As stock indexes plunge across Europe and Asia, Britain unveiled plans today to inject up to 50 billion pounds — close to $90 billion — into its biggest retail banks. Recent efforts to bolster world credit markets have failed to stem fears that the spreading financial crisis could lead to a global recession. We go to Rome to speak to economist Loretta Napoleoni, author of Rogue Economics: Capitalism’s New Reality. [includes rush transcript]
Markets around the globe continue to plummet despite indications from Federal Reserve Chair Ben Bernanke that he would lower interest rates. Bernanke described the financial crisis as a threat of "historic dimension."
While Britain prepared to unveil a rescue package for its leading banks, the International Monetary Fund called for globally coordinated policy actions and said it expects credit losses to reach $1.4 trillion. The slump in Europe and Asia followed a huge sell-off on Wall Street, which saw the Dow Jones close down more than 500 points on Tuesday. Markets are down sharply today in London, France and Germany. In Asia, Japan’s stock market plummeted 9.4 percent, its biggest one-day drop in more than two decades. Markets in Australia, China and Taiwan are among other fallers. And Iceland, which enjoys one of the highest standards of living in the world, is facing a near financial meltdown. The government has taken over the country’s second-biggest bank, fixed the exchange rate of its plummeting currency, and asked Russia for a massive loan, as it tries to stop the collapse of its economy. Meanwhile, Russia, Indonesia, Ukraine and Romania shut down their stock exchanges.
In further signs the crisis is escalating, Britain unveiled plans today to inject up to 50 billion pounds, close to $90 billion, into its biggest retail banks. This is British Prime Minister Gordon Brown.
PRIME MINISTER GORDON BROWN: Good strong banks are essential for every family and for every business in the country. And extraordinary times call for the bold and far-reaching solutions that the Treasury has announced today.
In an effort to kick-start stalled money markets, the Bank of England will offer at least 200 billion pounds in short-term lending. But recent efforts to bolster world credit markets have failed to stem fears that the spreading financial crisis could lead to a global recession.
We go now to Rome, Italy, where we’re joined on the telephone by Loretta Napoleoni, an economist and author of Rogue Economics: Capitalism’s New Reality.
Loretta Napoleoni, welcome to Democracy Now! Explain what’s happening on the global front.
Well, thank you for inviting me back. What is happening now is that the crisis, which started in the United States three weeks ago, is moving across the Atlantic, and it’s hitting the European markets. The problem is that European banks are, to a certain extent, linked to American banks, but also they started to play the market using derivatives, but also mortgage-backed securities themselves. So what is happening is that in their portfolio at the moment, there is an increase in toxic assets, as in the United States, and very, very little liquidity. So the banks need money, and governments are intervening to tap liquidity into the financial markets — exactly the same thing that has happened in the US.
Let’s start with Britain. What is happening there? What does it mean that they are part-nationalizing their banks?
Well, a year ago, Great Britain nationalized Northern Rock, the first bank they were really into its financial situation. And what they’re doing at the moment, they are nationalizing parts of banks which are in need of immediate financial help. So the ownership of between 40 to 50 percent of these banks is passing on to the Treasury. So, the people, basically, the population of the United Kingdom, the taxpayer, is going to be the owner of these shares. In exchange of that, the government is pumping money into these banks.
But, you know, it’s a dangerous route, because, of course, the taxpayers cannot cover the entire debt of the United Kingdom banking system. So this is why Gordon Brown has called an emergency meeting for next Tuesday, where all the European governments’ representatives — but also, I think, the United States — will attend, in order to find a solution to what looks like a general banking meltdown.
Iceland — it’s not only about banks going down; this is about the entire country, one of the highest standards of living in the world, the entire country in financial ruin.
Well, this is what — this is the danger. The danger is that these governments step in and nationalize banks and take on the entire debt of these banks. Eventually, this debt is going to be bigger than the GDP of the country, but also bigger than the amount of money that this country can attract in order to cover the debt. This is what is happening in Iceland.
Iceland yesterday issued an emergency call to the European countries. Now, let’s not forget that Iceland is part of Europe, and they actually use the euro as their currency. So they issued this emergency call, asking for funds, asking for help. And the only country that lent money to Iceland — $3 billion dollars — was Russia. So, today, this morning, they suspended operation, banking operation, in Iceland in order to find a solution to what looks like the impossibility of the government to cover the entire debt of the three largest banks in Iceland.
And let’s talk about Germany, Switzerland, France, Egypt. The Dow declining for a consecutive day here, Japanese markets fell more than nine percent. All over Asia?
Yes. I mean, this is the crisis. This is like a sort of shock waves. It starts in New York on Wall Street, and now it’s moving across the world, because banks have links with each other. So some banks in Europe, some banks in Japan or in China have assets which were, you know, toxic assets coming out of — from Wall Street or from other — from the city of London, from France or from, you know, wherever. You know, there were these toxic assets.
So, what is happening is that banks are trying to rescue, first of all, their own banks. So we see in Germany that the German government has intervened for the last week, week and a half, massively on the market. It saved the Hypo Bank, which is the largest bank, which gave mortgages in Germany. And what the German government has been trying to do in the last three or four days was to avoid a concerted effort of the Europeans to save European banks, because, of course, Germany is the country which has most assets. It’s actually the country that has cash, and it doesn’t want to use this cash to save French banks or Italian banks. But, you see, if Iceland comes will come under serious stress in the next few days, the Europeans will have to save Iceland, because you can’t have a European country — you can’t have a country which is inside the euro going bankrupt without having tremendously negative effects inside the euro area.
Now, countries like Japan are also in very serious trouble. And let’s not forget that Japan just came out in the last six months from a recession, similar to the one we’re going in, which lasted for ten years. So its economy is particularly weak. And then, finally, also China capped the interest rate today for the second time in two weeks. But, you see, the Chinese government, the Japanese government, to a certain extent, has a much bigger margin of maneuver, because their exposure to these toxic assets is much lower than the exposure of the Europeans.
The Europeans are the ones which are, to a certain extent, even in a worse situation than the Americans banks, because the Americans banks have had rescue packages, because the US has moved quickly, in order to prevent the crisis — in order to manage the crisis. The Europeans can’t agree on what to do, and this is highly, highly negative for the market.
Is the world entering a global recession?
Oh, yes. We are in a global recession. The industrial index in the United States in the month of September fell 43 percent. Now, that is an indication.
There also [inaudible] is another indicator which is very important, and we should look at that, is the commercial paper, that yesterday, the Federal Reserve intervened on the market and decided to take on commercial papers. Now, commercial papers is what big companies use in order to cover short-term operations which are related to the production of whatever they produce, so this is where the industry basically borrows money from banks. Now, this commercial paper market froze, literally froze, in the last week. So, big corporations can’t make — people that actually operate on the industrial level could not get cash, could not get money, in order to run the everyday business. So this is why the Fed intervened. So, now, what the Fed is doing is acting as a clearinghouse between banks and the industry. Banks put money in the Fed, and the Fed used this money to discount commercial papers coming from the industry. Now, that is an indication that we are going really into deep recession, because the moment in which the industry can’t get cash moved is the moment in which they will stop producing.
The same phenomenon is happening in Europe. I mean, we have a drop, a drastic drop, in production, and we are already seeing people being laid off. So we’ll have an increase in unemployment in European countries, where unemployment is already very high.
Loretta Napoleoni, I want to thank you for being with us, economist and author of Rogue Economics: Capitalism’s New Reality, joining us on the phone from Rome, Italy.