KEY POINTS:
The inauguration of Barack Obama to the most powerful job this week has changed the world on many levels. But what is not understood is that Obama, as his opponents accused him of being during his campaign, is the most left-wing leader to occupy the White House. His voting record in the Illinois Senate and the United States senate were consistently socially and economically progressive. Therefore it's no surprise that in his inaugural speech, he repudiates the excesses of the free market and corporate capitalism.
For the best part of two decades, the ideological right-wing and the corporate elites have run the US and the world as they wished. All countries followed their lead and as a result the world is on the precipice of an economic disaster which could equal the Great Depression of the 1930s.
It is ironic that capitalism, which has almost been brought to its knees by the greedy corporate elites, now expects to be saved by a working class black kid from a single-parent home. There is a lot of truth to a joke going around African-American circles that black people are still having to clean up after the white folks.
The US economy is so dominant, that if Obama is not able to turn around America's mess, we're all going down. Obama was spot on when he mentioned that the economic crisis was in large part brought about by ordinary people being lulled into a false sense of security by banks' willingness to offer cheap credit.
We've all been living on borrowed money from banks backed up by over-inflated house prices. The banks responsible are now in panic mode and tightening up.
This gives people less to spend, causes profits to drop, resulting in businesses laying off workers and reducing supply. Once it gets into this spiral, the whole system is in trouble.
But what most New Zealanders haven't quite comprehended yet is that our country is in a worse position than the United States. The banks in New Zealand have been given an unfettered licence to create debt on a colossal scale to keep the perception that our economy has been growing. But it's all smoke and mirrors.
Economist Rod Oram says our average household debt over the last 15 years has mushroomed from 60 per cent of GDP to 160 per cent today.
This makes New Zealand the second most indebted nation in the OECD. This spending has fuelled the housing price bubble which has doubled since 2000.
Our political and business leaders over the years told us not to worry and encouraged property owners to use their homes as ATM machines.
In the three decades before 1980, New Zealanders saved about 10 per cent of their income. But in recent years, our spending on average has exceeded our incomes by 15 per cent.
A couple of months ago, economist Gareth Morgan noted that the "average house prices used to be twice a graduate's salary. Nowadays, it's eight times that and the median salary is less than the interest on the average mortgage". The median house price had skyrocketed to the extent that by last year it had reached 6.3 times the average household income. Frighteningly that's double that in the United States.
Even with this alarm bell ringing successive Labour and National governments refused to intervene. Both had an ideological consensus that they shouldn't interfere in the free market as supposedly it would miraculously correct itself. But now it should be obvious to everyone that the whole global banking system was just an elaborate pyramid scheme which is now coming to an end.
While the bankers gave themselves billions in commissions and fees, their customers now have huge debts that they cannot repay. Canterbury University's Chris Eaves estimates that at least one in five homeowners owe more on their home than it is worth. With house prices plummeting, this percentage will rise. The downward spiral has begun and no one knows where it will end.
Everyone acknowledges that unemployment will soar as people start cutting their spending. But what makes it even worse for New Zealand is that two-thirds of our GDP is made up of household expenditure.
Therefore if households restrict their spending to their income, then that would equal a 10 per cent decline in GDP - just like that. In the recession of 1990-1991, GDP declined by 2 per cent and unemployment jumped to 10 per cent. John Key should know this and if it's not already giving him a headache and sleepless nights, it soon will.
We have been living in cloud cuckoo land for 20 years. The free market policies adopted in the late 80s have caused a real decline of wages by about 25 per cent over this period. This has been covered up by workers having access to easy credit and working longer hours.
No wonder National has called a summit to get as many of the players to take some sort of collective responsibility for the impending crisis. But Band-Aids aren't going to work. The cause of our problem wasn't economic; it was ideological.
The only way to fix our economic problem is to nationalise our financial system and take it out of the hands of the pirates who have been running our banks like casinos.
