For many trade unionists the financial events of the last year have been troublesome, to say the least. What has been going on to create such economic turmoil: massive job loss, bankruptcies, credit freezes and incredible amounts of debt and bailout funds? Moral condemnation is easy – and certainly justifiable. But what lies beyond this – in the realms of analysis and political response? Paul Mason’s Meltdown: the end of the age of greed (2009) provides one answer, in its attempt to relate the spectacular economic events of autumn 2008 to long–term economic and political trends within contemporary capitalism.
As a journalist (he is economics editor of BBC TV’s ‘Newsnight’ programme), Mason moves easily between reportage on financial affairs and socioeconomic themes, charting the links between the so-called ‘credit crunch’ and policy turns towards deregulation, subprime mortgages, as well as emerging global imbalances in the world economy.
He manages to successfully illustrate the workings of those arcane financial instruments that have featured so heavily in the journalistic coverage of the crisis – collateralised debt obligations, credit default swaps and co. The main political theme of ‘Meltdown’ is Mason’s argument that this crisis signals the death-knell of the neo-liberal framework that has dominated the global economy for the last three decades. The final part of the book takes up this theme in depth, tracing its historical trajectory and considering possible alternatives to it.
‘Meltdown’ begins, however, with a series of dispatches from the heart of financial capitalism in autumn 2008 as the credit crunch and its run of banking disasters commanded the attentions of the world’s media and political elites over a number of weeks. Mason’s TV role takes him back and forth between US and UK financial centres, to EU and G20 summits, and earns him access to some of the major players in the unfolding drama.
It is events in the US that hold centre stage, one after another of the major banks falling into difficulty and forcing American financial and political elites to engineer a series of contradictory and insufficient responses: – letting Lehmann Brothers collapse, shoring up AIG, then attempting to capture the ‘toxic debts’ of the big banks in a separate institution and cleanse the whole system (preserving its private ownership in the bargain). None of these options proved an effective countermeasure to the contagion of an economic crisis that rapidly froze the everyday functioning of the banking system, now fatally dependent upon short term borrowing and inter-bank loans.
This turbulence was not confined to the US financial sector, as we now know. Mason tracks its progress through other major capitalist states, who were forced to step in and rescue their own banks as they were drawn into the turmoil – the likes of RBOS and HBOS in the UK, and their equivalents in Germany, Iceland and Ireland. In Britain, excessive dependence of the banks on short-term borrowing froze the whole financial system, forcing New Labour to part-nationalise major banks and provide a £400 billion guarantee of bank loans. Eventually all the other major governments were forced to follow suit to forestall global financial collapse. Nationalisation was resoundingly back on the policy and political agenda despite, as Mason notes, the ideological preferences of G7/G20 political and financial elites.
By the time these measures were taken, however, the effects of the crisis had spread fatally to the real economy, large and established firms now struggling for access to increasingly scarce finance and facing bankruptcy. Although by the end of 2008 an estimated $12 – 15 trillion bailout had been undertaken, Mason recognises that this had still not dramatically altered the fortunes of banking sectors, stock markets or the ‘real’ economic base across the capitalist heartlands.
What had created such a drastic situation? Part two of the book identifies a number of causal factors, with prime focus given to the deregulation of the global banking system in the last three decades. Freed from previous limits on their operation (some going back to the New Deal era), investment banks rose to become the kingpins of a new banking system: excessive financial speculation, the creation of new financial instruments (futures and derivatives) and mega profits boosted by foreign exchange trading fuelling their exponential growth. By 2007, for example, global derivatives trading alone was an incredible eight times larger than the whole of the real economy. The so-called ‘hedge fund’, a new vehicle for high-risk investment that was also to feature heavily in the 2008 crisis, simultaneously rose to prominence.
Beyond this official framework, Mason describes the birth of a ‘shadow banking system’, of a piece with the ‘off-balance sheet’ accounting practices familiar from the Enron scandal, but on a much larger and more dangerous scale. ‘Shadow banking’ operates without any capital cushion (i.e. deposits as a % of loans), using off-balance sheet companies (registered in tax havens) to generate profits through complex lending and insuring operations. These grossly inflated real asset levels and effectively escaped all remaining regulation of banking practices.
The fatal flaw in all this chicanery was its interplay with the official banking system. When the chain of paper transactions involved in its ‘structured investment vehicles’ (SIVs) and ‘conduits’ ground to a halt, and began unravelling, investment banks suddenly found themselves massively exposed to huge volumes of bad debts previously kept off their balance sheets.
This deregulated financial system was closely involved in two other determinants of the crisis Mason discusses. First of these was an unexpected consequence of the rise of Asian capitalism, its surplus capital now travelling east to west for non-productive investment, facilitated by US investment banks. Given historically low long-term interest rates, these funds rapidly became deployed in a series of short term ‘asset bubbles’ (alongside similarly withheld Western profits). The result was a set of destabilising booms and busts in the stock, housing and commodities markets. Investment banks were major beneficiaries: “Wall Street sold high interest opportunities in a low interest world” (p71).
Major victims of this frenzy were undoubtedly those in the Global South, who found their basic consumption needs now at the mercy of spiralling fuel and food prices, as a burgeoning commodity futures market became the latest hot zone for speculative investment. In Mason’s opinion, this combination of Western greed and starvation, reflected in major food riots across the Global South, represents “the first truly global economic disaster”.
A second factor, with a similar dynamic of financial winners and losers, was that of the subprime mortgage market. Mason takes the city of Detroit as illustrative here, its low-wage economy becoming a prime target for novel financial products that enticed America’s poor into home ownership. Subprime lending promised high rates of returns on investments and rapidly grew to cover 20% of all US mortgages. It functioned through a process of ‘structure finance’: these high-risk loans were bundled together in ‘collateralised debt obligations’ (CDOs), risk assessed and insured, moved off the lender’s balance sheet (via the ‘credit default swap’), and then sold on as high risk investments to the likes of major investment banks, hedge funds – and more surprisingly, to local governments, building societies and pension funds. By 2008 there existed $58 trillion worth of these CDOs.
This whole apparatus soon imploded however. As ‘Meltdown’ details, the initial risks were miscalculated – falling house prices, mortgage default and rising unemployment sending the subprime market into freefall (with 20% of Detroit homeowners losing their property). Insuring these risks amplified the damage – $58 trillion would actually be equivalent to the whole of global GDP – and the credit rating agencies involved in verifying the CDO values were exposed as unreliable.
It was the linkage between subprime and the shadow banking system that transmitted this ‘virus’ across the whole global finance sector. The ‘SIV’ s and ‘conduits’ now faced massive losses on their investments, hedge funds collapsed, mortgage banks followed suit (Northern Rock in the UK); and the $58 trillion CDO bill sent short-term borrowing costs through the roof, exposing mainstream banks now heavily reliant upon this.
In the official banking sector, asset valuation was now practically impossible, massive debt write-downs occurred and huge losses declared, freezing future lending and generating mass panic. Furthermore the core problem underpinning the whole 2008 crisis – a huge, unregulated shadow banking system – proved immune to traditional policy counter-measures. Billions were poured into the system but instantly eaten up for urgent short-term borrowing, whilst bank recapitalisation faltered as share prices tumbled. In the end only a massive state bailout could stabilise the situation and head off global disaster.
So much for the events and determinants of autumn 2008. In the final part of the book Mason takes a further analytical step back, to consider the underlying ideology that has dominated economic policy for the last three decades and the relationship of the crisis to global economic trends. The neo-liberal project and its mission – to implant market forces across the globe through the policy vectors of deregulation, privatisation and free trade – is clearly implicated in the 2008 crisis and its determinants. Furthermore, key personalities involved in the events of autumn 2008, like Alan Greenspan and Ben Bernanke sitting at the apex of the US financial system, were heavily committed to this project.
This all adds up, according to Mason, to the effective end of this ideology. Mainstream politicians have been reluctant to acknowledge this – repeatedly hoping that free market compatible solutions could restore the fortunes of the economic system and thus responding in a halting and ineffective manner to the crisis. More alarming for Mason is the parallel failure of neo-liberalism’s many critics (within the anti-globalisation movement and beyond) to grasp the role high finance plays in the modern economy and elaborate any coherent alternative programme or historical successor to reorder an exhausted economic system.
What historical possibilities exist here is a theme Mason broaches in his final chapter. The global economy stands, he says, at a unique point: economic crisis, technological revolution (the emergence of information as a productive force) and a series of global imbalances linked to the rise of Asian capitalism creating a conjunctural mix immune to simple solutions. Mason believes a new model of economic growth and banking can be envisaged, where a socialised financial system, under partial state control, acts alongside redistributive fiscal policy to power a more sustainable development.
However this option, which many trade unionists would support, must reckon with the urgent need to redress the global economic imbalances of investment, production and government finances spawned by the growth of China, Russia and co. Their resolution demands fundamental shifts within these economies, China shifting its production towards the domestic market, rescuing the debt-laden US economy and powering the world out of recession. In turn, an equally dramatic alteration in the balance of class forces within China – enriching the mass low-wage migrant workforce within its export factories – will be essential, one heavily dependent on the course of their class struggles.
And it is with class struggle and the revival of organised labour as a social force that ‘Meltdown’ concludes. Today the global labour force stands at an unprecedented level, swollen by the extra 1.5 billion workers brought into play through developments in Asia. Though this initially tilted power in capital’s favour, Mason argues the best chance of ‘re-regulating’ capitalism and harnessing the progressive of IT as a productive force lies with “the world’s working poor” and their struggle for social justice. That struggle will only succeed to the extent that it goes beyond the contemporary practices of ‘community organising’ favoured by the anti-globalisation movement – that “low-level, non-ideological, anti-political culture of resistance” (p170) increasingly found in trade union organising too. To reform capitalism requires a clear focus upon the state as a vehicle for social justice – “You cannot reform the banking system branch by branch” – and the elaboration of a ‘big picture’ narrative. As the neo-liberals had to reluctantly rely on the state to stem the 2008 economic crisis, so the Left cannot make any significant steps beyond it without recognising that ‘localism’ is never enough.
And so, if 1989 promised ‘the end of history’, twenty years on the search for an alternative future is definitely on. As the major vehicle of the ‘world’s working poor’ trade unions must take their place at the forefront of this search and struggle. The works of Dan Clawson and Fletcher and Gapasin (previously reviewed on this blog), fill in some of the parameters of what a ‘social justice’ union orientation will involve.
Review by network member Richard Leitch, September 2009