| Structural Greed:
The ‘Credit Crunch’
John Barker
There have been economic and financial ‘crises’ ever
since I remember. For most people in the world financial crises are
anything from an hourly to, possibly a more privileged, monthly experience.
But this is not what is being talked of now which is instead a ‘major
event’ in the richer part of the world involving sums of money
beyond our ken; billions and trillions. The fetishistic notion of ‘economic
collapse’ then gets floated. What does this mean when there are
millions of malnourished people, and when vast numbers of people are
continually scrabbling for a living in the ‘informal economy’?
Such ‘crises’ in the richer world are often dramatized as
fundamental, even terminal to capitalism by anti-capitalist socialists,
and sometimes by excited financial journalists. So far it’s been
a history of crying wolf which makes a person wary about exaggerating
what is happening now in this ‘sub-prime/credit crunch’ sequence.
Most major banks, even those that have had to write-off bad debts often
in the billions, have still made profits in the billions. Equally,
corporate profits in the US-epicenter have been, in capitalist terms,
healthy. And yet this ‘crisis’ is different to others of
the last fifty years, both in reality and in the way it has been presented
to the public:
• Its longevity. No sooner was this crisis being put to bed – crosses
nailed through hearts, frankness and reassurance offered in the same breath – than
up popped another write-off. In April 2008, the Term Auction Facility in the
US was increased by $50bn and expanded the kind of assets used as collateral;
precisely the kind of assets that precipitated the crisis. The Bank of England
followed suit, though insisting the collateral were ‘high-quality’ assets.
Similarly, the size of the write-offs involved seems to get bigger as time goes
on.
• The expansion and extension of usury, seen in the sheer scale of credit
in an era of securitization, much of it ‘non-productive’ but all assuming
steady cash flows from those who borrow.
• Many of the bones of modern capitalism are now showing, such as the fragility
of the valuation of collateral assets and their cash-flow ‘assumptions’.
How shaky its normally hidden infrastructure becomes when banks are afraid to
lend to other banks.
• As a crisis of information in the era of the information technology revolution
and with credit ratings agencies coming in for serious criticism it profoundly
undermines capitalism’s claim to be the only efficient assessor of risk
and allocation of resources.
• The ethic of transparency, preached to poorer parts of the world, is now
seen to be rooted in a financial universe that is proudly opaque.
• The self-advertised competence of Central Banks and regulators is undermined
and in some ways their collusion with financial excesses is revealed. This was
shown not just in the seediness of predatory mortgage lending but also in its
deceptive packaging.
• More clearly seen is the dependence of so called ‘free-market’ capitalism
on tax gathering nation states and federations. Like the present ‘rescues’ of
banks, the system’s dependence on export credit guarantees and state ‘defence’ spending
may yet become news. Shown too is the psycho-political forces at work in the
case of the appeals to Sovereign Wealth Funds to ramp up the asset base of banks.
• Most of all, this crisis reveals that the global pot of surplus value – however
much it has grown thanks to the development of East Asia and the accompanying
pressure on wages elsewhere1 – is always finite at any
given time. This is combined with the added problem of its realisation as the
urge to squeeze out more of this same surplus value. As the Herald
Tribune put
it: “In any country or business sector, there is a limit on the number of
good investments.”2 Witness the coincident fall in the
value of the dollar which is not unfamiliar,3 but also the
global rise in the price of basic food. While the so-called fundamentals of capitalist
economies have proved to be elastic, especially when it comes to credit creation,
they have been shown up by the real fundamentals of daily subsistence. Needless
to say one cannot live without food and its supply cannot be turned on and off
by the mouse or the remote-control.
But there is still a job to be done to contest capitalism’s explanation
of its own present ‘crisis’ by its elite, wiseguys and lickspittles.
They all hope to retain their dignity and go unpunished by virtue of
a limited period of purely technocratic ‘mea culpa’. This
self-explanation is not an exclusive monologue, but those calling for
the regulation of ‘free-market’ capitalism in its own interest
have been doing so for a long time, and to no effect.
The Language of ‘Sub-Prime’
The most public strategy of in-house explanation of the last several
months’ ‘crisis’ has been to isolate ‘sub-prime’ mortgages
as the sole culprit, while at the same time wiseguys like Rupert Murdoch’s
Irwin Stelzer have emphasized how relatively small the amount involved
is, and how even smaller the percentage of ‘delinquent payments’ – i.e.
overdue for more than fifty days. Bank of England figures indicate
that bonds backed by ‘sub-prime’ mortgages is $0.7 trillion.
This, as Donald Mackenzie has pointed out, is a lot of money. But it
is only 2.5% of all non-government binds and outstanding corporate
loans.4 If this huge amount of money is in fact relatively
small, doesn’t this then indicate a fragility to the circuits
of credit and liquidity?
‘Sub-prime’ suggests an ‘underclass’ as promoted by neoliberal
conservatives. Josef Ackerman, head of Deutsche Bank referred to ‘sub-prime
delinquencies’. Others use corporatist allusions; the loans were ‘toxic’,
there was ‘gangrene’ and danger of ‘contagion’. It is the
language of disease in what is an otherwise healthy fantasy world where free
markets are beneficial to all, similar to the ‘rotten apple’ line applied
in those very rare cases in which police brutality is inescapably proven. But
the real blow of these mortgages very clearly lands on those people who have
lost their homes; people who have figured rarely in accounts of the credit crunch
except for brief TV images of a gothic-looking Detroit and stretches of empty
houses in Cleveland. But this obviously has had an impact on banks too. What
needs explanation is how this crisis had an impact greater than the relative
amount of money involved. We should remember that neither the generic mortgage
crisis, nor levels of personal indebtedness, especially in the USA and UK, came
out of nowhere. The evidence of its roots can be found some years back.5
Jan Hatzius, Chief Economist of Goldman Sachs in the USA, equates what
has happened to the dotcom bubble in so far as this crisis is a consequence
of the mistaken belief that normal laws had been overcome and, in this
case, US house prices could never fall. For the governments of the
USA and UK, house prices are politically important because ‘house
owners’ are a key voters. In the UK, the meanness and perversity
of a policy of little or no new social housing has helped drive the
steady increase in house prices to such an extent that no doubt many
bourgeois have felt it to be their right that their properties should
go on increasing in value for ever. Blindly they ran into the reality
of higher rates of interest as Hatzius’s analysis implies. But
this does not explain the impact on the wider financial world which
is not like the dotcom bubble. This time around, mortgages for the
poor at high rates of interest were just one area of riskier lending
supported by the prospect of high returns. Of course, in the purview
of capitalism, these mortgages were attractive because of the high
rates of interest charged. Then they went even higher in the US because
Federal Reserve policy at that time intended to counteract inflation.
As John Lanchester has pointed out, US interest rates went up “just
as many of the sub-prime borrowers were coming off their first two
years of fixed-rate mortgages.”6 As a consequence,
the money of so many poor people, and their homes with it, simply went
down the pan. That wonderful amoral word ‘mis-selling’ comes
to mind here.
These developments are still not explained simply by the picture of
eager salesmen followed by eager bankers acting out of greed or the
need to perform. The eagerness to squeeze money out of the poor of
the developed world tells a larger story. Not so many years ago banks
decided they could squeeze no more out of the poor of the lands of ‘emerging
markets’. In the spectacular case of Argentina they switched attention
to that country’s middle class. A politico-economic crisis ensured
and brought a government that played successful hardball with its creditors
and their international financial institution backers. ‘Emerging’ stock
markets have since produced well above average returns for investors,
but to match and amplify this the poor of the developed world were
brought into play. Here too, however, the competition for even expanded
surplus value, created real contradictions. The holding down of real
wages in the USA over a long period7 in the interests
of surplus value production made rising housing costs unreasonable,
if not impossible, for those same wage earners and it is they who have
borne the brunt of ‘the crisis’ in the developed world.
The process of making smart and profitable ‘financial instruments’ out
of mortgages for the poor, mirrors those chains of sub-contracting
in globalised capitalist production. With chains of production, the
CEO of the multinational can deny knowledge, say, of child labour on
another continent. Speculation in mortgages likewise
reveals the abstraction of finance and how far apart are the worlds
of borrower and banker. Given that Deutsche Bank is said to now be
the biggest landlord in Cleveland, USA, the packaging of these mortgages
has made that distance even greater.
Bankers Ain’t What They Used To Be
When it comes to blaming someone else, the bourgeoisie have no equal.
Central banks, regulatory agencies, hedge funds, and credit ratings
agencies have all been pinpointed. These prominent damage-limiting
self-explanations assume that once-upon-a-time there were bankers who
were real, experienced bankers and they would have looked at the realities
of where a loan was going and sensibly assessed its risk.8 Over
the last decade and more, as this discourse runs, they have been replaced
by mathematical whiz kids empowered by the Scholes-Black equation and
the power of computers who created elaborate programmes and new financial
instruments designed to get an almost abstract share of the global
surplus value pot. It’s implied these bright guys were too clever
for their own good and are without ‘sound judgement’.
If that is the case, however, the degree of havoc caused is only possible
because of the greater amount of credit that can be created (liquidity)
by contemporary capitalism. Increasing credit increases speculation.
The mathematicians may have developed and refined a variety of derivatives,
but this only provides the opportunity, as the whodunits say. Yet mathematicians
did not deregulate banking, nor come up with the idea of ‘securitization’,
nor institute the changes in the capital ratio requirement of banks
enshrined in Basel II rules. A lesson drawn from the Wall St. crash
of 1929, which had created misery for millions, was that investment
and retail banks should be kept separate; that the ordinary depositors
should not be financing the risks taken by investment banks (risks
on a greater scale given the greater cash base the retail bank could
provide). The lesson produced the Glass-Steagall Act which kept them
separate. After ferocious lobbying by the banks, the Act was repealed
in 1999.
Securitization is the creation of asset-backed securities; debt securities
which are backed by a stream of cash flows. In the 1980s, the notorious
McKinsey management consultancy empire “was showing its banking
clients how securitization had a cost advantage relative to traditional
lending. The process has massively increased international liquidity.
These are first sold by the borrower to a special purpose vehicle which
isolates claims for repayment against the ultimate borrower who can
also keep the debt ‘off balance sheet”.9 It
is also the case that the assets being bought with the borrowed money
are themselves collateral. Such deals are ‘leveraged’. From
the investor’s point of view the returns are likely to be greater
than on average equities, but assume that the future is tied up, that
those cash flows are secure, that, in this instance, mortgages would
be paid in orderly fashion by poor people.
The accusation against the first manifestation of mathematician-bankers
focused on computer-programmed ‘quant’ or ‘tracker’ trading
programmes. They were seen to be inflexible and to replicate each other
in such a way as to cause exaggerated movements in and out of currencies
and investments. It was an internal critique especially prevalent at
the time of the South East Asian currency crisis of 1997-8. But they
have continued to be part of ‘normal practice’ because they
were normally profitable, though not always. In August 2007 Goldman
Sachs announced that its Global Equity Opportunities Fund had lost
$1.8bn with such trading, yet this didn’t stop it from announcing
record profits of $11.6bn 4 months later in December 2007. This hardly
gives anyone an image of orderly accumulation!
This time around, in-house analysis has faced serious presentational
problem by which widespread faults in risk assessment have to be acknowledged
without notions of structural greed or capital’s accumulation
imperative making an appearance, or even the vicious circle described
by Donald Mackenzie between liquidity and ‘financial facts’.
Loans which share with ‘sub-prime’ mortgages the promise
of high returns were in ‘emerging markets’ – but also
Private Equity buy-outs and highly leveraged Hedge Funds, the material
form of what has been called “financial arbitrage capitalism.” Back
in May 2007, before ‘sub-prime’ became familiar news vocabulary,
one especially shrewd wiseguy – ‘star’ investment manager
Anthony Bolton. Bolton – having sold nearly all his bank and financial
stocks – warned that large private equity deals were exposing
banks to a default risk; that there had been unchecked lending to support
a wave of mergers and acquisitions, and that many of these were “covenant-lite”,
meaning that if such a company were to go bust the bank would have
little ability to reclaim the money lent. This came at a time when
in the USA there had been a record leveraged buy-out of the health
capitalists HCA for $33bn, and in the UK of Manchester United and Liverpool
football clubs, touching certain sporting nerves in civil society.
A report by Robert Parkes of HSBC suggested that all but the 20 biggest
companies were potentially subject to such buy-outs. He estimated that
ready sources of cash and debt gave private equity global purchasing
power of $4.5 trillion.
Despite the lack of interest premium in such ‘covenant-lite’ loans,
European and USA banks were falling over themselves to make them, and
did not need mathematicians to do it for them. Merrill Lynch, the bank
involved in the HCA buy-out, announced that a large part of its profits
came from such loans. The lack of premium was dwarfed by their sheer
scale and therefore profit to the bank which, like other such banks,
wanted its cut from the expanded, yet limited, global pot of surplus
value; limited even where it is a matter of “buying and selling
claims on future value created in future productive activity,” as
Peter Gowan puts it.10 Private equity firms are a
case where the assumption is that they will be more efficient in squeezing
out surplus value from any given company usually by increasing the
intensity of labour of its workforce, or by selling off the most profitable
parts of the company, and that the cash flow is guaranteed. A study
by Mark O’Hare of the research company Private Equity estimated
that in the decade since the mid-1990s the typical European buy-out
fund had given 15-20% returns to its investors net of fees, as opposed
to a far lower FTSE return. Banks, for their cut, sub-contracted the
job of squeezing out the extra surplus-value to these specialists,
but with few safeguards.
Anthony Bolton was not alone in speaking out in May 2007. The new chief
of the US Federal Reserve, Ben Bernake, gave a warning a little stiffer
than that of his predecessor Alan Greenspan who made utterances about ‘irrational
exuberance.’ Bernake said, “I urge banks to closely evaluate
the risk that they’re taking (…) not only in the context
of a highly liquid, benign financial environment, but in one that might
conceivably be less liquid and benign’. More specifically, on
the 20th of the month the Financial Stability Forum, a typically ad
hoc set-up of global financial regulators (which “brings together
on a regular basis national authorities responsible for financial stability
in significant international financial centres, international financial
institutions, sector-specific international groupings of regulators
and supervisors, and committees of central bank experts”) reported
to the G8 at its Potsdam meeting that “investment banks are so
keen to win business from hedge funds that they are relaxing their
risk assessment.”
Why should this be the case? At various times, in-house analysis of
the crisis has made reference to both the pressures and incentives
on and for bankers to make loans. As individuals, the bonuses – often
in the millions – come with the loan regardless of how it pans
out. This was touched on by London broker Terry Smith: “Now you’ve
got a divorce between the origination of the credit and the person
who carries the can for its (the loan’s) service.”11 But
the bonus system is now built-in by the notion that ‘the best
and the brightest’ must be kept by individual banks at all costs,
an elitist manifestation of structural personal greed. This was referred
to by the Financial Stability Forum on 10th Feb 2008 in which it cites
how the lavish performance pay regimes in London and on Wall St. “encouraged
disproportionate risk-taking with insufficient regard to long-term
risks.”
The pressure on bankers is that the real crime in their competitive
world is to miss the boat when new loan opportunities are being taken
by other banks. And the pressure to come up with the highest rates
of return for investors usually comes from fund managers, themselves
under pressure to perform. What has been most revealing is the focus
on UBS Bank. They have been portrayed as dowdy virgins, tempted by
high returns into an exotic world of credit derivatives which they
didn’t really understand. But what of the losses made by supposedly
streetwise Citigroup and Merrill Lynch which lead to the resignations
of the chairmen of both? Simply put, the pot of global surplus value
is limited at any given time.
Mervyn King, Chairman of the Bank of England in early 2008, in front
of the UK’s Treasury Select Committee stated: “One of the
problems is the immense pressure on fund managers to achieve above
average returns. This is madness when it is not possible for everyone
to earn above average returns.” Here was an admission that the
pot is limited, but then failed to account for structural personal
greed by falling back on a familiar ahistorical standby: “But
I don’t think you can regulate human nature”.
“Making Your Investment Work As Hard As You
Do.”
This has been the slogan of advertisements for the Allianz financial
outfit which appeared on the BBC World channel. It highlights the privileged
position of the investor class.12 Up until the recent
talk of risk assessment and the lack of it, this privileged class seems
to have assumed that its right to a return is inviolate. As shown by
Rob Ray in Mute (9/8/07), this has been almost institutionalized with
PFI. Through the proposed MAI (Multilateral Agreement on Investment)
which has been successfully resisted, such privilege was planned to
be institutionalised on a global scale with private capital able to
sue member states of the WTO. Instead this goal is sometimes achieved
with bilateral trade deals between very unequal partners, and backed
up with the threat of “investment strikes.” Both are aimed
at and within nation states.
What has upped the stakes is the investor now expecting a ‘higher
than average return’ without risk. The benchmark has been from
Private Equity buy-out funds with their 15-20% returns, and on “Emerging
Market” funds. With these, the Morningstar investment research
firm estimated that in the three years up to and including 2006, “Diversified
emerging stock markets funds returned 56%, 24% and 32%, way above the
7% on domestic equities”. And returns lower still from the safest,
Treasury Bill, assets. Clearly such funds take a more direct share
of that surplus value produced in Asia and Latin America, but they
have helped create a benchmark.
In a previous ‘crisis’ which dominated the 1980s and beyond,
that of ‘Third World” debt, banks with petrodollars to play
with but a shortage of investment opportunities in the rich world poured
money especially into Latin America. As early as 1976, Chase Manhattan
generated 78% of its profits on its international operations. Increased
interest rates and restructured debt packages increased the levels
of repayment. Even for countries requiring no restructuring, banks
increased the interest rate spreads. Over the course of the 1980s the
accumulated debt of Latin America grew from $257bn to $452bn despite
total annual interest payments of $170bn. By 2000 the debt was $750bn.
The well-known history is that this form of free-market capitalism
then needed the World Bank and a resurrected IMF to keep the show on
the road and provide the discipline (with ideology attached) to ensure
that higher priority was given to servicing the debt than any objectives
like maintaining living standards.
“If You Can’t Protect That Which You
Own, Then You Don’t Own Anything.”
This is what Jack Valenti, head of the Motion Picture Association of
America, once said. In May 2007, Sally Dewar, capital markets sector
leader at the Financial Services Authority, remarked that in the good
old days before a decision to lend money by a bank was made, it would
go to a credit committee of top bank executives listening to staff
giving a pitch about the ability of the client to repay and on what
terms. Whereas now, she said, these terms are given less consideration,
and instead more importance is attached to how quickly the lender can
offload the debt by selling on portions to rival banks. At the same
time, this offloading of debt was supposed to make the financial world
more resilient to shocks by spreading it around the world. But already
by August 2007 the cry went up, “No one knows who owns this stuff.” This
stuff being CDOs (Collateralised Debt Obligations) and ‘credit
default swaps’, instruments and processes whose workings have
been so well documented by Donald Mackenzie.13 CDOs
started as forms of insurance – banks paying others to take the
risk on loans or part of loans they had made – but then were taken
up as profit-makers in themselves as packages of mixed debt. These
too, as sophisticated forms of securitization, were put into special
purpose vehicles typically registered offshore. There are different
grades of what could be called ‘creditworthiness’. Not unusual
rates of return are 15-20%, while the highest rated offer returns better
than the equivalently rated corporate or government bonds, as the McKinsey
Consultancy had predicted. Many are mortgage-backed, of which, as previously
shown, ‘sub-prime’ are a small component. What is difficult,
MacKenzie shows, is valuing derivatives like CDOs. It is also an arena
for mathematicians and computer power. Naturally enough ‘recovery
rates’ (or the extent to which loans are ‘covenant-lite’,
as Anthony Bolton put it) are a factor in determining ‘value’,
but the most problematic is what is called ‘correlation’;
the degree to which one loan default might be part of a pattern, a
cluster of defaults.
It is at this point that the blame game returns to the mathematician
bankers. It’s they, as well as the immense computer power used
by ‘the single-factor Gaussian cupola’ (which has become
the standard and only mutually intelligible way of CDO valuation),
who are at fault. By developing ‘credit indices’ valuation ‘facts’ are
created but these have proved to be especially volatile. The dynamic
created by defaults has, in turn, created increasingly irrational derivatives
reminiscent of the ‘Persian’/‘survive or perish’ bet
for dodgy cheapo airlines of the future – a great satirical riff
in James Kelman’s novel You Have To Be Careful
In The Land Of The Free. The outcome, Mackenzie argues, is not that banks have been
hiding their losses, but that the losses are hard to measure credibly.
How, he asks, can you value a portfolio of mortgage-backed securities
when trading in them has ceased? It has been down to central banks
to give them a value which they may not have at all. It is this which
gives the lie to the sanguine line that everything is OK, it’s
not a solvency crisis, but “a fairly typical liquidity crisis.” Whatever
else, it is not typical.
Out Of The Shadows
Along with Metrolines, credit ratings agency companies (Standard and
Poor, Moody’s and Fitch) have been dragged out into the bright
lights of blame. Auditors seem to have escaped any censure until the
Financial Stability Forum meeting in February ’08 attacked secretive
off-balance accounting. Given the ‘form’ of the oligopoly
of global auditors, this is amazing.14 Metrolines
are presented in the UBS category; foolish virgins who left the safe,
dull business of insuring municipal bonds, to insure exotic derivatives,
attracted by the returns on offer.15 More venom has
been directed at the ratings agencies, attacks which however, undermine
a key component of ad hoc capitalist power.
During the 1980s and ’90s this oligopoly of private companies
(Standard & Poor, Moody’s, and Fitch) exerted huge power over ‘third
world’ economies, their country ratings determining what rate
of interest they would have to pay on their debt, and in some instances
whether they got credit at all. “The ratings agency’s appearance
as a non-partisan institution devoid of political affiliation, and
thus motive, also conceals its disciplinary nature in terms of ideologically
reproducing the ‘international’ standard of corporate governance.”16 As
part of an ad hoc tyranny, ratings agencies may be more effective,
say, than the IMF questioning the creditworthiness of Malaysia when
it sensibly introduced currency restrictions during SE Asia’s
currency crisis. The ideological dimensions of this tyranny were illustrated
in an interesting way by a commentator of the sanguine variety: Jeremy
Warner of The Independent attacked proposals from the British government
that would in some way monitor these agencies. He argued that this
would mean “governments would become responsible for the ratings,
thereby politicizing the whole business of credit.” But as we
know in so many instances, especially in the Third World, credit is
already politicized in this way.
Yet such power is undermined by the present publicity which has arisen
because of losses made in the rich world. David Einhorn, CEO of Greenlight
Capital hedge fund, and Mackenzie differ in the nature and degree of
blame attached to the these agencies for giving too high a rating to
many CDOs. But what they agree on is that whereas the agencies were
used to rate just corporate and government bonds, much of their business
is now with CDOs. Also, that there is a conflict of interests given
that the agencies are businesses, and it is the issuers of debt instruments
who pay the agencies to rate them.
As presented in naked Capitalism,17 Einhorn argues
that it goes further; that CDOs carry the highest fees, and that these
fees were correlated with their willingness to look the other way at
credit losses. Or rather, that ratings (AAA or AA+ for example) were
created equal, whereas “the more complicated the paper – like
CDOs – the more risk it was allowed to carry in each ratings category”.
This is what infuriated Anthony Bolton; the lack of premium on riskier
debt and which he warned about months before Standard and Poor downrated
some sub-prime-based CDOs. Mackenzie is slightly more sympathetic,
given that agreeing on the value of an asset had become more difficult.
But says they were/are at fault for rating mortgage-backed securities
on the basis of previous experience of default rates and the proceeds
of repossession property sales, and did not take into account the bubble
in house prices or the appetite for risky debt driven by investor expectations.
In reality, the assumed cash flows were not there.
All this makes a credit ratings oligopoly, with the power to decide
on what terms people can get credit, look amateur as well as greedy
in their own way. But they cannot be blamed for this appetite for debt
giving higher returns. The ‘virgins’ of UBS or German landesbanks
were not led astray by hired malefactors and incompetents, but the
pressure and greed for higher returns.
“They got this really nice house…Bought it when the price
was right, and I mean: really right. Back the late Seventies you know?
Before everything explodes there, prices go right through the roof;
then ten or twelve years later, after all the suckers pay them, get
in hock past their balls, down the prices come again...And now the
banks are goin’ under; we’re all really inna shit.”
George V. Higgins, ‘Bomber’s Law’, 1993
The consequence of this crisis in the value of asset-based securities
has had predictable consequences. Not knowing what securities are worth
has seen banks not willing to lend to each other and tightening up
on loans generally. Equally predictable in the UK, this has focused
on mortgage lending, but it also affects what might be called productive
loans. Thus the impact of the ‘credit crunch’ on the real
economy.
The great hegemonic strength of capitalism today is its perverse universalism.
The financial system must be saved or everyone is affected. In a previous
specifically ‘debt’ crisis, that hit Latin America right
through the 1980s, the IMF and BIS (Bank for International Settlements)
were brought in to save the banks from potential defaults on their
loans. “The decision to ignore the normal workings of the market
mechanism and allow the imprudence of the bankers to go unpunished
was quite deliberate. The system had to be saved.”18 What
happened was an unplanned resort to official recycling, which is what
we are seeing now in the present crisis, with injections of liquidity
from central banks. Even commentators from the Keynesian tradition
who are keen on ‘moral hazard’ (i.e. that banks and investors
should pay for their mistakes), fall back on disease imagery; how the
failure of one bank would create a vicious circle of financial mistrust,
further failures and a Depression such as began in 1929, and how a
financial collapse would end up hurting millions of savers and investors.
The most spectacular rescuing was of Northern Rock in the UK and Bear
Sterns in the USA. What stands out in both rescues even though their
causes were so different – Northern Rock as a ‘victim’ of
illiquidity – is the determination to at least maintain the fiction
of a free market. In the case of New Labour it even at one point meant
backing a chancer like Richard Branson until wishful thinking was no
longer possible. In the case of Bear Sterns the fiction of the buy-out – on
tough terms – was that it was done by the JP Morgan bank at a
fire-sale price.19 In this instance, the Federal
Reserve was so keen to see the deal go through that it offered to guarantee
the $30bn worth of hard-to-sell mortgage-backed securities, while JP
Morgan played tough on voting through the deal by BS shareholders,
this while it itself has an unknown exposure to credit default swaps.
These were the unavoidable public spectacles. At the same time there
has also been a steady official recycling, that is the provision of
credit to capitalist banks by Central Banks. This passes under the
rubric of ‘liquidity injection’ as if this were a neutral
process. The Federal Reserve was quickest off the mark. On the 16th
August ’07 it announced a cut in its discount rate to make it
cheaper for banks with cash-flow problems to borrow money; a U-turn
from their inflation concerns of just one month earlier. More to the
point, they made it possible to borrow cash against assets no one seemed
to want to buy (and therefore of undefinable value) with home mortgage
and related assets specifically listed as acceptable collateral. The
policy of restricting these loans to short periods was also abandoned.
The new liquidity would be available as long as needed. The Bank of
England was slower off the mark, and has been blamed for this. Starting
from a hard ‘moral hazard’ line, described as ‘Victorian’,
the run on Northern Rock forced it to change. At first banks could
borrow from it, but publicly and at stiff rates. In December ’07
it joined the Fed, ECB, Swiss and Canadian Central Banks to make a
$100bn international ‘injection’, offering for its part $20bn
of 3 month funds at two auctions. This time it accepted a wide range
of ‘high-quality’ collateral, and without the penalty rate
it had imposed before. Then this could be done privately and for longer
periods. In late April ’08, after nine months of ‘credit
crunch’, it was announced that it would be willing to exchange
government bonds for mortgage-backed securities; swaps for one year
periods which could be extended to 3 years. This facility would run
to between $100-200bn. These securities were again described as ‘high-quality’ but
the reality is that these are illiquid in the present climate for the
precise reason that who can say what is ‘high quality’. With
house prices falling, interest rates rising, and the possibility of
a sharp economic downturn, an increasing amount of mortgage debt will
not produce those cash-flows, and will ‘go bad’.
This Bank of England move followed a similar plan announced by the
Fed which on May 2nd ’08 raised the size of the ‘Tem Auction
Facility’ (another liquidity injection process) and also allowed
lower-rated asset-backed debt to be used as collateral, some of which,
on the ‘free market’, would be priced at zero, some of which
could be reliant on credit card debt, unsecured loans and auto loans.
At the same time, the Fed20 has been steadily cutting
interest rates. This was the policy used consistently by Alan Greenspan
to the point where the ‘Greenspan put’ became part of the
financial world’s own language, meaning that the Fed would always
act to protect the market from losses. The policy under the new chairman,
Ben Bernake, was going to be much tougher, just as wise-after-the-eventers
were attacking the Greenspan legacy, blaming him for creating one asset
bubble after another. In fact, since the ‘crisis’ began,
the same policy has been followed.
The amount of credit, as of March ’08, supplied officially to
the US banking system far exceeds that coming from Sovereign Wealth
Funds to which some banks have turned to ‘strengthen’ their
cash base. For example, in December ’07 Merrill Lynch sold $5bn
of its equity to the Singaporean government’s investment fund
Temaesk, and the Abu Dhabi Investment Authority has taken a $7.5 bn
stake in Citigroup. These are entirely rational moves by these Funds,
given a reluctance both to hold more dollars or to dump them, given
that this would set-off a self-defeating spiral in its value. Despite
the rationality and the relatively small amounts however, it is these
funds which have created psycho-political and ideological anxieties,
given that these are the Funds of not-white men from what might be
called varieties of ‘state capitalism’ that had been cast
into the dustbin of history by Alan Greenspan in 1998. “Foreign
governments may not operate solely in accordance with normal commercial
considerations,” is the way these anxieties have been expressed.
A characteristically ad hoc outfit, The International Corporate Governance
Network, met SWF (sovereign wealth fund) representatives in Gothenberg
in March, but did not call for a regulatory regime, rather that the
SWFs should be transparent in their motivations. This came after the
SWFs had rejected Larry Summers’ (ex-US Treasury) demand at Davos
that they sign up to a code of conduct, transparency and so forth.
Capital is capital with a global shared class interest, but these SWFs,
having been continually lectured on the subject since 1997, must have
enjoyed saying, ‘Well, what about transparency in your own banking
system then?’
The Invisible Hand And The Puppeteer
‘Adam Smith’s invisible hand has a puppeteer – the US Federal
Reserve’, read a Herald Tribune headline after the US government-organised
rescue of Bear Stern, the USA’s fifth largest investment bank. Calls for
regulatory systems and architectures are, rather, the quid
pro quo for this practical
business of rescuing banks. Some of those making such calls are rightly keen
to talk of how the free marketers, players and ideologues always complaining
of government interference, run to governments for help whenever there is a crisis.21 What
the commentators and players (George Soros and all) demand is that new regulation
of the markets be introduced for its own sake, and that of everyone else. Apparently
regulations should involve new layers of transparency, accountability and financial
monitoring. In the happy world of Will Hutton, it should not be so difficult: “We
must have a government that understands the delicate relationship between markets
and the state and is ready to act – and a wider business culture that accepts
the necessity. Business needs government and has to accept that regulation and
intervention are part of the bargain.”22 Well that’s
all right then, apparently all it takes is a little delicacy and a wider culture
and all will be well.
Back in August ’07, Gavyn Davies, a pillar of the British power
elite, was telling the Bank of England not to play the hardball game
it was threatening but that it should “address some regulatory
deficiencies once the crisis blows over.” In the ever-more comprehensively
deregulated world, such calls appear at regular moments of ‘crisis’.
Real heavyweights like Alexander Lamfalussy and Felix Rohatyn have
said such things on and off for 30 years. George Soros, Peter Sutherland,
as well as “Third World” governments that had been so currency
battered, called for a ‘global financial architecture’ after
the free movement of capital had such a devastating impact on Asian
economies in 1997-8. The response from the self-confident Clinton Treasury
team was that this was unnecessary and wrong. What mattered were national
regulators for transparency and accountability.
Soon after the collapse of the ironically named hedge fund Long Term
Capital Management Fund, other regulatory demands were made. But all
this talk was merely about calming nerves. The US Treasury obviously
hoped the impetus for reform would pass before issues related to offshore
banking centres,23 hedge funds, or even deeper issues
like capital market liberalisation, became subject to scrutiny and
negotiation. Indeed in 1999, one year after the rescue of LTCM, the
Glass Steagall Act was abolished! Soon after all the dire warnings
of May 2007, Hank Paulson, the new Treasury Secretary24 was
complaining that regulations introduced after Enron were becoming oppressive
and would make New York ‘uncompetitive’. It is this same
Hank Paulson who planned what The Guardian (31/3/08) headlined as the “biggest
shakeup of Wall Street watchdogs in 80 years.” Although suggesting
a merger of some existing regulatory authorities and giving new monitoring
powers to the same Federal Reserve, the same ‘Club Fed’ which
missed the mortgage crisis, the proposals would not limit banks’ exposure
to credit instruments. In fact it sought to limit what regulation was
capable of. “I am not suggesting that more regulation is the answer,
or even that effective regulation is the answer, or even that more
effective regulation can prevent the periods of financial market stress
that seem to occur every five to ten years. I am suggesting that we
should and can have a structure that is designed for the world we live
in.”
The Herald Tribune headline25 was more pertinent: ‘Treasury
Proposal Gives Wall St. What It Wants’. It noted that a Wall St.
lobby group, ‘The Committee on Capital Markets’, had released
a report saying that the “shift of regulatory intensity balance
has been lost to the comparative advantage of the US financial market.” What
also stands out in the Paulson version is his nonchalant insistence
that this crisis is just one of those things, a regular period when
financial excess is reined in before a new burst of lending and growth
will resume on a ‘sounder’ basis.
In a letter to investment firm ECOFIN in September ’07, UK chancellor
Alistair Darling specifically warned of the dangers of regulatory overkill.
Apart from demands to tackle the role of ratings agencies, the promise
has been for more monitoring of a wide range of financial institutions
and businesses. In the UK, this to be done by a beefed up Financial
Services Authority. It is the banks who pay for the bulk of the FSA’s
activities, and of course they have lobbied hard to restrict any growth
in regulation. It is indeed the regulation by ‘principles’ only
that Paulson wants New York to emulate. The FSA is the same institution
which failed to monitor Northern Rock for two years before its share
price started to dive in April ’07. It brings into question the
competence as well as the will of such an agency given that the Northern
Rock model of lending long, when 70% of the money with which to make
them were from funds raised on the international market, was obviously
flawed.26
Beyond The Duologue
In-house analysis of the crisis has not been a monologue. There is
a clear difference between those calling for regulation and more international
managing of the international economy as the price of Central Bank
rescues, and those from what I’ve called the sanguine camp. The ‘regulators’,
also nervous that more and more interest rate cuts may not have the
intended effect – as happened in Japan in the 1990s after the
fall-out from a property asset bubble collapse – are often enthusiasts
for ‘moral hazard’. Or, rather, believe that present Central
Bank policy is one of postponement and that the next credit crisis
will be worse. This idea of ‘postponement’ figured in critiques
of Keynes; that government deficit spending could only postpone capitalist
realities for a period, and that in the end debts must be paid. The
irony is that the neoliberal model depends on a cocktail of ‘Keynesianisms’,
military, asset, and personal indebtedness, which might also be called
privatized Keynesianism. These ‘regulators’ will, I believe,
have little real effective policy impact, even though their concern
is for the long-term and general well being of international capitalism.
There are many in the sanguine camp but Jeremy Warner of The
Independent is as representative as any. Talking first in the UK context, he argued
that firmer regulation “is a complete waste of time and energy.
For the moment bankers have learned their lesson and are already well
ahead of the regulators in sorting out the mess they’ve created.
They won’t quickly repeat the mistakes they’ve just made.
Whatever the new regulations put in place, markets will inevitably
find a way of circumnavigating them. Come the next crisis, it will
be a different door altogether through which the horse bolts. Worse
still, any new regulatory obligations will help create the next crisis,
such is the ingenuity of markets and the law of unintended consequences.”27
The ideological assumptions here are staggering. Perhaps they should
be placed first against Josef Ackermann of Deutsche Bank who confessed: “I
no longer believe in the market’s self-healing power.” But
no problem here for the likes of Jeremy Warner: The banks have learned
their lesson and are ahead of the game; it’s a cyclical business,
just one of those things. But there is also a back-up. That the market
will out, is backed up by a certain brand of fatalism. Never mind that
capital does not want to be regulated, there’s no point. Proponents
of neoliberalism are very keen on ‘inevitability’, that everything
is cut and dried, no one is responsible and politics are an irrelevance.
Internationally Warner argues something similar, that no institution
could command in “today’s viciously competitive global economy”.
Vicious? Certainly. But selective when it comes to competitive; competitive
for a share of the global pot, but dominated by oligopolies.
If neoliberal capitalism’s assumptions are absolute, and its model
both global and secure, there is of course truth to Warner’s arguments.28 The
British state described by Marx could push capital to act in its long
term collective interest, but this no longer seems either possible
or desirable from the neoliberal point of view. Regulation and institutional
arrangements are anathema except for moments when rescue is needed,
because these will inevitably involve negotiations, and negotiations
will involve, at however subterranean a level, notions of fairness.
The private property nature of capitalism is an absolute given, not
to be tampered with by either democratic institutions or notions of
justice. Thus, in addition to the prospect of being given short shrift
by the Soverign Wealth Funds, it would have been ideologically difficult
for the ad hoc International Corporate Governance Network to demand
regulation in their case.
An often more radical voice has characterized the crisis as showing
the evils specifically of financial capital, that this has become ‘casino
capitalism’. It’s certainly true that Wall Street and the
City of London have political clout as well as the power to decide
who gets credit and who not, and that their demand for higher than
average returns (a bigger share of the global pot) has created the
present crisis. This too is likely to have a negative impact on economic
activity. But if a consequence of this negative impact is a mood of
resentment, it would seem all too easy for ‘financial’ to
be made synonymous with ‘Jewish’ or ‘cosmopolitan’ capital
for example. Easy to imagine how an ultra-leftist turned Nazi like
Horst Mahler is already pushing this version of events.29
Contemporary capitalism is not just ‘financial’ capitalism. ‘Productive
capital’ on the front line of squeezing out surplus value is not
doing so solely for the benefit of the banks, and besides, also puts
a chunk of their realised profit into financial assets. Contemporary
capitalism is not going to ‘collapse’. It is vulnerable however,
shown by its hysterical intolerance of any other economic model, while
millions take objection to being squeezed for more surplus value whether
through increased intensity of labour, or having the costs of their
reproduction increased. To be superceded, or even reformed in any meaningful
way, its own version of itself must be challenged; its legitimacy,
competence and the self-confidence of structural greed.
Notes
1. In May 2006, Stephen King, MD of economics at HSBC was commenting
on the size of Chinese production and India and its cheap labour, went
on to say, it “has made it a lot more difficult for Western workers
to demand wage increases in compensation for higher petrol prices or
gas bills.” And these workers will presumably be none-too-pleased.
The smug, patrician tone of that “presumably be non-too-pleased
is a real piece of work, but the point is clear a squeeze on real wages
can only make the pot of surplus value that much greater.
As to surplus value, I am using this in the broadest sense of economic
exploitation. That is the global pot also includes the kind of non-value
production, of theft, war looting and the other dirty washing of contemporary
capitalism.
2. IHT “The Return of Hot Money” 20/5/06
3. During a previous ‘credit crisis’ , that of ‘Third
World’ debt and its repayment in the 1980s, the dollar also fell
4. Donald MacKenzie “End-of-the-World-Trade”: London Review
of Books 8/5/08: http://www.lrb.co.uk/v30/n09/mack01_.html
5. See for example, Barker: “The D Word”
6. London Review of Books, 3 January 2008, ‘Cityphilia’,
John Lancaster: http://www.lrb.co.uk/v30/n01/lanc01_.html
7. Robert Brenner estimates that for 80% of American workers real wages
have stayed at 1979 levels.
8. This hardly explains how it was Derek Wanless former chairman of
NatWest was the man in charge of credit controls at Northern Rock at
the time of its collapse.
9. Their role in the Enron scandal obviously did not lessen their popularity.
10. ‘The Globalization Gamble: The Dollar-Wall Street Regime and
its Consequences’, Peter Gowan: http://marxsite.com/Gowan_DollarWallstreetRegime.pdf
11. The Guardian 15/9/07
12. ‘Class’ here is admittedly short hand. The privileges
of rich and corporate investors are ideologically validated by the
existence of pension funds as investors, and therefore of millions
of not-rich people, those who, in the slogan, ‘work hard’.
The question of who loses when investments ‘go bad’ is also
germane. In the case of Enron there is evidence that the biggest losers
were pension funds in Republican controlled states. At the same time
the fetishistic quality of the slogan is obvious; investments do not ‘work’.
13. ibid
14. The lectures that South East Asian governments had to endure in
1997-8 on transparency, accounting standards and so on, must have caused
grim mirth amongst them given the record say of Coopers & Lybrand,
auditors to Robert Maxwell, Polly Peck. In good British style they
changed their name by amalgamation. As PriceWaterhouse Cooper they
were the auditors for Northern Rock. In fact they earned more from ‘advisory’ work
with it, than from auditing.
15. Though one Metroline, XL Capital, is being sued by Merrill Lynch
over 6 ‘credit default swaps’ worth $3 billion.
16. Soederbergh: Global Financial Architecture: Zed Books
17. www.nakedcapitalism.com/2007/11/rating-agencies-created-incentives-to.html
18. Soederbergh.
19. JP Morgan has played this role as government –backed leader
to both enforce and represent the collective interest of banks before.
It was they who took centre stage in the Situations Room of the White
House at Christmas 1997 in organizing the ‘bail-out’ of South
Korea.
20. It has been recently dubbed “Club Fed”, a piece of wit
that has for a long time described Federal prisons as opposed to state
ones, on the grounds that such prisons are relatively cushy. This is
the Fed in the Greenspan + era..
21. It should be amazing that this free market fiction should still
be maintained despite the sheer size of Export Credit Guarantees, and
of that R&D and profit that comes through military contracts.
22. The Observer
23. At the height of an earlier round of demands for regulation, Alan
Greenspan argued, with a fatalism sometimes used by deregulated capital’s
apologists, that regulating offshore banking centres would only send
such finance ‘further underground.’ They have proved to be
indispensable to deregulated financial capitalism, e.g. the registering
of SIVs in the Cayman Islands, and to recycle so much of the dirty
money also indispensable to modern capitalism. This is what Loren Gouldner,
following Rosa Luxemburg calls ‘fictitious capital’. As I
noted earlier I have used surplus value in its broadest sense to include
such money.
24. Paulson, like Robert Rubin Treasury Secretary under Clinton, was
a CEO of Goldman Sachs, the investment bank. ‘What’s good
for General Motors is good for America,” is long gone, and one
reading might be that it’s a case of “What’s good for
Goldman Sachs.” There is some truth in it, but it also indicates
the nature of what Wright-Mills called The Power Elite, revolving doors
between private capital and government as well as the military. Rubin
was drafted in As CEO of Citigroup after the resignation of Charles
Prince.
25. 2/4/08
26. This overuse of securitization was used to increase lending to
the point where Northern Rock accounted for 20% of British mortgages
at the start of 2007.
27. The Independent 14/9/07
28. Never mind a lack of authority to regulate, there is not even an “authority
on the global scene to come out with a credible estimate of the overall
exposure”, to ‘bad’ debt, as Diane Cholyleva of Lombard
St Research put it recently.
29. See also the latest from Samuel Huntington, American ultra-nationalist.
The cosmopolitan globalizers are the enemies of America and some of
them are American: therefore they are in effect, traitors. See his
Who Are We? Finance capital is rather, a form particularly suited to
the Power Elite. |