Weapons of financial mass destruction threaten new meltdown

On the fifth anniversary of the great global financial meltdown, set in motion by the collapse of Lehman Brothers on Wall Street, the government’s narrative about the state of the economy is odds with those in the know.

On the one side, the ConDems are talking up indicators that could indicate that things are on the up and up. They hail accelerating economic growth, rising house prices, official figures about falling unemployment, record profits for the banks and continuing low interest rates.

But sober financial experts on both sides of the Atlantic warn that none of the causes of the biggest crash in history have been removed. Indeed, quite the opposite.

Chief among the indicators that another meltdown is looming is what some term “the financialisation” of the economy. This is a renewed and massive increase in the power and size of the banks and the global money markets. Alongside this are huge rises in government debts.

At the same time, the oversight that governments, financial experts and international institutions insisted was needed to prevent a repeat has not happened. Putting in rules and regulations in place – with powers to enforce them – has proved to be impossible.

Daily Telegraph financial writer Jeremy Warner has warned that “the underlying fault lines that created the crisis in the first place” have worsened. And his concern about the absence of serious financial reform is amply reinforced by Time magazine’s cover story, “How Wall Street Won, the myth of financial reform”.

Rana Foroohar writes that the “financialisation of the American economy, a process by which the nation has become inexorably embedded in Wall Street” just keeps rolling on. She notes:

“US financial institutions remain free to gamble billions on risky derivatives around the world. A crisis in Europe, for instance could still potentially devastate a US institution that made a bad bet and in turn, send shockwaves through the $2.7 trillion held in US money market funds, much of which is owned by Main Street investors.”

Faroohar’s recommendations point to the scale of the problem. She says that what is needed is to fix the too-big-to-fail problem; limit leverage; expose “weapons of mass financial destruction”; bring shadow banking into the light and “reboot the culture of finance”.

In her dreams!

Her argument is reinforced by the top US Federal Reserve official responsible for oversight, Daniel Tarullo.  He says that regulators should force the biggest banks to reduce their borrowings and improve their liquidity. Post-financial crisis rules were inadequate and left too much “too-big-to-fail risk”.

Despite new financial rules introduced by president Obama, the reality is that regulation has proved impossible. An extraordinary investigation by journalist Massimo Calabresi demonstrates how the privatisation of banking oversight has turned financial regulation into a massively profitable  - and politically incestuous – industry.

Under new US laws, private accounting firms have taken over from publicly- accountable examiners. The complexity of global banking and the legal attempt to “control” them have become so complex that it appears that only outside consultants can actually fathom them.

But this “insider knowledge” comes at a deeply compromising price. The reality is that the “the revolving door between Washington and Wall Street [is] still spinning like a top”, Calabresi concludes.

Julie Williams was disgraced in her role as primary regulator for the Office of the Comptroller of the Currency. But this did not prevent her from becoming gamekeeper-turned-poacher. Earlier this year she was hired by the giant accounting firm Promontory as managing director. And, you’ve guessed it, Promontory helps banks self-regulate and find a route round government oversight. Promontory raked in nearly half the £1 billion consultancy fees paid by the banks to private consultants.

The story of Promontory and the US regulators is only the proverbial tip of the iceberg and that independent – or any other - regulation is a pipe dream. The last five years are proof if proof be needed that the financial markets are an out-of-control beast.

The global capitalist economy remains debt driven while the financial sector still resembles the house of cards that fell apart in 2007. Stand by for Meltdown II.

Corinna Lotz

A World to Win secretary

Panic as new meltdown looms

On the eve of the third anniversary of the collapse of Lehman Brothers – the investment bank which became the icon of the crash of 2007/8 – the world’s financial markets are once again in a febrile state little short of panic.

Exposure to Greek debt this morning led the ratings agency Moody’s to downgrade two French banks, indicating how close to another financial meltdown we are.

A Greek default, which will threaten the euro as a trading currency, seems impossible to avoid. Interest charges on lending to the Greek government have gone off the scale. One three-year bond, which was trading at 20% in June, now commands an astonishing 172%.

Jeremy Warner, the Telegraph’s senior business commentator, warns: “Greece is already effectively a cash only economy. Most forms of credit has effectively dried up, the Greek banking system is finished, and capital controls to prevent what little money that remains from leaving the country are surely only a matter of time. European banking must prepare for the worst as far as Greece is concerned.”

Charges on Italy’s €1,900bn debt mountain have also soared to record levels. The desperate Berlusconi government is offering state-owned properties and power companies for sale to the managers of China’s investment funds.

As the second phase of the global capitalist crisis breaks through, stark new figures tell the human story of millions of lives throughout the world, already wrecked by failed and now abandoned attempts to bring about a return to growth.

In 2010, 46.2m Americans fell below the poverty line, taking the rate to 15.1% of the population from 11% in 2000. More US citizens are living in poverty than at any time since records began more than 50 years ago according to the US Census Bureau.

With the more affluent having so far managed to stabilise their income, the 2.3% drop in median household income of all Americans in 2010 from the previous year masks a much greater decline for those below the line. Increasing long-term unemployment has depressed wages and left many without any income at all.

The number of Americans without health insurance rose by nearly 1m people to 49.9m. Nearly a quarter of American children are now living in poverty. Their number increased for the fourth year in a row to 22%, the highest since 1993.

Across the border, Mexico had 53 million people - half the country's population - living in poverty in 2010, according to the Monterrey Institute of Technology, with almost 20% in extreme poverty. Even for those working, according to the Bank of Mexico, 95% of the 800,000 jobs created in 2010 paid only $10 a day.

In Greece, poverty has visibly increased on the streets of the capital of four million, where people huddle in sleeping bags in empty alleys and can be seen rummaging through rubbish containers, looking for food or scraps of metal or glass to sell.

NGO Klimaka estimated the population living on the streets has increased by a quarter to 17,000-20,000 over the past two years. With Greek unemployment now over 16%, the new homeless come from all walks of life.

In the UK, the number of homeless families rose by 10% to 44,160 households in the past year, the first increase since 2004. Real incomes for UK families have dropped by 3.5% in the last year, according to the Institute for Fiscal Studies (IFS).

IFS researcher Robert Joyce, predicted the future in quietly measured tones: “The current economic downturn began more than three years ago, and may seem like old news. But, as in other developed countries, the most severe consequences of the recession on UK living standards have only just begun to be felt, and will continue to be felt for years to come.”

The global economic contraction the collapse of Lehman Brothers set in motion is driving debt-strangled Europe and everywhere else towards a second, far more devastating implosion. The Arab Spring could well be followed by the European Winter.

Gerry Gold

Economics editor

A dictatorship of capital in the home of democracy

The global “psychological operation”, aka psyops, that helped to secure last night’s vote of confidence in the Greek parliament for the hastily reorganised Pasok cabinet is a clear expression in its historical birthplace of the negation of democracy.

Massive demonstrations in Syntagma Square in front of Parliament, accompanied by general and other strikes have delivered that message. Yet all of the notions of the will of the people, all citizens having a say, equal participation, self-determination have melted into the air.

On the eve of the confidence vote “inspectors” from the International Monetary Fund (IMF) and the European Central Bank (ECB) arrived in Athens to reinforce the hurricane of warnings of the terrible consequences for Greece should it fail to adopt the prescribed measures.

These are designed to ensure that the monstrously, impossibly, unsustainably indebted country meet its obligations to other governments, banks and financial institutions.

These two unelected agencies represent the interests of the participants in the global financial system – the banks, hedge funds, bond dealers, speculators and gamblers in derivatives that stand to lose unimaginable sums of unearned, mostly imagined title to wealth.

And the pressure is certain to mount in the days running up to July 3, when the “socialist” government must vote – if the “international community” has its way – to make a new, even more severe assault on its own people who clearly can’t and won’t take any more.

Let’s not suggest for one moment that there’s a global conspiracy, that the psyops operators are acting according to an agreed plan, (although who knows what was discussed earlier this month at the annual Bilderberg meeting).

No conscious conspiracy is needed to excite the credit ratings agencies Moody’s and Standard & Poor, who’ve simply continued to do their job – putting a set of letters (CCC, the lowest) to the likelihood that Greece will be able to pay the interest on its debts - simultaneously ensuring that soaring interest rates put it into the realm of the impossible.

Nobody needs to tell the banks and investors who’ve lent to Greece that the only way to defer the looming global breakdown is to close down any drain on profitability, to eliminate public sector spending, to transfer whatever is left to the for-profit corporations.

But why is Greece’s debt so important that it has become the focus of world attention? Compared to the amount the US owes – its national debt is approaching $14 trillion – it hardly seems worth bothering about.

There are plenty of people talking of a new Lehman moment, a reference to its collapse in 2008 which triggered the present financial crisis. They are only too aware of the interconnected web of debt dependency that ties countries, corporations and populations.

German, French and British-based banks have massive holdings of Greek debt that would be worthless if a default takes place. And banks have so far only written off around half the vast overhang of fantasy finance created in the globalisation period from the 1980s onwards.

Where does Greece fit into all of this? It is the home for the world’s largest fleet of merchant ships. Close to 4,000 vessels, approximately one fifth of the world’s total, carry oil and many other commodities around the world in tankers and containers making a huge contribution to world trade.

With trade certain to collapse as it did in 2008 – when it plummeted by 90% – and tourism, Greece’s second largest source of income certain to fall as living standards in the rest of Europe decline, Greece hasn’t a hope of sustaining its repayments.

In 508BC, following a popular uprising, the government of Athens was reorganised around an assembly of all of the citizens. It was an early model of democracy. In the ferment of political discussion on the squares of cities, towns and villages of Greece, Cairo, and Madrid a new richer concept of democracy is emerging.

Its needs to embrace the ending of the dictatorship of capital over people’s lives and the principles of self-determination expressed, for the first time, through demos and kratos – people and power.

Gerry Gold

Economics editor

Europe in the eye of the storm

With Europe firmly at the epicentre of a new stage of the global financial crisis, the heads of government meeting in Brussels today is hoping for the best but undoubtedly preparing for the worst. As events spiral out of control, there are warnings of dire political consequences from predicted social unrest as governments slash and burn spending on public services and jobs.

The European Union itself is now under severe strain as an economic and political entity. Inter-bank lending is virtually frozen and the single currency severely weakened since the financial meltdown in Greece and the emergency intervention of the Intenational Monetary Fund.

Spain, in particular, is in dire trouble and we’re not talking about the country’s shock defeat by the Swiss at the World Cup. Unemployment is already a catastrophic 20% - twice that level among young people – and the Socialist Party government’s cuts programme has provoked plans for a General Strike.

As the crisis moves from banks to nation states, Spain is being talked about as the Lehman Brothers of the 2010 crash,. Many foreign banks are holding Spanish government debt that is no longer worth what it was bought for. With their own balance sheets looking decidedly unhealthy, the banks are on strike. Francisco Gonzalez, chairman of the BBVA financial services group, admitted: "Financial markets have withdrawn their confidence in our country. For most Spanish companies and entities, international capital markets are closed."

The comparison with Lehman Brothers is as serious as it can get. Lehman’s collapse in the autumn of 2008 plunged the world economy into recession. A collapse of the Spanish economy would usher in a deep, unparalleled slump. In the United States, top fund manager John Hussman, in his latest weekly market commentary, believes that the country is already in recession. Spain going belly up and asking for €250 billion to shore up its finances could prove the last straw.

The is what made billionaire philanthropist and investor George Soros issue a stark warning of how the deepening economic and financial crisis will strain political systems come to their limits. He told a conference: "If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period.” This was a hardly disguised reference to the rise of Nazi Germany in the wake of the Wall Street crash and the onset of the Great Depression.

Soros is concerned that he “fiscal discipline” – cutting budget deficits – is a big policy mistake and that the thing to do is to maintain public spending along the lines advocated by John Maynard Keynes in the 1930s. That presupposes that a) this will lift capitalist economies out of recession and b) governments are free to adopt this course.

A year or so of central banks in America and Europe printing money à la Keynes in a bid to “restore growth” has failed. This is because the economic crisis is a combination of over-producton and mountains of debt which have wrecked the financial system and not one of under-consumption. In fact, much of the new money printed simply leaked out of national economies into global financial markets.

Of course, Soros is right in that cutting budget deficit will only worsen the crisis, leading to higher unemployment and severely reduced living standards. But with capitalist governments competing with each other for decreasing amounts of available credit, there is little choice in the matter. Spain and Greece have put the frighteners on the Clegg-Cameron coalition and tightening the regulation of the financial system is a little like bolting the stable door after the horse has fled.

The threat of dictatorship raised by Soros is not outlandish. Any idea that day-to-day politics is possible as this crisis unfolds should be put to one side, along with notions that the budget cuts can be thwarted with protest and pressure alone. Revolutionary economic and political solutions along the lines suggested in our Manifesto are more to the point.

Paul Feldman

Communications editor

Bankrupt, which ever way you look

Britain is bankrupt – and not just financially either. The obscene bidding war that is going on about public spending cuts confirms that all the major parties have gone bust too as they fall over themselves to offer more pain than their rivals.

The Liberal Democrats are, of course, neither liberal nor democrat but a version of Toryism that goes back to the 18th century. So leader Nick Clegg can pledge “savage spending cuts” while Vince Cable wants a public sector pay freeze.

New Labour’s Ed Balls is offering up deputy head teachers galore as ministers begin to wield the axe while the Tories say they will take drastic action to stabilise public finances if they win the forthcoming general election.

Now the election could produce a hung parliament, with the possibility of a Tory-Lib Dem coalition the outcome. How this might work out in practice is being rehearsed in Leeds, where the city council is under the control of just such a coalition. The council leader is Lib Dem Richard Brett.

The council is cutting the wages of refuse collectors by up to £6,000 a year. More than 500 refuse and street cleaning workers have vowed to strike indefinitely against the plan. The council is presently using private contractors to try and break the strike.

Behind the panic over spending cuts is the fear of the ruling classes that the British state could become insolvent. The Sunday Telegraph yesterday spelled out the disaster scenario, noting that the national debt was equivalent to more than £25,000 for every family in Britain. Interest payments alone are heading towards £60 billion every year.

The paper held out the prospect of a Lehman Brothers debacle where the investment bank went bust after lenders refused to extend further credit, warning: “Something similar could easily happen to Britain. If foreign investors lose confidence in our ability to repay our colossal debts, we will go bust .. Such a crisis, if it happens, will make the present one look positively kind.”

So what’s on offer is a nothing less than an alliance between the state and the bankers to punish working people for the madness of capitalism. The state under the Tories and then New Labour embraced wholeheartedly the creation of an unsustainable debt-driven economy. When this crashed last year, the banks that stoked up fantasy finance were bailed out with taxpayers’ money. Now services and pay have to be slashed to the bone so that the same bankers can stay in business.

Yet none of this will do the trick anyway. As George Parker, the Financial Times’ political editor, remarks today: “No other big country has seen its public finances wrecked by the financial crisis in quite the same way as Britain. The next election will be dominated by questions about when and where to cut a deficit amounting to one-eighth of the country’s income.”

In other words, the sums are simply too huge for a cut here or there to make a difference. At the same time, the financial system itself is on life-support. The magnitude of debts still out there mean that most banks are insolvent, lacking the assets to cover loans that are “non-performing”.

What is unfolding is an historic crisis of the capitalist state and the financial system which won’t be solved by a general election. What is demanded is a total reconstruction of the political and economic system along democratic lines, which involves the repudiation of debts to bankers and the closure of financial markets. Campaigning along these lines would have the merit of seizing the initiative rather than leaving it to Brown, Clegg and Cameron.

Paul Feldman
Communications editor

Brown presents the bill

A year and a day ago the Federal Reserve, the US central bank, took the decision to instruct Lehman Brothers to file for bankruptcy after 158 years of trading. It was a case of too big to fail and too big to save. Within days, the world economy fell off a cliff and has never recovered.

With its roots in barter, exchanging manufactured goods for raw cotton, Lehman’s history is inextricably a part of the history of capitalism. The company began its diversification into financial services in the 1880s (around the time of Marx’s death).

In the 20th century, Lehman was instrumental in enabling the explosive growth of profitable commodity production and exchange, notably through finding the capital for retail giants like Woolworths, then television and later computer manufacture. It also helped finance Halliburton, the oil company at the heart of the Bush administration’s war on Iraq.

At its pinnacle it was among the elite of the world’s financial services companies, actively spinning the web of debt that enmeshed the world. As the credit crunch took hold in August 2007, it closed its sub-prime mortgage lender with the loss of 1,200 jobs.

But it was all too late. A year later, its liabilities exceeded its assets to such an extent that not even the American government could bail Lehman Brothers out and it went to the wall. Today, like much of the global capitalist economy, Lehman Brothers is bankrupt but still trading. So many dead men walking.

As the world was considering the significance of the passing of Lehman yesterday, prime minister Gordon Brown was opening a new chapter in the rapidly worsening global economic crisis that went hand-in-hand with the decline of banking and finance.

Brown was a key figure in ensuring the subordination of the British economy to financial interests, announcing a new “golden age” for the City just weeks before it all went pear shaped. Now he’d come to present the bill for the damage, not to the bankers, but to the assembled ranks of the representatives of the organised working class at the TUC in Liverpool. They listened with protest messages raised while for the first time he talked of public spending cuts to come after the next election.

Attempts to restore the flow of credit have failed. Global stimulus packages have concentrated on eliminating huge swathes of the global car industry, dumping hundreds of thousands of workers on the streets. Unemployment is soaring. Tens of millions around the world are already without work, soon to be homeless if they aren’t already, without healthcare or pensions. And now Brown talks of cuts.

Politicians of all parties are competing to prepare voters for the devastation to come, the price to be paid for keeping the capitalist system in existence. This bidding process finds parties competing for the right to inflict the impact of the crisis on the majority of the world’s population, forcibly if necessary.

Commentators may delude themselves with good news, but the majority will see no sign or possibility of a “recovery”. They will not benefit from an illusory “return to growth” that is in essence the prelude to a further lurch towards outright slump.

Lehman Brothers was broken by fantasy financing that in the form of debt fuelled the economic boom. And there are mountains of debt still out there with claims on real assets and future earnings. In the absence of a recovery, these assets – in the shape of jobs, pensions and homes – are likely to be wiped out by capitalist bankers and corporations.

So this is no time to be caught up in discussions about ending “unbridled free market capitalism”, nor speculating on “a realignment of world capitalism”, nor even pushing for the kind of change that would “renew capitalism in a fairer form”. These are mere palliatives that leave the basic cause untouched and untreated.

What we must now do is to acquire the power to switch from a credit-dependent system of for-profit production based on legalised exploitation of labour to production for need guided by democratic decisions based on collective ownership. That’s how to fight the cuts as well as create a sustainable future.

Gerry Gold
Economics editor

On a knife edge

The Financial Times puts it like this: “The world has not ended. The international economy has not yet collapsed. But one thing is now quite clear: the banking system as we know it has failed.” Note the “yet” because the financial earthquake that produced the collapse of Lehman Brothers and Merill Lynch will claim more victims and translate into economic slump.

The American International Group, a global insurance company that sits at the centre of the world’s financial system, is on a knife edge. Others in the sickbay include Goldman Sachs, Morgan Stanley and the HBOS bank in Britain. “The locusts may be running out of big names to attack, but there are still some big names in the market’s sites,” said Alan Ruskin at the RBS Greenwich Capital.

After a series of spectacular rescues, starting a year ago with Northern Rock, the world’s central banks have reached the already-stretched limits of possibility in their attempts to avert disaster. They can only stand and watch as the laws of the market take their toll on debt-laden financial institutions that are unable to keep their operations going.

On Friday, Lehman Brothers was an investment bank with $42 billion of liquid assets. By Monday it was bankrupt. Why? Lehman Brothers had invested 35 times the value of its capital in a variety of exotic instruments that few people understand. The bank depended, however, on constant refinancing. But with great holes appearing in the balance sheet, the loans dried up and Lehman Brothers was suddenly a financial king with no clothes.

Joseph Stiglitz, Nobel prize winner in economics, and former senior chief economist of the World Bank says: “The present financial crisis springs from a catastrophic collapse in confidence.” According to Stiglitz it is “the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers”. He should know. It was the objective, law-governed pressure for the expansion of capital that transformed the role of the World Bank and created new institutions like the World Trade Organisation which obliged governments to reduce and eliminate regulation.

As we explained last year, in A House of Cards, the disintegration began in 2005 when the frantic period of credit-fuelled growth that had produced globalised corporations reached the limits of the markets. Consumers, who had been equipped with new ways to accumulate debt so as to buy the torrent of cheap commodities needed to fill their newly-acquired mortgage-funded properties found themselves at the limits of their ability to repay even the interest on their mountainous loans.

So came the collapse of the pyramid of exotic, toxic, derivative financial products which had been invented to provide a mirage of wealth. But, just like the highly-profile “extenders” used to cheapen and debase the food we eat, they too had no real value. Instead, just as we have been poisoned and weakened by “food” consisting of fats and sugars, these worthless financial products poisoned and weakened the real, productive economy.

What to do? The Financial Times says things have begun so bad “as to render a coherent regulatory riposte impossible”. We agree. The financial and economic and social system based around production for profit is broken. It is beyond repair and must be replaced. It means moving rapidly to a system based around social ownership, and the identification and satisfaction of need. Only then will we be able to begin to repair the damage done to the planet’s eco-systems by decades of wilful destruction by credit-crazed capitalist corporations.


Gerry Gold
Economics editor

A Sunday crash on Wall Street

It has come to something when the right-wing Daily Telegraph starts talking about the possibility that "capitalism is collapsing under the weight of its internal contradictions". But with Lehman Brothers, one of the world’s biggest investment banks going to the wall overnight, and another, Merrill Lynch, disappearing in a rescue takeover on the same day, you can understand the paper’s concerns.

Sunday’s Wall Street crash with its echoes of 1929, followed by a sea of red on the London stock market, is a qualitative turning point in the debt-driven financial crisis which surfaced in the summer of 2007. The US government took the ailing mortgage companies Freddie Mac and Fannie Mae – both created by Washington in the 1930s – under its a wing only a week ago. Seven days later, the Federal Reserve was not prepared or able to save Lehman Brothers or Merrill Lynch. Instead, America’s central bank is allowing securities firms to swap shares for short-term loans, which sounds like a recipe for further disaster.

With one of the world's biggest insurers, AIG, seeking a $40bn bridging loan after reeling from losses on its exposure to property and financial insurance deals, the global financial system has entered into the unknown. The crisis has developed a momentum all of its own, where state interventions are unable to deal with the outcome of those infernal “internal contradictions” referred to by the Telegraph (which doesn’t, however, acknowledge Karl Marx’s analysis of capitalism as its source).

The Telegraph is unable to explain what these contradictions are, preferring instead to lambast central bankers for keeping interest rates too low as the cause of the crisis. But as A House of Cards explained, the contradictions are more profound. They centre around capital’s need for constant expansion and the spawning of incalculable amounts of corporate, state and personal debt in the process. Converting debts like mortgages into credit seemed an easy way to make money – until the economy went into reverse.

In the end, the Telegraph cannot grapple with the contradiction of being a paper of the big business and the Tory party and insists that “the free market remains our best hope” for coming out of the crisis. This is not such an outrageous view as it first appears. In the absence of a non-capitalist alternative, global capitalism will eventually emerge from the crisis – at a price. This is the crucial lesson of the history of capitalism.

Previous slumps and crisis were “solved” – through the destruction of capital and jobs (25,000 worked for Lehman Brothers and 2,500 the XL holiday company), homelessness and poverty, authoritarian rule, fascism and world wars with their tens of millions of dead and injured. This is how the “free market” sorts out the internal contradictions of capitalism and is a price we cannot afford to pay. The growing political instability in Britain, with New Labour in permanent turmoil, the Lib Dems moving sharply to the right and the ugly face of state-sponsored racism coming to the surface, are intimately connected to the economic and financial crisis.

These are the issues that have to be addressed, for example, by this weekend’s Convention of the Left in Manchester. Building a movement that can mobilise to create not-for-profit, commonly-owned enterprises and banks as an alternative to the capitalist market economy is the priority. This is the focus of A World to Win’s Stand Up for Your Rights festival on October 18 which you are warmly invited to take part in.

Paul Feldman
Communications editor