The origins of the current credit crisis lie in a loose monetary policy and excessive capital flows that were turbo-charged by "financial engineering" techniques used by banks. Borrowing bought more borrowing, fuelling price increases in financial assets -- debt, equity, property, infrastructure. In good times, financial markets embrace capitalism. In bad times, financial markets re-discover socialism.The de-leveraging and price adjustment can be achieved by creating inflation through a loose monetary policy. If asset prices remain at current levels, higher inflation allows values to fall in real terms. Higher inflation also reduces the value of borrowings that must be paid back allowing the required reduction in leverage.
Crisis is unavoidable, and he claims that investors will lose their confidence "at some point," creating serious dilemma for "both exchange markets and interest rates." As the United States faces the threats of a potential housing bubble, a massive trade deficit and the lowest level of American savings in history. The Fed slashed interest rates, and Congress provided extreme tax cuts giving American households unprecedented buying power. While the government's response did help the U.S. economy grow, it also created immense debt. To alleviate this problem, at some point, U.S. consumers will have to curb spending and concentrate on saving – plus the economy will be forced to forego foreign investment. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade.
Rising prices. Growing unemployment. For millions of workers across the United States, times are tough—and getting tougher the surge in oil prices is a reflection of a boom in world capitalist production. Such booms inevitably lead to overproduction—the uniquely capitalist phenomenon of producing more goods than can be sold for a profit. The housing sector of the economy, like the oil and energy sector, has particular importance in the overall economy. A slowdown of home construction is felt in construction as well as in the production of basic materials like lumber and glass.Under capitalism, production is based on profits, not on social needs. A 2004 report by the National Law Center on Homelessness and Poverty estimated that there are 3.5 million people experiencing homelessness in any given year, with nearly half of those children. Far from reflecting the demand for housing, the boom in housing prices is the result of monetary intervention by the U.S. Federal Reserve. Low interest rates over the past three years have had the effect of driving for-profit investment into the housing market in the expectation of high returns. Compounding these signs of impending crisis within the for-profit, commodity-driven sector of the economy is the overarching political project of U.S. imperialism for world domination. It is impossible to separate the capitalist economy from the U.S. war drive in the Middle East and throughout the world.Vast spending on the military-industrial complex, involving huge capitalist corporations coordinated by the Pentagon, was a key factor in rescuing U.S. capitalism from the ravages of the Great Depression of the 1930s. But since the Vietnam War, military spending has proven unable to act as the same sort of stimulant that it did during World War II. While military spending has contributed to softening the impact of capitalist downturns, the boom-and-bust cycle of the U.S. capitalist economy has continued unabated.
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