In a three-parter today, tomorrow and Monday, The Slog examines how we got to here, and how to get out of here
The one topic no politician, banker, Hedge Fund or multinational CEO will talk about at the moment is where all the money resides. The answer of course is “all over the place somewhere else” for most of us: but what the self-styled élite won’t do is join in a simple debate about who’s got the vast majority of it, where most of that vast majority sits, and then what role the owners of that money have played in creating the current surreal economic mess.
The point of having that discussion is not so lots of hairy Marxists can start shouting “Property is theft!” and “The boss class has the workers in chains!”. I’m not talking redistribution here: I mean, who should pay the most money from here onwards to bale globalism and its deranged investment banking system out of the pit it has excavated for itself?
I’d like to do this along three dimensions if I may: ethical, economic, and financial. The first area I realise is of no interest to the culprits, but it is to the victims – and equally important, it is to history. The second will look at the economic consequences of those in charge continuing down the current road to serfdom. And the third will, I accept, ask some questions that at least partly suggest “to each according to his means”. These people say they’re saving the world and doing God’s work; well, now’s their chance to walk the walk.
The ethics of it all
The crisis has its roots spread out across acres of historical ground like some giant biblical tree, and so any ‘explanation’ of how we got to here will inevitably be over-simplified. I would venture to suggest, however, that my account won’t be simplistic…whereas the guff we’re offered by the mass media and Sovereign States pretty obviously is. Their line is “We’re all in this together” which is OK so long as you assume we all fired an equal number of torpedoes at the Lusitania. This clearly isn’t so.
The best starting point is probably the early to mid 1970s. The two most influential Anglo-Saxon nations at the time were still probably America and Britain. Germany was growing fast, but it was still divided and, to some extent, on the Naughty Step. In the States, President Nixon had signed a Bill pushed towards him by the US business and banking lobby, and its effect was to remove any relationship at all between the value of the Dollar and an accepted norm – basically, gold. In the Middle East, oil prices spiked. In the UK, a Labour government allowed inflation to let rip (it was still unable to control its Trade Union affiliates) after Ted Heath had taken on the miners’ union and lost.
What happened then was a double backlash. In Britain, the Conservative Party abandoned Heathite One Nation Toryism in favour of Labour’s quieter life, and the Americans abandoned Nixon in favour of Carter….only to discover, that the liberal Left was, as usual, all over the place. So the second (much more convincing) backlash occurred: a lurch to the Right. Margaret Thatcher became Prime Minister in 1979, and Ronald Reagan won the Presidency in 1981.
The West was having one its panicky moments: people were lying unburied on the streets of London, the winter had been very cold, the Arabs were trying to bankrupt us, and the Mullahs were kidnapping US citizens. Everything in the way of economic and banking thinking that went before had obviously been wrong, the State was too big and wasteful, it was time to deregulate the wealth producers, annihilate the quasi-Commies, it was time for the next stage of capitalist growth to get under way.
Probably the most important output of these two leaders in domestic policy (in foreign policy, my view is that they did remarkably well on the whole) was to cut taxes, make banking supervision far lighter, encourage banking to create ‘wealth’ via its investment sector, and get traditional rent-payers to move onto the home ownership ladder. In point of fact, both Reagan and Thatcher left the State bigger than it’d been before they arrived, and Reagan’s legacy was a whopping national debt growing at an annualised rate of 14.2%…easily the fastest in US history.
But one overall result of their years in power is indisputable: people felt richer. They felt this because the housing markets were booming, and credit was easy to get. In the UK, a fair number of those who bought council houses or first-time properties during the bubble wound up in negative equity; and in the US, towards the end of Bush Sr’s term the US economy and debt were beginning to cause concern. But on the whole, most people had done well. This meant that left-of-centre politics had to change: to become more inclusive, and to be more prudent. Or put another way, just like the other lot only much nicer, allegedly.
The two men elected on this ticket – Bill Clinton and Tony Blair – spent their time in office ‘spinning’ apparently good things, but above all balancing budgets most of the time. They were, respectively, moderate Republican and Leftish Tory in reality. They pretty much let the greed rip, but helped minorities and the poor to do better: Clinton pushed mortgages at them, and Blair patronised them. But very little changed really. The new God was still Mammon, the new paradigm was still in fashion, boom n bust had been abolished forever, and growth was going to be eternal.
Except it wasn’t. There were three reasons for this. First, the ‘wealth’ was derived paper not real product economic output. Greenspan probably spotted this (and lunatic credit ratings) in 2003, but did nothing that would hurt Bush Jr. Second, Asia and South America were beginning to consume their own stuff rather than buying Euro-American: such growth as existed was being taken up by the newcomers (‘Brics’) and the Anglo-Saxons were losing share of world trade. China in particular had a low cost of output, and so began to build up surpluses. With these – like the oil-rich Arabs – it bought Anglo-Saxon debt….debt created by (a) expanding State spending/waste and (b) falling appeal and rising costs of their exports.
Third, the European Union embarked on the biggest and most ill-advised currency project in history: the euro, a money form that was both fiat and incapable of devaluation. Give Bankers and southern Europe access to that deadly brew, and you are doomed: but a useful catalyst in the process nevertheless was Jean-Claude Trichet, the then head of the European Central Bank (ECB). Trichet sprayed Europe with cheap sovereign credit, and failed to either regulate or keep an eye on American banking firms doing the same. Within five years, Greece owed €250bn and Germany was about to become the world’s leading exporter….yet they both used an identically valued euro. Mad.
Greenspan’s failure (and Gordon Brown’s) was to do nothing about the various banking and credit bubbles expanding dangerously – beyond licking bankers all over. Derivatives, collateral forms, and credit targeting reached a stage where they made no sense at all except to the bankers who peddled them, and the politicians who enjoyed taking the credit for growth.
The subject of Growth is worth further interrogation at this point. It remains one of many ex cathedra neoliberal assumptions that There Is No Alternative to economic growth. It can be argued that indeed yes, in a globalist economy based on mercantile competition, one needs growth; and further, struggling Asian and South American living standards can’t be improved without their economies growing. But in the West, the ‘need’ for growth is much less clear. What most proponents of the concept really mean is growing shareholder value. And as Ben Bernanke has proved over the last four years, you don’t need economic growth to do that – just taxpayers’ money.
It is time in fact to get to 2008 and the sudden learning curve we all went up. We discovered ‘sub-prime’ debt, ie, badly targeted debt. We discovered ‘derivatives’ ie, salami’d packages of random toxic debt sold to the naive by an army of Elmer Gantrys. We discovered ‘wholesale money markets’ in which (Northern Rock felt) prices couldn’t possibly rise because it was another New Paradigm. We discovered how easy it was for Lehman to go under, and as result of that, we learned about Too Big To Fail. But most of all, we discovered the bailout, and how the sky would fall in unless everyone in the doo-doo was bailed out…by us.
In the first 12 months after April 2008, the global cost of bank bailouts to the taxpayer was a staggering £4.5 trillion. By early 2010, the IMF was putting the cost at £11 trillion. By the end of 2011, the US watchdog put the cost in America alone at £20 trillion….about 30% higher than the US gnp. Nobody wants to quantify the cost any more. You can see why they don’t…especially the politicians who under-wrote it.
By early 2010, most of us had learned two further terms: QE (Quantitative Easing) and Zirp (Zero Interest Rate Policy). All the major central bankers – Bernanke, King and eventually Draghi – did the same sort of thing. Ostensibly, QE was there to kick-start economies, and Zirp to encourage the use of credit to expand business. In fact, QE was and is a way to retain confidence in the stock market (by upping dividends) while Zirp is the means by which Banks can (if they choose) use it to repair balance sheets with cheaply borrowed money. That is, credit and borrowing – the two biggest culprits – were made even cheaper – and encouraged.
This is a pivotal point in the ethics of what happened: for sovereigns and central bankers chose to salvage the banking system at the expense of working citizen earnings, and to remove the investment income of the middle-income retired. As a result – respectively – citizen unemployment rose, and senior citizen living standards were decimated. Rich monied influence, failure to invest soundly, greed and systemic perversion of objectives were all rewarded. Everyone else was punished…their sole crime having been to max out their cheap credit, the availability of which was the only thing driving the economic growth pattern in the first place.
In short, the path to the denouement – and the ‘solution’ when it arrived – were deeply unethical, being injurious to social stability and personal quality of life, while thrashing the innocents.