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

 

Debating the Stimulus - and the rights of the needy

Kevin Rudd - we need to Keep up the Pressure on Labor in the lead up to the next Federal Budget.

Stimulus Package Passed

Today the Australian Labor government of Kevin Rudd passed a formidable stimulus package through the nation’s parliament amounting to $42 billion.

The package included “$14.7 billion…on schools infrastructure” and $”6.6 billion…to build and upgrade public and Defence Housing.”

Also passed were measures to provide insulation to every Australian home –at a cost of $3.7 billion– with flow-on effects for energy efficiency for years to come.

However, the package was redrafted after concerns raised by the Greens, Family First, and independent Senator, Nick Xenophon.

Specifically, Xenophon managed to extract $900 million to be devoted to restoring the Murray-Darling basin.

Planned payments to single-income families and tax bonuses for workers, meanwhile, were wound back by $50 to $900.

These changes were supported by Australian Greens senators. The money saved, as a consequence, (over half a billion dollars), was redirected into a number of measures - including the creation of “over 10,000 green jobs”.

The Greens also secured an agreement from the ALP to ‘sit down and talk’ about welfare reform. But no firm commitment on pensions was given by Labor.

Such an understanding may comprise a good start – but does not go nearly far enough. (We will consider this in a later post.) The unemployed will be particularly vulnerable as we lurch deeper into crisis. These people should not be made to shoulder the burden, and reform of pensions ‘across the board’ is needed urgently.

Around the world governments are facing the reality of financial and economic collapse. Global action is necessary to ‘jump start’ the world economy – and to breathe new life into consumer demand and investor confidence.

Critically – reflating unsustainable ‘bubbles’ – whether in housing or elsewhere – is not the answer.

In the immediate future, the aim is to boost economic activity here and now. But further on, governments need to invest in the kind of long term infrastructure and skill-formation that will provide for productivity and quality of life.

Investment in public housing – for ’20,000 social housing units’ – is a vital response to the plight of vulnerable Australians. But an ever greater investment is necessary – in light of the crises which are gripping our nation.

6,000 elderly Australians were classified as homeless in 2008. And as of 13/2/2009, over 1800 houses were reported as having been lost to bush fires in Victoria.

Investment, here, fulfils a crucial human need – and can buoy the economy over the coming months.

GIven the extraordinary circumstances, the government ought to provide funds in full for reconstruction - in instances of those disadvantaged who had been unable to afford insurance.

But the task of providing for fire victims should not detract from prior plans to construct housing elsewhere. The project needs to be expanded in its scope.

Finally, Rudd Labor needs to get its house in order with regard to the construction of a National Broadband Network.

The massive task of constructing a joint wireless/fibre to the home network could provide thousands of jobs into the future – while driving productivity – and appreciably improving our quality of life.

Such a project should be fully public funded and owned: as even 'part private' monopolies can result in abuse of market power.

For all these plans to work, though, – over both the short term and the long term - global co-operation and co-ordination is required. And Australia needs to do its part.

Amongst all this, though, it seems that the leader of the Opposition in Australia is playing a dangerous game of rank political opportunism.

Well may we hope that the Australian people will see through Turnbull's opportunistic gambit. Playing upon fears of ‘Labor debt’, Turnbull will be hoping that Australian voters will turn on the government as the crisis deepens, and later on as debt needs to be serviced sustainably once the economy finally returns to growth.

The spectre of ‘Labor debt’, here, is put forward in a shallow line of argument which has gained currency with repetition – again and again - over the years.

But even if the debt we incur now must be serviced later: it is only through investment in infrastructure, housing, and welfare – that the most vulnerable are protected: and that the basis of future growth and quality of life is set.

Failure to invest in infrastructure now will impact negatively on productivity into the future: and will feed into a ‘recessionary spiral’. We need, therefore, simultaneously to address the crisis 'here and now' - while planning for future growth.

So - here - amongst the community of progressive bloggers - what should we do?

We must ‘get out there’ and argue for reform: supportive of Labor’s measures – but demanding more. We must fight the tendency towards austerity – and we pressure government to target assistance to those most in need.

Labor could also have gone further for these people. Leading into the next Federal Budget, we must demand far-reaching welfare reform.

Preferably, with the support of the Greens and Family First, we might look forward to an increase in the full single rate of all pensions to at least 30% of Male Average Total Weekly Earnings. (MATWE) This would amount to $674.52 a fortnight.

A rate of somewhere between 85%-90% of the single rate could, meanwhile, be provided for couples. (Difficult estimate as we do not have access to modeling.)

We will consider this further, though, in a future posting. At this stage I encourage readers to contribute to the debate. Your comments are welcome. (but no flaming or trolling)

Keep up the pressure – the next major flashpoint will be the 2009 Federal Budget. Progressive forces need to mobilise and co-operate now. By winning the the debate in the 'public sphere' (the 'cultural struggle' some would say) we provide Labor and others 'room to move'.

The struggle we wage here and now is just as important as that going on in our parliaments!