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The new bubble

15th May 2009

By: Seeraj Mohamed


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Some economists accuse developed countries of telling developing countries to “do as I say, not as I do”.

Cambridge University’s Ha-Joon Chang says that all developed countries used trade protection policies to protect their 
domestic industries while they were developing. 
He says that countries like Germany, the US and Japan all had deliberate policies to protect and nurture their industrial sectors.


Of course, once you have a developed economy with strong industries, you want other countries to open up to your exports.
Therefore, it could be in your interest to tell countries with weaker industries than yours to reduce import tariffs and other trade protection measures. 
The developed countries also told developing countries to liberalise their financial markets.

We, in developing countries, can learn from developed countries but not by taking their self-interest-laden policy advice. 
We have to study what actually happened to understand their successes and their failures. Financial deregulation has been one of their major failures.


Financial liberalisation allowed the financial sector to grow out of control over the past few decades. 
The financial sector began taking a larger share of global profits. It drew skills and talent away from productive activities into speculative activities.

During this period of growth of finance, there was a decline in global economic growth and investment. 
There was a shift in business and investment attitudes, where the focus was not on building long-term businesses and stable 
enterprises with steady returns. Investors 
expected higher short-term returns. 
They incentivised the management of large corporations to focus on increasing short-term returns.

As a result, jobs were lost and economies deindustrialised. 
The remuneration of corporate executives skyrocketed, while their corporations were downsized. 
As more money moved into financial speculation, permanent jobs were casualised and work outsourced. 
Levels of income and wealth inequality grew globally.

At the same time, economies’ vulnerability to crises increased. There were government bail-outs of finance after each bout of crisis. However, banks were rarely allowed to fail. Instead, new bubbles were inflated after each bout of crisis.

Developed countries have thrown unbelievable amounts of public money at their failing financial institutions since the current crisis started. 
The bankers that created the crisis are being saved by the politicians who were 
lobbied to remove the financial regulations.

The hundreds of millions bankers spent on lobbying in Washington DC have earned huge returns as they earned the bankers billions of dollars in bonuses before the crisis and hundreds of billions in bail-outs during the crisis.

The governments and central banks of developed countries have tried to resuscitate their debt markets. 
We have seen them print money and increase their government bud-
get deficits. 
However, a large proportion of their households and busi-
nesses have too much debt.

They have moved into a phase of saving, not borrowing. They will need access to some debt to help them deal with cash flow problems. 
But it seems that the recapitalised banks are still reluctant to lend to them. The billions of dollars poured into financial institutions have not been enough to stop a crash in the real sector or to prevent the loss of millions of jobs.

And there are still billions of 
dollars of toxic financial assets left in the 
global economy.

We are told that green shoots are appearing in the global economy by people like Ben Bernanke.

Unfortunately, it seems that they are back to playing their games with financial markets. 
They are trying to create positive perceptions because the hundreds of billions poured into the banks are not working. 
In fact, there seems to be a danger that the governments and central banks of the US and some European countries are, in the pro-
cess, creating a new bubble, this time funded 
by public money.


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