Save the market from market
forces By John Vandaele
BRUSSELS - Neo-liberalism is slowly fading
away - that is, if we define neo-liberalism as an
ideology that steadily wants to reduce and
belittle the role of government and promote ever
freer markets.
While almost everybody
nowadays recognizes the market as an interesting
instrument, dogmatic market fundamentalism is on
the way out. If you want to prevent big trouble,
there is really no alternative but that it should
be so.
Let's start with the latest
upheavals in the financial sector. The subprime
mortgage crisis in the United States is a classic
example of how an almost complete lack of
regulation nurtures financial disasters.
Financial companies were allowed to sell
mortgage deals that at
the
start seem cheap but jump to higher rents as the
years go on. You really didn't need a lot of
fantasy to see trouble ahead: poor families who
could not have been supposed to be able to pay
these kind of rents were nevertheless lured into
these dodgy packages.
It all contributed
to inflating house prices, to what in effect
became a housing bubble. That made homeowners feel
so rich that they started borrowing money against
the inflated value of their houses: that's how the
housing bubble also inflated a consumption bubble.
We'll have to see what happens with that one.
People having trouble paying their
mortgages also could take new loans against the
inflated house price to pay their mortgage. That
was only possible as long as house prices kept
rising. When that stopped, the whole edifice
started to unravel.
The financial
companies who sold the bad mortgages were able to
keep on doing so because the bad mortgages were
endlessly repackaged into increasingly complex
financial products, derivatives, and then passed
on to other financial players. These derivatives
were actually so complex that even the world's
biggest banks got nailed by them - Citibank, UBS,
Merrill Lynch, JP Morgan, all lost billions of
dollars on these repackaged sub-prime mortgages.
Some of these crown jewels of US
capitalism had to be rescued with money from
sovereign funds of China and the Arab world.
What does all this mean for you and me?
The practical consequences are that millions of US
citizens will be forced out of their houses, and
that the ensuing US recession will also affect
world growth.
In the UK there was a run on
a bank, Northern Rock, because customers believed
their money was at risk. It had to be nationalized
at a cost of more then US$100 billion (in loans
and guarantees) of taxpayers money, to make sure
its clients didn't lose their money.
We
have not seen the end of it. Financial wizards
have been knitting all financial sectors together,
and so the lack of confidence keeps spreading.
Nobody knows where exactly this will end.
The basic tale is by now familiar in the
financial sector: regulating authorities refuse or
do not dare to step in and so let a crisis build
up. One reason surely is that regulators very
often are closely linked to the financial sector,
because they have been part of it.
That is
true at the national level - many US ministers of
finance come straight from Wall Street - but also
at the international level. The International
Monetary Fund is supposed to keep an eye on the
global economy and financial system but has
trouble doing so.
Cees Maas, at the time
chief executive of ING, an international bank
based in the Netherlands and vice-chairman of the
International Institute of Finance, the world
association of banks, told us at the annual
meeting of the International Monetary Fund in
2004: "Before, the IMF and the World Bank used to
keep their distance towards private banks. They
wanted to demonstrate their independence, they
feared being influenced. That's now changed.
Contact is much more easy going now: we share the
same vision but have a different role."
The problem with sharing the same vision
and having a lot of contact is that the public
officers may indeed have difficulties keeping
their distance. They do not dare to disturb the
profit games of the financial wizards - they don't
want to take away the punchbowl just as the party
gets started.
And the last two decades the
financial sector has been having a lot of parties,
especially in the US. The profits of financial
companies jumped from 5% of total corporate
profits after tax in 1982 to 41% in 2007, even
though their share of corporate value added rose
only from 8% to 16%.
Financial companies
are worth 27% of the global value of all stock
exchanges. That is much more than what they
contribute to the economy. "The explosion of
financial techniques started already in the
seventies. Instead of being an instrument, they
have become the essence of the US economy," says
Geert Noels of Belgian investment bank Petercam.
The IMF not only is close to bankers, it
is also very weak towards the rich countries that
don't need its money. Many directors at the IMF
saw, and see, the risks of the enormous
disequilibrium between the US and China. Even
though in the Articles of Agreement of the IMF,
Article 1 says one of the purposes of the IMF is
"to shorten the duration and lessen the degree of
disequilibrium in the international balances of
payments of members", the IMF has not been able to
lecture these countries into a change of policy.
So the Chinese have been piling up the
billions of dollars they have earned with their
massive trade surplus with the US. Instead of
selling these dollars and changing them to yuan to
use them internally, they have kept them as
international reserves, thereby keeping the dollar
exchange rate relatively high and that of the yuan
relatively low. And in doing so China further
exacerbated the trade deficit.
Large parts
of these Chinese dollar mountains were then lent
back to the US government when it looked to borrow
money to finance its own deficit. (Lately part of
that cash has been used to buy shares of US banks
in trouble.)
So both countries developed a
very asymmetrical position: the US, with a very
low savings ratio, lending dollars, spending more
than it earns, thereby stimulating the world
economy, especially Chinese exports. The Chinese
economy, with a very high savings ratio, and hence
very dependent on exports, is running ever-bigger
trade surpluses with the US and lately also with
the EU. The trade deficit with China grows 15
million euro ($23 million) per hour, EU trade
commissioner Peter Mandelson said last year.
This trend cannot continue. The question
is how it will be reversed. A brutal change of
policy could be devastating to the world economy.
What would happen to the world economy if the
Chinese drop a large part of the more than $1,000
billion they hold as reserves, and in doing so
melt down the dollar value? Nobody knows.
Even people who have defended
globalization all along now see the writing on the
wall. Read what Martin Wolf, head economist of the
Financial Times, wrote on February 6. "We have no
obvious alternative but to try to regulate the
financial sector ... A financial sector that
generates vast rewards for insiders and repeated
crises for hundreds of millions of innocent
bystanders is politically unacceptable in the long
run. Those who want market-led globalization to
prosper will recognize that this is its Achilles
heel. Effective action must be taken now, before a
still bigger global crisis arrives."
We've
been here before. During the Great Depression,
then US President Franklin Roosevelt said that
money was too important to be left to bankers.
Once again, politics will have to overcome the
resistance of the financial world that sees money
as a way to make profit. That's why we've seen
this massive financialization of the US economy
with the risks for the real economy ever growing.
That has to change: money is there to serve
the economy and society, not the other way around.
There is really no alternative to more
regulation, part of it on an international level,
so as to make sure that the financial sector
serves the wellbeing of its citizens. One
particular change of regulation should be that
bankers' compensation is related to long-term
success of their institution and not the
short-term hike of its stock. Once again, rules
will have to protect capitalism against itself.
Hence, TINA - the acronym for "There is no
alternative" - is back. Former UK prime minister
Margaret Thatcher famously said, "There is no
alternative" to the neo-liberal politics she
reinvented. Well, now we see TINA is coming back,
but this time around it has a completely different
content: there is no alternative to more and
better regulation. Unless, of course you want to
run the risk of a crisis with unpredictable
consequences.
John
Vandaele is journalist with the Belgian
magazine Mo, and author of several books on
globalisation, most recently The Silent Death
of Neoliberalism, 2007
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
