It has been seven to eight years since the world was rocked by an economic cataclysm called the housing crisis. Banks and financial investment houses that were hitherto believed to be too big to fall were rocked at its foundations when billions of dollars were lost in a high stakes gamble gone bust called the housing bubble.
But the housing bubble – the highly irregular skyrocketing of values of housing assets, the frantic trade in financial instruments that gathered mortgages called collateralized debt obligation (CDO) or mortgage-backed securities, and insuring these CDOs through AIG’s credit default swaps – was just a vehicle in the high stakes gambling being done by large international banks, financial investment houses and large multinational corporations through what is called by the boring name portfolio investments.
Earlier on, in 2001, the world was rocked by the bursting of the high technology bubble, or the high stake bets on stocks of software and IT companies. This sent companies in Silicon Valley crashing as it would do so again seven years later when Wall Street was plunged into the quicksand of bankruptcy.
It was actually the housing bubble that allowed the global economy to ‘recover,’ albeit temporarily, from the bursting of the high-tech bubble. Meanwhile, the real economy has remained stagnant as industries are dealing with the problem of production surpassing consumption, by a people whose purchasing power are weak. Capital was invested, nay gambled, in complicated financial instruments. Even companies such as GE created banks and financial investment arms to trade in financial instruments.
So after the housing bubble burst seven years ago, what now?
Actually the world is still reeling from the crisis and there is no relief in sight.
While the people of the world are being bombarded by reports of rosy economic figures supposedly indicating that the global economy is on the road to recovery, an obscure, short article revealed a different picture.
The article is BIS warns low interest rates could spell ‘entrenched instability’ published by GMA news online, June 28, 2015. The BIS is the Bank of International Settlements. It is the Central Bank of the world comprised of 58 central banks. It has a core of 31 chiefs of central banks of the most economically powerful countries of course.
Every two months, the chiefs of more than a dozen central banks meet to decide whether “to devalue or defend currencies, fix the price of gold, regulate offshore banking, and raise or lower short-term interest rates.”
The BIS is not controlled by any government, pays no taxes, and has its own police force.
What did the BIS warn about in the article?
It warned about the persistently low interest rates. In fact, some countries such as Switzerland, Sweden and Denmark have negative interest rates. Japan, in recent years, also approximated negative interest rates. In fact, interest rates are even lower now than at the height of the 2007-2008 financial crisis.
Why are interest rates very low?
Central banks lower interest rate to encourage borrowings for investments to stimulate the economy. And this monetary policy of lowering interest rates is, the BIS warned, “overburdened in an attempt to reinvigorate growth.”
But companies are not too keen on borrowing for production as inventories are still high. Banks, on the other hand, are too cautious to lend money, especially after suffering billions in dollars in losses both from housing loan defaults and too much betting in financial securities.
Governments, on the other hand, borrowed unsustainably to finance its bail out packages and to run the state machinery. Greece, for example, is now on the verge of a major debt payment default unless it is bailed out by the European Union, which would be voting on the matter soon.
This, the BIS said, resulted in “too much debt, too little growth and too low interest rates.”
And yet, governments still rely on the same monetary and fiscal policies that have so far been ineffective while retaining the same neoliberal framework and policies that caused the economic crisis in the first place.