Ten Years After the Economic Crash, What has Changed?
Ten years ago on September 15th Lehman Brothers went belly up. The banking firm held assets of $639 billion, making this the biggest bankruptcy in history. The capitalist world was already in recession, but this further blow caused absolute panic. As Larry Elliott commented in the Guardian (30.08.18) it represented “a near-death experience for global capitalism.”
Prior to 2007 the world economy had been in boom. Some felt this could go on for ever. Only a few months before, Labour Chancellor Gordon Brown had addressed financiers at Mansion House as follows: “Over the ten years that I have had the privilege of addressing you as Chancellor, I have been able year by year to record how the City of London has risen by your efforts, ingenuity and creativity to become a new world leader....So I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”
What illusions! Brown and the rest of New Labour were infected with the ideology of neoliberalism – free market fundamentalism. Neoliberals believe that all restrictions and regulations on capitalism should be scrapped to let the system demonstrate its natural dynamism. Government intervention only slows it down. So rules on banking were progressively scrapped over the years before the crash.
The result was an uncontrolled orgy of lending. A survey by accountants PwC in late 2010 found that by 2009 total debt (corporate, household and government) in the UK was £7.5 trillion, 540% of GDP. The same process was at work in other advanced capitalist countries. In the USA by 2005 consumer debt was 127% of consumer’s income. Americans were head over heels in debt.
Financiers showed immense ingenuity in developing arcane financial instruments, which were completely socially useless. The story of the ‘credit crunch’ - when world capitalism went to the dogs - is the story of derivatives. Derivatives are so called because they are financial instruments (pieces of paper) derived from other transactions (represented by other pieces of paper). Starting with the 1990s with the liberalisation of banking rules, creation of derivatives exploded. While production advanced at an average rate of 3% p.a., derivatives were growing at 25% a year. This was a classic pyramid of paper claims.
Based on a house price bubble some financial institutions invented securities based on the income from mortgage payments. Some of these were sound and some worthless (called sub-prime), since the homeowners were unable to keep up payments, but all were wrapped up in the same financial instrument. Who knew which was which?
Perhaps the apotheosis of this process was illustrated by Andrew Haldane, Chief Economist of the Bank of England. It is a CDO squared (A Collateralised Debt Obligation is a package of loans.) A CDO squared is a CDO of a CDO. The documentation for this instrument ran to 1,125,000,300 pages. Haldane comments, “An investor in a CDO squared would need to read in excess of 1 billion pages to understand fully the ingredients. With a PhD in mathematics under one arm and a diploma in speed-reading under the other, this task would have tried the patience of even the most diligent investor.”
No wonder not a soul understood how these things really worked. All the same huge quantities were traded until in 2007 the music stopped, just like in a game of musical chairs. Then the collapse of Lehman began a financial meltdown. Lending dried up – credit crunch!
But modern capitalism relies on a network of credit links ruled over by the banks and other financial institutions. As recession bit millions lost their jobs, millions more their homes. Governments all over the capitalist world rushed to help out not the innocent victims of the crisis, but to throw money at the banks which had triggered it in the first place.
Ten years later what has changed? As Larry Elliott went on, “The banks were never broken up. Plans for a financial transactions tax are gathering dust. Politicians toyed with the idea of a green new deal and then promptly forgot about it. There never was a huge swing of the pendulum away from the prevailing orthodoxy, just a brief nudge that was quickly reversed.” The banks are still not lending to industry. They are basically just gambling houses. The capitalist system is still firmly in place.
Neoliberalism, the illusion that capitalism runs best as a self-regulating system, had set the scene for the most serious economic crisis since 1929. It should have been totally discredited by the crash. Queen Elizabeth II visited the London School of Economics in 2008. She asked, “Why did no one see it coming?” Good question. As Aditya Chakraborty reported, some heterodox economists did see it coming. “It’s just that they were mocked and marginalised and bullied into shutting up. One of those bullies was Brown himself.” (Guardian 05.09.18) He goes on, “Those responsible for the duff theories remain well dug in on university campuses.”
The world economy began to recover from the effects of the Great Recession, but slowly, very slowly even compared with the economic recovery after the Great Depression of 1929-1933. The rich recovered quickly and have done stunningly well ever since. For the rest of us it’s been a different story. Since September 2008 pay packets in the UK have risen by 3% less than prices. Working people are still worse off than ten years ago. This is the first time this has happened since the nineteenth century!
If real wages have been falling, how do working people survive? Many have no option but to get themselves up to their necks in debt. But the tsunami of debt was one of the triggers of the Great Recession, typified by Lehman’s collapse ten years ago. Now we’re back to where we started from.
Neoliberalism lingers on. Why? As we have seen the ‘theorists’ of New Labour were completely in thrall to its tenets. This was the case with the leadership of most of the world’s social democratic parties at the time. Traditionally the social democrat parties have been the main representatives of the working class in the advanced capitalist countries, committed to extract reforms on behalf of their voters. But what do they do when the system goes into crisis and the capitalists say they can no longer afford reforms but demand counter-reforms? They have to choose between the interests of the system and that of their supporters.
Social democratic parties were often in office in Europe during the Great Depression of 2008. By unhesitatingly siding with the interests of the capitalists and demanding austerity from the working class in one country after another they inevitably discredited themselves. They lost votes as a result. In effect they were committing suicide.
In Britain Labour under Gordon Brown shovelled enormous sums of money at the banks. An article in the Independent on December 4th 2009 by Andrew Grice assessed the cost of the bank bailout at between £850 billion to £1 trillion. Costs of the bailout were still rising at the time he wrote the article.
When the Tories and LibDems came to power in 2010 they really put the boot in, demanding wholesale austerity. In other words the working class was to pay the cost of a crisis that was none of their making. The new government argued there was no alternative because government spending and borrowing were out of control. Of course it was. But that was in large part because ‘we’ had already shelled out a sum amounting to more than half a year’s GDP on the banks, as much as what 64 million earned and spent over more than six months. Plenty of money for some!
Neoliberalism, the ideology that caused governments to tear up banking regulation, ought to be in shreds. In fact it lingers on. Why? Labour did not challenge it. The leadership shared its basic premises, and until 2015 called for austerity lite. The election of Jeremy Corbyn as leader showed that Labour’s ranks have rejected neoliberalism and austerity. The electoral advances of 2017 demonstrated that wider layers of the British people agreed.
Neoliberalism and austerity are what our ruling class clings to and needs. The system is unreformed. As the pyramid of debt rises up once again, another crash will come. A challenge to neoliberalism and austerity is a challenge to the system. Labour must gear itself up for that fight.