Tuesday, May 4, 2010

Layer 295 . . . Bunting, Bankers and the Financial Doomsday Machine

The Casino

I've been working on a metaphor, and a way of explaining the way in which our economy has gone from being a workshop to being a casino, and it goes like this.

Imagine a merchant bank is holding a large stash of cash which it can either invest in building a factory that will make useful things and yield modest profits over many years, OR it can use that stash to build a casino, in which other merchant bankers from around the world can come and place bets. The City of London, which is the name of this particular merchant bank, made a choice to build and operate the casino, and also spent all its profits on placing bets there itself, having decided that low-risk low-returns manufacturing was just too boring and too unprofitable to bother with. They wanted big bucks and they wanted them instantly.

Some of the players who came to the casino did well, and others did badly. Goldman Sachs and Barclays did well; Lehman Brothers, RBS and HBoS did very badly indeed.

The owner of the casino was always a winner, and always made big profits, as long as it could pay for the upkeep of the casino. But instead of saving some money in reserves 'just in case', it decided to borrow money at low rates of interest whenever it needed to pay utility bills etc - in order that it could keep on placing big bets and winning big. But there came a day when it needed to pay some large bills and suddenly found that no-one was lending money any more on account of the collapse of a massive worldwide pyramid-selling (Ponzi) scheme, which had gone completely belly up. Nobody trusted anybody else not to go broke, so no-one was willing to lend money.

The big banks that gambled in the casino ran out of money for the same reasons.

The casino owners had three choices - either declare themselves bankrupt, put the casino up for sale, or go cap in hand to the government to borrow the huge amounts of money they now needed to stay solvent.

The government was a very stupid government and was also very afraid of the casino owners and their mafia friends, who had been been keeping the government sweet with some tidy sums in taxes and lots of friendly back-slapping.

The government could, and should, have used that moment to buy the casino for a very small sum of money, in the name of its citizens, but instead it smiled at the bankers and told them that of course they could have as much money as they wanted or needed, at very low rates of interest, even though the government then had to go and borrow the money elsewhere at high rates of interest, which looked likely to become even higher as time passed. And from then on it was business as usual. The only losers were the people the government was supposed to be serving - us - who were then responsible for paying off the trillions that the government had loaned on behalf of the casino owners and players.


I know for sure that Madeleine Bunting is an admirer of Naomi Klein and has read all her work on Disaster Capitalism because I saw Madeleine introduce Naomi on the stage of the QE Hall on the South Bank at the time of the publication of The Shock Doctrine - one of the all-time key books on economics, finance and capitalism. If anyone still hasn't read it, then they're not really bothered about what's been fucking up the planet, and who's really responsible for it, these past 30 years. Bear in mind that The Shock Doctrine appeared in print just before the shit actually hit the fan a couple of years ago.

Madeleine's columns in the Guardian continue to put the spotlight on the really important issues we need to deal with as a matter of urgency.


Finance is responsible for this savage new era. But it's off the electoral agenda

The economic future will be painful, yet the public and their leaders show no appetite for wrestling the financial leviathan responsible

We had one small question on bankers' bonuses in Thursday's economic debate and some halfhearted discussion of banking reform before moving on to a subject that arouses far more passion – immigration. Bankers' bonuses are the very least of it – the relatively insignificant tip of an iceberg – a radical restructuring is urgently necessary, argues Better Banking, the New Economics Foundation's manifesto published last week in a bid to try to get this issue on to the agenda. But the conclusion is clear; there is no great anger or appetite in the British public or their leaders for a wrestling with the leviathan financial system which is sucking the lifeblood from our political economy. That time may come but right now, all that everyone wants is for everything to go back to the way it was in 2007: booming property prices, rising debt levels. Faced with an irritating problem of dry rot, the homeowner is resolving just to patch up the visible bits and pretend the rafters are not crumbling and the ceiling is not going to fall in.

If you think that is a bit of hyperbole, read the Financial Times's Martin Wolf on the "financial doomsday machine", or the head of the Financial Services Authority Adair Turner's thoughtful speech in March, when he concluded: "We need to challenge radically some of the assumptions of the last 30 years", which have been "deep-rooted drivers of financial instability". Wolf is no leftie, but he declared recently that "a large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders while increasing the fragility of the economy as a whole". Just in case you were wondering who the outsiders are, it's you and me – our pensions, our savings, our mortgages, feeding this bloodsucker.

You might have thought that the treatment meted out to Greece, Portugal and Spain in the bond markets would have prompted more questions about how the financial system works. All the more so since this is the nightmare scenario that George Osborne has been dangling in front of the electorate. Who are these credit ratings agencies who are plunging the continent into crisis?

But no, the irony is that while we are immersed in an electoral process which is all about bringing those in power to account, the unaccountable financial system that is responsible for the painful years which lie ahead – of unprecedented cuts and the political conflict that will result – goes largely unchallenged. Politicians are left ignominiously to beg or reproach these credit ratings agencies – as both Portugal and Brussels did last week. (Agencies now described by economist Paul Krugman as "deeply corrupt", still wielding huge power despite a track record on Enron and sub-prime which has revealed an appalling lack of judgment.)

You might have thought that the spellbinding moment of Goldman Sachs executives fumbling through their files to find answers in the US Senate hearings might have prompted more outrage at the duplicity and self-serving corruption entrenched in the financial system. As Turner admitted a year ago, "British citizens will be burdened for many years with either higher taxes or cuts in public services – because of an economic crisis ... cooked up in trading rooms where ... many people earned annual bonuses equal to a lifetime's earnings of some of those now suffering the consequences."

The gross injustice of it is one reason for anger, but there is another, even more important. David Harvey, author of The Enigma of Capital, was in the UK last week on a timely promotional tour; his central thesis is that capitalism is inherently crisis-ridden, and that its crises mutate rapidly. Eighteen months ago we had a debt crisis of the financial sector, now we have a public sector debt crisis spreading across Europe. That has prompted a political crisis across the eurozone, and particularly in Germany and Greece; voters in the former are incandescent about lending their money, while in the latter it is rapidly becoming a crisis of the state itself as the unions declare a general strike for this Wednesday, and protesters had to be dispersed with teargas over the weekend. Average Greek incomes have dropped 20% with low- and middle-income earners worst affected.

The political fallout of crisis-ridden capitalism in the 1930s was precisely what politicians and policymakers wanted to prevent as they constructed the postwar Bretton Woods financial system: slow and steady were its primary requirements, and between 1945 and the mid-70s it led to better average levels of growth than the boom and bust cycles of the more volatile decades which followed. The great poison of lightly regulated capitalism is as much about volatility as it is about inequality; it is so destructive of the social fabric, ratcheting up unemployment, destroying neighbourhoods, provoking tensions which feed into political extremism and violence.

But for the last 30 years such insights were marginalised by efficient market theory which argued that left to themselves, markets were self-equilibrating and stable. This was pure fantasy, yet it seduced politicians and electorates, who got the illusion of economic growth they needed, while the fantasy generated millions which poured into the pockets of an elite.

Curiously, the one group who really understood the fantasy were those who were peddling it. The US Senate investigation into credit ratings agencies has just released a mountain of documents which reveal a mind-boggling insouciance. One internal email at Standard & Poor's in December 2006 read: "Ratings agencies continue to create an even bigger monster – the CDO [collateralised debt obligation] market. Let's hope we are all wealthy and retired by the time this house of cards falters." And indeed many of them are; profitability at the agencies soared in the early years of this decade.

This election is a kind of lull before the storm. While excited discussions consider the potential for electoral reform, the real story of the next few years will be the savage dismantling of social democracy and a new era of industrial strife organised via Twitter. Then there will be plenty of public anger, but the bankers and financial analysts will have got what they wanted – wealthy retirements and fortunes salted away in the country homes from which they survey the wreckage.

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