First there was the sub-prime crisis, which dragged the world economy into a recession from which it is still struggling to recover almost three years later. And now there’s the sovereign debt crisis, which is causing chaos in Greece, stress in Spain, Portugal and Italy, and creating reverberations in the not-so-stable economies of Europe and beyond. Are these two crises related? Are they phase one and two of the same meta-crisis? Or is it just unfortunate timing that one crisis occurred so soon after the other?
Hank and Ben
Let’s rule out right away any idea that the close proximity of these crises to one another is somehow coincidental. There are too many common features between them to do otherwise. Salient among these is the role of the big financial houses in first creating, then benefitting from the crises. Goldman Sachs, whose execs are equally at home in the company’s NY headquarters, the halls of the US Treasury Department or the vaults of the Federal Reserve, spurred the first crisis by short selling subprime backed securities. For their efforts, they received $10 billion from the US government’s Troubled Asset Relief Program (TARP). In the lead up to the current crisis, Goldman helped the cash strapped Greek government borrow more money than it could afford – just like the subprime real estate borrowers in the US – and provided cover to help them protect their bond ratings and hide the transactions from the European Union, which prohibits members from running up such high levels of debt. According to the New York Times:
“Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. […] As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.” (New York Times, 13 February 2010)
In the first crisis, with one of its top men – Hank Paulson – as head of the US Treasury, Goldman not only cashed in on the TARP payouts but also watched with glee as its biggest competitors – Lehman Brothers and Bear Stearns – were allowed to fail. In the second crisis Goldman also took out insurance in the form of credit default swaps on the prospect that the Greek finance deal might go sour.
Other banks participated in the sovereign debt feeding frenzy, and not just in Greece. As the Times article put it:
“In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then leftoff the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come. Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.” (New York Times, ibid.)
For the banks, it was a classic “heads we win, tails you lose” situation.
Protest against Greek austerity measures
The Greek government’s debt – its “sovereign debt” – is valued at $30 billion. A default on this debt would be a severe disappointment, to put it mildly, for the banks to which it is ‘owed’. Their plans to reap profits far into future from this hidden mortgaging of an entire country’s wealth would turn to ashes, as would the derivative deals they have no doubt made on the back of these loans.
This is where another similarity with the subprime crisis becomes apparent. Both the subprime crisis and the sovereign debt crisis were accompanied by an outcry from politicians and the media that if emergency public funds weren’t appropriated to pay off the debts owed to banks financial Armageddon would follow. Marcy Kaptur, member of the United StatesHouse of Representatives, has made the case from the floor of the House that the bailout of the banks by the US government, and the media hysteria that prepared the way for it, were both part of a put-up job. Kaptur asserted that, as many of her fellow citizens suspected, attention was diverted from the real
Marcy Kaptur
victims of the subprime scam – people who were sold mortgages they couldn’t afford under false pretences – in order to give the banks one of the biggest windfalls in history.
Similarly, The Greek crisis has resulted in a transfusion of loan money from Europe and the IMF to be used to bail out the Greek government – i.e. to enable it to pay off its creditors. This is another windfall which ultimately rewards the banks and financial houses for their predatory dealings. At the same time it is a tragedy for the Greek people, who are being saddled with disastrous cuts in jobs, wages and public services, to pay for the loans.
There are signs that Spain is being set up to be the next cash cow for the financial houses. Spanish Prime Minister Zapatero has expressed worries that the English language media were focusing undue attention on his country’s debts, and there were concerns in the Spanish government about “speculative attacks” on Spain’s economy. Zapatero has tasked the Spanish National Intelligence Center with looking into the situation (Reuters, 14 February 2010). It is likely that they would be looking for evidence of default swaps on Spanish debts and short-selling positions.
This is not at all to overlook the immediate domestic and regional factors which made these countries vulnerable to the crisis. The Greek government was notoriously tolerant of corruption and very bad at collecting taxes, while the collapse of a real estate bubble in Spain increased that country’s financial exposure. Imbalances between the economies yoked together into the Euro zone also increased the vulnerability of the weaker members. As Doug Henwood put it, there is “nothing like a once-in-2.5 generations global economic crisis to reveal the fissures underlying what from a distance seemed like a relatively placid surface”. (Henwood’s article, Old world, new crisis, which is the source of the above quote, goes into some detail about the problems underlying the until now ‘placid surface’ of the Euro zone. See: Left Business Review, no. 126, 4 May 2010, p.4).
So clearly there is an intimate relationship between the world financial crisis which kicked off in 2007 and the current sovereign debt crisis of 2009-2010. The relationship is based on the new concept of the “too big to fail” financial institutions. The big financial institutions have insinuated themselves so deeply into the global economy that they can blackmail the whole world in order to be kept in their blissful state of mega profitability. Not only are the banks themselves too big, but their ‘clients’, which they reduce to a state of indentured servitude, are themselves megalithic: in the first instance the biggest purveyors and insurers of US mortgages – Fannie Mae, Freddie Mac, AIG etc, and now the central finance mechanisms of entire countries.
The relationship between the first and second crises is not merely based on the financial houses’ use of a similar modus operandi in both cases, however. What underlies the deployment of their new instruments of debt and deception in both cases is a unifying feature of the world political economy itself. This is that the globalized world economy is in a state of long-term – perhaps permanent, or even terminal – crisis. The imperative of entrepreneurs to constantly improve their profitability by seeking out ever-cheaper costs of operation resulted in the gutting of industry in the West as production and jobs were shipped offshore to the cheapest possible labor markets. The collapse of industry and the loss of millions of well-paid jobs brought about the phenomenon of the credit-fuelled ‘service’ economy, in which consumers and enterprises increasingly relied on credit and interest rather than the production and exchange of goods for their economic survival.
The sub-prime and sovereign debt crises are only two of many crises of the past and yet to come, which are the result of the switch from production-based economies to credit-based ones. This is not to imply that production-based capitalist economics was without problems. Far from it: recurring crises of over-production resulted in the collapse of prices and devastating deflation, while at other times underproduction triggered by natural or man-made causes resulted in intolerable price inflation in certain sectors or across economies. Periodic panics wiped out stock values and destroyed banks and industries. The constant war between labor and capital over the division of the fruits of production resulted in work stoppages, civil unrest, and outright warfare.
'Offshoring' of production
The new-style crisis has different characteristics. Confrontations between labor and capital are no longer over the division of earnings from production but a desperate battle by workers to try to retain some sort of employment in the face of the elimination of entire productive sectors and even whole national economies. They face entrepreneurs who have no long-term investments or interests in any particular sector. Unlike the industrial entrepreneurs of the past, who built factories and railroads, and cities to house their workers, the entrepreneurs of debt have no vested interest in a particular place or a particular workforce. They can shift the focus of their operations to another bank, another country, another market, another sector, at the press of a computer key.
And, while industrial production is being transferred to developing nations, such as the ‘BRIC’ countries – Brazil, Russia, India and China, the old-style model of industrial capitalism based on long-term investment and development geared in large part to an internal market is not being transferred along with it. The workers of the developing countries have little bargaining power because they are at constant risk of losing their livelihoods to workers elsewhere in the world who will do the same job for less pay. Moreover, the financial collapse of the ‘consuming countries’ of the West will take the emerging economies of the developing world down as well.
The implosion of the housing market in the US, the spike in unemployment throughout the West, the severe crises of national economies in Iceland, Greece, Spain, the Baltic countries, and many others – all are outgrowths of one unitary and ongoing crisis which has its roots in the current historical phase of finance-dominated entrepreneurialism. There is no prospect of going back to the previous, industry based phase, even if such a thing were desirable. The resolution of this crisis is difficult to predict. The only realistic hope is for a resolution which embraces the need for social reforms emphasizing sustainability over endless growth, and the equitable ownership and distribution of wealth over its concentration in a few hands. While there may be chance that such a resolution will occur, it is by no means inevitable. In fact, without mass mobilization of populaces to fight the political battles needed to push forward such reforms, it is rather unlikely.
