Financial Failure – Déjà vu all over again?

Although there have been some reforms and new regulations imposed on financial markets since the crisis of 2008, there are many signs that dangers remain. There is a risk of financial market volatility and a climate of uncertainty. As with the Great Recession produced by the earlier financial crisis, a return of banker irresponsibility would, once again, be paid for by the public.

A bank brought to its knees in the earlier crisis and saved by the public, the Royal Bank of Scotland, in a note to its clients, advised:

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

Financial Crises – Recurring nightmares

There have been several financial crises in recent decades. All are a little bit different, but they are all linked with financial market de-regulation. They were liberalized and internationalized to accompany and accelerate globalization on the assumption that self-regulation rather than government rules would achieve ethical behaviour and stability.

After the bursting of the American sub-prime bubble and the failure of Lehman Brothers, followed by a cascade of failures in the US and Europe, a political consensus emerged of impressive proportions. It was agreed that this was a “man-made” disaster and that it must, urgently, be fixed.

There was a relatively brief, exceptional period of international cooperation that prevented the Great Recession becoming a Depression, but eight years later and facing another potential crisis, reform and re-regulation measures are far too limited to block another crisis.

Already in June of 2015, the OECD Business and Financial Outlook 2015 speaks of what it considers to be a “puzzling” situation. It describes a “global financial landscape that reflects legacies of the crisis of 2007-2008. Legacies include high levels of public indebtedness, low interest rates, “cash injections” and other measures to increase the liquidity of the banking system, all combining to create a world “awash in liquidity”. The broader context is a weak and still slow recovery from the depths of the recession.

The report goes onto say,

“This strategy has encouraged large players in the financial markets to pursue a ‘search for yield’ and to pay prices for assets in bond and equity markets that may not realistically reflect inherent risks. The resulting disconnect in risk arises when listed companies, who conduct a large proportion of the world’s capital formation, see considerable risk on the horizon while major players in financial markets seem completely unconcerned.”

In other words, on the horizon, there may be, once again, considerable risk for the public. It may be the return of the vampire in the form of new bank bail-outs, new austerity programmes, more cuts in public services and social protections and growth of joblessness and precarious work. However, that shock, if it comes, will be administered to weaker economies and weaker public finances.

Another difference with the financial crisis of 2008 is that, in that earlier period, most emerging economies and many developing countries were largely spared effects of the crisis. Any new crisis will be truly global.

There are problems in the Chinese economy which, given its growing engagement and ties with other economies, create global shock waves. Other emerging economies are also experiencing slowing, no growth, or “negative growth”.

The global trade union movement, in addition to raising issues of persistent unemployment, inequality, tax justice and a host of other critical issues continues to remind governments of the dangers lurking in financial market. A statement addressed to G20 Finance Ministers of the Trade Union Advisory Committee (TUAC) and the International Trade Union Confederation (ITUC) at the end of February 2016 warns, “… opacity over the balance sheets of global banks remains. Too-big-to-fail financial institutions are still in place despite pledges to the contrary. Uncertainty remains about the growth of the shadow banking sector, whose size and corresponding risks are in fact not entirely known at this point.”

One of the factors that produced the 2008 economic crisis was the growth of unsustainable private debt in the US. Granting sub-prime loans to those who could not afford them was, at best, irresponsible. It was a scheme that could only have been viable in an environment of rapidly and endlessly accelerating housing prices. It turned poor people into speculators.

Other factors included the loss of good, secure jobs (often with union representation) and lower real wages. Those seeking the “American dream” saw little alternative to borrowing beyond their means. And, the money was easily available. In other words, inequality, in this and many other ways, was a contributor to the financial and subsequent wider economic crisis.

Of course, poor people were not responsible for the sleight of hand that made it a global crisis. The loans were hidden and re-packaged so as to appear to be sound, safe investments. They were able, in that way, to seep into even conservative portfolios and go global. It was like passing off cut glass for diamonds, but few were arrested.

There was, if somewhat delayed, a public reaction against the handling of the 2008 financial and subsequent economic crisis. At first, it seemed as if there was wide, if grudging acceptance of bailing out banks in order to save the economy in spite of the suffering inflicted by austerity programmes and unemployment. However, when the public witnessed the return of business as usual as if nothing had happened; concentration and abuse, big salaries and bonuses, and the arrogance of private power combined with government “response” in the form of a few tepid words rather than action, there was outrage.

People resented the fact that when bankers made mistakes, it was the public that had to pay, but that when things went well, the returns went into the same private pockets as before. If anything, the elite became richer, more privileged, and more insulated from the public will than before.

Such abuses and growing inequality in many countries generated a profound sentiment of injustice. That healthy reaction brings both opportunities and dangers.

It can only be an opportunity for mainstream politicians if they show some courage and decide to determine economic policy rather than simply following the lead of the dogma and actors of financial markets. There cannot be a repeat performance of many promises and little action.

There are also great dangers. Populist politicians, mainly from the Extreme Right, exploit the obvious and growing unfairness of our societies and the equally obvious contempt of elites for the people. They poison legitimate concerns and fears with various forms of bigotry. Their “solutions” are simple because they are simplistic. And, their DNA contains few democratic genes.

So, the question is clear. Are political leaders and public institutions capable of addressing these problems, dysfunctions, and injustices in a clear, serious, and responsible manner? Or are they condemned to irrelevance because they leave an empty chair where democratic alternatives to an unelected financial ruling class should be argued and imposed? As Edmund Burke said, “The only thing necessary for the triumph of evil is that good men do nothing”.


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Jim Baker

Jim Baker is Senior Consultant to Education International.

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