When the world almost ended

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When the world almost ended


10 years ago the global financial system almost sent the world into a great depression. Yohann Koshy writes about what went wrong and where we are now.

Lehman Brothers are the fourth-largest US investment bank and they started in 1850. In September 2008, they filed for bankruptcy. It seemed that the global finance and even capitalism itself, was coming to an end. Mohamed El-Erian was the CEO of PIMCO, a large US investment management firm. He asked his wife to withdraw as much money as possible from the ATM in case the banks didn’t open. A hedge fund manager in New York sent a short email to a journalist: ‘It feels a little like the end of the world.’

The world almost ended and everything stayed the same. There was time to breathe with nationalizations, cash injections, and money-printing. But now economists and bankers are talking about more problems to come soon. Before we think about what happens next, let us remember how we got here.

The 2000s

A good starting point is the early 2000s. After the dotcom bubble and the 11 September attacks, the US central bank cut interest rates to help the economy and avoid a recession. This meant it was cheap for financial institutions to borrow money and it was expensive for money to stay doing nothing. Mortgage lending increased, particularly to working-class black and Latino families, which were often offered low interest mortgages, which then became more expensive. Rising house prices and cheap consumer imports from the Global South made us think times were good - it didn’t matter that wages were not going up because families could remortgage their homes.

The Global South helped us to spend in another way, too. After the financial crises in Asia in the 1990s, developing world governments started ‘self-insuring’, after their bad experiences with the IMF and World Bank. This meant keeping reserves of the safest currency, the US dollar, in case there was another crisis. China had a successful export economy and was the biggest buyer of dollars. And so China’s savings were in the United States, and it seemed that we had to spend them, writes US journalist and novelist Keith Gessen.

So any American could get a mortgage easily and it didn’t matter if they could not make the repayments. NINJAs – mortgage recipients with ‘No income, No Job, No Assets’ – was the lenders’ name for these borrowers. Wall Street ‘securitized’ all these mortgages into ‘paper’ bonds which they sold to other organisations for a commission.

Soon homeowners could not make the repayments and house prices dropped. The mortgages were made into complicated products and were everywhere in the global banking system. And so the problems were everywhere and no financier knew who was responsible. In 2007, inter-bank lending stopped as banks realized they had ‘no way of valuing the more exotic assets on their books’. In 2008, Merrill Lynch said it would be ‘writing down $8bn of subprime-related assets’. Big investors, who kept their money in the shadow banking sector were worried and asked for their money back. The economist Gary Gorton says the 2007-08 financial crisis was really an old-fashioned bank run. About $1.2 trillion was withdrawn from the shadow banking sector.

US federal reserve chief Ben Bernanke said that 12 of the 13 largest financial companies in the US were about to fail. In Britain, the government had to help the banks. In Iceland banks almost ruined the country. And the Eurozone soon noticed it was in trouble as some of its banks had worse problems than America’s banks.

Something for nothing

The time after the Second World War in Europe, between the mid-1940s and early 1970s, was the longest time without a financial crisis for two or three hundred years. In 1944, the US helped to win the War and its economy was not touched by it. So the US decided it would produce commodities for the world to buy at the same time as a rebuilt Germany and Japan. European currencies would be linked to the value of the US dollar, which was linked to the quantity of gold held at Fort Knox and under the US Federal Reserve. This ‘gold standard’ forced discipline on the financial system: it was much harder for banks to create credit. But it was also unsustainable. And when President Nixon ended the gold standard in 1971, he began the time of ‘financialization’.

In this second period, the US and UK were less interested in producing goods. They used their financiers in Wall Street and the City of London to use the profits from the production of goods in other countries. This was possible with deregulation and new financial markets, especially in Britain with the abolition of currency exchange controls and Thatcher’s ‘Big Bang’ reforms of 1986. Working class power and wages were blocked with attacks on the unions in the US and Britain and also in countries like Canada, Italy, Spain, Germany, France, Chile, Peru, Bolivia, and Ecuador. This allowed more wealth to move from workers to owners.

With profits from across the world going into the City of London and Wall Street, bankers could gamble. For example, derivatives, which was a way to protect farmers from changing commodity prices, were created to bet on currency exchange rates. Soon there were derivatives of derivatives of derivatives, bringing the market’s value to 700 trillion dollars in 2011. The creation of complicated systems like ‘credit default swaps’ and ‘collaterized debt obligations’, was an important part of this. This allowed wealth to be much more than what national economies could produce. This led to serious instabilities.

We must remember that financialization is a form of class power. Financialization affects social life, as families spend more on mortgages, consumption, education, health, and people are linked to financial assets through their pension and insurance. At the same time governments build fewer social homes, more people take on private mortgages, creating revenue which is financialized. Costas Lapavitsas, in Profiting without Producing, says this is the simple ‘transfer of personal income directly to the profits of financial institutions’.

Socialism for the rich

First, governments took action. The IMF says that between 2007 and 2008, the taxpayers put into the financial system in the Global North the equivalent of 50.4 per cent of the world’s GDP. This created budget deficits, which austerity programmes were used to solve. This moved the cost of the crisis to the less privileged people in society. Second, central banks used ‘quantitative easing’, printing money, and added trillions of dollars of bonds to their balance sheets, which reduces the cost of borrowing for banks. But the uncertainty in the economy meant this extra cash went into short-term speculation and not long-term investment. This meant gambling with property prices and playing with stock prices to increase executive salaries.

Political systems have been more and more in the power of financial interests since the 1970s, and have done little.

Britain’s Vickers Reforms recommended separating investment banks – which gamble with fictitious capital – from high-street banks. But this has not happened yet. Vickers himself told the BBC that Britain ‘would be in big trouble if a very large, complicated banking institution got into trouble’.

What can we do?

In fact, the least privileged US citizens – black, Latino, and female workers with little money and a lot of debt – started the global crisis. Ordinary people do have influence, the question is finding a way to use it. One idea this year came from Yanis Varoufakis, who was finance minister. He suggested millions of people pay utility bills to private companies that have been financialized, which ‘have already sold to financiers the next 20 years of the electricity bills that they will be paying’. This direct action could find out which financial derivatives are ‘packaging the bills in a particular neighbourhood’, and then payment strikes over the internet could be made in a way to make them bankrupt. This is moving resistance and influence from the workplace to the home.

Also an intellectual revolution is needed in the economists. One idea concerns money. Neoliberal economists focus a lot on the way central banks print money, but little on the way most money actually comes into the economy, which is via the private commercial banking system in the form of debt. This is what happens every time the bank gives a mortgage: it creates credit out of air. Economists, like Leo Panitch and Sam Gindin, are recommending this power is placed under democratic control. Ann Pettifor says this would make bankers servants of the economy so that only environmentally good and productive investments are financed.

There is a danger in focusing too much on the ‘crisis’, when the daily experience of life under financialization is a crisis too. Global crises show the interests of power very clearly. Ten years ago, Ben Bernanke, chair of the US central bank and Henry Paulson, secretary of the Treasury, told confused President Bush what was going to happen: a lot of action by the state to save the financial sector.

Who will give the orders after the next crisis, especially if the central bankers are this time to blame? But we must not blame migrants, workers, and the underprivileged but those who create and profit from the bad financial system. So, what will start the next crisis? Time to be like the financiers themselves, and speculate…

NOW READ THE ORIGINAL: https://newint.org/features/2018/07/01/the-next-financial-crisis

(This article has been simplified so the words, text structure and quotes may have been changed)