The Depression We Had To Have

George Soros is no screaming Trotskyite, but even he can see what's happening to global capital.
In an interview with the Austrian newspaper Der Standard, he has blamed "market fundamentalism" for the crisis afflicting global capital markets. He could have a point.
Deregulated financial markets in the US allowed capital traders to create easy credit, with no oversight from the Federal reserve. This is turn led to inflated property values as a whole bunch of people jumped into a market they had no place being in the first place.
The loans were chalked up by financial institutions - some of them banks, but a lot simply mortgage warehouses - who onsold these liabilities to a lot of chumps left holding a pile of candy no one wants to eat.
The financial institutions reward themselves with NINE figure incomes (The CEO of one mortgage warehouse, Countrywide, was on US$615 Million a year) and walk away whistling while the end-gamers - often retirement funds and municipalities (including here in Australia) take a bath.
Meanwhile, the poor marker who took the loan just loses their house. In reaction - and this is reaction as in reactionary - the leading candidates in the current race to be Emporer Of The World are falling over themselves to embrace Keynesian pump priming. This will, of course, horrify the very "market fundamentalists" Soros has been warning about. But will the pump priming make any difference?
Welcome To The Wankersphere has pointed out that the US recession - which is an actuality, if not technical reality - stems from over inflated asset values, not a lack of economic activity. Yet. Which is precisely the problem that bedevils the Australian finance market. People borrowing against homes that are vastly over inflated. It's not hard to see what will happen once the Easy Credit crisis starts to haemorrhage around the globe.
We are already seeing it with the bearish stock market fluctuating like manic depressive on amphetamines. The real crunch will come in the form of a credit squeeze, the like of which we have not seen in some time. Which is no doubt why Central Banks are flooding capital markets in an attempt to stay that frabjous day.
But western capital reserves are not exactly flush - witness the US deficit - and diving further into an already empty cookie jar will have to be paid for somehow. Which is when the Chinese will come along with the greatest foreclosure of all, and bye-bye liberal democracy for the duration.
Mind you, this seems to fly obliquely over the heads of a general populace - concerned more about partying teenagers and sooky cricketers than the fact that the roof over their heads is about to disappear like Dorothy's house in Kansas.
Housing is a significant player in the Australian economy - if it tanks then it is going to screw up the retirement and savings plans of millions of Australians. The flow on through the economy by a credit squeeze will affect the big employment sectors of retail and hospitality. We could see money dry up, along with jobs. All this at a time when the economy is 'growing'.
Of course a lot of this stems from the legacy of ten years of doing nothing with the proceeds of a mining boom apart from splashing cash around and inflating a housing bubble (that's now about to burst).
While responsibility lies with Howard and Costello, this won't wash with the Australian public - they'll be calling for Wayne Swan's head on a stick by Christmas. I noticed that the Harvey Norman retail chain has announced sales growth of over A$3 Billion, or a little over 12%, for the first half of this financial year. The bulk of these sales will be on credit, and if we drop into a recession that looks like being of the scale that Soros predicts, Harvey Norman won't see half of that money.
This is the problem with credit - it only works if there's a capacity to repay - and years of supply side market fundamentalism has destroyed the household sector's ability to do exactly that.
I was travelling back from Lithgow before New Year and was amazed at the number of cars, boats and bikes saw on the side of the road for sale.
The last time I remember this phenomenon was in 1990 when the then treasurer Paul Keating was assuring us that there was no recession . Later that became the recession we had to have.
This recession promises to be much deeper, as Soros has pointed out. The financial sector has gone a bridge too far - simultaneously calling for, and getting, policies that squeeze those on the bottom, then trying to milk those very same people through credit, as Ralph Nader pointed out this week.
They could never have it both ways and now the harvest shall be reaped. And a bitter harvest it will prove to be.