Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

“Most advanced economies will not accept any more [bailouts]…The political reaction will be very strong, putting some democracies at risk,” he told delegates.

“I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future,” he said.

He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years’ time.

Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.

In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in “complete denial” over the mounting bill of the financial rescue packages and agreed with Britain’s neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.

Mr Strauss-Kahn said that while the global economy had made “remarkable” progress in exiting recession, and was on the cusp of recovery, it remained “highly vulnerable” to shocks.

He said state support for the world’s battered economies must remain in place if a smooth recovery is to be achieved.

“We recommend erring on the side of caution as exiting too early is costlier than exiting too late.”

Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.

In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.

His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.

The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.

Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will “depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other”.

Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.

Source: http://business.timesonline.co.uk/tol/business/economics/article6928147.ece

According to the World Bank, world-wide wealth to the tune of $34 trillion has now been wiped out in the latest phase of destruction. This means that, if you believe its chief economist, Justin Lin, we have some way to go before the orgy ends.

Twelve months ago, in the summer of 2008, in a Renegade Economist documentary – http://www.youtube.com/watch?v=1nttuh8oHYw&feature=channel_page – We forecast that the wipeout of wealth would reach $45 trillion.

Carry on Crushing

According to Lin, the World Bank’s first Chinese official to serve as chief economist, the West should accelerate the destruction of its capital base.

 ”Excess capacity has built up and unless this issue is addressed, we will face a deflationary spiral,” he warns. The West, apparently, should demolish more factories, adjusting the industrial base to accommodate economic reality.

But here’s the problem: if China continues to invest in capital formation (which it is doing), and if China’s labour costs remain lower than the wages paid to western workers, the trade balance between East and West will continue to be lopsided in favour of Mr Lin’s homeland. So how do we stop the downward spiral?

China has an advantage over the West: its command control in Beijing is determined to boost growth even as the West continues its toboggan ride into depression. At the last count, China was growing at an annual rate of 7.9%, and rising.

Eastern Promise

What if the West accepts Mr Lin’s advice, and demolishes more of its manufacturing capacity? Disgruntled French workers apparently find this strategy appealing, as a negotiating tactic: workforces are now rigging factories with gas canisters, to blow up the capital equipment if they do not receive improved redundancy pay-offs.

But if we carry on crushing the West’s industrial base, the ratio between the West and the East’s capacity would have to be adjusted on a continuous basis, until everything that we consumed was Made in China.

Do we have to allow the Chinese to specify the terms for the next business cycle? No! The appropriate tax reform would reduce western labour costs (without reducing living standards), while raising incentives to invest in the innovative firms that could lead the West out of depression. Instead, conventional economic wisdom urges us to accelerate the destruction of capital. It seems that our forecast – the wipeout of $45 trillion worth of wealth – will be realised in 2010.

 Was that a laugh, I heard, as I last strolled past Marx’s mausoleum in Hampstead?