Another Drug We're On
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In future, we should look for the emoticons, the smileys and digital winks in emails that the finance guys use when they know they're doing wrong.
'It's another drug we're on', admits the Lehman executive running the infamous Repo 105 tactic in an email. The tactic involved hiding debts away from Lehman's balance sheet by temporarily 'selling' them and buying them back once the bank's quarterly report had been submitted. Another Lehman exec asked: is the tactic legal, do other banks do it, and is it disgiuising holes in our balance sheet? He emails back: ' Yes, no, and yes :)'.
At the ratings agency Standard&Poor's, where they've knowingly mispriced risk, one guy messages another: 'Let's hope we are all wealthy and retired by the time this house of cards falters', adding the emoticon 'O)'.
Meanwhile, at Goldman Sachs in London, trader Fabrice Tourre jokes:
More and more leverage in the systems, the entire system is about to crumble any moment ... the only potential survivor the fabolous Fab ... standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding the implications of those monstrosities !!!
As more evidence of criminality and corruption emerges, there is always this knowing informality amongst bankers as they break the rules. 'Done for you big boy', writes one Barclays employee to another as they manipulate LIBOR, the rate at which banks lend to each other, the most important interest rate on the planet.
John Maynard Keynes once called money 'a link between the present and the future'. He meant that what we do with money today is a signal of how we thinks things are going to change in years to come. What we did with money in the run-up to 2008 was to massively expand its volume: the global money supply rose from $25 million to $70 trillion in seven years before the crash—incomparably faster than growth in the real economy. When money expands at this rate, it is a sign that wethe future is going to be spectacularly richer than the present. The crisis was simply a feedbacksignal from the future: we were wrong.
All the global elite could do once the crisis exploded was put more chips on the roulette table. Finding them, to the tune of $12 million in quantitative easing, was no problem since they themselves were the cashiers at the casino. But they had to spread their bets more evenly for a while, and become less reckless.(Ref)
That, effectively, is what the policy of the world has been since 2008. You print so much money that the cost of borrowing it for banks become xzero, or even negative. When real interestrates turn negative, savers — who can keep their money safe by buying government bonds — are effectively forced to forgo any income fromtheir savings. That, in turn, stimulates the revival of property, commodity, gold and stock markets by forcing savers to move their money into these more risky areas. The outcome to date has been a shallow recovery — but the strategic problems remain.
Growth in the developed world is slow. America has recovered only by carrying $17 trillion Federal debt. Trillions of printed dollars, yen, pounds and now Euros are still in circulation. The debts of Western households remain unpaid. Entire ghost towns of speculative property — from Spain to China — continue unsold. The Eurozone — probably the most important and fragile economic construct in the world — remains stagnant, generating a level of political friction between classes and countries that could blow it apart.
Unless the future delivers spectacular riches, none of this is sustainable. But the kind of economy that's emerging from the crisis cannot produce such wealth. So, we're at a strategic moment, both for the neoliberal model and for capitalism itself.
If we rewind the tape to New York in September 2008, you can see what was rational about the optimism that drove the boom. In my footage from that day there's a crowd of people outside the Lehman HQ taking photographs on their Nokias, Motorolas and Sony Ericssons. The handsets are long obsolete, the market dominance of those brand names are already gone.
The rapid advance in digital technology that drove the pre-2007 boom has barely paused for breath during the slump. In the years since Lehman collapsed, the iPhone conquered the world and was itself surpassed by the Android smartphone. Tablets and e-books took off. Social networking — barely talked about then — has become a central part of people's lives. Facebook had 100 million users when Lehman went bust; it has 1.3 billion users at the time of writing and is bigger than the entire global internet was in 2008.
And technology progress is not confined to the digital sphere. In those seven years, despite a global financial crisis and a massive earthquake, Toyota has manufactured 5 million hybrid cars — five times five times the number it had made before the crisis hit. In 2008, there were 15000 megawatts of solar power capacity in the world. In 2014 there were ten times that.
This, then, has become a depression like no others. We have seencrisis and stagnation combined with the rapid rollout of new technologies in a way that didn't happen in the 1930s. And in policy termsit has been the 1930s in reverse. Instead of exacerbating the crisis, as they did in the 1930s, the global elite reached for policy tools to cushion the real economy — often in defiance of what their own economic theories tiold them to do. And in key emerging market countries, rising demand for commodities together with the global monetary stimulus turned the first years after 2008 into a bonanza.
The combined impact of technological progress, policy stimulus and the resilience of the emergent markets has produced a depression much milder in human terms than that of the 1930s. But as a turning point, this is bigger than the 1930s. To understand why, we have to explore the chain of cause and effect.
For both left- and right-wing economists, the immediate cause of the collapse is seen as 'cheap money'; the decision by western states to deregulate banking and loosing credit after the dotcom crash in 2001. It created an opportunity for the structured finance bubble — and the motive for all the crimes: bankers were effectively told by politicians that it was their duty to get rich, through speculative finance, so that their wealth could trickle down to the rest of us.
Once you acknowledge the centrality of cheap money, that leads to a deeper problem: 'global imbalances' — the division of labour that allowed such countries as USA to live on credit and run high deficits while China, Germany, Japan and the other exporting countries took the flip side of the deal. Certainly these imbalances lay behind the glut of credit in Western economies. But why did they exist? Why did Chinese households save 25 percent of their wages and lend them via the global finance system to American workers who saved nothing?
In the 2000s, economists debated rival explanations: either over-saving by parsimoious people of Asia was to blame, or over-borrowing by the profligate people of the West. Either way, the imbalances were a fact of life. Dig for any deeper cause and you get to the hard bedrock of globalization itself, and in mainstream economics globalization cannot be questioned; it's just there.
The 'bad banking plus imbalanced growth' thesis became the explanation for the collapse. Put the banks right, manage the debts down, rebalance the world and things will be all right. This is the assumption that has guided policy since 2008.
Yet the persistence of low growth has now driven even mainstream economists beyond such complacency. Larry Summers, Treasury Secretary under Bill Clinton and an architect of bank deregulkation, shook the economics world in 2013 by warning that the West faced 'secular stagnation' — that is, low growth for the foreseeable future. 'Unfortunately', he admitted, low growth has been present for a long time, but has been masked by unsustainable finances. Veteran US economist Robert Gordon went further, predicting persistent lowgrowth in the USA for the next twenty-five years, as a result of lower productivity, an ageing population, high debts and growing inequality.
Remorselessly, capitalism's failure to revive has moved concerns away from the stagnation caused by overhanging debts, towards one where the system never regains its dynamism.
Ever.
To understand what is the rational about these premonitions of doom, we need to examine four things that at first allowed neokiberalism to flourish but which have begun to destroy it. They are:
'Fiat money', which allow every slowdown to be met with credit loosening, and the whole developed world to live on debt.
Financialization, which replaced the stagnant incomes of the developed world with debt.
The global imbalances, and the risks remaining in vast debts and currency reserves of the major countries.
Information technology, which allowed everything to happen, but whose future contribution to growth is in doubt.
The destiny of neoliberalism depends on whether these four things persist. The long-range destiny of capitalism depends on what happens if they don't.