Lawmakers in the US struggle to come to terms with the scale of the financial crisis, the Paulson solution, and the role of government in resolving this crisis.  Republicans, particularly conflicted, sabotaged the $700 billion bail-out last Thursday.  At this moment Alan Greenspan proferrs advice from the lofty heights of the pedestal he still, astonishingly, stands on.  “As a practical matter” he and others write in the Wall St. Journal (26.09.08) and “at the current stage of the crisis, the only way that financial institutions can continue to function is for the government to provide financial support.”

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15th September, 2008.

To address this very grave global financial crisis effectively, one needs to analyse it correctly. A wrong analysis results in wrong conclusions and solutions, just as a wrong medical diagnosis can lead to wrong, often life-threatening treatment.  Orthodox economists, who have for so long turned a blind eye to the finance sector, to privatised credit creation and its role in fuelling asset bubbles, do not understand this crisis. They did not predict this crisis. And their  deeply flawed economics mean they cannot therefore resolve this crisis. Indeed they are supremely irrelevant to this crisis.

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We trust Central Bank governors. They are after all, civil servants – not masters of the universe – there to serve the citizenry, not just the finance sector. And they are charged to act as ‘guardians of the nation’s finances’.

So when the deputy governor of the Bank of England says in a report on the nation’s financial stability on the 1st May, 2008 that: “the most likely path ahead is that confidence and risk appetite will return gradually in the coming months” we are inclined to believe him. His comforting words were echoed by that American civil servant and central bank governor of the Federal Reserve, Ben Bernanke, who said in a speech on 9th June, 2008 that “although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

But then a cautious citizen turns to Page 27 of the Financial Times of 14th June, and reads that European banks have a $400 bn hole on their balance sheets, in spite of raising a great deal of money from the capital markets this last week. Furthermore there are fears of another American bank failure – Lehman brothers – ‘a dead bank walking’ according to critics quoted in the FT on 14th June.

A cautious citizen would extrapolate from this first, that confidence is unlikely to return; second, that risks have not diminished over the past month or so. Third, that therefore our public servants are either a) deluded or b) unaware of the state of banks’ balance sheets.

This could cause a cautious citizen to lose confidence in the pronouncements of central bankers.