The Global Financial Crisis – What can we do about it?

Originally published by Australian Options – a quarterly journal for social justice and political change.  (Please copy and distribute)  To contact Australian Options email Frank Barbaro – filef@tne.net.au

Written by Patricia Ranald

The share market crash of October 2008 sent shock waves though the global economy, with unemployment growing in many countries. We hear the same people who caused the problems, the bankers and major employers, calling on governments to bail them out with public money, and to put off urgent environmental measures needed to address climate change.

At the same time workers are losing jobs, and pensioners and superannuants are struggling just to keep going. We need to understand why this has happened and what can be done to stop it happening again.

We must ensure that workers and others on low incomes do not bear the main burden of the crisis through unemployment and reduced incomes.

Why did it happen? Deregulation and growing inequality

The immediate causes of the global financial crisis lie in the US banking system, but the longer term causes arise from policies implemented by governments around the world

over the last twenty years. Called economic rationalism, neoliberalism, or the Washington Consensus, these policies have removed social regulation designed to protect consumers

and workers, have redistributed income to the rich, and promoted huge growth in both corporate and consumer debt. These policies also assumed that economic growth could

be endless, ignoring the history of boom and bust cycles in capitalist economies over the last two centuries. Global inequality also increased, with over two billion people living on less than US$2 per day.

Governments have cut company taxes, wealth taxes and income taxes for high income earners, and have introduced consumption taxes like the GST, which fall most heavily on

low income earners who spend most of their income. There have also been cuts in government spending on health, education and welfare, and privatisation of many services.

But private profits have been guaranteed by continuing government subsidies, as we have seen in services ranging from childcare to toll roads.

 

Legislation like Howardʼs Work Choices reduced basic working standards and allowed employers to impose individual contracts on workers, while restricting their rights to join unions and bargain collectively.

 

The justification for these policies was that redistributing wealth to the rich would result in higher levels of investment and employment, and that benefits would “trickle down” to

lower income groups. But they were based on a culture and practice of greed which undermined community values and increased inequality. As the late American journalist Studs

Terkel remarked, “The only thing trickling down from the top is meanness.” 

In their recent book Who Gets What? Analysing Economic Inequality in Australia (Cambridge University Press 2007), Frank Stilwell and Kirrily Jordanʼs detail the falling share of wages as a share of total income, and the increase of profits as a share of total income particularly over the past two decades.

 

Executive pay has reached obscene levels.  A recent survey by the Australian Council of Superannuation Investors showed that chief executivesʼ fixed median pay increased by 96.4% from 2001 to 2007, compared with a 32.3% increase in average adult weekly ordinary time earnings over the same period. For the 69 chief executives surveyed, average total pay

in 2007 was $5.53 million, up from $4.56 million in 2006 and $3.77 million in 2005.

Growth of the finance sector, ʻcasino capitalismʼ and the environmental crisis

Following the Great Depression of the 1930s, in which unemployment reached 30%, many banks collapsed and millions lost their savings, governments introduced regulation to ensure that banks had adequate funds and would not engage in high risk loans or investments. Government-owned savings banks provided for low income savers. Since the 1970s, privatisation and deregulation of the banks, and the finance sector more generally, removed these safeguards.

Mergers have created giant global banks focused only on short term profits. This led to the “financialisation” of the economy, or “casino capitalism”, in which the finance sector as a whole has grown much faster than the rest of the economy, driven by highly profitable but complex financial products involved in currency trading, futures markets and corporate and consumer debt.

The growth of consumer debt through credit cards, personal loans and mortgages has been highly profitable. Falling real wages and casualisation of work have meant that consumer

debt can be the only option for low income earners to maintain living standards.

The growth of all forms of debt enabled huge increases in production and consumption which

accelerated the global warming that had been developing over the last two centuries of industrialisation.

The US sub-prime mortgage crisis

The immediate cause of the crisis was the massive growth of high risk or “sub-prime” mortgage loans in the US housing market, which began after interest rates fell in 2001-2. Falling real wages and casualisation of low paid work in the US increased the numbers of working poor, often depending on more than one part time job without earning a living wage.

Millions of low income Americans, often from Afro-American and Hispanic communities, had no access to affordable housing as governments cut public housing programs.

Lending to people who cannot afford to repay is known as predatory lending, and had been illegal in some US states. But these laws were repealed in the name of deregulation.

US banks offered mortgages to low income people at initial low interest rates. But hidden in the fine print was a shift to higher interest rates that they could not afford. The banks knew that many people would not be able to continue payments, but they gambled that rising house prices would cover the cost of defaults.

The banks then converted the risky loans into securities, which were promoted and sold as investments with acceptable risks but high interest returns. Ratings agencies like Moodyʼs and Standard & Poors rated these securities as good investments.

The deregulation of global financial markets meant these securities could be sold to other banks, local government and pension funds all over the world, including Australia, creating contaminated time bombs in the global banking system.

By 2007, the highest risk sub-prime mortgages were 14% of the total US mortgage market, with a further 10% of the market classified as risky. As the higher interest rates kicked in over

2007-8, millions defaulted, flooding the US market with millions of houses for sale, leading to sharp falls in house prices. Families were left homeless as their houses were sold.

The ratings agencies downgraded the value of the securities. Banks and other investors

throughout the world suffered huge losses, leading to bank failures in Europe and the US. Banks stopped lending to each other and to their customers.

With less money available to buy shares, share markets plunged in value, leading to losses for superannuation schemes and retirement incomes. Economic growth has slowed, unemployment isrising, and the US and European economies are now officially in recession.

The Australian economy was boosted by the resources boom, but growth is now slowing We are now seeing rising unemployment and layoffs in retail, mining,manufacturing and other industries.L FINANCIAL CRISIS

Government responses

The crisis has undermined the myth of self-regulating markets. Governments are now discussing how, not whether, to regulate markets and use government spending to prevent a worsening of the recession and to create jobs.

Government spending is essential when private investment is paralysed. Priority should go to job creation in health, education, public transport and environmental projects, and to assist workers and low income people who will otherwise bear the brunt of the crisis through unemployment, homelessness and loss of retirement incomes.  Maintaining these incomes also creates demand for goods and services in the economy, and helps economic recovery.

Some business interests are trying to use the economic crisis as an excuse for delaying urgent action on climate change.This is nonsense, since green jobs can be part of the solution to the crisis.

A new report Green Gold Rush issued jointly by the Australian Council of Trade Unions and Australian Conservation Foundation shows that 500,000 jobs could be created in renewable energy, energy-efficiency, sustainable water systems, biomaterials, green buildings and waste recycling if governments provide the necessary support   

see http://www.unionfiles.com/green/Green_Gold%20_Rush_final.pdf).

 

Similar proposals for a “Green New Deal” have been made in Europe and the US.

Globally, governments have said that they will guarantee bank deposits. This does not involve immediate spending, and has prevented the disastrous runs on banks of the 1930s which meant millions lost their savings. 

Governments have also agreed to introduce stricter global regulation of financial institutions, but the details remain to be seen. The European and Chinese governments have also announced massive government spending programs.

Direct government support in the form of payments to particular banks, especially investment banks that have made and lost super profits, is more controversial. In Britain and Europe, governments have invested in or nationalized some banks, meaning that they will eventually get a return on their investment, and have introduced stricter regulatory frameworks.

In the US, in the dying days of the Bush Republican government, the conditions for banks to access $700 billion of government funds were unclear. There is strong public opposition to public money going to investment banks without any assistance for the millions who are losing their homes, while bank executives walk away with massive payouts. The new Obama Democratic government will have to address this challenge.

Although Australia has a much lower level of sub-prime loans (called “low doc” loans here), Australia has a high level of overall consumer debt (including mortgages, credit cards and personal loans).

Sydney economist Steve Keen estimates this consumer debt is 156% of the gross domestic product. We are now seeing increases in mortgage defaults with rising levels of homelessness. (see Deeper in Debt: Australiaʼs addiction to borrowed money, at www.cpd.org.au)

The Rudd Government has guaranteed bank deposits and paid an initial government assistance package of $10 billion to pensioners, carers and families with children in

December 2008. This both helps those on low incomes and boosts consumer spending, helping employment in retail, manufacturing and services industries.

The bringing forward of government capital spending of $5.5 billion on local government infrastructure, larger infrastructure projects and renewable energy will also help to boost employment.

But as the global crisis has worsened, the government has introduced a second, much larger package totaling $42 billion.

Again many of its proposals are welcome, especially expenditure on schools, public housing, energy efficiency and other infrastructure. But there are questions about the equity impacts. There is no rise in payments for unemployed people, wealthy private schools may receive the same assistance as more needy public schools, and more investment is needed in public transport.

There were some improvements to means tests for unemployment benefits, green energy investment and investment in the Murray-Darling basin environment made by Greens and independent Senators, as the Government needed their support to pass the package in the face of Liberal-National Party opposition.

 

Proposals to create jobs and make Australia fairer and more environmentally sustainable

•   Re-regulation of the financial system to prevent such a crisis in the future. This would include much stronger regulation and transparency rules for all financial instruments and institutions, outlawing of all forms of predatory lending, regulation of lending for stock market trading and regulation of ratings agencies

•   Regulation of senior executive incomes, and removal of bonuses that reward risky behaviour for short term profit

•   A uniform national tax on all properties over $2 million to discourage speculation and property booms,

•   A small Tobin tax of a fraction of one per cent on international currency transactions, to discourage speculation and provide a fund for development assistance in the poorest countries

•   A publicly owned savings bank to provide low cost banking for consumers and small business as real competition with other banks

•   Publicly funded consumer credit education programs for schools and the community

•   Increased public spending on public housing, including cooperatives and local social housing projects, and incentives for private investment in affordable housing,

•   Public investment and incentives for private investment to create green jobs in renewable energy, energy-efficiency, sustainable water systems, including industry and household water recycling, biomaterials, green buildings and waste recycling.

•   Increased spending on public transport, in cities, between cities and in rural centres

•   Increased spending on public hospitals and health care, and restore bulk billing and dental health coverage

•   Increased spending on public education at all levels (preschool, schools, TAFE and university) to reduce class sizes, and upgrade school buildings and equipment.

•   Following the failure of ABC Learning, government should fund good quality, accessible and affordable community-based childcare

•   Public investment to close the gap for Indigenous health outcomes, and encourage biodiversity conservation and environmental management on Indigenous lands

•   Boost pensions and benefits to provide a living income

•   Use the new industrial relations law to implement Australia’s commitment to fair workplace laws under the International Labour Organisation Conventions, including freedom of association and collective bargaining rights.

•   Clearer obligations on employers to consult and negotiate with unions about proposed layoffs, including paid training days as an alternative