Has globalisation outstripped governance structures?

In November 2006, almost a year before the financial crisis that struck in 2007 and the recession that followed in its wake, Bloomberg Business Weekly put forward an idea that sounded radical at the time: A Big Big Idea – probably  too big to even consider right now – would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.” The idea is increasingly appearing less radical as the world seems to be heading for a completely restructured economic dispensation, along that which is likely to be a messy path.

Since then, the debt crisis in the European Union, fears that the Chinese economic miracle is but an illusion and a bubble on its way to a bust, market jitters of a disorderly crackdown on banks and financial markets, the inability of governments to come to grips with the problem of unemployment, and even the BP oil disaster in the Gulf of Mexico have dealt body blows to the hopes that the world economy can, driven by market forces, outgrow its woes.

It has also seen a fast dwindling blind faith in The Market to rectify matters.

In May this year, we could see how uncoordinated actions by national governments could spook the markets when American, European and Asian shares all tumbled in the wake of Germany’s partial ban on naked short selling and ahead of a crucial vote on the United States financial regulation bill.

Egon von Greyerz, from the Swiss asset management Matterhorn, recently wrote in a newsletter: “Yes, this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit-infested and bankrupt world.

"They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money.

"The consequences are clear: we will have hyperinflation, economic and human misery as well as social unrest,” he wrote.

He added that “the latest EU [European Union] and IMF [International Monetary Fund] package of $1 TRILLION (750 billion euros) is yet another futile attempt by governments to abolish poverty by printing paper.

"Let’s be absolutely clear: this money does not exist and the EU governments are hoping by declaring such a large amount, they can con the Wolfpack speculators (expression coined by the Swedish Finance minister, Anders Borg).

"At this point, the EU has just picked a large round figure out of the air. But when their bluff is called by the Wolfpack and the next attack happens, EU governments will - after initial huffing and puffing - start printing unlimited amounts of paper," wrote Von Greyerz.

“Already back in 2007, we warned about the very high risk of the CDS [credit default swap] market. This is now one of the primary instruments used by the Wolfpack.

"The Wolfpack, speculators with enormous firepower such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack," he added.

"It was not the Wolfpack that caused the problem in, for example, Greece - but they can bring down a weak victim quickly and profit immensely and immorally from it.”

On the final day of the United Nations Conference on the world financial and economic crisis, Brazil's Minister of External Relations Celso Amorim also called for greater global co-ordination of economic and financial activities. It was the belief in self-regulation of markets which was one of the main causes of the current crisis.

The oil disaster in the Gulf of Mexico has  placed another factor with massive economic implications firmly back on the agenda: The fossil fuels dependence of the world - and the US as its biggest economy - has become untenable. Indeed, even before this disaster, US President Barack Obama had made his country’s dependency on oil a key issue before American voters. If anything, the Gulf of Mexico oil spill has instilled that promise with new urgency and momentum.

(For the full report, click here)