Sub prime Fiasco – Where to Now?

October 2008

Nobody knows where the current international financial crisis will lead to. Perhaps massive government injection of (taxpayers’) money will restore some order and confidence and the international economy will carry on - more or less - as normal. Perhaps we are in for a meltdown where cash becomes king, the economy crashes and the weaker and less fortunate will suffer greatly. This is what most politicians fear. Perhaps some entirely new order will emerge. I personally fear that the outcome will be a further massive transfer of wealth from the majority to a small elite of super-rich - a process that has been accelerating since 2000. We are living in interesting times.

There is a great deal of discussion as to how we came to this point. First financial speculators and ‘short sellers’ were identified as the villains. Short selling is betting that a stock will fall in value. Banning this practice however failed to make any significant impact. Greedy, reckless bankers have been identified as the culprits: In their insatiable pursuit of profit and bonuses they gambled with abandon, invented ever more complex financial products and put the entire global economy in jeopardy. The financial authorities are also being blamed for failing to oversee the financial industry.

Although there is truth in all the above explanations, they do not get to the root of the issue. Over the past 30 years the neo-liberal agenda has dominated the world economy. This agenda proposes deregulation, privatization, reduced tax and reduced public spending as the optimum way of running an economy. Underlying these policies is a basic assumption: greed is good. The argument is that each party freely acting solely in his own interests will produce the maximum benefit for the greatest number of people. Despite abundant evidence that neo-liberalism produces massive and devastating inequality and cannot coexist with democracy it has been declared as the only game in town and has been given free reign over the past decades.

The regulators didn't’t so much fail in their duty as they had little or no authority to provide any meaningful regulation. The politicians won’t admit this, as they are the ones who removed the regulation and regulatory power. Many financial services people have behaved in a greedy fashion, but the economic system encouraged this culture and behaviour. The stock market (i.e. investors like pension funds and private wealthy individuals) demanded ever increasing short-term profits from businesses, including banks. In this environment a banker who attempted to behave in a socially or fiscally responsible fashion would not have lasted long in his or her job.

What we are witnessing is the collapse of the free market neo-liberal agenda. But this is not apparent from what is reported by the mainstream media. Why is this? For the simple reason that the media is largely controlled by the people who have most to gain from this agenda and the most to lose if it is challenged. A free market is merely an illusion when power inequalities exist, as they always do. It systematically removes wealth from the less powerful and transfers it to the most powerful. There is no level playing field. It has been accepted by the public in the western industrialized countries because, up to now, the majority of people in these countries have seemed to benefit economically from it. Those who have lost the most live in remote countries or in ghettos and the link between poverty and neo-liberalism is kept well hidden from us.

But neo-liberalism is ironically doomed to failure through the very extent of its success. As it has increasingly controlled politics and politicians, insatiable greed, corruption and decadence have crept in, accelerating the transfer of money from the lower and middle classes to the super-rich. Over the past few years the middle class in the US has diminished in size (due to the wealth transfer mentioned above), which posed a problem for the free market. There were less people who could afford to buy the products and services produced. The solution was to loan them the money to buy the houses, plasma TVs, SUV's and other products, regardless of their ability to pay. That worked for a while, but you reach a point where the inability to pay coupled with the lack of new borrowers becomes apparent. House prices fall, resulting in negative equity and the ‘sub prime’ crisis which kick started the current fiasco.

The financial system is currently in the limelight, but other sectors, such as transport, energy and healthcare are likely to be next, to say nothing of the destruction that we are effecting to our habitat. We have privatized many essential services in the belief that they will offer a more effective, efficient and economical delivery. I propose that the opposite is in fact happening and this will become more apparent in the near future. Essential services will continue to deteriorate for most of us and become increasingly less available to the less well-off. Some may even collapse, just like the financial system has ceased to function.

So, where do we go from here? Do we try to patch the system up and hope that order will be restored or do we take a hard look at where we are going? Do we want real democracy rather than the illusion of democracy or do we want to be governed by a tiny minority of powerful individuals and corporations? Is it true that greed is good? Perhaps there is an alternative story that deserves an airing. What kind of world do we want to create and pass on to our children and grandchildren? The financial crisis is an early warning signal that we need to heed. It offers us an opportunity to reexamine and reevaluate our priorities. If we don't take this opportunity then we should not be surprised when the next, more serious crisis, emerges.