Thursday, September 29, 2011

Feeding the Financial Crisis

The situation is easily summarized.

In August 2007, the first clear signs surfaced that the financial sector had been piling up profits and individual payouts by greatly increasing the risk of their investments.  They did this while convincing themselves and nearly everyone else that risk had not really increased.  They used very high leverage, invented new instruments backed with dubious collatoral, etc - all this has been well analyzed in books like Econned.  When many people began to notice the AAA collatoralized debt obligations were junk, their value crashed, along with market averages overall, while highly exposed firms either went out of business (Lehman) or were bailed out by the government -- to the tune of $10-11 trillion (or maybe $29 trillion).

Government debts increased rapidly in Europe and the US.  While some government stimulus for the real economy was provided, it was not enough.  The financial crisis became an economic crisis, and there has been no real recovery -- only 16 of 100 American cities in one survey have recovered even 1/2 of the jobs lost during the initial downturn.  

Four years after the 2007 beginning, the financial sector is again (or still) in systemic trouble.

Hence austerity: austerity, laced with free-market ideology now functioning less as thought than as a paralyzing hangover, is in effect forcing governments to keep all possible government resources liquid for the next bank bailout.

In addition, most observers are convinced that the real problem is not private but public debt.  There is enormous discussion of the bad behavior of Greece, which has to scrape for every ten billion euros while private bank exposures are at least an order of magnitude larger.  Ireland is also going through a finance-created depression but it is rarely mentioned, perhaps because the bad actors there cannot be said to be tax-avoiding shopkeepers but the country's entire banking sector.

Meanwhile, bank reform has been paltry and pushed back through the concentrated efforts of the financial sector.  Regulators can't even see the majority of financial transactions, much less regulate or tax them. The head of the French banking authority recently estimated that opaque transactions form somewhere between 50% and 75% of the total.

There will be no recovery for economies, only for banks.  That is the post-feudal tradeoff that rules policy. 

Thus banks continue to make grotesque fortunes on a scale condemned by all known religions and ethical traditions in the same pre-2007 way, through junk and leverage (pious Deutsche Bank has "assets" (positions) 35x equity), added to which for several years has been essentially zero-interest public money on which they can make an automatic spread, meaning even more free money.  The banks' position seems to be that:
  • the government should buy everything forever, meaning unlimited bailouts at a moment's notice
  • but the financial sector should pay no tax for govermments
  • hundreds of millions of ordinary people should just lower their standard of living accordingly.
There are deep cultural questions lying behind what is obviously a disgusting ethical situation: 
  • where did the banks get their sense of entitlement, particularly to salaries in the tens or hundreds of millions of dollars annually for individuals?  Someone who gets mad at the idea of being taxed at more than 15% a year on $300 million, as Steven Schwarzman did, might be described as  insane.
  • Why does it seem like the people protesting (e.g les "indign├ęs" of Greece, Spain, Israel, Wall Street) are a tiny minority?  Is it only media (non)coverage or bad coverage?
  • Relatedly, why is there no public or popular critique of the entire theory of economies and societies that underlay a banking system that had failed and had to be rescued?
  • It is said that (most) "people don't see any alternative," but WHY NOT? There are lots of ideas out there, and even more suffering and depression, so how long will the gelling take?  Sure, the US Democrats and the French Socialists proposed nothing of any importance, but why are people waiting for them? 
The "decline of the West" is being executed from within and from the top.  It's not a conspiracy, it's just how the system's logic is now working.  Governments are protecting extraction at the expense of production.  However, had I been Chairman Mao, believing that heightening the contradictions of capitalism would hasten the system's demise, I couldn't have done better than to gut manufacturing while feeling finance.  Were I to rewrite the Terminator series, I couldn't do better than to replace the military net that generates the Schwarzenegger character with the bots behind program trading (though the pros won't help me with the script).