Like the great majority of my fellow human beings, I am not, nor have I ever been an investment banker, a mortgage broker or a hedge fund manager. And, I suspect like them also, I find the arcane world to which the masters of the financial universe belong, bewildering in the extreme. In attempting to understand what has happened during recent months, we come up against an unfamiliar jargon. For example, with deregulation the market took over from banks which had acted as intermediaries between savers and borrowers, in a process known as disintermediation. When investment banks took on excessive amounts of debt far beyond their capital base, they were said to become highly leveraged. When banks issue loans and then sell these assets into secondary loan markets, this process is known as securitization. The obfuscating jargon served to persuade the uninformed that the system worked rationally and in everyone’s best interests. If one protested that it was driven by greed, then we were told that private greed translated into public good. But now this myth is no longer widely believed. J K Galbraith once remarked that “as the speculative waters subside, all manner of crimes are revealed to an astonished public view.”
Criminal enquiries have been launched in the U.S. but do not expect many prosecutions. Such enquiries will leave completely untouched such noble champions of the public good as Alan Fishman, chief executive of Washington Mutual. WaMu, which has just been bought by JP Morgan for $1.9bn, had a stockpile of dubious mortgages which led to the bank’s seizure by the authorities. When Fishman joined WaMu three weeks ago he got a signing on bonus of $7.5m. Just three weeks later he is likely to receive a severance payment of $11.6m. Not bad for a three week stint.
The accelerating pace at which the sub-prime mortgage crisis developed into the credit crunch and progressed from a few bank failures into a full-scale financial melt-down, has been a roller-coaster so breathtaking as to make Harold Wilson’s famous much quoted dictum that “a week is a long time in politics” seem like an understatement.
On both sides of the Atlantic the politicians have been forced to confront a crisis that just a few weeks ago would have been unimaginable to them. Indeed, less than a week ago, John McCain was still saying that the U.S. economy was “fundamentally sound”. Gordon Brown has spent the best part of his eleven years in office, first as Chancellor of the Exchequer, and more recently as prime minister, telling us that the British economy was strong and stable and that under his stewardship the country would never return to “boom and bust.” He now claims that his government bears no responsibility for the crisis engulfing the financial system. He “feels the pain”, he says, of those who are unable to meet the astronomic rise in the cost of fuel and those who cannot meet their mortgage repayments and face the prospect of re-possession of their homes. He is deeply concerned about rising food prices and rising inflation. But, despite widespread popular revulsion at the unprecedented profits made by the privatised energy companies who have made a killing from the huge rise in oil prices, he has refused popular demands to impose a windfall tax on them. At the time of writing (28.09.08) he is in Washington to assure George Bush that “whatever the details” in U.S. treasury secretary Paulson’s planned $700bn bail-out of the financial markets, he will support it.
As champions of the neo-liberal “free market”, the U.S. and British governments have promoted de-regulation in all spheres of economic life, including the financial system. Both governments have refused to acknowledge that Chicago school unconstrained free-market capitalism has played any part in creating the present crisis. In the haggling that has been going on between congressional leaders, perhaps most amusing is the split in Republican ranks between those, including Bush (who, with his customary elegance told the group that unless the deal is accepted “this sucker could go down”), and those like John Boehmer, who appear to regard any intervention by the federal government as tantamount to socialism or communism. Such, during the past 35 years, has been the ideological backlash against Keyensian interventionism in the operation of the free market, that even when faced with the imminent breakdown of the whole financial system and the long-term consequences that would follow from this, governments have been most reluctant to intervene. Only when major mortgage and investment banks such as Northern Rock in Britain and Fannie Mae and Freddie Mac and AIG in the U.S. faced imminent collapse was the last resort of nationalization contemplated, and then every effort was made to avoid using the term because of its socialistic connotations.
No-one appears to have any idea of the scale of the operation that may be necessary to prevent the present crisis sliding into a full-blown slump. In the U.S. no-one seems to know exactly how much “bad debt” the banks have accumulated through years of more or less unregulated operations, so one can only guess at the final figure that may be needed to bail them out. It could be anything from $700bn to $1 trillion. This would have to be added to the federal government’s existing debt of $5.4 trillion. Working people in the U.S. and in Britain have reason to be concerned about the impact on their lives of the cost of salvaging a financial system that is responsible for creating the crisis. Public spending to bail out the banks will appear to most people like theft of their money to pay for the greed of those who have become billionaires at their expense. The argument that this is necessary in order to prevent an apocalyptic collapse of the financial system and a return to the mass unemployment and impoverishment of the 1930s will be treated with the contempt and cynicism it deserves. Expect drastic cut-backs in welfare spending, public health care and environmental programmes. Expect very hard times. And also, those responsible for creating this crisis should not be surprised if the harsh times that surely lie ahead bring widespread anger and resistance by those who will be expected to pay the price for the salvage operation.
Likely Political Consequences in the U.S. and Britain
In the United States it seems that there is widespread and growing public anger that those hardest hit by this crisis will be the ones who will be made to pay for it. Whoever becomes president in November will face some very hard choices. There are signs that support for Obama is increasing, though things could easily go the other way. Those who have been mobilised in the Democratic campaign, particularly the younger generation and large numbers of African Americans who have been inspired by Obama, expect change. They have pinned all their hopes on him as the antithesis of everything that the Bush administration represents. Should he be elected he will need to fulfil the promises he has made and meet the expectations his rhetoric has inspired. He will be operating in the most difficult of circumstances and the demands on him will be great. It is no exaggeration to say that there are clear similarities with the Crash of 1929. In 1929 Republican president Hoover, another champion of the unrestrained free market, had only been elected one year earlier at the height of the boom. It took another three years before F.D. Roosevelt came on the scene, and, under considerable pressure from a militant labour movement, brought in the New Deal. Obama, should he be elected, will need all the skills and determination of FDR and more. He will need to take immediate action to end the disastrous wars into which Bush took the U.S. If Europeans had a vote in the presidential election, Obama would win by a landslide. It is not only Americans whose expectations of Obama are high.
In Britain the crisis has not yet struck home with the intensity it has in the U.S. But it will. Only this morning (29.09.08) it was announced that the government is to nationalise the stricken mortgage bank, Bradford and Bingley, to save it from a panic run to withdraw savings. This follows the earlier nationalization of Northern Rock and, just few weeks ago the, the forced buy-out of HBOS by Lloyd’s TSB., creating a mega Bank.
Since15.September $550bn have been injected into the money markets. The housing market is in free fall and unemployment is rising. In terms of solutions to the problems faced by the hard-hit people of Britain, the mainstream political parties have nothing worthwhile to say. They are as bankrupt as the financial system. It is likely that there will be an autumn and winter of bitter discontent and I hope and expect it will take the form of increased militancy and resistance by those hardest hit by the crisis.