In 1980 90% of capital transactions took place in the real economy. 15 yrs later 95% of financial transactions happened in the virtual economy also known as “financial markets”.
“…. Even an accumulation of debts may appear as an accumulation of capital, (so) the height of distortion taking place in the credit system becomes apparent.”
(Marx, Capital, Vol. III, Chapter 30: Money Capital and Real Capital)
2005: THE REAL WORLD: (suffers from more and more capital being sucked into the black hole of reckless financial engineering….)
A study about “Global Governance of Financial Systems: The International Regulation of Systemic Risk” was published in 2005. The authors conclude that “financial deregulation and liberalization have created many opportunities for economic growth but have also burdened the economy with a great many financial crises over the past 30 yrs” They rightly argue that the massive deregulation enabled the banks to adopt more “innovative financial instruments”, and that it “increased international banking activities and interdependence (which means) greater exposure to systemic risk arising from bank failures and high volatility.”
2005: THE FINANCIAL WORLD: (lavishes praise on the excessive risk takers…) e.g.Euromoney recognized Lehman Brothers with several awards, including “Best Credit Derivatives House,” “Best Debt House in North America,” “Best Debt House in USA” (also in Italy, Israel and the Netherlands).
“Securitization Deal of the Year”: Whinstone Capital Management – Northern Rock’s £423 million funded synthetic securitization (doublespeak at its finest…) of First Loss Risk Management (sole structurer and joint bookrunner) .. the list goes on and on…. (
The glorification of these processes by the business press deserves criticism.
In 2006 another alarming study by the IMF (Safeguarding Financial Stability by G.Schinasi) raised even more concern about the negative consequences of deregulation regarding “the potential for fragility, instability, systemic risk, and adverse economic consequences”. The “left-leaning” independent press ran several articles on the subject, warning of the dire consequences if this cancerous system was allowed to grow even further.
In 2007 Paul Krugman, pointed out predictions about 2 million foreclosures in the US and asked “Why was nothing done to avert the subprime fiasco? Why were warnings about “abusive lending practices” in 2004 (!) ignored?And his answer was: ideology . The people in charge “were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.”
So there was plenty of warning but suggestive media rhetoric (“financial tsunami”, “turbulences”, “in Not geratene Banken” (German Press), is still insinuating that the crisis is a kind of unpredictable natural disaster and that the government must now come to the “rescue” with even more billions of borrowed money, while taxpayers have been allocated the role of unwilling guarantors for the astronomical debt.
In light of this media performance, the arrogance and hubris of Wall Street and their international clones, I find it extremely galling that “financial analysts” like Steven Pearlstein keep telling the public that they are ignorant of the “seriousness of the situation” (hence their opposition to the “rescue” plan. At the same time he sticks to the official line, that this is all about “greed, arrogance and imcompetence” and that we are in this big hole “all together” (as long as the bubble kept growing the party was very exclusive….)
For more than a decade these megalomaniac bankers and investors reaped astronomical profits through “excess leverage and a pyramid scheme” (Jo Stiglitz), were paying just 15 % tax on obscene profits, and are now demanding with a straight face, that the mess they have created is being socialized. The last standing investment bankers are now seeking shelter under the big umbrella of the state (what´s left of it after the Friedmanite ideological cluster bomb attack…)
Adding insult to injury, the gamblers get even more borrowed capital to relieve them of their “toxic” products at overpriced rates in order to “restore confidence” in the market. The same economic parasites who betted on the odds that (their own) corporate borrowers would not be able to pay their debt (“credit default swaps”) get a fresh supply of artificial “life-blood” (in the form of more debt) in the hope that this time they will have more luck in their artificial casino world…. As Adrian Mole used to say: How stupid can you get?
For years we have been told that there is no more money for social security, etc. and that fiscal austerity (reducing budget deficits) is the highest priority of government. Now all of a sudden, taking on billions of more national debt is no longer a problem, on the contrary it is an absolut necessity to guarantee the survival of an insane financial (debt) system that created the crisis in the first place.
Instead of disarming the financial hydra (by disentanglement and outlawing of “multifunctional banks” e.g. restore Glass-Steagall, which separated commercial from investment banks and insurance companies) and implementing a kind of “Financial Product Safety Commission” (as suggested by Prof. Stiglitz) the stuffed shirts and hypocrites passing off as democratic politicians tell the public “that these institutions are too big too fail” and to save ourselves we must give them even more borrowed money to play with….. In the US, they even create more and bigger “financial supermarkets” (e.g. Bank of America acquires Merrill Lynch) so the hydra gets another ugly head…..
The same politicians, who had swallowed the neoliberal gospel about the benefits of “regulatory and tax relief” hook, line and sinker and therefore aided and abetted the financial crimes that created this mess, are now appearing on (German) TV-shows expressing their outrage about “the greed and lack of transparency” in the banking industry. What the public basically feels, is in my view, that absolutist kings like Louis XVI. were guillotined for lesser crimes…… This is a new kind of financial / corporate feudalism with the last step yet to come – the rich paying no taxes at all – socializing cost and risk has already been achieved.
At least here in Austria, one former chief executive (of the BAWAG bank, then owned by the Austrian Trade Union Federation OEGB – of all people), was found guilty of breach of trust, fraud and falseaccounting and was sentenced to nine and a half years in prison. The judge also ordered him to repay Bawag €6.8 million in pension benefits. (Note: Austria did not just produce the infamous Hayek! We had a much greater economist and thinker: Karl Polanyi (THE GREAT TRANSFORMATION)
But the bigger problem is that this crisis is not debated in the greater context: Pearlstein – as most other commentators – warns of the “prospect of little or no economic growth” as the greatest threat but in reality THIS ENDLESS GROWTH IS THE UNDERLYING PROBLEM:
As Marx understood, capitalism suffers from a systemic fault: Overproduction – since there is no self-containing principle . (This insane concept also causes environmental destruction (loss of habitat and functioning ecosystems, loss of biodiversity, “climate change”, etc.) To overcome this dilemma, economists tried globalization (increased access to cheap labour, raw materials and new markets, formerly known in as colonialization) and neoliberal “reforms” – both of which worsened the situation (but further enriched the business elite with “trickle up” policies). The last resort was “financialization”: In order to maintain rising profits more and more (actual and borrowed) money is being pumped into the financial markets (as mentioned at the beginning but the enormous artificial profits are not backed by real value: they “created a hyperactive financial economy and a stagnant real economy”.
Greenspan flooded the market with cheap credit because he knew that creating another bubble was the only way to keep the system afloat (at least until he fled the scene of the crime, …). The extreme volatility of this system and risk for society as a whole apparently did not bother him, the Fed or the bankers and politicians who worked hand in hand…. (in the true spirit of de Mandeville and Friedmann)
And why should it? When the corporate welfare system is so reliable and many journalists so gullible?
The last words must go to Karl Marx, a man with incredible foresight (the things he could not predict were the advent of a brainwashing PR-industry, a corporate media and the systemic “dumbing down” of the masses….):
“In a system of production where the entire continuity of the process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases….. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis.” ………
At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; …..unsuccessful speculation with the capital of other people; finally, capital which has depreciated or is completely unsaleable…. The entire artificial system of forced expansion of the reproduction process [“economic growth”] cannot, of course, be remedied by having some bank, like the Bank of England give to all the swindlers the deficient capital …… and having it buy up all the depreciated commodities at their old nominal values.
Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only ….., notes, bills of exchange, securities.
Particularly in centers where the entire money business of the country is concentrated, like London [or New York]…the entire process becomes incomprehensible.”
Note: This comment is a reply to an article in The Guardian Weekly: “Global Economies left teetering” by Steven Pearlstein (03.10.2008), originally published in the Washington Post
 Oxford University Press, Authors: Alexander Kern, Rahul Dhumale and John Eatwell
 A Catastrophe Foretold, New York Times, October 26, 2007