by Michael Smith
The governor of the Bank of Spain recently issued a rather bleak but probably more realistic, assessment of the economic crisis, one that is probably than that of any other banking chief or politician, warning that the world faced a "total" financial meltdown not seen since the Great Depression.
"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with the El Pais daily newspaper.
"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.
"There is an almost total paralysis from which no-one is escaping," he said, adding that any recovery – penciled in by optimists for the end of 2009 and the start of 2010 – could be delayed if confidence is not restored.
He must be the only one finally willing to say what everyone, at least those of us on the lower end of the food chain, has been seeing for ages.
Ordonez recognized that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze could not be ruled out.
"This is the worst financial crisis since the Great Depression" of 1929, he added.
Ordonez said the European Central Bank, of which he is a governing council member, would cut interest rates in January if inflation expectations went much below two percent.
"If, among other variables, we observe that inflation expectations go much below two percent, it's logical that we will lower rates."
Regarding the dire situation in the United States, Ordonez said he backed the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.
Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid September.
Interbank markets are a key link in the chain which provides credit to businesses and households.
The problem is that nothing is going to kickstart anything. If those people really think that a few percent – 2.5% as in the case of Britain – of reduction in sales tax or such gimmicks will boost consumer confidence and they will run out to the stores to spend, spend and spend even some more then they need to leave office now, for they live even more in cloud cuckoo land than we, the people, have assumed for years. Most of those people do not appear to live on this planet anyway but on some parallel universe; that much is clear to all but the blindest person possible. And this blindness has nothing to do with eyesight but everything with vision.
The truth, as I see it, is, I am certain, that the recovery penciled in by the optimists, who seem to try and tell everyone that that is definitely the time that the economy will be back on track, may not just be delayed a little but a lot more, more like a number of years.
The realists, though some would call them pessimists, amongst the financial wizards and analysts, reckon that this economic downturn, as some still term this current depression, might make the Great Depression of 1929 and beyond look somewhat like a walk in the park.
If things really get that bad then we are all in for trouble for, while in the Great Depression people, neighbors, family and community looked out for everyone, in general, such safety net, if we might call it thus, no longer exists.
Families no longer are together, neighborhoods no longer function as they did then and as for community; what community. However, maybe, just maybe, this economic crisis might return us all to the real values of life.
We can but hope, I guess.
© M Smith (Veshengro), December 2008