This is the first of a series of pieces examining the global financial crisis.
Socialists are often accused of overstating the extent of the periodic crises of capitalism. However, today it is difficult to overstate the scale of the current global financial crisis. Supporters of the system are out-bidding each other in hyperbole. One shell shocked “senior banker” in London told the Times that there was no future left for the traditional investment bank.
“The world is on the brink. The market is puking all over us. There’s no capital left in the world.”
There’s plenty of capital of course, it’s just that the fictitious sort has melted away. (He was proved right about investment banking though.)
Suddenly, people who had insisted that the state should keep its nose out of their business, have started demanding that it step in to rescue them. Even in the USA, the home of the theory of the “small state”, a Republican administration has taken state control of some of the ‘commanding heights’ of the capitalist economy, though, of course, only to save the system from going down the plug.
Suddenly Alistair Darling’s comments about the most serious crisis for 60 years seems a little conservative. He should have said 80 years.
A recent Times editorial, commenting on the ‘rescue’ of HBOS said:
“There can no longer be any doubt that the financial crisis will affect us all, and is likely to unleash a destabilising recession.”
It refers to this week’s events as “the world’s biggest fire sale”. It reckons that the scale of what is at stake in the ‘rescue’ of HBOS is “extraordinary”. HBOS holds 20% of British mortgages and one in ten people hold current accounts with it. It employs 70,000 people. It is around ten times the size of Northern Rock. The government, insisted the Times, could not have allowed HBOS to fail.
It concludes that:
“September 17th, 2008, will go down as an unprecedented day in the history of free markets and modern finance. It will undoubtedly be seen as a turning point. The question is whether it will be for good or ill.”
The answer it considers “uncertain”.
In an opinion piece in the same issue, Anatole Koletsky describes how “events can move straight from impossible to inevitable, without ever passing through improbable.”
“Two weeks ago nobody would have imagined that, before the end of the month, the Bush administration would have nationalised the world’s biggest insurance company, that two of the biggest four global investment banks would be out of business and that the US government would take responsibility for three quarters of the country’s new mortgage loans.”
Koletsky is concerned that the ‘rescue’ of HBOS may drag down Lloyds.
“If this happens every big bank in Britain, except possibly HSBC, will have to be nationalised, Northern Rock style.”
The same he says, would become inevitable in the US if market speculators turn their attention to other stumbling financial institutions. If any more dominoes fall, he predicts, the whole US financial system will have to be nationalised. In times like these it is difficult to keep up with the pace of events. The US government is now putting together proposals to effectively nationalise all the bad housing debt.
In Britain the Financial Services Authority has imposed a ban on “short-selling” (making money on declining shares) in banking and finance, until January 16th, following a similar decision by the Federal Reserve in the USA.
“We will clean up the financial system”, boldly declared Gordon Brown, talking as if he made the decision of the FSA. However, it is precisely the deregulation of finance, supported by the neo-liberals of New Labour, which has created the problems now emerging. The supposed ‘success’ of the British economy was based on the growth of financial services. But the greater the weight of that sector in the economy over all, the more vulnerable has it become in the face of the global financial crisis. Brown’s assertion that there would be no more “boom and bust” under New Labour simply ignored the realities of an economic system in which boom and bust is inherent in its DNA.
“When troubles come they come not single spies but in battalions”, said the bard. Real life is stranger than fiction. Who could have imagined that a right wing republican administration would have fallen back on nationalisation, state control in the way they have. This is above all a crisis, probably terminal, of the neo-liberal ideology which opened up the deregulation of the 1980’s. “It went too far” is the mantra of shell-shocked financiers. Some form of regulation is now inevitable. But what, and how far will it go? The FSA’s ban on “short-selling” is only temporary. It considers it a perfectly reasonable activity in ‘normal times’.
What appears beyond debate is the fact that the current crisis is the direct result of the deregulation craze of the 1980’s and beyond, securitisation of debt, and the growth of all the weird “financial instruments” have created the conditions in which when the US housing market hit the floor, nobody new what the value of ‘collateralised debt obligations’ (bundles of the famous sub-prime mortgages) were worth, so banks would not risk lending to each other for fear of losing their money.
Irony of ironies, Goldman and Sachs and Morgan Stanley have now said to the US government please regulate us. The era of the investment bank is at an end. They are to become “bank holding companies” subject to greater scrutiny. The New York Times describes this as “a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age”. The change in their status gives these two “masters of the universe” access to the full array of lending facilities of the Federal Reserve.
Interviewed by Andrew Marr, Gordon Brown, Chancellor for ten years spoke as if he had only recently discovered “irresponsible” lending. He said that the current financial crisis was the result of the absence of a global regulatory system, despite his best efforts. The BBC’s Robert Peston commented:
“…there will be wry amusement in Brussels and throughout the Eurozone about Brown’s claims that he was the champion of more integrated regulation across borders – because for years he and the Treasury battled successfully to prevent tighter Europe-wide regulation of financial services.”
This is the picture of a man who will tack this way and that in order to try and survive, but don’t expect a self-criticism of opinions he held yesterday that real life has exposed as baseless. He has rapidly dropped his “golden rule”. This is the moment he said in which it was right for the government to borrow a good deal more! Is the man a neo-Keynesian?
We will see exactly what regulation the FSA proposes, but it would be a safe bet that it will be more in the line of tinkering rather than abandoning the fundamentals of the neo-liberalism which created “the Golden Age”.