Monday, September 15, 2008

Too big to fail? Apparently not...

The unregulated casino model of global finance has taken another knock today with the fall of US banking stalwart Lehman Brothers. The US government told Wall Street that no public money was on the table to bail Lehman Brothers out for their greed and stupidity and that to save the ailing bank Wall Street would have to come up with the good themselves. When this money was not forthcoming the bank was allowed to fail. An example was made of Lehman Brothers that banks cannot continue to act so recklessly under the assumption that they would be rewarded for their failure by the taxpayer. The market in the US and London took a hit and speculators hovered like vultures to profit on the doom and gloom.

One thing about the global financial crisis that has struck me is how so many apparently intelligent people could have acted so stupidly and expected the profits to keep on coming. It does not take a genius to work out that asset-backed securities reliant on people paying back mortgages they cannot afford for their revenue stream are of dubious value. All it takes is a default on the loan and the not too unlikely scenario (given the drop in house prices) that the value of the collateral (the house) is worth less than the mortgage for the securities to become worse than worthless. As these bizarre financial instruments are traded across the world's financial system no one knows who is infected and no one is taking the risk so trading has slowed down. Cue the drying up of credit, the subsequent drop in demand and of economic growth and, due to rising oil and food prices, the onset of stagflation. All because of a bunch of greedy bankers blinded by their own apparent brilliance our economy is now under threat, workers are being restricted to below-inflation pay settlements and small businesses are going bust.

It is, however, not just the fault of the bankers. Governments across the world have bought into and propagated the myth that the market is so effective and so efficient that it should regulate itself. Central Banks, also enamoured by this magic formula for economic growth, added fuel to the fire by keeping their interest rates dangerously low. "Buy now, pay later" became the zeitgeist and borrowing reached epidemic levels. Following de-regulation by the government the financial sector in the UK has ballooned in proportion to manufacturing- you know, the people who actually make things of use and real value- and it has become more powerful than the so-called trade union barons of the 1970s so decried by the Tory press. What has become apparent is that financiers are only interested in short-term profit, not the long-term good of the economy. As a result they made short-term decisions that maximised profit at the expense of stability and this has now culminated in the so-called 'credit crunch.'

The house of cards is falling down as the market convulses spasmodically to reach a point of equilibrium. What will emerge as the dust clears will no doubt be very different but it is in this interstice of the narrative that the future of finance will be determined, it is in this fire that the future will be forged. The financial framework is a creation of law, as are corporations and banks themselves. It is time now for our lawmakers to step up to the mark and re-regulate finance to ensure the mistakes of the past are not repeated in the future. Do we really want a credit-creation system in which 97% of currency is privately created through the fractional reserve banking system? Do we really want an economy that relies on a few square miles of the City of London to be the engine of growth for the rest of the country? The answer is surely no. It is time to restrict the reckless practices of the money-lenders and to reject their claims that they are capable of behaving responsibly in a way which benefits us all as they clearly are not. Unfortunately I cannot see such visionary leadership coming from Gordon Brown, a leading proponent of the neoliberal economic policies that led us into this giant mess, nor from Cameron's Conservative Party that has, since Thatcher, been the political wing of the City. Maybe America will show leadership on the issue like Roosevelt did in the 1930s but, then again, maybe not. Maybe we should let the whole system collapse and fight for a new one to take its place. The times are a-changin', everything is to play for.

2 comments:

saint germain en laye said...

Finance world is very crazy... i can't believe a big company as Lehman is dead !... poor capitalism...

Anonymous said...

The price of property has been crazy - some people made a killing out of the panic of homebuyers - the chickens have come home to roost for the daft lending by the banks