Economic crisis – the long view
Article published: Monday, December 1st 2008
This month Mule will present a series of articles on possible routes out of the economic crisis. But first off, a look at the causes. Should we blame a few bad apples in the financial sector, the ‘greedy’ poor or lax regulation? Or is the current financial meltdown the sign of a much deeper malaise? Andrew Bowman investigates.
What caused this mess? You’ll know the media scapegoats: reckless bankers, excessive bonuses, shortsighted government regulators. Conservative papers blame ‘greedy’ poor people who couldnt resist that extra credit card to pay the heating bill. True, a risk-taking banking culture and hard-to-value financial instruments are factors. As is under-regulation. However, they are symptoms not causes. We’re witnessing the results of broader economic processes: principally, the impossibility of maintaining ever-expanding profits given the limits capitalism inevitably runs up against. Jargon surrounds this topic, but history makes it clearer. We could go back to the origins of capitalism itself, but haven’t the space. So, to the late 1970’s, when high inflation was the major economic issue. The organized working class and their demands for higher wages were falsely blamed. The power balance between business and labour began tipping towards the former, wiping out the post-World War II redistribution of wealth. By ‘labour’, I mean working class, not just cloth-capped factory workers, but everyone working to make somebody else profit. Margaret Thatcher and Ronald Reagan led the attack, championing ‘neoliberal’ economic policy, with these key aspects: – Prevent red tape’ restricting industry in key areas (i.e. worker’s rights, taxation, movement of currency). – Loosen controls on movement of goods and money, known as ‘free trade’ – and who could be against freedom? Unless of course, it’s freedom for some at the expense of others. Wealthy countries dominated trade negotiations in areas such as agriculture, gaining full access to developing world markets whilst blocking the reverse. – Reduce economic policy to controlling inflation through adjusting interest rates, and give up on attempting to get full employment through state investment in industry: unemployment would reach a ‘natural’ rate. – Abandon wealth redistribution: wealthier people use money more efficiently, and inequality motivates entrepreneurs. – Cut welfare provision (it’s expensive and only makes workers lazy) and increase support for business. Think privatization schemes, tax breaks and R&D for high-tech industry. – Finally, break the unions the 1984 miner’s strike was the key battle. Neoliberal policies were sold as government butting out of our business, especially businesses’ business. Really, the state never shrank away, just did different things. Even today, state expenditure still accounts for around 40 per cent of Gross Domestic Product, with the Financial Times recently reporting that since 1998, two thirds of UK jobs created are state supported. Real wages have been driven down by global competition. The ‘flexibility’ and ‘mobility’ created by neoliberal reforms allowed much of UK industry to move overseas for cheaper labour and bigger profits. Massive inequalities have opened up, and the problem of over-production has arisen: ever-increasing amount of goods and services produced to sustain economic growth, with not enough consumers to ‘absorb’ them. Additionally, aside from finance, private industry in the UK has been stagnant since the 1970s. To keep the economy afloat it was necessary to grow consumer spending, and grow the still-competitive financial sector. Problems? Lower real wages limit consumption, and fewer large companies nowadays raise money from banks, preferring instead to play the stock market themselves. Two birds, one stone: debt. Poorer people were plied with loans, fueling consumer spending. Financial institutions earned money from the interest, and by selling the debts on. More money could be made ‘insuring’ and gambling on – the risk of debtors defaulting on their repayments, using ‘credit default swaps’ and other derivatives. This hid the huge risks of such excessive lending. Spiraling personal debt (up from £570 billion in 1997 to £1500 billion in 2007) helped the financial sector to boom to four times the size of GDP in recent years, with growth rates quadruple those in other economic sectors. The government encouraged the whole process with low interest rates, light regulation, and by issuing bonds as market benchmarks. Remember all those daytime TV ads flogging us credit cards, loans, mortgages bad credit history not a problem? Painted as an act of corporate philanthropy, the mass integration of the working class into financial markets was a predatory move which profited from welfare cutbacks and falling wages. Lower council housing provision meant more mortgages. Private Finance Initiatives (PFI), got quick money for new hospitals and schools, but brought the fate of key public services into the financial system. Pensions have gone this way too. And of course, lower wages were compensated for by ever larger loans. Major banks like HSBC and Citi now make around 50 per cent of their profits from loans to individuals! The consumer spending these loans facilitated, as former chairman of the US Federal Reserve Alan Greenspan admitted, effectively "carried the economy post 9/11". The same was true in the UK. Credit was extended to NINJAs, standing for No Income, No Jobs, No Assets. Their debts were bundled together with thousands of others, then sold, and sold again as ‘collateral debt obligations.’ It was a disaster waiting to happen. Defaults in the US ‘sub-prime’ mortgage market sparked a chain reaction, taking down some of the world’s mightiest banks. Northern Rock dealt in the UK equivalent of the sub-prime market. The housing bubble had come to symbolise economic prosperity, when really it was designed to compensate for excessive debt. Rising asset prices raised levels of net individual wealth, thereby boosting confidence to take on yet more debt. Government analysts blamed rising prices on lack of available housing, and compliant media commentators made immigrants or conservationists the culprits. Plummeting housing prices leave an economy dependent on the income of people who have no income, due to their debts. With the contagion spreading beyond the financial sector as major retailers begin going under, the government’s Pre-Budget Report represents a desperate attempt to get people spending again. This comes on the heels of the bank bail-outs, a desperate attempt to get banks even more indebted than individuals – lending again. The banks, however, remain unwilling or unable to lend to one another, or indeed to individuals, upon whom much of the burden is again falling in the form of harsh interest rates and repossessions. The good times (for some), saw the longest period of economic growth in 300 years, winning Labour two comfortable re-elections. They bent over backwards to nurture and appease – the financial industry. As the Financial Services Authority said back in 1999: "we’re committed to maintaining a light regulatory touch for business…they’re in the best position to determine the terms on which they should do business with each other." ‘Self-regulation’ meant that the trade in derivatives labeled ‘financial weapons of mass destruction’ by world’s richest man Warren Buffet proliferated with minimal scrutiny. Additionally, with controls on currency movement weakened, big business could ‘vote’ against undesirable government policy by moving their custom abroad. The end result, besides billionaire hedge-fund managers paying less income tax than their cleaners, was an economic system based upon fatally huge inequalities and imbalances. So the crisis isn’t just the result of a few bad apples in the financial sector, nor a sudden ‘lack of confidence’. It has a real basis in the limits to profit-making caused by the contradictions discussed above. It won’t, then, be fixed by legislative tinkering, or reducing bonuses. Governments plowing money into the economy may help save capitalism in the short term, but with the huge national debt, this will delay rather than avert a major catastrophe. But is it a catastrophe? And is capitalism worth saving? Radical economic changes are required, and so there’s an opportunity to produce something fairer, more equitable, more rational.
This will all depend on how hard people push for it.
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