Saturday 26 September 2009

Prime Suspects

A disaster without consequences? Can so much damage be inflicted on the global economy without leaving a trace?

THERE’S SOMETHING not quite right about this so-called "economic recovery". Something that simply doesn’t add up.

Apparently, it’s possible to inject trillions of dollars into the world’s major economies without setting off an inflationary firestorm. Supposedly, it’s possible for the world’s taxpayers to rescue a teetering financial system without their governments erecting even the flimsiest of safeguards to prevent the poor dupes from being forced to rescue it all over again. Theoretically, the restoration of consumer confidence will be enough to get business back on its feet – even though the endless supply of credit that kept consumers spending before the financial crisis shows little sign of being restored along with it.

What the economic experts seem to be saying is that all of the arguments that were rolled out against governments and families spending more money than they received simply cease to apply when the world’s largest banks, investment houses and insurance companies stand in need of a bail-out. These institutions, we’re told, are "too big to fail".

Sadly, the obverse contention: that the debts of low-income mortgage-holders and borrowers are "too small to worry about" doesn’t seem to carry the same weight. Indeed, there are many economists who argue that it was the big money-lenders’ disinclination to worry about the credit-worthiness of their small, "sub-prime" debtors that precipitated the whole sorry saga.

But why, you might well ask, would a banker lend money to someone who could never hope to pay it back? Whatever happened to the level-headed, no-nonsense manager of your trusty neighbourhood bank? The chap who, after many years spent weighing-up the ability of his customers to honour their obligations, knew, to a high degree of certainty, who he could take a punt on – and who he should refuse?

Gone – along with the sort of bank he used to manage.

Your mortgage may stretch out ahead of you for the next 15 to 20 years, but the financial institution which signed you up doesn’t measure its business in terms of years or decades, but in quarters.

No longer are bankers rewarded for their sober judgement and dependability, but according to how much debt they have sold in the last three months. The more they sell, the more they make. Not, as used to be the case, through steady increments in their annual salary, but by way of huge bonus payments.

At the upper levels of the world’s biggest banks, these bonus payments now far outstrip their recipients’ base salaries and, not surprisingly, such bonuses have become the prime focus of their careers.

But, where is the incentive to be cautious, or even sensible, when you are paid according to your contribution to an institution’s profits, and have no responsibility for its losses?

The world’s financial institutions are like the motorist so obsessed with increasing his speed that he devotes more and more of his attention to the speedometer, and less and less of it to steering the car.

Small wonder the global economy crashed.

The last time global capitalism got itself into such a parlous state was 80 years ago, and the financial institutions responsible paid for it politically. Indeed, the staid neighbourhood banker invoked earlier was the product of their democratic chastisement. A strict regulatory framework was thrown up around the finance sector, and for nearly 50 years capitalism kept its eyes on the road and its foot off the accelerator. As a result, the 30 years following World War II were the most prosperous in human history.

Sadly, while the leaves of human memory are prone to fall, human greed is evergreen. By the 1980s a toxic combination of inflationary war expenditures, reactionary politics and technological innovation had contrived to free finance from the restrictions imposed upon it by the Wall Street Crash.

Like a corrosive acid, the ethos of finance capital dissolved not only the regulatory chains that bound it fast, but also practically every other restraining device created by the democratic state for its own defence.

Which is why, though no one disputes their guilt, the international financial institutions responsible for the Crash of 2008 have proved more than a match for those who have, once again, attempted to chain them down.

Hence my scepticism concerning all this talk of "recovery".

The only "green shoots" I can see are in the bankers’ garden.

This essay was originally published in The Timaru Herald, The Taranaki Daily News, The Otago Daily Times and The Greymouth Evening Star of Friday, 25 September 2009.


Nick said...

Glad you mentioned this little skeleton in the cupboard, well actually it is a giant voracious zombie about to slip its chains. I get the feeling that the major holders of debt may be holding off the demand for repayment incase such a demand pulls down the whole edifice.

Watching the oil price is instructive as it is indicative of productive output and its well down. It shows all is not right with the growth based model, margins made from demand can no longer prop up interest and repayment on debt. And given oil is running out the game is up.

I for one have no faith in the economists forecasts here, we are sitting on a debt mountain which must eventually be redeemed or defaulted. Either way it will be the financial equivalent of thermo nuclear meltdown.

Anonymous said...

I recommend reading The Automatic Earth blog.
We're definitively not out of the woods yet, it's just a lull.

Adolf Fiinkensein said...

We'll all be rooned, said Hanrahan.

Anonymous said...

Good analysis Chris! Though you seem (inadvertently, surely?) to endorse capitalism when you say:
"...for nearly 50 years capitalism kept its eyes on the road and its foot off the accelerator. As a result, the 30 years following World War II were the most prosperous in human history."

The failed model Nick calls "the growth based model" is actually capitalism. Infinite growth in profits is just a delusion that has got us into this recession.

After all, the banks & finance houses lent to workers who could not afford the repayments, so government bails out the banks & finance houses. All this does is shift the debt burden from the shareholders of the banks, to taxpayers, who are predominantly workers (because the bank shareholders use accountancy tricks to dodge paying tax).

At some point in the near future, the vast debt governments (especially the US govt) have taken on to bail out the banks has to be repaid (ironically, to more finance house shareholders) or defaultd, as Nick said. But if the worker taxpayers could not repay the initial debt to banks, how can they repay the increased (through interest) state debt? They cannot.

So we are just deferring the financial repayment collapse, and increasing it's magnitude. So Adolf and Hanrahan are right - "we'll all be ruined!". But while the mythical Hanrahan was mindlessly pessimistic, we can see and tackle the cause of the collapse - capitalism.

Time to build the alternatives to capitalism.

Tauhei Notts said...

I think I know when this idiotic banking started. It was when the Visa Cards were first issued circa 1981. My bank manager mate was astounded when useless clients were given cards with a $3000 credit limit. There is no known way that those people will ever repay that debt he told me, over a beer or three.
Another bank manager who was very good at his job was sent sideways because he did not have a university degree. His numerous replacements, like customers of a brothel, come (cum?) and go, leaving huge amounts of irrecoverable debt to be followed up.
We used to make jokes like
" a school of fish"
" a bunch of bananas"
"a wunch of bankers",
but it is the new bankers who have the pallid expression of perpetual masturbators.