Is the Financial Crash 2.0 Coming?
Market ideology has been on the rise since the 1980s. Only a few voices warned of the risks and instability of the liberalized financial markets. Politicians made great reform promises after dramatically underrating the extent of the crisis.The European states mobilized 4.5 trillion euros to prevent their banking systems from collapsing. After they profited from the generous bailout packages, the banks speculated against the most indebted countries.
IS THE FINANCIAL CRASH 2.0 COMING?
Ten Years after the Lehman Bankruptcy: For a Financial System in the Interest of Many
By Isabelle Bourboulon
[This reading sample of the 2018 Attac-Basis text is translated from the German on the Internet, vsa-verlag.de.]
A Guide for Political Action
Our society is in danger when one part becomes so influential it dominates all other parts and can force its will on them. It is in danger when powerful minorities can enforce their interests and their striving for dominance. Although our society is democratic according to its self-image, it must submit to the will of a very powerful force that ruthlessly pursues its interests. The globalized financial markets are this power. They do not know any limits any more, no geographic limits and no limits to their boundless profit-mongering. We describe them as a casino. Their core business is speculation, gambling with gigantic sums. They deal with risks and responsibility like a gambler.
Ten years after the 2008 crisis, the situation today is comfortable again for financial market actors. The timid reforms of the first years after the crash did not seriously limit their power. At that time, a new phase of deregulation was marked out in Europe and the US. So President Trump turns back regulatory measures introduced under his predecessor. Politicians have seemingly forgotten again the lessons from the crisis. The next crash can come at any time.
Many people are scandalized in view of this dangerous situation and the outrageous injustice. But they feel powerless to change the course of things. Most are convinced the banks are still managed with the same irresponsibility as in the past. Since the modern world of finance is mathematicized and non-transparent in a crafty way - like a secret language keeping the people from gaining insight in the connections. Its functioning and its problems elude democratic discussion. Still, the only political battlers that one loses are those that are not fought! Many persons seek possibilities for political action. They want to resist and contribute so the financial system serves society and not vice versa.
This book is for them. Written in the form of a popular guide accessible for every public, it could help us understand the causes of the 2008 crisis, why it broke out and spread over the whole world and how it influenced our living conditions and working conditions. What was done - or not done - to reform the international financial system and why the crisis is not really solved are analyzed in the second chapter. The consequences for the countries of the South are summarized. The current situation is described, the increasing inequality, the role of tax havens and the unchanging power of finance capital. Finally in the fourth and last part, proposals are made for the democratic control and regulation of financial markets for the priority of law before the power of money.
This book is published in several languages (French, English, German and Spanish). It also supports the political campaign Ten Years of Financial Crisis - organized by social movements and civil society in Europe. The high-point will be September 15, 2018, the tenth year anniversary of the Lehman Brothers bankruptcy.
Beyond the 2018 campaign, we hope this book will help organize a counter-veiling power against the world of finance capital - locally, on the national plane and internationally. The masters of money hold fast to their privileges and profits at the expense of society more than ever. Changing the power relations and hierarchy of power is crucial. Civil engagement and civil disobedience will be important instruments to create the new solidarity world we desire.
1. Ten Years Ago
What caused the crisis?
Market ideology has been on the advance since the 1980s. Measures to privatize and liberalize the financial sector and capital streams were carried out on national, European and international planes without creating crisis-prevention mechanisms. In the 2002, private households in the US were stopped from acquiring property. Property loans were deregulated by raising the indebtedness limit again and again for private households including lower income groups. American banks encouraged households to become indebted beyond their means, first at zero-interests and then at variable rates that followed the market interests. The goal was to compensate for the stagnation of real wages that continued for a long while. So the purchasing power of households and the economy could be kept going through private indebtedness. Driven by a surplus of credits, an enormous real estate bubble arose until the prices began falling and did not rise any more. In 2004, the Federal Reserve (FED), the US Central Bank, resolved to raise its interest rates to curb speculation. The storm began to brew.
In the spring and summer of 2007, the US real estate market turned. The noose tightened for many private households. They could no longer meet their payment obligations to the banks. Driven by the neoliberal practices of financialization, the banks packaged rotten and risky real estate credits in complex financial products, the so-called Collateral Debt obligations (CDOs). These products subdivided outstanding debts - from hardly risky to very risky - were described by insiders as toxic or radioactive. Nevertheless, they were sold to investors worldwide.
From June 2007, the crisis rapidly spread in industrial countries. On June 22, the Bear Stearns investment bank that held many of these rotten debts declared the bankruptcy of two of its hedge funds and the stock exchange crashed on July 26. On September 14, the British bank Northern Rock collapsed after a panic among its customers. It was nationalized by the British government on February 22, 2008 and since then has been a symbol of the financial crisis. To avoid a liquidity crisis in the bank system, the central banks of all large political economies lent hundreds of billions of dollars, euros, yen and pounds from today to tomorrow. In addition, the FED lowered its key interest from 5.25% to 0% from 2007 to 2008 to prevent the transfer of the crisis to the real economy. But this did not change much. Neither the insolvency of many institutes nor serious effects on the real economy could be prevented.
Gradually, J.P. Morgan Chase took over Bear Stearns, two giant real estate banks, Fannie Mae and Freddie Mac, were nationalized and the largest insurance, the American International Group (AIG), declared bankruptcy. AIG had sold complex derivatives, so-called credit default swaps (CDS) that actually were intended as securities against non-servicing real estate credits including sub-prime loans. The collapse of Lehman Brothers on September 15, 2008 triggered the classic chain reaction, as known from all great financial crises. The global banking system was shaken in its foundations. Panic ruled in the massive financial centers and monetary transactions grinded to a half, particularly inter-bank transactions (banks constantly lent enormous sums in normal times). This led to a credit crunch. The world was confronted with the most severe financial crisis since Black Friday 1928.
Who Predicted the Crisis?
Aside from civil society organizations like Attac and several heterodox economists, only a few voices warned of the risks and instability of the liberalized financial markets. In the months before the Great Crisis, the forecasts of the mammoth multilateral institutions and the central banks were optimistic and rating agencies gave banks a Triple A, the best possible rating, just before they went bust. The European Central Bank under the leadership of Jean-Claude Trichet had no presentiment of any crisis and resolved raising interests in the summer of 2008 out of fear of inflation. A few weeks before the collapse of Lehman Brothers, Alan Greenspan, chairman of the FED up to 2006, was convinced the balance sheets of the bank were solid. "For forty years, everything functioned perfectly."
After examining the Anglo Irish Bank, Olivier Wyman, one of the most prominent financial strategists and the CEO of a worldwide business consulting firm, said: "This is the best bank in the world." Four years later, it went bankrupt and caused a 30% collapse of the Irish GDP. After the G8 summit of 2007, the CEO of the Deutsche Bank, Josef Ackermann, reacted to the criticism of Attac Germany on the risks of debt risks and new products: "They increase the risk security of the total system and the stability of the financial markets. Therefore, they are not a danger." Jim O'Neill, the star-analyst of Goldman Sachs, predicted a grandiose comeback of the United States from 2011. He said, the stock market would climb 20% and unemployment would fall to the pre-crisis level. We could laugh at these high-paid analysts and financial prophets if the crash did not have such catastrophic social consequences - impoverishment, unemployment and economic stagnation.
Before the crisis, some responsible politicians in the EU did not know the name sub-prime. In France, the rightwing candidate in the presidential election, Nicolas Sarkozy, recommended organizing the mortgage system according to the American example that shortly after ruined millions of American households. On September 25, 2008, ten days after the Lehman Brothers bankruptcy, the German financial minister Peer Steinbruck said: "The financial crisis is an American problem."
How Did Politics React?
Politicians made great reform promises after the dramatically underestimating the extent of the crisis: What happened would not happen again! France held the presidency of the European Union in these terrible weeks when the world economy stood under shock of one bank collapse after another. Nicolas Sarkozy took the bull by the horns and proposed a meeting of the most important European politicians in Paris to find a political answer to the tsunami. "We must make an intelligent capitalism out of capitalism without faith and law," he declared.
At the Paris Summit on October 4, 2008, Nicolas Sarkozy, Angela Merkel, Gordon Brown and Silvio Berlusconi promised a bailout for the European banks and urged an international summit for reforming the global financial system. On October 10 and 12, the G7 countries, the euro-zone, resolved a comprehensive plan to bailout the global financial system. In the United States, the Paulsen Plan earmarked the creation of a public fund of at least $700 billion giving the state the possibility of buying back bad debts to stabilize the financial markets. In France, the government passed a national plan to make available 10.5 billion euros to France's six largest private banks. In a countermove, the banks should award credits to small and medium-size businesses and private households to mitigate the effects of the crisis on the total economy. The banks did not hold to the conditions. In Germany, the financial ministers told the press: "The Federal Government guarantees the savings of Germans." This aimed at averting the risk of a panic among the depositors and a run on the banks. Berlin also drew up a bailout plan. Finally, a G20 summit took place in Washington on November 15, 2008. The group of 20 was founded after the 1999 Asian crisis as a dialogue forum of financial ministers, central banks and supervisory authorities of industrial- and threshold countries. The expert group Financial Stability Board commissioned by the G20 made a merciless diagnosis: the big banks are the most dangerous actors for the stability of the international financial system. They were described as "system relevant." In addition, non-transparent businesses, above all over-the-counter bilateral trade and margins, had to be guaranteed.
However, the politicians of the EU were satisfied with speeches while holding back with substantial reforms. In April 2009, Sarkozy warned banks of business with tax havens. He urged banks "to lead the way with a good example" by reducing their activities in 42 tax havens that were on the black list of the OECD. If necessary, "they could apply sanctions." Several months later, the French president praised a little hastily: "Tax havens and bank secrecy do not exist any more." In September 2009, Sarkozy and Merkel demanded again the regulation of the financial system. The EU needed several years to gradually bring about several financial reforms, different from the United States that passed the extensive Dodd-Frank bill for a stronger financial regulation.
The Consequences for the Economy and the Population
European states mobilized 4.5 trillion (4,500 billion) euros to prevent their banking system from collapsing like a house of cards. But these exorbitant costs are only the direct costs of the financial crisis. In addition, there are the higher indirect costs through recession and increased unemployment engendered by the crisis. Like a toxic virus, the crisis of private finances expanded to public finances and the real economy. The loss in financial assets was estimated at 31% of the GDP for the United States and 23% for the euro-zone. Most developed countries experienced a permanent decline in their economic activities in the Great Recession. In the 2nd and 3rd quarter of 2008, production in the euro-zone declined 0.4%. The victims of the crisis in Spain, Ireland and Greece, countless unemployed, were added to the millions of American households. The population everywhere lost purchasing power.
How Crisis Management Aggravated the Crisis
From 2010, the euro-zone nearly imploded on account of the higher public debts in most member countries. The sudden debt explosion can be referred back to the recession caused by the financial crisis, the nationalization of private debts, and the bailout of the banks responsible for the crisis.
A real vicious circle destabilized both the public budgets and the financial system. Public debts suddenly increased which triggered a wave of mistrust and speculation toward the public budgets, the euro and those banks that were the main creditors of the governments.
After they profited from the generous bailout packages, the banks began to speculate against the most indebted countries. American hedge funds, in particular, speculated against the euro.
Far from protecting the countries of the euro-zone from the crisis, the euro intensifies the crisis by deepening the imbalances between the rich countries of the North and the less developed countries of the South, the PIGS states (Portugal, Ireland, Greece and Spain). Greece and Ireland are the countries affected most intensely. From 2007 to 2010, the public debt burden in Greece rose from 105% to 140% of the GDP and from 25% to 97% in Ireland. These two countries received financial "assistance" from the European Union and the International Monetary Fund (IMF) estimated at 206.5 billion euros for Europe and 85 billion euros for Ireland. This assistance was combined with drastic structural adjustment conditions to prevent further speculation against the euro and mounting debts. A brutal austerity policy with immense social costs goes along with the explosion of poverty and unemployment. The share of unemployment rose to 13% in Ireland and to 25% in Greece. Nearly all the money that these two countries received - 77% for Ireland and 100% for Greece - was used to pay the creditors and to bailout the banks, mostly in foreign countries like Germany and France. The assistance had to be paid predominantly by the population stricken by the crisis. The taxpayers and the population of the impacted countries paid the highest price including many young persons who did not find any work in their countries and emigrated.
Germany, the Netherlands and Austria successfully enforced structural adjustment under the label Stability Pact. In November 2011, the chairperson of the CDU-fraction in the Bundestag, Volker Kauder, proclaimed full of price: "German is spoken again in Europe." Francois Hollande who declared the financial markets "his enemies" during his election campaign quickly bowed to Berlin. The protests of the population at the ballot box are ignored. The reactions in the countries affected by the crisis were immediate. Caricatures of Merkel in a Nazi-uniform appeared in Greek newspapers. The crisis promptly spread to politics. It deepened economic imbalances within the US and mobilized chauvinism and nationalism on all sides.
How "their" crisis became "our" crisis
Thus, the costs of the financial crash were much greater than the sums expended in bailing out the banks. The banking crisis became our crisis striking us intensely: state debt crisis, austerity policy, wage freeze, falling purchasing power and investments, massive terminations, rising unemployment particularly among youths, deteriorating working conditions, cuts in the social net etc. The governments resolved "structural reforms" that neoliberals always advocate while the banks responsible for the crisis evade far-reaching reforms. Unemployment reached historical all-time records. Employees, pensioners and receivers of social transfers paid the bill. The official unemployment rate in the European Union jumped from 7.3% before the crisis to 11.1% in 2012. The unemployment rate for young persons under 25 was twice as high on average in the euro-zone and reached almost 50% in 2012 in Spain, Greece, and Portugal. Part-time work, precarious jobs and limited work contracts expanded. The crisis intensified the polarization between nonsense or "bullshit" jobs and well-paid jobs.
The crisis was also the opportunity for applying a shock strategy leading to growing inequality between the social groups and between the member countries. The public austerity measures that restricted access to public services in the public health system for example were an important element. Many reforms aimed at worsening living conditions of today's and future pensioners. In the United States, 10,000 families were expelled daily from their homes in the months after the Lehman bankruptcy. How many lives were destroyed? How many businesses closed and why?
contribute to this article
contribute to this article
add comment to discussion