Recently on a long trip around South Africa, I bought a book by Graham Turner – “The Credit Crunch” (ISBN: 978-1-77009-687-5) which aims to talk about the housing bubbles, the effects of globalization and ultimately the worldwide economic crisis which has taken economy by storm. This book has a nice localized South African introduction which explains the global economic crisis in the South African context which shows us readers that we as the South African public in fact are barely being affected by the downturn on the economies.

The book does not deny the fact that South Africa is in a recession and this had recently been officially declared by the South African government. In South Africa, capital markets froze and most foreign investment in the economy stopped. This is attributed partially to the political environment in which South Africa has been in for the last year or so with the ousting of Thabo Mbeki and the speculation of Jacob Zuma taking control of the South African government as the President.

As with the other major economies of the world, much of the problem was caused by the outlandish lending of money to businesses and individuals. Within three years, South African lending had doubled. However, after the collapse of the Lehman Brother Bank in the United States, the rest of the world economies came to a holt and collapse was inevitable. So you may ask, why is South Africa in not as bad of a position as the rest of the western world? The answer is simple – good financial planning.

In the March of 2006, the South African government passed the National Credit Act. The purpose of the act was the promote a non-discriminatory marketplace in which the issuing of credit is regulated and black economic empowerment is encouraged.

I am a follower of the free market economy in which the government is not expected to intervene in the economy and which believes that industry in a country should be privately owned and run. Everything is run as a business as such and there is competition in the market which in theory drives prices down and efficiency up. This book carried what seemed to be a very strong socialist agenda, so I took this into account and was cautious about the concepts and suggested solutions that Turner mentioned in the book.

The book starts out with the Burberry case in which they moved their production location out of the United Kingdom into China because it was cheaper to produce out of China in comparison to production out of the UK. He suggests that this is abuse of the power of globalization.

With that in mind, this article will briefly summarize the book – The Credit Crunch (hopefully I will not give it away or stop you from buying the book – in the end it was a heavy, but brilliant read).

Chapter one was an introduction, so we will start with Chapter two.

Chapter 2: Global Contagion

This chapter starts off with a look back into past recessions and economic depression with a special highlight to the crash of 1929. It then proceeds to discuss how the government began to increase public programmes and ultimately improved the standard of living for many American people. In the past year or so, I have been doing extensive research into the Great Depression of 1929 in the United States of America. Many of the government programmes with special mention to Social Security will need to be privatized as it has become such a large burden and expense on the American economy. It then starts to talk about the first housing recession. What caused the housing bubble in the first price? Well, when problems begin, government brings the interest rate down which in a sense encourages lending. Banks become greedy and essentially, they offer loans to anyone essentially leading to a great increase in the amount of credit issued by the banking system.

This eventually becomes an issue as there is a massive excise of houses in the market leading to a state of deflation which has occurred in the United States recently and previously in Japan.

Chapter 3: Addicted to Debt

With special mention, the United Kingdom and the United States of America is considered to be “addicted to debt” according to the author. In the United Kingdom, under the leadership of the conservative party, the debt ratio increased by 49.8 per cent within 18 years. However it was much worse under the leadership of the Labour party under the financial guidance of Brown – in which it rose 71.5 per cent.

Even worse, in the United States of America, the person debt has risen by 159.1 per cent since the year 1997 (speaking numbers: from $5,547.1 billion to $14,374.5 billion).

Chapter 4: ‘Free Trade’ and Asset Bubbles

According to the author, wages would of fallen if United States and the United Kingdom had not of had the explosion of debt. This chapter talks of how China’s (in fact all low cost labour countries) contribute to the flattening of wage compensation.

Chapter 5: Dealing with the fallout

This chapter deals heavily with one of the biggest mistakes made by the government in a economic crisis – the slashing of interest rates which essentially encourages the usage of credit and this is what asset bubbles are made of. The author suggested that the United States and other western economies should of looked to the Asian crisis to learn from the mistake made there, however, he claims that they (the government) ignored the warnings.

The author suggests that interest rate cuts are not good enough in order to bench the economic crisis, however, the author says that this can assist insuring that the slump is not prolonged. However, it is essential that the these cuts in the interest rates are made at the right stage and the government is notorious in failing in this regard.

Chapter 6: A Global Credit Bubble

This chapter talks yet again about bubbles in the market and “reassures” that they are not isolated events and that it has happened on a number of occasions – but surely then should we not not by now know as to how to avoid them from happening? It brings to light the possibility that emerging economies may be artificially keeping there currency value down in order to remain competitive. It suggests that developing countries see a rise in living standards during times of contraction and  crisis in the markets. Finally, this book introduces the concept of “too much intervention” – briefly, this book seems to suggest that inappropriate intervention in the economy can be the fuel which worsens credit bubbles.

Chapter 7: This chapter simply revisits Japans crisis – I will not summarize this chapter for that reason.

Policy Failures in a Liquidity Trap

The introduction into this chapter starts suggesting what could of been done in order to prevent the rise in real borrowing costs. It discusses the reasons as to why the Keynesian policies failed and also the causes of a “liquidity trap”.

The book then ends in a chapter discussing the way forward and what we can perhaps expect in the future. I enjoyed this book, however – it is packed with economics concepts – but it has an explanation of them before the start of the actual book. This book does carry what seems to be a socialist agenda and I took that into account while reading – and even though I may not agree with all that was said in the book, he successfully backed all his concepts and theories up.

Its a recommended read,

Noel Harrison