The road to meltdown
Photo by Terence T.S. Tam
‘You mean, we’re giving the banks all this money just so they can lend it back to us with interest?’ Well, yes, that is precisely what the bank bailout currently means – and an incredulous ‘vox pop’ interviewee on a radio station in Britain had got it in one. So had a woman in the US who pointed to one of the empty ‘foreclosed’ homes in her street and said: ‘It’s not as if there’s anything wrong with the house.’
Common sense is uncommon among the light-fingered people who have had their hands on the tiller of the ship of state, the luxury yacht of globalization. What the rich world faces is, in truth, nothing much more complicated than a good, old-fashioned debt crisis – even if ‘credit crunch’ sounds nicer. Either way, it’s a matter of living beyond one’s means, of not paying debts where they are due. This has been possible only because the debts are owed, for the most part, by the rich and powerful in the Minority World to the poor and vulnerable in the Majority World – and to that ultimate creditor of everything, nature itself.
In fact, it all began with what looks like a gift from nature – oil. The price quadrupled during the first ‘oil shock’ in the early 1970s. This generated vast quantities of windfall cash for the oil-rich OPEC countries (or rather, their rulers). The cash had to go somewhere. So a new sort of footloose currency, sometimes styled ‘petrodollars’, began to circulate. This evaded the rules that had governed international finance since the Bretton Woods conference in 1944 – which was aimed, if a little uncertainly, at preventing a repetition of the Great Depression of the 1930s and the bloodshed that followed.
Incubated by petrodollars, Masters of the Universe duly hatched on Wall Street and in the City of London. A receptive President Nixon had been prevailed upon to begin financial deregulation in 1972 – by some counts there have been 42 financial crises worldwide in the 36 years since.
Much of the cash went wherever it seemed most likely to make the fastest and fattest returns. At the time, since the rich world was staggering under the impact of the oil shock, that pointed to a motley crew of corporations, despots, oligarchs, kleptocrats and chancers operating in former colonies and across the Third World. They duly squandered the money on themselves, recycling it once more into the numbered bank accounts and tax havens thoughtfully provided by the Masters of the Universe. The cancerous reproduction of candyfloss, globalized finance had begun.
Before long, however, the problem of ‘servicing’ these debts, or paying them back, threatened to result in defaults on a massive scale and, what was worse, sink the financial institutions that were responsible. So a ‘Third World Debt Crisis’ was concocted. This, the first of such crises, established the principle that liabilities incurred for private gain must, in the name of saving the system from itself, be offloaded via governments on to the public at large.
Politically, this meant subjecting these regions to whatever form of repression came most readily to hand. Economically, it meant ‘structural adjustment’, first cobbled together in response to the crisis in Mexico in 1982. This imposed the privatization of everything, the cutting of public expenditure and the charging of fees for public services, including healthcare and (in flagrant breach of the Universal Declaration of Human Rights) elementary education.
To pay back their oppressors’ debts, and to earn the foreign currency that was demanded in payment, the people of these countries were also required to adopt ‘export-oriented growth’; to ship out, all at the same time, whatever natural resources they possessed, including food in hungry countries and raw materials like timber, copper and, of course, oil. Environmental destruction escalated apace, while the resulting glut of commodities on world markets made them incredibly cheap.
At much the same time, corporate globalization twigged that cheap commodities could be matched with cheap, unorganized labour in places like China, Indonesia or Mexico, to produce cheap consumer goods. Together, these two cheap things from the Majority World removed the threat of price inflation in the Minority World. This gave birth not just to a globalized consumer culture but to low interest rates and cheap money.
All the signs are that the meltdown has a long way to go yet. Many millions of lives will be ruined, starting with the most vulnerable, most of whom live in the Majority World
With this money a veritable orchestra of financial instruments began to ‘leverage’ – acquire with borrowed money – everything within reach. It levitated into a world of make-believe riches based on (insider) information and (private) services which made nothing but money itself. The crude reality of inflated prices for ‘assets’ like homes, together with trade or budget deficits and personal debt – particularly in the US and Britain – was casually discounted. Confidence, or blind faith, was everything.
But the growing scarcity of oil in particular and finite resources in general grew along with their consumption, so that their cheapness could no longer be assured. Supercharged by speculation, the price of oil, food and commodities on world markets eventually began to soar – a warning of what was to come.
Countries with trade and budget surpluses (notably China and, once again, OPEC) had by now accumulated vast ‘Sovereign Wealth Funds’. For a while they had little option but to feed the debts of the Minority World – again, that cash had to go somewhere.
Then, in August 2007, the default line was crossed. Sovereign Wealth Funds would not, understandably enough, lend to bankrupt private financial institutions in the rich world. So, once again, private liabilities had to be offloaded, via governments, on to the public. Any thought of ‘structural adjustment’ here was, however, dismissed as the economic madness it always was. Huge sums of funny money were spirited from nowhere. Quite how these governments can themselves remain solvent no-one yet wants to say.
Whatever else, neoliberalism lies in ruins. A financial cartel that was too big to fail has failed all the same. Moral hazard now defines a system of private finance that cannot function without public funds, obtained by what amounts to blackmail on an industrial scale.
All the signs are that the meltdown has a long way to go yet. Many millions of lives will be ruined, starting with the most vulnerable, most of whom live in the Majority World. Good can come out of it only if the historic debt to these people, and to nature, is repaid. And that can happen only when the realization dawns that ‘regulation’ and ‘nationalization’ are not technical fixes but acts of democratic control. The victory of Barack Obama in the US presidential elections is a step forward. But the hardest part is still to come.