A world citizen’s guide to the 2008 crash

By John Roberts

News pictures of the world’s financial and political leaders in the past few days have raised irreverent thoughts of “pass the parcel”‘ as they searched for ways to offload debts or commitments; and “headless chickens” as their comments and attitudes showed that they had no idea what to do next. The self-assurance of the rich and powerful has deserted them. As they so often said, “we are in uncharted waters”. What one or two of the more frank among them has said is (despite its abolition) “we’ve had the boom, now it’s the bust”.

Our economic institutions and habits were largely created in days when most lived by subsistence farming and only a minority had comfortable lives. That minority went on to create financial instruments designed chiefly to serve their interests: as pressure grew for the majority to share in material comfort, those were modified to produce goods that would also ease the lot of the poor. The upshot is that our systems suffer severe crises, more or less regularly every 70 to 80 years. The latest has become most critical in summer 2008

As industrialisation and science changed the world into one capable of producing almost limitless quantities of goods the economic and financial institutions did not adapt. Competition had succeeded too well in stimulating production and, owing to an inherent flaw in a profit-seeking capitalist system, periodically led to a flood of goods that could not be sold: unless these were taken out of markets, as in space travel, making weapons, building nuclear plants, Channel tunnels, etc. Stock markets collapsed and strains on the antiquated financial systems became apparent.

The past may be over, but its consequences will stay; and to avoid repeating the mistakes, we need a clear idea of the reasons for where we are today. Unfortunately, apart from the complexity of our situation, many of those who offer to explain it are chiefly concerned to protect their own positions and benefits conferred by the status quo and therefore can hardly give good and unbiased advice.

Chess is not an easy game to play well but its moves are quite simple. So, too, in understanding our financial system, simplicity and honesty are a good way to start. Banking basics: although at one time money and valuables were safeguarded by bankers and that was their primary function, those days have long gone. Instead, banks take in deposits and then use them to lend greater sums to borrowers, charging them for the privilege. Depositors get a small proportion of the banks’ profits. As a consequence of this, the most important question in the industry is the degree of confidence that depositors feels for the banker’s honesty and financial stability, since they know that there is never more than a small proportion of the outstanding loans that is actually covered by his monetary assets.

Banks know that they can safely lend more, much more, than they have taken in deposits, but what is the safe limit? Five times, ten times? Or greater amounts? During the recent financial melt-down, mention has been made of ratios of 35:1. Clearly safe limits have been passed. How and why? The answer to this question shows where things have gone badly wrong. Not surprisingly, stupidity and cupidity have both played a part. But regulators existed who were supposed to protect depositors and others from such serious defaults as have recently occurred. Why?

Over the past decades, the financial boom has meant that bankers and their allies have been able to call the tune for politicians. Apparent success with production, wealth and financial dealing have given the bankers sufficient influence to soften, evade and outmanoeuvre governmental regulation. The “free” market, i.e. a financial system dominated by capitalists controlling vast wealth, has become largely able to manipulate and outwit governments. A system based on making profits related to work done well has graduated to a system motivated by greed for immense gain.

The dominance of capitalist money men has led finally to near collapse of the whole financial system, with the predictable result of jeopardising the whole economic fabric of global society. For one of the key facts is just that – the global nature of the economic and financial system that sustains and underpins all our institutions. But whereas they have appeared strong and soundly based, they are accompanied by a global political system that is anything but.

For we have a global financial-economic system that is in theory based upon national sovereignty although in practice – as we can now clearly see – that sovereignty has been so far eroded by the vast sums of money in the hands of banks and other business corporations that it is in effect nominal. That is shown by the domino effect of banks collapsing in different countries one after another, within days or hours of each other, leading as in Iceland, to the very real possibility of the bankruptcy of the entire country.

Iceland was not a part of the eurozone and only fear of the domino effect of failure has so far kept other European states more or less acting jointly. This may, at any time cease: as pointed out by Larry Elliott on October 5 “in the long term, monetary unions do not not survive without political union” and so the argument is that a halfway house is inherently unstable. The economist Ruth Lea made the same point on television next evening.

The corruption and grip of money on our world has added a further complication when coupled with the vast financial power in the hands of criminals. These dominate the drug trades; they trade in illegal weapons smuggling, thus augmenting the evil of the ‘legitimate’ arms traders (i.e. those authorised or subsidised by nation states); and the ‘people smugglers’ who enable migrants to evade border controls and may thus disrupt the societies that they join. While the Americans and British are carrying on illegal wars in Iraq and Afghanistan, pirates have begun to thrive in the seas around Somalia.

One further reason for the banking chaos has been the way in which mortgages and loans, often promoted to people with little chance of paying for them, have been divided up and sold as assets. These have further been sold on by lenders into complex packages that have sometimes become so obscure that no one could tell what they were worth. Thus the bankers were dealing in fictions, not realities.

History provides clues. In economics the trade cycle is recognised from the early days of capitalism. From 1700 onwards a predictable succession of booms and busts have taken place, with the longest of these taking 70 years or so from one bust to the next. The precise causes have been argued over by theorists but they have been accounted as almost facts of nature. Is it a price worth paying for the free market that has supposedly led to such prosperity?

For over 60 years, federalists and world citizens have warned that the planet needs to be governed, equipped with the institutions to enable us to surmount the problems of the world community. The most urgent of these is the threat of climatic change and consequent global disaster but we may now find that our present economic chaos will prevent many countries from producing and consuming in ways that are hastening that disaster. Saved by our own folly would be an ironic ending!

This article was written by John Roberts, who may be contacted at jrmundialist@btinternet.com. The opinions expressed are those of the author and not necessarily those of Federal Union.

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