Assessing the significance of credit rating agency Standard & Poor’s historic decision to downgrade the debt outlook for the USA is complex. But significant it definitely is.
S&P and Moody’s, which between them control 80% of the market, act as intelligence gatherers and forecasters on behalf of capitalist investors. They examine relevant aspects of an institutional issuer of debt – usually a corporate entity or a state body – and assess the risk to an investor of placing their money with that institution.
The higher the risk, the more the issuer of debt has to pay to the investor in interest or “yield”, and consequently, the more the corporation has to make from its operations, or in the case of a state, the more it has to extract from its citizens in taxes.
So, you might say, the increasing burden being placed on the populations of effectively bankrupt countries like Ireland and Greece is largely on the say-so of these agencies.
Like all these agencies, S&P is a competitive, for-profit operation. In order to keep its customers paying their fees – and that is mostly the corporations whose performance is being assessed – it needs to show that it is getting its assessments right, more than it gets them wrong.
In the run-up to the 2007-8 global crash, S&P was itself mesmerised by the hysterical expansion of fantasy finance in which products derived from the issue of traditional forms of credit and debt based on real value multiplied the amount in circulation many times over. The big players issued monumental quantities of derivatives and they paid the ratings agencies huge fees to provide the market with favourable assessments.
Money talks.
So the agencies failed to provide any warning about the impossible state of Lehman Brothers which crashed out of existence in 2008.
Governments, on the other hand, don’t pay the agencies to assess the health of their economies, or to assess the risk that they might default on interest payments to the investors who lend them money through the bonds they purchase.
The rating agencies make their assessments as part of the fees paid by corporations who want to know whether the state’s debt is more or less risky. The big, or even only question at stake is: will the government act sufficiently strongly to provide the conditions for the corporations to intensify the extraction of profit from their population?
So when S&P decides to downgrade the outlook for US debt, it is taking into account many factors. These days the judgement is more political than it is economic.
The on-going Punch & Judy style shadow-play between Obama and the Republicans over the $4-5 trillion programme of cuts to be visited upon the American people is one aspect of the analysis.
As one economist observed: "The key question is whether the gridlocked US political system can respond in time to avert a bond market revolt."
Some commentators say that S&P’s action is a warning to Obama from the world of finance. If they don’t crack down hard enough, investment money will go elsewhere and interest rates will rise.
But they’ll also be assessing the likely contagion effect of the wildfire of revolt spreading outwards from Tahrir Square throughout the Middle East, North Africa and taking in Gabon in Central Africa.
They’ll be weighing up the likely outcome of the political struggle against the regimes that have ensured the supply of cheap oil to fuel growth over the last forty years.
They’ll be closely examining the protest movement in Europe for signs that it is moving beyond resistance. And they’ll be studying developments like the People’s Assembly arising from the occupation of the State Capitol in Wisconsin.
It’s no wonder S&P has downgraded the US government’s prospects for paying back its loans while continuing to borrow at relatively low interest rates.
Gerry Gold
Economics editor
For revolutionary solutions to create a sustainable, not-for-profit economy in place of global capital alongside a real democracy based on People’s Assemblies. Visit our web site at www.aworldtowin.net
Showing posts with label financial crash. Show all posts
Showing posts with label financial crash. Show all posts
Wednesday, April 20, 2011
Friday, February 18, 2011
How Cairo connects to Wisconsin and Britain
As people battle tanks and security forces in Bahrain, Libya, Iran and Yemen, and hundreds of thousands gather once more in Tahrir Square in Cairo to “protect the revolution”, you might wonder how this connects with struggles in Britain, the United States and other major capitalist countries.
While it seems that the upsurge in North Africa and the Middle East is mostly about the demand for political freedom and democratic rights – things we are said to “enjoy” already in this and other countries – this is too limited a view. The connections are more direct and just as explosive in their potential.
As we pointed out yesterday, the prolonged world recession which now includes rampant food inflation, falling living standards and mass unemployment in countries like Egypt and Yemen, is a key determining factor in the street revolts. Since Mubarak was overthrown a week ago, a wave of strikes over pay and conditions has gripped Egypt. The economic and the political are now joined together.
The global crisis has undoubtedly weakened the political standing of United States and its ability to influence events. This is sensed by protesters everywhere. Washington lagged well behind events in Egypt and although its Fifth Fleet sails out of Bahrain, the masses there clearly don’t give a damn either.
Now the proverbial chickens are coming home to roost. Anti-cuts campaigns proliferate in Britain and some unions are preparing strikes against the Coalition over jobs and pensions. The middle classes are on the move over library closures and the threatened government sell-off of forests.
With a million young people on the dole and record numbers working part-time, the number of working households close or to or below the breadline is increasing daily. Channel 4 News found dozens of US-style charities are handing out food parcels in Britain’s cities.
The latest estimate is that 53% of working age households in poverty have at least one working adult. “What the foodbank experience suggests is that these individuals are finding they plummet into crisis situations suddenly and more frequently,” the report said.
One woman who has been forced to use the foodbanks in Salisbury said: "Because I've always worked, I never expected to be in that position where I would be so grateful for somebody else giving us some food."
In the United States, where there are 10 million out of work, there is a growing revolt against attempts to make workers pay the entire price for the crisis, nowhere more so than in Wisconsin
This week, 30,000 public employees overwhelmed the state capital in an action against plans to strip them of benefits and collective bargaining rights. The Republican Governor failed to get a quorum for his bill when Democratic senators made themselves scarce. Similar attacks on the public sector are taking place across the country as budget deficits mount up.
In Washington, meanwhile, the Obama administration is preparing to end the Federal government’s involvement in social housing. The plan is to hand over the mortgage banks founded by Roosevelt in the 1930s to the very same banks responsible for the crash of 2008.
What we experience in Britain and the US more sharply than ever before is a form of dictatorship just as oppressive as the one overthrown in Egypt and under attack elsewhere. It is the dictatorship of the banks and the corporations, whose political front is provided by the likes of Obama, Cameron, Clegg and Miliband.
As Mahatma Gandhi said, when asked what he thought about Western “civilisation”: “I think it would be a good idea.” The real lesson from Egypt, Tunisia and other revolts is that we should get ready for our own Tahrir Square if we are to achieve a democracy of ownership and control that strips big business of its hold over us.
Paul Feldman
Communications editor
While it seems that the upsurge in North Africa and the Middle East is mostly about the demand for political freedom and democratic rights – things we are said to “enjoy” already in this and other countries – this is too limited a view. The connections are more direct and just as explosive in their potential.
As we pointed out yesterday, the prolonged world recession which now includes rampant food inflation, falling living standards and mass unemployment in countries like Egypt and Yemen, is a key determining factor in the street revolts. Since Mubarak was overthrown a week ago, a wave of strikes over pay and conditions has gripped Egypt. The economic and the political are now joined together.
The global crisis has undoubtedly weakened the political standing of United States and its ability to influence events. This is sensed by protesters everywhere. Washington lagged well behind events in Egypt and although its Fifth Fleet sails out of Bahrain, the masses there clearly don’t give a damn either.
Now the proverbial chickens are coming home to roost. Anti-cuts campaigns proliferate in Britain and some unions are preparing strikes against the Coalition over jobs and pensions. The middle classes are on the move over library closures and the threatened government sell-off of forests.
With a million young people on the dole and record numbers working part-time, the number of working households close or to or below the breadline is increasing daily. Channel 4 News found dozens of US-style charities are handing out food parcels in Britain’s cities.
The latest estimate is that 53% of working age households in poverty have at least one working adult. “What the foodbank experience suggests is that these individuals are finding they plummet into crisis situations suddenly and more frequently,” the report said.
One woman who has been forced to use the foodbanks in Salisbury said: "Because I've always worked, I never expected to be in that position where I would be so grateful for somebody else giving us some food."
In the United States, where there are 10 million out of work, there is a growing revolt against attempts to make workers pay the entire price for the crisis, nowhere more so than in Wisconsin
This week, 30,000 public employees overwhelmed the state capital in an action against plans to strip them of benefits and collective bargaining rights. The Republican Governor failed to get a quorum for his bill when Democratic senators made themselves scarce. Similar attacks on the public sector are taking place across the country as budget deficits mount up.
In Washington, meanwhile, the Obama administration is preparing to end the Federal government’s involvement in social housing. The plan is to hand over the mortgage banks founded by Roosevelt in the 1930s to the very same banks responsible for the crash of 2008.
What we experience in Britain and the US more sharply than ever before is a form of dictatorship just as oppressive as the one overthrown in Egypt and under attack elsewhere. It is the dictatorship of the banks and the corporations, whose political front is provided by the likes of Obama, Cameron, Clegg and Miliband.
As Mahatma Gandhi said, when asked what he thought about Western “civilisation”: “I think it would be a good idea.” The real lesson from Egypt, Tunisia and other revolts is that we should get ready for our own Tahrir Square if we are to achieve a democracy of ownership and control that strips big business of its hold over us.
Paul Feldman
Communications editor
Wednesday, September 15, 2010
Too big to regulate
Two years after the global financial system imploded, the world’s central banks and regulators have agreed a set of measures intended to prevent a repeat performance. There are, however, more than just a few flies in the ointment.
The measures agreed are really quite simple. They require banks to double to 4.5% the ratio of capital held in reserve to meet losses of “risk-weighted assets”. Banks that fail to meet the basic provisions will not be allowed to pay dividends.
The accord reached in Basel is supposed to “ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”
In response to fears that the impact of introducing the tighter controls could themselves trigger new crises, the new limits will be phased in over a period up to 2019, much to the relief of the speculators on the global markets which marked bank shares up on the news.
In its simplest terms, the assumption underlying the new regulations is that they will stabilise the financial sector. This would allow enough time for the global capitalist economy to recover its growth trajectory.
There are, however, more than just a few flaws in the accord, and the most obvious is admitted by the official press release, which says: “Systemically important banks should have loss absorbing capacity beyond the standards announced today.”
Put another way, the influence of some very large banks has become so great that it puts them beyond the powers of regulation. According to the Forbes 500 list, the top eight corporations in the world measured by their assets are all banks: BNP Paribas, HSBC, Bank of America, JP Morgan Chase, Banco Santander, ICBC, Wells Fargo and the China Construction Bank.
Their towering “assets” are, in fact, accumulated debt and it’s a burden that is taking its toll around the world in terms of job losses, cuts to pensions, destruction of public services and lower living standards.
The creation of these behemoths was a necessary consequence of keeping capitalist growth on track during the globalisation decades. Then, the volume of credit and the velocity of its flow around the spreading networks grew much faster than the production of commodities. Regulation was relaxed and then eliminated; new forms of credit were created that circumvented whatever controls remained; and financial markets beyond the reach of regulation are continuing to expand.
Towards the end it seemed – to many – as though the world of credit had taken to the air on a hugely profitable life of its own separated from the hard reality of the world below. The crash of 2008 proved them wrong. Now the majority are paying the price as the surplus capacity which resulted from an orgy of debt-financed investment and consumption is swept away.
Alongside the restoration of credit controls, indebted governments are hard at work ensuring that anything that hasn’t already been turned over to the for-profit sector will be. In Britain, the Lib-Tory coalition is restructuring the state to abandon responsibility for key services like health and education while cutting benefits to the bone.
Many of those still in work are already discovering the impact of sharpening global competition. For the generation now leaving college, the only hope is for a period of unpaid internship, or work experience to add to the CV. In China, before even completing their studies, hundreds of thousands of college students are being redirected to work for nothing in shiny new factories.
Protests, strikes, resistance or mass campaigns of civil disobedience, can all play a role in highlighting the need to go beyond the existing economic, social and political system. But new, permanent democratic forums must be developed to challenge and replace the existing state. In this way, we can create the conditions for ending once and for all the self-destructive capitalist financial and economic system.
Gerry Gold
Economics editor
The measures agreed are really quite simple. They require banks to double to 4.5% the ratio of capital held in reserve to meet losses of “risk-weighted assets”. Banks that fail to meet the basic provisions will not be allowed to pay dividends.
The accord reached in Basel is supposed to “ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”
In response to fears that the impact of introducing the tighter controls could themselves trigger new crises, the new limits will be phased in over a period up to 2019, much to the relief of the speculators on the global markets which marked bank shares up on the news.
In its simplest terms, the assumption underlying the new regulations is that they will stabilise the financial sector. This would allow enough time for the global capitalist economy to recover its growth trajectory.
There are, however, more than just a few flaws in the accord, and the most obvious is admitted by the official press release, which says: “Systemically important banks should have loss absorbing capacity beyond the standards announced today.”
Put another way, the influence of some very large banks has become so great that it puts them beyond the powers of regulation. According to the Forbes 500 list, the top eight corporations in the world measured by their assets are all banks: BNP Paribas, HSBC, Bank of America, JP Morgan Chase, Banco Santander, ICBC, Wells Fargo and the China Construction Bank.
Their towering “assets” are, in fact, accumulated debt and it’s a burden that is taking its toll around the world in terms of job losses, cuts to pensions, destruction of public services and lower living standards.
The creation of these behemoths was a necessary consequence of keeping capitalist growth on track during the globalisation decades. Then, the volume of credit and the velocity of its flow around the spreading networks grew much faster than the production of commodities. Regulation was relaxed and then eliminated; new forms of credit were created that circumvented whatever controls remained; and financial markets beyond the reach of regulation are continuing to expand.
Towards the end it seemed – to many – as though the world of credit had taken to the air on a hugely profitable life of its own separated from the hard reality of the world below. The crash of 2008 proved them wrong. Now the majority are paying the price as the surplus capacity which resulted from an orgy of debt-financed investment and consumption is swept away.
Alongside the restoration of credit controls, indebted governments are hard at work ensuring that anything that hasn’t already been turned over to the for-profit sector will be. In Britain, the Lib-Tory coalition is restructuring the state to abandon responsibility for key services like health and education while cutting benefits to the bone.
Many of those still in work are already discovering the impact of sharpening global competition. For the generation now leaving college, the only hope is for a period of unpaid internship, or work experience to add to the CV. In China, before even completing their studies, hundreds of thousands of college students are being redirected to work for nothing in shiny new factories.
Protests, strikes, resistance or mass campaigns of civil disobedience, can all play a role in highlighting the need to go beyond the existing economic, social and political system. But new, permanent democratic forums must be developed to challenge and replace the existing state. In this way, we can create the conditions for ending once and for all the self-destructive capitalist financial and economic system.
Gerry Gold
Economics editor
Wednesday, November 05, 2008
US voters vent their anger
Barack Obama’s historic and clear-cut victory in yesterday’s US presidential election is the result of a mass mobilisation of people and energy by his campaign that will prove all but impossible to contain within the narrow confines of the American political system.
Paul Feldman
Communications editor
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