Posted on 17/01/09 in Economy
Having been called the greatest economic crisis since the Great Depression of the 1930s, the credit crunch dominates newspapers and has involved state interventions of unprecedented magnitudes. Initially the affected parties were to be found among the large banks and on the trading floor – not the kind of people that we young and idealist Greens take too much interest in. It has, however, developed rapidly into something that will supposedly be apparent in the wallets of every one of us during the coming years.
In that transformation of perceived scale, public understanding has not transformed concurrently. The prime suspect has not evolved beyond ‘greed’ and ‘lack of regulations’ and we ought to overcome the whole misery by adding some public money to our patience. And then everything will be as it was. But in fact this third crisis in a row does one thing in particular: it shows, once again, that neoliberal action jeopardizes global livelihoods and makes the meaning of ‘value’ itself subject to inflation. Of all markets, the financial market is possibly the most abstract one, but also the most dominant.
The concept of the ‘market’ originated on the village square where goods were traded, just like they exist today. In the financial exchange of Wall Street, however, pieces of corporations are traded instead of tangible goods. A company’s value rises or falls according to the expectations the traders hold for the company.
For example, fossil fuels are scarce yet greatly wanted, making them – and the companies that own them – very valuable. Hence having shares in Shell or BP would be an assurance for profitable returns if it were not for the mess in the Middle East, the issues of oil depletion and the uneasy relations with Russia. Financial trade involves multitrillion-dollar processes which are very reactive to the whims of geopolitics and chance events all over the world.
This is just where complexity starts. A huge market exists for so-called obligations, the holder of which is entitled to get a loan refunded. With the development of a new class of financial products called ‘derivatives’, the money industry was more or less set free. Derivatives range from moderately logical to very bizarre financial contracts, whose values are derived from the value of something else, or of something at another point in time.
A primitive example is a farmer selling his future harvest at high current price levels, shifting the risk of falling price levels to the buyer. Air France-KLM has kept its fuel costs low for long by buying their kerosene half a year in advance, while other aviators were hit in the wallet due to soaring fuel prices.
This use of derivatives is called ‘hedging’. The other use is speculation: betting on the movement of a stock (whether the stock goes up in value or goes down). The characteristic that differentiates derivatives from other investment types is the ability to make a profit even if the stock goes down in value or goes sideways. This is made possible by the sophisticated but dubious properties of derivatives. After the burst of the dotcom- bubble, the internet-hype, in 2001 (damage: $7 trillion), the US interest rate was set at a historic low of 1% to stimulate investments.
This allowed for an accumulation of speculative investments in real estate. Investment funds were found in loans (often from abroad), rather than using own capital, and house prices increased year after year without actual increases in value. Home-owners felt rich, consumed wildly and kept feeding the economy. They were, however, not able to pay their mortgages, and the demand for real estate was based on mere speculation.
Meanwhile, the mortgages were repackaged and sold over and over again, leaving the holders unaware about the ‘risk of default’ of the loan or mortgage – the chance that a debtor is not able to meet his required payments. As long as there was profit to be made, however, this accumulation of problems was ignored or kept silent.
Ironically, the system allows these risks to be cashed by others. Clever use of derivatives created a market of speculation on defaulting credits in total valued $45 trillion (note: the world GDP is $50 trillion).
That is the extreme example of a financial bubble growing on another bubble, stacking gamble upon gamble, grossly oversizing most other markets we know. Basically, the whole problem has been created because investors use money they don’t possess and/or ‘invest in’ (bet on) market events and movements. How big? Derivatives account for an estimated $516 trillion (I assure you, there’s no typo here). The system that enabled these incredible developments was a response to an earlier failure of modern capitalism.
Between circa 1945 and 1975, capitalism in its current form came into being.
After the Second World War, global development was desired more than ever. Initially, states were strongly involved, but the post-war, large-scale planning machinery increasingly malfunctioned and the market was set free to provide further growth. Capitalism’s tendency to build up much more productive capacity than the population’s capacity to consume, however, led to a ‘crisis of overproduction’ and hence stagnation. The oil crisis added to the financial misery. The answer to these problems was an enormous expansion of the capitalistic rampart.
Beside the invention of financial tools like derivatives, state market constraints were further reduced and globalisation utilized to provide a bigger market. If the North isn’t big enough to provide financial growth, why not involve the rest of the world as a growth opportunity? The former colonial relations, ‘failing’ states and the lack of emancipation of civilians in developing countries made it possible for Northern concerns to in effect take over Southern productive capacity.
Worldwide financial institutions like the World Bank and the International Monetary Fund (IMF), however often they speak of global development, have been primarily focused on increasing world trade through trade liberalisation.
The stimulation of Southern economies is rather a by-product of the neoliberal agenda of the North than a primary goal. Economic growth is sacrosanct – but what is growing is of minor importance. As a result, financial profits instead of civil merits are optimized. For example, local farmland is used to meet the demand of Northern livestock farmers through the intervention of huge agricultural investors that do not have local knowledge or local interests. The threat of soya farming for both the Amazon and the rural population is considerable, but it provides economic growth, so why stop?
The previous year’s food crisis is just about the same in its essence. There has never been a food shortage, but food is distributed according to the wrong incentives. The link with the financial crisis is to be found in the underlying motivation, namely, to make the most money in the shortest time span. I don’t argue that this motivation is the strongest among most institutions that play a role in the world economy, but in mere size this market dwarfs all other markets and its devastating power can be recognized in the credit crisis.
The derivative bubble is the exponent of speculative ‘financial engineering’ (a term that actually exists), while the development versus trade liberalization debate exemplifies the inability of state and market institutions to recognise what really matters and what should be growing. Green and socialist parties have been pointing this out for a long time.
However, proposals that could actually improve the situation fundamentally are scarce. Firstly, parties lack the scientific and empirical knowledge needed to sketch a new order. Secondly, there has not been found a wave to surf on and promote the message among the public, a wave that Al Gore did find (but even then the results can be meagre).
There is a risk that the financial crisis could even reduce the opportunities for such a wave, because states and corporations are already reluctant to commit to sustainable efforts. But the accumulation of crisis upon crisis (climate, food, credit) makes very clear that this current world economy will not guide us through the rest of the century without putting everything of any real value at risk. Steps towards a new society can be made by leaving the valuing and possession of produce up to those that depend on it: local people.
Money-obsessed people who have lost the concept of value and necessity somewhere between stock exchange and Millionaire Fair do not have the least right to decide where food is going and where it is not.