - which meant at the time the United States - to take proactive measures to reduce their surpluses by stimulating their economies. But Keynes was overruled by the American delegation. The framework that emerged thus had no formal sanctions against surplus countries, which was to prove its undoing when the United States slipped into deficit and Japan emerged as the pre-eminent surplus country.

The central flaw in the system was visible almost immediately. Other countries needed to obtain supplies of the us dollars that Bretton Woods had enthroned as the world's money. But this required American balance-of-payments deficits that would ultimately weaken confidence in the dollar. Although the us had balked at Keynes's notions of institutionalizing pro-growth requirements on countries running external surpluses, Washington ended up doing what he wanted anyway: running a pro-growth economy that produced a dollar outflow. In the first decades after the war, these flows primarily took the form of such transfers as the Marshall Plan, aid to Occupied Japan, and military spending on a global network of bases and the Korean and Vietnam Wars. From the mid-1960s, however, the outflow migrated to the trade accounts when the us began running systemic trade deficits.

Meanwhile, Japan took advantage of the economic ecology of the era to construct an economy run on mercantilist lines, complete with trade protectionism and draconian capital controls. The demands of the time for reconstruction were so obvious that implementation of whatever seemed to work required no political discussion or theoretical justification. Japan's truncated policy elite reoriented the institutional mechanisms they had used to direct scarce financing to munitions makers during the war years to ensure that promising export industries had priority access to funds. The objective was to accumulate sufficient dollars to pay for essential imports of commodities and capital equipment. Washington had no objection and indeed encouraged what Japan was doing; no one on either side of the Pacific at the time believed that the country posed any long-term threat to American manufacturing or technological supremacy. The us market was open to Japan without any reciprocal obligation - apart from unrestricted access for the us military to bases strung throughout the length of the Japanese archipelago, lip-service in support of American foreign policy, and keeping leftists away from the levers of power (a 'threat' that Japan's power holders exaggerated to Washington when their economic methods began to cause political problems in the us).

Japan succeeded beyond anyone's expectations, racking up growth rates between 1955 and 1969 that were higher than any previously achieved in human history. But because Japan's economic methods involved the systemic suppression of domestic demand and the deliberate channelling of financing into internationally competitive export industries, the inevitable result was a string of trade surpluses that began to alter the global economic ecology in which Japan had thrived. Specifically, it exposed the flaw at the heart of Bretton Woods - that there was no way to force surplus countries to make adjustments. By the late 1960s, the us had become the world's leading deficit country. Unwilling to take the necessary measures to reduce the us deficit - slowing down the economy and accepting lower living standards - and unable to persuade Japan to permit the yen to rise and thereby ease the strains on the Bretton Woods system, Nixon allowed it to collapse.

In the wake of its demise, however, which shocked Tokyo's policy elite, the Japanese authorities began to implement policies designed to recreate its certainties: a dollar-centred global order and an undervalued yen that would permit Japan to continue to run an export-led economy. There was little overt debate; indeed the Ministry of Finance actually went so far as to suppress discussion in the financial press of the possible virtues of allowing the yen to rise. To any student of the country's political history in the 20th century, the reason was obvious: a fear of the disorder that would come from the economic and political shifts necessarily accompanying a restructuring of the economy to put domestic demand instead of exports into the driver's seat. Instead, Japan accumulated dollars. Among other things, it was those dollars that permitted the Reagan administration to finance an explosion in us government deficits without paying any political or financial price. When those dollars reached the point where they began to have serious effects on Japan's ability to conduct monetary policy, the authorities began deliberately to foster the growth of asset bubbles to counteract the dollar build-up.

After the bursting of the latest and largest of these bubbles, Japan's policy makers partly lost control of economic events. The key point, however, is that the beginning of today's crumbling of the global economic and financial order lay not in the wave of investment from the West in search of low-cost production, as Turner would have it, but farther back, in Japan's efforts to recreate the certainties of Bretton Woods. This is not only because to this day Japan is the world's largest holder of dollars outside the United States - add Japan's dollar holdings in nominally private hands to its official holdings and the total is still twice the size of China's - but because the lesson that the rest of Asia took from Japan's example, as a country that had risen from absolute poverty and devastation to the front rank of the world's industrial powers in less than 25 years, was to keep your currency cheap, structure your economy to generate exports, and pile up dollars to protect yourself from balance-of-payments crises. To be sure, countries such as China and Thailand (although not South Korea) deviated from the Japanese model in one crucial way: they opened themselves up to direct foreign investment. And of course Turner is absolutely right that most of that investment was driven by Western corporations seeking to lower wage costs. But that was an opportunistic response to the conditions created by Japan's success in the 1970s in repairing the international economic and financial order that had emerged from the Second World War.

The current economic cataclysm has, however, destroyed that order and it cannot be repaired a second time. This is probably the way in which today's events most closely resemble the Great Depression. In The World in Depression (1986), the late Charles Kindleberger wrote that the origins of the Depression were 'complex and international', and that it was 'so wide, so deep and so long because the international economic system was rendered unstable by British inability and us unwillingness to assume responsibility for stabilizing it.' Similarly, the us today is manifestly unable any longer to stabilize the global economy and no other entity - whether China, Japan or the eu - has either the ability or willingness to take over the job on its own. The system has worked after a fashion for the last forty years because first Japan, and then China and the other 'tiger' economies of Asia, recycled the earnings from their exports into the us economy and left them there. They did so for the most fundamental of political reasons: fear of domestic disorder. China needed millions of jobs for young people; Japan sought to postpone the political upheavals that restructuring would inevitably involve. But these reasons for piling up dollars no longer exist. With a ruined financial system and an economy in free-fall, the us cannot turn these dollars into demand for Chinese and Japanese goods. This is why the omens out of Asia today are as dark as those emanating from the us.

Occasional shafts of light can be glimpsed in the otherwise unrelieved gloom. Turner's indictment of the role of corporate interests, scouring the planet for the cheapest labour costs, may now receive a wider and more sympathetic hearing. One very much hopes that he is right when he asserts that 'a more equitable balance of power between capital and labour will have to emerge' if the world is to enjoy the real benefits of trade. The current crisis may give governments the political space to address other crucial challenges that Turner mentions, such as peak oil and global warming. Alas, the dead weight of conventional wisdom is so overwhelming that even leaders with the best intentions do not really know what to do other than fall back on formulae - stimuli, bailouts, interest rate and tax cuts. The need for a new global economic and financial architecture is obvious. But in order to lay the conceptual foundation, the world awaits a new Marx or Keynes - someone who understands power, who understands institutions, who understands that there is no such thing as a value-free 'science' of economics and can help get us beyond the fantasy of a technical fix for the mess we are in.