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How the World Heads for the Next Crash
Governments secure the money of the rich. State debts have grown in nearly all countries of the world since 2010. Ten years after the outbreak of the financial crisis, the economy is again in a standstill or mired in crisis. Trump wants to cancel the most recent bank regulations and cut taxes for corporations in half.
HOW THE WORLD HEADS FOR THE NEXT CRASH
Ten Years of Financial Crisis
By Yves Wegelin
[This article published in 2017 is translated from the German on the Internet, http://www.woz.ch.]
Ten years after the beginning of the great financial crisis, the dominant policy is aggravating the causes for that crisis worldwide. While this helped the ascent of right-wing nationalists like US President Donald Trump, the next crisis is on the way in the background.
At the beginning of 2007, the world was looking up. The economy hummed; the EU expanded to Rumania and Bulgaria. The worst US president imaginable then was named George W. Bush. Somewhere in Illinois, a senator named Barack Obama announced in the middle of February with the great promise of wanting to move into the White House as the first black president.
At the same time, news about staggering financial institutes like the New Century Financial Corporation that dismissed 3200 workers piled up in the US media. The institutes sold mortgages to poor Americans who now could not pay the interests anymore. This was the beginning of a gigantic financial crisis that turned the world upside down within ten years.
In the middle of May 2007, Federal Reserve Chairman Ben Bernanke set everyone at rest saying the mortgage crisis will hardly have any effects in the US economy. On August 9, 2017, the French financial institute BNP Paribas announced its investors could not be paid off anymore and the European Central Bank provided 95 billion euros to keep the banks liquid. The crisis was serious and global. US banks packaged the rotten mortgages, bundled them with other credits into new securities and sold them all over the globe.
TOO BIG TO FAIL
The first bank run occurred on September 13, 2007. Long lines of people who wanted their money back formed before the branch offices of the British Northern Rock. The British government stopped the onslaught by announcing a guarantee for deposits. In 2008, the US government bailed out several banks. On September 15, 2008, the crisis reached its climax when the government decided to let the Lehman Brothers investment bank go bankrupt. Pictures of bankers with their necessities in cardboard boxes streaming out of the glass skyscraper of the collapsing bank circulated all over the world.
The blackout of the financial system threatened. In the US and Europe, governments bailed out the banks with billions. Europe's governments alone made available 4.5 trillion in tax money up to 2011. On October 16, 2008, Switzerland made $66 billion available for UBS.
The banks are "too big to fail." They are too big to let fall without dragging the whole economy to the abyss.
The governments intervened with enormous packages when the global economy plunged into the deepest depression since the world economic crisis of the 1930s. In November 2008, the EU commissioner Manuel Barroso called upon Europe's states to make available 200 billion euros. At the beginning of 2009, the newly elected President Barack Obama followed with $800 billion. The bank bailouts, the economic packages, and the recession made the public debts explode. In 2007, the average state debt of the G7 countries (that produce nearly half of the global value-creation) climbed in three years from 77% to 102% of the gross domestic product (GDP). The governments borrowed the money from the banks they bailed out. This is a new business in the billions for the banks that receive money almost free of charge from the central banks.
At the same time, a social catastrophe was on the way despite the state interventions. In the US, unemployment increased in three years from 4.6 to 9.6%, in Spain from 8.2 to 19.9% and for youths from 18 to 42%. With the global decline of economic demand, unemployment is exported to half the world. Oil countries like Russia fall into problems with the falling oil price. When investors in 2010 were roused up on the search for new investments and revved up food prices, hunger crises occurred globally and the number of people enduring famines soared to 150 million.
WHAT WENT WRONG?
The months after the collapse of Lehman Brothers were the time of great debt confessions. Alan Greenspan, chairman of the Federal Reserve until 2006 and possibly the most influential economist of the last decades, replied to the question of a congressperson whether the crisis did not show his economic ideology failed: "Absolutely, exactly, that is the reason I was shocked because I was convinced for forty years or more that it functioned extraordinarily well." What went wrong?
The shortest answer is greed. The greed for money seduced bankers to take greater and greater risks. So they granted destitute Americans mortgages that they sold as securities to other greedy bankers all over the world. That was the conclusion of the official US investigation on the financial crisis.
That is also the answer given by the 2013 film "The Wolf of Wall Street" in which the most screwed up Wall Street brokers sold junk securities all over the globe and in the evening held wild orgies while the small in stature slammed against the wall.
The economic growth and the inflation remained moderate despite this debt-driven consumption. The central banks also decided to do nothing against the low interests that ultimately fueled the stock exchanges. So the MSCI index reflecting the stock prices of the G7 countries rose from $140 to $1427 dollars. The German sociologist Ralf Dahrendorf described the world economy right before his 2009 death as "credit capitalism."
As Bernanke explained, the increasing savings were led by so-called global imbalances within the individual countries and also beyond the borders. A large part of China's savings flowed to the US where Chinese goods were purchased. German investors lent their money to Spain that thereby became indebted. The euro was responsible in the long-term. The euro was too weak for an economically strong country like Germany and too strong for countries like Spain. This enabled Germany to export more to Spain than vice versa. Spain financed this import-surplus with money borrowed from Germany.
In a word, Germany drives Spaniards into debt so they can keep the German economy humming.
The call for a reorganization of the world economy was loud when banks paid out bonuses in the millions already in 2009 while the social crisis deepened. There were also mass protests in Greece and Spain after revolutions began spreading over the Arab world from Tunisia – triggered by the exploding food prices. In Manhattan under the name Occupy Wall Street, demonstrators in the fall of 2011 occupied Zuccotti Park. Control of the banks and closing the wealth gap were their demands.
Intellectuals, VIPs, and politicians were in solidarity worldwide with the movements. "Be outraged," the 93-year old former French resistance fighter and UN diplomat Stephane Hessel urged in an essay. A breeze of revolution is in the air, the belief in a better world.
Several things happened under this pressure at least concerning the first demand. Under the title "Basel III," the G20 governments decided that banks' capital holdings must be at least 8% of their (high-risk) investments. Moreover, the US and the EU and Switzerland drew up plans to mobilize the foreign capital of a bank in case of emergency. That the taxpayers must pay should be prevented some day.
In addition, there are plans to regulate banks if they declare bankruptcy. Some governments have passed laws to mute or subdue the risk-readiness of bankers. Since 2013, bonuses can be as great as the fixed salary in the EU. Many governments even prohibit banks from proprietary trading, trading for its own account (trading with securities on their own books) and not in the commission of clients.
If the demand of Occupy for more justice was called a small revolution, the answer of the governments was a counter-revolution. With their interventions after the outbreak of the crisis, they ensured as the first priority that the debt-bubble did not burst. Most private household debts remained anyhow. The states shouldered a large part of the debts that private households could not bear anymore, firstly by paying the losses incurred by the banks and secondly by answering for the economic programs that the households could not afford.
When Greece, Ireland, and Portugal could not bear the debt burden any longer, the remaining Euro members helped out by borrowing money to lend to the crisis countries. The Central Bank did the rest by lowering the interests to zero. The lower the interests, the easier it is to bear the debts.
The governments secure the money of the rich. Their wealth in large part becomes the debts of others. Otherwise, the economy would fall even more deeply. Nevertheless, the governments could have taken air from the bubble – by canceling a part of the debts or by taxing great income and wealth more strongly to repay the debts. The industrial countries introduced the automatic information exchange to prevent tax evasion. They took measures so corporations could not simply evade taxes anymore. Apart from that, the governments decide for another way. States and private households should hold onto their debts or pay them back.
The time of austerity policy began in Europe when the government representatives of the G20 countries announced the "latest events showed the importance of sustainable public finances" at their summit in Toronto shortly after their 2010 award of credit to Greece. Instead of higher taxes for the rich, governments resolved cuts to public services, clipping the social state, canceling public jobs and reducing wages. The result can be read in a recently published OECD study. The industrial states distribute less wealth downwards than before the financial crisis.
Moreover many countries have deregulated their labor markets forcing down the lower wages. Together with the austerity policy, this led to aggravating income inequality in most industrial states since 2007 in the US, Germany, Italy, and Spain – according to the same OECD study.
So the debts are growing again. The private household debts in those countries that triggered the financial crisis have fallen somewhat – but are rising again in many other countries like France and Italy. State debts have grown in nearly all countries of the world since 2010 – from 95 to 119% of the GDP on average in the G7 countries. The stock markets are cooking. After 2007, the G7 stock index sank from $1420 to $653, reached its former high-water mark in 2013 and then climbed again to $1672. Analysts warn of a crash. One US fund manager speaks of the "most overrated moment in the history of the market economy" and predicts a rapid 60% drop in prices.
The stricter bank regulations can hardly counter the growing inequality and the low interests. If a crash occurs, the resolved higher capital holding requirements in some cases will hardly be enough to cushion the losses, as the renowned bank expert Anat Admati warns.
HOW TO ANSWER TRUMP?
Today, ten years after the outbreak of the financial crisis, the economy is again in a standstill or mired in crisis. The EU is in retreat since the Brexit resolution. Donald Trump follows Obama the bearer of hope and makes Bush look like a reasonable person. Right-wing nationalism arising all over the earth is the new ugly face of the counter-revolution. Trump wants to cancel the most recent bank regulations and cut taxes for corporations in half. When he mounts the lectern, he invokes the nation's distribution battle against the outside: against China, against Mexican immigrants – and against the world generally.
In that way, he wins more than millionaires, businesspersons, and bankers who want to protect their wealth. He rallies all those behind him who have gone down since the financial crisis and whose hope for justice was disappointed – and now believe Trump that justice must be gained by fighting other nations. Revolutions often end in war as the philosopher Hannah Arendt wrote. Still, no war rages in the West. However, Trump's nationalism is intent on stifling the voices of 2011 that rebelled against big money.
Political resistance opposes this nationalism, racism, and sexism today. However, it is simultaneously important to oppose nationalism in Stephane Hessel's call for social justice. The ground of nationalism is economic egoism.
Marc Batko, “Alternative Economics. Reversing Stagnation,” Smashwords, $3.99 with coupon code PU68W (until July 4), https://www.smashwords.com/books/view/627516
George Monbiot, “Neoliberalism. The Ideology at the Root of all our Problems,” The Guardian, April 2016, http://www.truth-out.org/opinion/item/35692-neoliberalism-the-ideology-at-the-root-of-all-our-problems
Ann Pettifor, “Be angry at bankers, be angrier at economists,” The Guardian, 2012, https://www.theguardian.com/commentisfree/2012/jun/29/bankers-economists-judicial-public-inquiry