For those not aware #gfc2 is the Twitter hashtag used for "global financial crisis 2". And the question I ask is a real one.
A couple of weeks ago I wrote a blog wondering whether July 2011 felt like July 1914 did. And then along came a Greek deal, and now a US debt deal, and you might presume I had been prematurely melodramatic. I wish that were true; I very much doubt it is.
Just to put this in context the Guardian has just reported that:
Stock markets took fright on Wednesday as fears grew over the health of the global economy and the ongoing European debt crisis.
There was heavy selling in London when trading began, sending the blue-chip FTSE 100 index falling by 91 points, or 1.6%, to 5626. There were also heavy losses across Europe, The French CAC and German DAX indices were down 1.6% and 1.1% respectively.
The European markets took their cue from Tuesday's 2.2% fall in the US Dow Jones index. Overnight, the Japanese Nikkei fell 2.1%, its biggest daily loss since the rout that followed Japan's March earthquake.
And the effective interest rates Italy and Spain are paying have gone over 6% when Germany is paying 2.4% whilst the US is being marked for credit downgrade by all major ratings agencies. Gold has hit a record price. Perversely, the cost of UK debt has fallen to new lows: we're now a safe haven. Anyone who thinks we are out of the crisis has to be seriously misguided. And as for those agreements - to shift world war metaphors, think of them as being something equivalent to Chamberlain's Munich deal with Hitler - simple exercises in staving off the inevitable
But does that mean a new global financial crisis is likely? My answer is a very simple 'yes'. And the reasons are not hard to find.
As I'm explaining in my forthcoming book - 'The Courageous State' - there is a two part economy in this world. There's the real one - the one where you and I live and meet our needs, make and sell things (if only words on screens) and which is the measure of real well-being.
Then there's the other one - the feral one if you like (feral as in wild and out of control) - existing way beyond the limits of the real economy and only loosely related to it, made up of the enormous financial balances denominated in cash of various sorts, existing only as entries in computer ledgers. Some of these cash balances are backed up by supposed assets which are at best legal claims on property which may or may not realise real worth, such as shares (whose value usually have almost no direct bearing to the companies that lend them their names), property (which has been priced as a consequence beyond the reach of the real economy) and more obscure derivative products which few understand and which even fewer trade in ever larger amounts.
This feral economy represents the wealth quite deliberately extracted from the real economy by those who have exploited it over the last thirty years of neoliberal domination by ensuring that the share of real wages in GDP has fallen from about 58% in 1980 to about 53% now (see diagram 1 here for detail) - with the cash they have extracted being stashed as unproductive wealth (often offshore). That unproductive wealth, whether held as cash or placed in assets that have near liquidity such as shares, property, derivatives, hedge fund and other portfolios, has had enormous consequences. There are many; let me just note two.
The first is that the refusal of the owners of this wealth to engage it constructively in the economy has been a contributory factor to under investment, stagnant real wages, and the rise in what has effectively been enforced borrowing by far too many households struggling to make ends meet - who have become increasingly indebted to the agents of the feral elite in the process (see diagram 3, here), reinforcing the whole vicious cycle as a consequence and withdrawing yet more and more funds from the real economy and into the free floating world of feral finance. The relationship of feral finance with the real economy has, therefore, been wholly negative here.
Second, the use of those feral financial balances to undermine currencies in pursuit of short term gain and maximum income returns has brought the whole edifice to the point of breaking. Breaking the real economy does not to the feral economy - downsides can be traded as much as upsides in the feral world of finance: gain is to be had in this world whatever happens in the real one. But the relationship of the feral economy with the real economy is again wholly destructive: those feral deals - done beyond regulation, assisted by the world of secrecy that tax havens provide, are bringing destitution, unemployment, real failure and fear to real lives.
There is only one way out of this - and that is to bring feral finance back under control. Of course that economy will fight back - Bob Diamond already is as he's admitted that 90% of Barclys' profits come from feral activity - but that's a challenge Courageous States have to face. And doing so is possible; the techniques are available. New, green, quantitative easing, spent into the economy, and not just given to banks, can reclaim this feral world and it's resources for the real economy. Forcing new investment policy onto funds that have been exposed to feral policies, such as pension funds, can reclaim these assets for ordinary people. I explain how here. And if necessary the countries of Europe and beyond will have to demand that banks deposit their cash in Treasury Deposit Receipts with central banks (as happened in the UK in WW2) to ensure resources are taken out of the feral economy and made available for the public good at a time of national and international crisis.
Do this and #gfc2 can be averted.
Don't do it and the world of feral finance wins.
It's a blunt choice. Will we have politicians willing to do this? That depends on whether or not we can recreate Courageous States at a time when we desperately need them.
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As you say, this is something of a no-brainer. Look beyond the media fixation on individual events in individual countries, and it’s immediately clear that the overall trend continues to push us inexorably towards another meltdown. The widely-mooted proposal that the US debt ‘deal’ will ameliorate or even decelerate this process is laughable — it’s a job killer, a revenue killer, a cast-iron legal guarantee that sustainable growth is off the table.
While I agree with much of what you say things can’t be left to politicians. If they could be relied upon we wouldn’t be in this mess. If we develop local currencies and maintain them ourselves in the face of the traditional hostility, lawful and otherwise, from the Establishment we’ll eventually be able to do away with the existing monetary system altogether, along with those who exercise dominion over our well-being by their monopoly of it.
BB
Great piece and I hope the politicians are listening! May I add a thought. A common denominator in the real and feral economies is the amount of debt that has to be serviced. But whereas the casino players in the feral economy can leverage their bets with money from the real economy and get tax relief on any interest they pay, government investment has to pay interest on the money it borrows – but obviously does not benefit from any similar relief and has to tax its citizens more to pay the interest it owes on its debts. Notwithstanding all the other loopholes, tax havens, etc that need to be closed down and curtailed, it seems to me that until governments start to cap the amount of tax relief they allow fincos to claim on their interest payments we will remain in a losing battle to the feral or casino economy. Allowing (productive) corporations to claim tax relief on their debts may well have been justified at some point in the past and continue to have some justification today, but today it is a ruse that is vastly exploited in the financial sector, at the tax-payer’s expense, and should be challenged – or should it forever be up to the tax-payer to pay the interest charge on these gamblers’ debts?
David, you make an excellent point about capping the amount of tax relief for interest payments on debt. The fact that this has gone unchecked has surely driven the private equity industry and for that matter the purchase of premier league football clubs. I wonder if any political party will embrace a capping policy because I am sure that if voters/taxpayers were aware of this subsidy gained at their expense they would call for a policy change.
#gfc2 will happen as governments are still in la la land. Government finances across the world are in tatters and the corporations and banks have the capital and assets. The emperors new clothes moment will be when the crisis that should have happened in 2008 finally comes to fruition. One possibility is that when governments are bankrupt they will focus on strengthening fiscal policies and redistributing wealth. The corporations could also realise that they need strong governments and public spending so they can make their profits. The wild card in the crisis is how the populus will react and how it will affect Western Democracy?
“The corporations could also realise that they need strong governments and public spending so they can make their profits.”
Yes, public spending is vital to the economy as it releases money into the general economy that consumers and industry have not lent into existence as a debt, therefore taking some of the load of debt from industry, consumers and business that they would otherwise be obliged to carry.
That’s why I always laugh when certain people say that private businesses prop up the state. They have it backwards! It is largely the other way around!
Yes, businesses, consumers and industry all pay taxes to the government, but the deficit spending by government circulates money into the economy that helps to keep many of these businesses going. Money that otherwise wouldn’t be there if taxpayers, industry and businesses were obliged to carry the debt burden themselves.
I love the ‘feral finance’ line & hope it will catch on.
I have been listening to R4 & the only people they ever ask to explain these things are city analysts. They genuinely don’t seem to see there is any lack of balance there. Even so, the last analyst was just bemoaning that there were no safe places where you could invest at the sort of interest rate you’d want. Surely the free market is telling them to either accept lower/zero rates or (preferably for us all) invest somewhere less safe like real businesses !
What is alarming is that people on the right only follow the market when it suits them. Listening to genuine R-W economists who followed the Hayek school, they reserved their greatest contempt not for Keynes but for the arch right-wing follower of Ayn Rand, Alan Greenspan who essentially set the value of gelt at nil & so paved the way for all the subsequent disasters.
[…] A longer version of this blog post is here […]
“And if necessary the countries of Europe and beyond will have to demand that banks deposit their cash in Treasury Deposit Receipts with central banks (as happened in the UK in WW2) to ensure resources are taken out of the feral economy and made available for the public good at a time of national and international crisis.”
Richard: TDRs were deflationary. Deliberately so. They were to take out of the financial system the effects of the huge fiscal stimulus, the war spending and borrowing.
Are you really suggesting that just at the moment we should implement a deflationary policy? Deliberately?
Tim
As is usual you misread things, I presume deliberately, completely out of context.
The precise reason for my recommendation is that we are suffering massive, excess, and harmful growth in some markets – rose in the financial/speculative sector. credit is being made available for that purpose, quite inappropriately. That is because banks are more than willing to create funding to support their own speculative, abusive, transactions which maintain their stranglehold on the economy at large.
In contrast, credit is not being made available for the purpose of investment, as is readily apparent, and to which the market has no answer despite the very obvious, and even desperate, need of many in the economy for the benefit that massive new investment might create. For example, we urgently need our economy to be made more energy-efficient. We do need new social housing. We need to utterly and completely eliminate the folly of financing investment through the PFI scheme. We do need to invest in new energy creation. We do need to create alternative forms of transport for the future. The folly of relying upon the private sector to provide for the elderly has become all too apparent as well, we need to invest in appropriate care facilities.
All these things are obvious. All of them could be funded by the state, and have to be funded by the state to meet the need that the market will always deny exists. The reason for Treasury Deposit Receipts is to withdraw cash from the banking sector, which is using it utterly irresponsibly, and to transfer it to the productive state sector where it can be used to great benefit.
This is not a deflationary policy. It is the policy for economic growth of this country requires hich in the process harnesses banking to the good of society, and not vice versa
Richard
A simple way to restore banking to its useful function: collect all land rent for public benefit. This will stop banks demanding land as collateral (since the capital value will tend to zero) and they will have to do the dull thing of assessing risk by knowing their customers.