by Paulo L dos Santos
The chronic banking crisis is flaring up again. Banks in the US and Britain continue to hemorrhage capital as recession and falling asset prices add to their losses. CDS spreads on bank debt are back on the rise. And the only thing propping up bank shares are daily promises of innovative ways to inject billions of fresh public money into the sclerotic veins of privately-run banks.
The latest such cures being prescribed involve either state-backed insurance of bank assets or the establishment of a state-backed ‘bad bank’ that would buy and hold toxic assets. The argument behind them, made most clearly by Paul Myners of the British Treasury, is that if the public takes on the bulk of the asset risks and losses lurking in bank portfolios, banking will become profitable once again, helping their private recapitalisation, and an eventual resumption of normal lending levels.
Why should the public lose its shirt to restore profitability to a sector that has pocketed billions as it created a crisis that will likely cost tens of trillions of dollars? Because, Mr Myners states without the distraction of substantiation, ‘The capacity for soundly managed banks and markets to support the generation of wealth in the economy could never be matched by the public sector’. The same argument has been made recently by The Economist and Alan Greenspan, also on the basis of pure chutzpah.
Yet the evidence supports a much dimmer view on the ‘entrepreneurial’ capacities for ‘wealth creation’ of private banks. Leading private equity boss Guy Hands recently commented to the Financial Times that, to his mind, British banks have lost all capacity to make loans to corporations in the domestic real economy. In my recent study of the activities of top international banks, I have documented what has been keeping them busy and profitable. The picture that emerges is one of remarkably well remunerated parasitism.
Even when they actively made loans, Citigroup, Bank of America, HSBC, Barclays and RBS centered their lending on mortgages, credit card and other loans to individuals, and loans supporting financial engineering. Lending to individuals has transferred increasing shares of wage income into bank profits, and its high profitability was a central contributor to the current financial crisis. Financial engineering operations aim to capture capital gains that are significantly funded from the mass of retail investors through fees and systematically lower returns on their pension, education and other savings. Lastly, banks have drawn astronomical revenues from card fees and other account service charges paid by clients to access and use their own money and accounts: a total of US$ 50 billion for Bank of America, Citibank, HSBC and Barclays in 2006.
In addition to being remarkably poor value for public money, plans to insure bank assets or create a public ‘bad bank’ are almost guaranteed not to work. They assume it is possible to identify and fence off ‘bad assets’ and quantify associated losses. This is impossible at this early stage of what will likely be a protracted recession. Any such programme would be followed by a steady stream of new losses, triggering new panics, renewed instability, and new cuts in lending. Ask the Japanese.
That takes me to the question of nationalisation, which, for all the recent hand wringing in the financial press, is a monumental non-issue. Bank losses will continue to mount and private appetite for investment in banks is unlikely to improve for many years. Gone are the good old days when Western states could count on their wealthy political clients in the Persian Gulf to pitch in the odd billion to support their private banks. In this setting, states will have little choice but eventually to nationalise weaker banks. That, in turn will likely send remaining private investors in other banks running for the exits, as recently argued in the New York Times.
The question is how banks will be nationalised and run. The Economist demands that any necessary nationalisations be undertaken ‘at market prices’, without seriously considering what those would be had states not supported banks. And both British and US governments have noted their commitment to run their investments on arms-length bases, leaving control to the officers and major shareholders that created the current financial mess.
There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks—or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.
Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves—after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.
State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.
These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality.
Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.
Tuesday, January 27, 2009
Monday, January 26, 2009
Gender and Finance
by Christina Laskaridis and Nuray Ergunes
The differences between genders have received little attention in the analysis of the capitalist system because women’s unequal state within society stems from patriarchal relations which are accepted as natural. Mainstream economics’ lack of insight into the interactions between non-economic and economic relations is a major reason for this ignorance.
As the expansion of financial relations changes that interaction, generally and specifically, through the intrusion into non-economic spheres, we seek to examine the gendered impact of these changes. Whereas, the gendered division of labour has been reasonably well explored, the gendered relations within finance are less so. How gender inequality is manifested during a period of financialisation will be explored through a series of blogs-to-come under the following issues:
a) With a detailed focus on microcredit, we will investigate how financial relations have penetrated the household sphere. Neoliberalism’s removal of social safety nets and privatisation of social welfare are the key factors here and are determined through class relations. It has allowed microcredit, sometimes labeled a ‘poverty management strategy’, to target women, adding a debt burden to women’s inequality.
b) The falsehood of microcredit as a solution to combat neoliberalism can be explored by examining certain characteristics of women’s work, and thus a gendered approach to the exploitative nature of financial inclusion can be developed.
c) Given that finance’s impact differs across genders, we will explore the extent to which financial products and conditions of disbursement and repayment can be differentiated between men and women.
d) Economic crisis tends to exacerbate existing inequalities: e.g. daughters are taken out of school, women take on extra work whilst still maintaining the household. We will explore the impact of the current crisis on women in developed and developing countries.;
e) The demands by civil society for a better financial architecture in response to the current crisis will remain incomplete without considering the above issues.
Underlying these areas of interest is an investigation of how the economic and non-economic spheres interact. This differentiation may be less distinct when considered in light of the increasing informality of women’s labour, especially in developing countries. Discussion of these recent changes of women’s position in the economy, is required to introduce more concretely the topics we will examine.
As a result of neo-liberal policies an increase in poverty and unemployment has been a worldwide phenomenon. In the name of fighting poverty, global management strategies have been developed, some of which have actually become socially threatening. One of these is microfinance, which has mostly targeted women based largely on the argument that it would strengthen and enhance their status. This argument relies on the peculiar characteristic of women’s labour, being determined through patriarchal relations. Characteristics such as being more reliable, self-sacrificing and easy to control are seen through examples of women’s lack of right to their income, expenditure of their income on needs of the household including children and through the efficacy of social pressure in the re-payment system of micro-credits.
In fact, microfinance leads to the commodification of women’s labour through finance. Increased labour market flexibility is one of the core patterns within financialised capitalism, the basic features of which are: increased informal labour, the removal of collective bargaining, increased income inequalities and the expansion of women’s labour. In other words, it means expansion of the gender-based labour market structure and the spread of production into small enterprises and households, especially in developing countries where the production is export-oriented and an increase in informal labour has meant the feminisation of labour. Throughout this process home-based work has had its social base widened. The reason for this is to resolve the conflict between women’s societal role (such as being wife, mother, daughter), and the role of labour needed by the capitalist system, which is flexible and cheap. Not only have these processes have been reinforced through microfinance but microfinance adds a burden of repayment into women’s life, with it’s associated anxiety and stress.
Although women’s labour has increased in the informal area, the unemployment ratio of women has increased in the formal employment area. The determination of formal employment by the structuring in the informal employment area has other dimensions. Within this context, women’s labour, which is determined by the patriarchal system, has formed a model of new employment and labour relations which is characterised by low wages, long working hours and unsecure working conditions. This form of labour is typical of the financialised capitalism era.
The differences between genders have received little attention in the analysis of the capitalist system because women’s unequal state within society stems from patriarchal relations which are accepted as natural. Mainstream economics’ lack of insight into the interactions between non-economic and economic relations is a major reason for this ignorance.
As the expansion of financial relations changes that interaction, generally and specifically, through the intrusion into non-economic spheres, we seek to examine the gendered impact of these changes. Whereas, the gendered division of labour has been reasonably well explored, the gendered relations within finance are less so. How gender inequality is manifested during a period of financialisation will be explored through a series of blogs-to-come under the following issues:
a) With a detailed focus on microcredit, we will investigate how financial relations have penetrated the household sphere. Neoliberalism’s removal of social safety nets and privatisation of social welfare are the key factors here and are determined through class relations. It has allowed microcredit, sometimes labeled a ‘poverty management strategy’, to target women, adding a debt burden to women’s inequality.
b) The falsehood of microcredit as a solution to combat neoliberalism can be explored by examining certain characteristics of women’s work, and thus a gendered approach to the exploitative nature of financial inclusion can be developed.
c) Given that finance’s impact differs across genders, we will explore the extent to which financial products and conditions of disbursement and repayment can be differentiated between men and women.
d) Economic crisis tends to exacerbate existing inequalities: e.g. daughters are taken out of school, women take on extra work whilst still maintaining the household. We will explore the impact of the current crisis on women in developed and developing countries.;
e) The demands by civil society for a better financial architecture in response to the current crisis will remain incomplete without considering the above issues.
Underlying these areas of interest is an investigation of how the economic and non-economic spheres interact. This differentiation may be less distinct when considered in light of the increasing informality of women’s labour, especially in developing countries. Discussion of these recent changes of women’s position in the economy, is required to introduce more concretely the topics we will examine.
As a result of neo-liberal policies an increase in poverty and unemployment has been a worldwide phenomenon. In the name of fighting poverty, global management strategies have been developed, some of which have actually become socially threatening. One of these is microfinance, which has mostly targeted women based largely on the argument that it would strengthen and enhance their status. This argument relies on the peculiar characteristic of women’s labour, being determined through patriarchal relations. Characteristics such as being more reliable, self-sacrificing and easy to control are seen through examples of women’s lack of right to their income, expenditure of their income on needs of the household including children and through the efficacy of social pressure in the re-payment system of micro-credits.
In fact, microfinance leads to the commodification of women’s labour through finance. Increased labour market flexibility is one of the core patterns within financialised capitalism, the basic features of which are: increased informal labour, the removal of collective bargaining, increased income inequalities and the expansion of women’s labour. In other words, it means expansion of the gender-based labour market structure and the spread of production into small enterprises and households, especially in developing countries where the production is export-oriented and an increase in informal labour has meant the feminisation of labour. Throughout this process home-based work has had its social base widened. The reason for this is to resolve the conflict between women’s societal role (such as being wife, mother, daughter), and the role of labour needed by the capitalist system, which is flexible and cheap. Not only have these processes have been reinforced through microfinance but microfinance adds a burden of repayment into women’s life, with it’s associated anxiety and stress.
Although women’s labour has increased in the informal area, the unemployment ratio of women has increased in the formal employment area. The determination of formal employment by the structuring in the informal employment area has other dimensions. Within this context, women’s labour, which is determined by the patriarchal system, has formed a model of new employment and labour relations which is characterised by low wages, long working hours and unsecure working conditions. This form of labour is typical of the financialised capitalism era.
Friday, January 16, 2009
CDS Central Clearing – will it really help?
by Duncan Lindo
“Credit Swap Clearing House to be running by year end” claim the headlines. But is the current lack of CDS central clearing really the cause of our multi trillion dollar financial crisis? If central clearing had been in place between 2001 and 2007 would it have averted the crisis? The only reasonable answer is no.
The authorities are reacting to the failure of markets by simply trying to implement markets twice as hard. Moreover we are witnessing a scramble between regulators to talk tough, act decisively and win the mandate for post-2008 regulation with little thought about what needs regulating and how.
Two of the largest alleged benefits are reductions in credit and operational risk but the advantages over the OTC market are slight and the impact on the causes of the crisis minimal. Prevention of a systemic chain of derivative counterparty defaults is a noble aim – but collateral agreements meant even Lehman’s default did not trigger such an event – 200mUSD of losses per bank is estimated not 20-40bnUSD per bank. A central clearer or an exchange should improve discipline and reduce operational risk – but the OTC market has shown it can clear up its act (e.g. tear ups, compression, clearing up confirms etc) and there’s nothing to suggest operational risk in the CDS market is systemic.
On these issues you might argue central clearing is marginally better than not but it’s hard to argue they are really fundamental to trillion dollar losses.
Transparency and prices are other areas mentioned. Apparently “buyers and sellers will know what they buying and selling” on an exchange (what an extraordinary thing that they collectively invested trillions of dollars without knowing that before!). In fact might not the reassurance of a clearing house further discourage active investigation and analysis by investors?
The same goes for prices. A clearing house will determine prices for every contract every day but very few of the outstanding contracts trade every day. The exchange will have to invent (“model”) the missing prices. It seems very likely that a clearing house publishing prices will only reduce the incentive for participants to use their own analysis and judgement. Isn’t this exactly the opposite of what is required?
Credit Risk Transfer started as bespoke, private and negotiated deals between those bearing credit risk (e.g. bank loan desks) and investors. Deals took time, details were analysed. Over time, and with the help of the dealers, the contract has become more standardised, information more social, markets more liquid; easier to trade in fact. In the moments before the crisis break there were many buyers and sellers, many transactions, much information about underlying corporate credits: few would have argued (in particular for standard corporate credit) that the market was not efficient. Yet the price was simply wrong. Risk premium was far too low.
The reaction to this market failure is to try even harder for the market. A clearing house is yet another step in the march of standardisation, liquidity and faster, easier trading. Is that really going to improve the quality of prices?
“Credit Swap Clearing House to be running by year end” claim the headlines. But is the current lack of CDS central clearing really the cause of our multi trillion dollar financial crisis? If central clearing had been in place between 2001 and 2007 would it have averted the crisis? The only reasonable answer is no.
The authorities are reacting to the failure of markets by simply trying to implement markets twice as hard. Moreover we are witnessing a scramble between regulators to talk tough, act decisively and win the mandate for post-2008 regulation with little thought about what needs regulating and how.
Two of the largest alleged benefits are reductions in credit and operational risk but the advantages over the OTC market are slight and the impact on the causes of the crisis minimal. Prevention of a systemic chain of derivative counterparty defaults is a noble aim – but collateral agreements meant even Lehman’s default did not trigger such an event – 200mUSD of losses per bank is estimated not 20-40bnUSD per bank. A central clearer or an exchange should improve discipline and reduce operational risk – but the OTC market has shown it can clear up its act (e.g. tear ups, compression, clearing up confirms etc) and there’s nothing to suggest operational risk in the CDS market is systemic.
On these issues you might argue central clearing is marginally better than not but it’s hard to argue they are really fundamental to trillion dollar losses.
Transparency and prices are other areas mentioned. Apparently “buyers and sellers will know what they buying and selling” on an exchange (what an extraordinary thing that they collectively invested trillions of dollars without knowing that before!). In fact might not the reassurance of a clearing house further discourage active investigation and analysis by investors?
The same goes for prices. A clearing house will determine prices for every contract every day but very few of the outstanding contracts trade every day. The exchange will have to invent (“model”) the missing prices. It seems very likely that a clearing house publishing prices will only reduce the incentive for participants to use their own analysis and judgement. Isn’t this exactly the opposite of what is required?
Credit Risk Transfer started as bespoke, private and negotiated deals between those bearing credit risk (e.g. bank loan desks) and investors. Deals took time, details were analysed. Over time, and with the help of the dealers, the contract has become more standardised, information more social, markets more liquid; easier to trade in fact. In the moments before the crisis break there were many buyers and sellers, many transactions, much information about underlying corporate credits: few would have argued (in particular for standard corporate credit) that the market was not efficient. Yet the price was simply wrong. Risk premium was far too low.
The reaction to this market failure is to try even harder for the market. A clearing house is yet another step in the march of standardisation, liquidity and faster, easier trading. Is that really going to improve the quality of prices?
Monday, December 1, 2008
The US yield curve: the “mirror” of the financial conditions
US Yield Curve (29/10/2008), source: Financial Times website
by Juan Pablo Painceira
The importance and hegemony of the US dollar within the global financial system has become the subject of much debate in recent years. As a consequence of the financial crisis the dollar’s position as the world currency has been analysed and challenged by some analysts, for example N. Roubini (http://www.rgemonitor.com/roubini-monitor/). However, another important analytical tool to understand recent movements in the financial markets has been neglected, namely the US Treasuries yield curve. This curve can be seen as a “mirror” of US financial conditions. This is because the state bonds market – and in particular US public securities - has been the key element in the expansion of finance around the global economy in the last 30 years. It has been also the benchmark for other capital assets.
The yield curve has taken on an unusual shape since the beginning of September (around 10th), as there is now a “dent” around the maturity of 2 years. Since then there has been a gradual move towards a “normalization” of the US yield curve, but this anomaly has persisted (http://www.bloomberg.com/markets/rates/index.html). Although the causes are complex –for example the effects of other financial markets such as money market and corporate bonds market – there are some clear short term short term and long term drivers for what has happened.
Short-term, the expectation of rate cuts has driven investor bets towards the short-term part of the curve, implying that there has been a risk premium in the yield curve, mainly around the maturity of 1 and 2 years. It is important to note that the new market for one year T-bills (officially called 52 week bills) was reopened only in June 2008, with the previous auction in February 2001. Another point is that the freezing in the money markets has slashed short-term interest rates, reflecting banks’ preference for hoarding cash and very liquid government bonds.
Longer term, the strong demand for Treasuries around 2 and 3 year maturity can be related to problems in corporate bond markets, where companies have had huge problems in getting finance. The corporate sector has also affected the shortest-term part of the yield curve through the crunch in the commercial paper market (securities up to 90 days market). The Federal Reserve’s balance sheet has showed an increase in what it terms its “other loans” item, where the total amount of securities with maturity over 1 to 5 years is now around $70 billion.
The huge drop in bond issuance in the corporate markets is important for ordinary people as even the biggest companies have had difficulties in accomplishing the simplest of obligations, for example their payroll! It is the main reason why the Federal Reserve has intereved in the corporate bond market through financing operations in the same way it usually does with financial institutions, mainly commercial banks. These operations are called repo operations, where the FED accepts the securities in exchange for cash for a pre-determined period of time. In another words, the Federal Reserve will be acquiring companies’ bonds in order to finance them for a certain period of time.
Finally, the aggressive emphasis on the steepening of the yield curve is related to the recovery of banking industry profitability, where we have the traditional “borrow short and lending long” strategy. However, the Fed has only succeeded in returning the yield curve to its normal shape (upwards) after 2 years maturity, and the fed funds rate has not followed this drop.
This emphasis can be also connected with the banking bailout plans around the global economy, as public financing for the banking recapitalizations is much cheaper. It happens because the US Treasury has been focused on short term financing in its strategy of debt management - the reoffering of 52 week bills and the release of new 3 year treasuries notes are a good example. The main assumption underlining this strategy could be related to the US authorities’ expectations on the final resolution of the financial crisis. As we can see, the US yield curve has much to tell us about conditions in the broader financial markets and economy.
Thursday, November 27, 2008
Could Turkey transform the global crisis into an opportunity?
by Elif Karacimen
The recent crisis triggered in the U.S. has attracted much attention from economists regarding the vulnerabilities of developed economies. Nevertheless, the heavy burden the crisis imposes on developing countries seems to have been ignored. Apart from ignoring the fragility of the developing countries to the global crisis, many mainstream economists even suggested that the recent crisis might turn into an opportunity for these economies. This is a widely expressed argument also in Turkey. The Turkish Prime Minister Recep Tayyip Erdogan said in a press conference held at the end of September that “no one should doubt that Turkey will get over current global economic crisis with minimum damage. I believe that Turkey will turn it into an opportunity.”
The argument of transforming crisis into an opportunity for the developing countries stems mainly from the belief that international investors, who have lost money in developed country financial markets, would prefer to invest in emerging market economies, like Turkey, to compensate for their losses.
However the reality for the Turkish economy is that there are many characteristics of its economy that makes it extremely vulnerable to the current crisis. The most important of them is the substantial current account deficit (about 6 % of the GDP), which makes the Turkish economy more vulnerable to the global crisis than many other developing countries. This is because is of ever-increasing difficulty in funding the deficit. Private sector borrowing and short term money flows are the two main channels through which the deficit has been financed. Nevertheless, the current crisis has obstructed both of these channels.
The private sector debt rose by 342 percent, from $43.1 billion to $190.5 billion between 2002 and mid-2008. It is obvious that as the crisis intensifies the private sector will find it very difficult to service its short term debt.
The reversal of the capital flows is another major threat to the funding of the current account deficit and also to the growth of the economy. Within the context of the IMF-led economic programs, maintenance of capital inflows became an inevitable condition of the economic growth. The economy achieved high growth rates after the 2000-2001 financial crises (6% on average between 2002 and 2007) due to the large international capital inflow. High interest rates attracted the capital flows and in turn the abundance of foreign currency led to appreciation of the Turkish lira. An overvalued exchange rate stimulated the imports of consumption and investment goods. But as world liquidity diminished foreign investors began to withdraw their money out of the country, and so maintenance of this import driven growth and also funding the large current account deficit have become impossible.
As a result, given the vulnerable characteristics of the Turkish economy, it is not reasonable to expect that Turkey can transform the crisis moment into an opportunity by attracting international capital inflows.
The recent crisis triggered in the U.S. has attracted much attention from economists regarding the vulnerabilities of developed economies. Nevertheless, the heavy burden the crisis imposes on developing countries seems to have been ignored. Apart from ignoring the fragility of the developing countries to the global crisis, many mainstream economists even suggested that the recent crisis might turn into an opportunity for these economies. This is a widely expressed argument also in Turkey. The Turkish Prime Minister Recep Tayyip Erdogan said in a press conference held at the end of September that “no one should doubt that Turkey will get over current global economic crisis with minimum damage. I believe that Turkey will turn it into an opportunity.”
The argument of transforming crisis into an opportunity for the developing countries stems mainly from the belief that international investors, who have lost money in developed country financial markets, would prefer to invest in emerging market economies, like Turkey, to compensate for their losses.
However the reality for the Turkish economy is that there are many characteristics of its economy that makes it extremely vulnerable to the current crisis. The most important of them is the substantial current account deficit (about 6 % of the GDP), which makes the Turkish economy more vulnerable to the global crisis than many other developing countries. This is because is of ever-increasing difficulty in funding the deficit. Private sector borrowing and short term money flows are the two main channels through which the deficit has been financed. Nevertheless, the current crisis has obstructed both of these channels.
The private sector debt rose by 342 percent, from $43.1 billion to $190.5 billion between 2002 and mid-2008. It is obvious that as the crisis intensifies the private sector will find it very difficult to service its short term debt.
The reversal of the capital flows is another major threat to the funding of the current account deficit and also to the growth of the economy. Within the context of the IMF-led economic programs, maintenance of capital inflows became an inevitable condition of the economic growth. The economy achieved high growth rates after the 2000-2001 financial crises (6% on average between 2002 and 2007) due to the large international capital inflow. High interest rates attracted the capital flows and in turn the abundance of foreign currency led to appreciation of the Turkish lira. An overvalued exchange rate stimulated the imports of consumption and investment goods. But as world liquidity diminished foreign investors began to withdraw their money out of the country, and so maintenance of this import driven growth and also funding the large current account deficit have become impossible.
As a result, given the vulnerable characteristics of the Turkish economy, it is not reasonable to expect that Turkey can transform the crisis moment into an opportunity by attracting international capital inflows.
Monday, November 24, 2008
A 1989 moment?
by Costas Lapavitsas
The current crisis is a regime break for the global economy, irrespective of its eventual resolution. For more than two decades the premise of economic policy-making has been ‘private good - public bad’, always favouring market solutions to state-based interventions. This has now been damaged beyond repair. Policy-making can be expected to put fresh stress on the public though the form this will take is not yet clear.
Keeping the proportions, the crisis has analogies with the collapse of the Eastern Bloc in 1989-1991. After the fall of the Soviet Union the credibility of socialist ideas and policies received a body blow. The best that the Left could do was call for ‘anti-capitalist’ policies or ‘resistance’ to the neo-liberal onslaught. This is likely to change, though a lot will depend on whether the Left can put forth innovative ideas and proposals.
There are several reasons why this crisis might lead to such profound change, four of which immediately come to mind. The first is its sheer magnitude. Global losses for banks already stand around $650bn. In the USA alone 17 major financial institutions have failed so far. By the time the crisis is over the cost for the USA is likely to run to several percentage points of GDP, perhaps in double digits. In other economies, for instance, the UK, Ireland and Iceland, things could be even worse. And that is without counting the social cost of the coming global recession.
Second, the crisis has been created by private finance at the heart of developed countries. It has nothing to do with bumbling state intervention, or war, drought and other external shocks. And nor is it the outcome of corruption or cronyism, the favourite bogeys of neo-liberals when it comes to financial crises in developing country. The crisis arose because freely competitive, private financial institution in developed capitalist countries proved to be inherently inefficient in organising society’s financial affairs.
Third, the crisis was caused primarily by the advance of finance to private individuals rather than to corporations or small businesses. Since the 1980s, big business has relied less on banks and more on open markets to obtain finance. Banks have turned to lending for mortgages and consumption as well as commissions from mediating financial transactions. Meanwhile, the withdrawal of public provision in housing, pensions, health, education and consumption has driven people into the arms of finance. The costs have been enormous. In the USA alone, close to 20% of disposable income was paid to financial institutions as interest and other charges in 2005, 2006 and 2007. But these costs are likely to be dwarfed by the impact of the crisis on working people.
Fourth, the only factor preventing complete disintegration of the financial system has been global state intervention. Liquidity provision by central banks has been limitless, running into trillions of dollars. Indeterminately large sums of public money have been committed to nationalising (partly or fully) commercial banks, insurance companies and mortgage providers in the USA, the UK and across Europe. Hundreds more billions of dollars are likely to be eventually committed to cleaning up the balance sheets of banks.
The crisis, then, has destroyed the conceit that freely competitive capitalist activity is the most efficient, or even the only, way of organising economic life. Once its sharp phase is over there will be debate on how to rebalance private and public in the economy. The Left should make definite proposals to replace private and individual with public and collective mechanisms in finance and more generally across the economy. A start could be made with housing, pensions, education and health. And, you never know, socialism might be mentioned again.
The current crisis is a regime break for the global economy, irrespective of its eventual resolution. For more than two decades the premise of economic policy-making has been ‘private good - public bad’, always favouring market solutions to state-based interventions. This has now been damaged beyond repair. Policy-making can be expected to put fresh stress on the public though the form this will take is not yet clear.
Keeping the proportions, the crisis has analogies with the collapse of the Eastern Bloc in 1989-1991. After the fall of the Soviet Union the credibility of socialist ideas and policies received a body blow. The best that the Left could do was call for ‘anti-capitalist’ policies or ‘resistance’ to the neo-liberal onslaught. This is likely to change, though a lot will depend on whether the Left can put forth innovative ideas and proposals.
There are several reasons why this crisis might lead to such profound change, four of which immediately come to mind. The first is its sheer magnitude. Global losses for banks already stand around $650bn. In the USA alone 17 major financial institutions have failed so far. By the time the crisis is over the cost for the USA is likely to run to several percentage points of GDP, perhaps in double digits. In other economies, for instance, the UK, Ireland and Iceland, things could be even worse. And that is without counting the social cost of the coming global recession.
Second, the crisis has been created by private finance at the heart of developed countries. It has nothing to do with bumbling state intervention, or war, drought and other external shocks. And nor is it the outcome of corruption or cronyism, the favourite bogeys of neo-liberals when it comes to financial crises in developing country. The crisis arose because freely competitive, private financial institution in developed capitalist countries proved to be inherently inefficient in organising society’s financial affairs.
Third, the crisis was caused primarily by the advance of finance to private individuals rather than to corporations or small businesses. Since the 1980s, big business has relied less on banks and more on open markets to obtain finance. Banks have turned to lending for mortgages and consumption as well as commissions from mediating financial transactions. Meanwhile, the withdrawal of public provision in housing, pensions, health, education and consumption has driven people into the arms of finance. The costs have been enormous. In the USA alone, close to 20% of disposable income was paid to financial institutions as interest and other charges in 2005, 2006 and 2007. But these costs are likely to be dwarfed by the impact of the crisis on working people.
Fourth, the only factor preventing complete disintegration of the financial system has been global state intervention. Liquidity provision by central banks has been limitless, running into trillions of dollars. Indeterminately large sums of public money have been committed to nationalising (partly or fully) commercial banks, insurance companies and mortgage providers in the USA, the UK and across Europe. Hundreds more billions of dollars are likely to be eventually committed to cleaning up the balance sheets of banks.
The crisis, then, has destroyed the conceit that freely competitive capitalist activity is the most efficient, or even the only, way of organising economic life. Once its sharp phase is over there will be debate on how to rebalance private and public in the economy. The Left should make definite proposals to replace private and individual with public and collective mechanisms in finance and more generally across the economy. A start could be made with housing, pensions, education and health. And, you never know, socialism might be mentioned again.
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At http://politicalfinance.blogspot.com/, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by http://politicalfinance.blogspot.com/ and how it is used.
Log Files
Like many other Web sites, http://politicalfinance.blogspot.com/ makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.
Cookies and Web Beacons
http://politicalfinance.blogspot.com/ does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.
DoubleClick DART Cookie
.:: Google, as a third party vendor, uses cookies to serve ads on http://politicalfinance.blogspot.com/.
.:: Google's use of the DART cookie enables it to serve ads to users based on their visit to http://politicalfinance.blogspot.com/ and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html
Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include ....
Google Adsense
These third-party ad servers or ad networks use technology to the advertisements and links that appear on http://politicalfinance.blogspot.com/ send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.
http://politicalfinance.blogspot.com/ has no access to or control over these cookies that are used by third-party advertisers.
You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. http://politicalfinance.blogspot.com/'s privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.
If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.
If you require any more information or have any questions about our privacy policy, please feel free to contact us by email at sholehalmaliki@gmail.com.
At http://politicalfinance.blogspot.com/, the privacy of our visitors is of extreme importance to us. This privacy policy document outlines the types of personal information is received and collected by http://politicalfinance.blogspot.com/ and how it is used.
Log Files
Like many other Web sites, http://politicalfinance.blogspot.com/ makes use of log files. The information inside the log files includes internet protocol ( IP ) addresses, type of browser, Internet Service Provider ( ISP ), date/time stamp, referring/exit pages, and number of clicks to analyze trends, administer the site, track user’s movement around the site, and gather demographic information. IP addresses, and other such information are not linked to any information that is personally identifiable.
Cookies and Web Beacons
http://politicalfinance.blogspot.com/ does use cookies to store information about visitors preferences, record user-specific information on which pages the user access or visit, customize Web page content based on visitors browser type or other information that the visitor sends via their browser.
DoubleClick DART Cookie
.:: Google, as a third party vendor, uses cookies to serve ads on http://politicalfinance.blogspot.com/.
.:: Google's use of the DART cookie enables it to serve ads to users based on their visit to http://politicalfinance.blogspot.com/ and other sites on the Internet.
.:: Users may opt out of the use of the DART cookie by visiting the Google ad and content network privacy policy at the following URL - http://www.google.com/privacy_ads.html
Some of our advertising partners may use cookies and web beacons on our site. Our advertising partners include ....
Google Adsense
These third-party ad servers or ad networks use technology to the advertisements and links that appear on http://politicalfinance.blogspot.com/ send directly to your browsers. They automatically receive your IP address when this occurs. Other technologies ( such as cookies, JavaScript, or Web Beacons ) may also be used by the third-party ad networks to measure the effectiveness of their advertisements and / or to personalize the advertising content that you see.
http://politicalfinance.blogspot.com/ has no access to or control over these cookies that are used by third-party advertisers.
You should consult the respective privacy policies of these third-party ad servers for more detailed information on their practices as well as for instructions about how to opt-out of certain practices. http://politicalfinance.blogspot.com/'s privacy policy does not apply to, and we cannot control the activities of, such other advertisers or web sites.
If you wish to disable cookies, you may do so through your individual browser options. More detailed information about cookie management with specific web browsers can be found at the browsers' respective websites.
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