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

Cracks deepen as 'recovery' proves a myth

New figures from the Office for National Statistics confirm what most people know only too well: living standards are falling sharply as a result of the recession. And the Con-Dem Coalition’s budget measures will ensure that things get a whole lot worse.

Real household disposable income – the total income of Britain's working and unemployed populations after taxes and adjusted for inflation – dropped by 0.8% in 2010, according to the ONS. The slide signals the first drop in real incomes since 1981, also during a recession, and the biggest since 1977, when there was double-digit inflation. The decline is set to worsen sharply to about 2.0% this year as the biggest public spending cuts since the second world war begin in earnest.

Incomes are being held down or falling, whilst prices of basic necessities including food, clothing and transport are soaring. Despite historically low interest rates and falling property prices, housing hasn’t got any cheaper apart from a lucky few with short-lived tracker deals.

Chancellor Osborne has learned something from the family wall coverings firm of Osborne and Little. He’s adept at papering over the cracks, or trying to, using faint praise from the Organisation of Economic Co-operation and Development – the club of rich countries – which said: “While this budget includes hard measures, we are convinced they are unavoidable in the short term to pave the way for a strong recovery,"

The trouble is there’s no chance of a strong recovery. Trying to bring one about just makes things worse. Despite adopting a series of unprecedented changes, the list of bankrupt European countries is growing rapidly.

Food price inflation brought on by the tsunami of credit that followed the 2008 financial meltdown triggered a wave of simmering revolutions in the Middle East and North Africa that is spreading throughout the region to Syria and Saudi Arabia sending oil prices to record levels despite slowing demand.

In America, the strengthening of financial services regulation is already making a bad crisis worse. According to Alan Greenspan, former chairman of the US Federal Reserve, the legislation “fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008”. Greenspan should know about these things as he presided over the growth of the credit bubble in the first place.

Greenspan, an arch-defender of unbridled capitalism says the modern economy is far too complex for regulators to understand, and to meddle is dangerous. He’s a much more old-fashioned kind of “hands-off” guy, seeing crises as unfortunate exceptions to the normal functioning of the system.

He says: “Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s ‘invisible hand’ that is unredeemably opaque. With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates.”

There is a truth in what he says, of course, in that market forces are pretty much uncontrollable. But in arguing against regulation, Greenspan is forced to open the can of worms that bedevils every one of the capitalist camps – the post-war relationship between growth and ever-expanding credit:

“The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.”

Like Osborne’s wallpaper, this thinly-veiled threat fails to mask the reality. Regulation or not, the majority of us will either have to live with the devastating and worsening consequences of the great crash that inevitably brought 50 years of credit fuelled growth to an end, or organise ourselves to replace the capitalist system with a sustainable, not-for-profit alternative.

Gerry Gold

Economics editor