Tuesday, September 22, 2009

Meltdown, but Is It the End of Greed?

I imagine that writing books on current affairs can be a perilous affair, because they so quickly become obsolete. However, if done correctly, they are important because the book format allows for viewing current events as a totality, and can shape how people view the world around them. This is perhaps most difficult to accomplish with economics, which is already a difficult subject for most. I pretend to no expertise, with my education in the field being largely auto-didactic and Marxist. My own interest has revolved around educating myself about neo-liberalism and globalization, and two of the more important, and comprehensible accounts of both, in my humble opinion, are David Harvey's A Brief History of Neoliberalism and Giovanni Arrighi's Adam Smith in Beijing.

Paul Mason's Meltdown: The End of the Age of Greed displays the same rigor and clarity of Harvey or Arrighi. He shows how neoliberalism, with its creed of deregulation, privatization, and financialization led to the collapse of finance and the banking industry. According to Mason, the driving force behind financialization was a surplus of capital that people sought to invest for a profit. Due to low interest rates, this surplus could not all be invested profitably in production of goods and services, and turned toward increasing financialization and speculation. The result: low interest rates have fueled
repeated bubbles in the price of assets: stock markets, houses, and latterly commodities like oil and grain. What we have seen since the year 2000, as investment dipped and interest rates fell, is the tendency for capital to flow frantically into one asset bubble after another, with the finance system as the conduit (p.70)
These bubbles are much easier to map, as it were, with commodities such as oil. Where Mason is at his best is showing how much more difficult it is to understand what happens when the greatest crisis revolves around derivatives such as credit default swaps and collateral debt obligations. A collateral debt obligation (CDO) is a set of "bonds wrapped together, often issued only for the purpose of being wrapped up and sold, in chunks, with the risks inside not immediately obvious to the credit rating agencies that gave them a risk rating (p. 188)" and a credit-default swap is, in this case, insurance on the CDO. The credit-default swap proved irresistible for profiteering because it both enabled investors to move liabilities off their balance sheets (because they were insured) in the form of CDOs, and CDOs offered buyers a higher interest rate. For a very short time, the going was good for high finance:
The value of asset-backed securities issued each year ballooned from a few billion in the late 1990s to $2 trillion when the bubble burst. The value of the credit default swaps grew much faster: from zero to $58 trillion in 2008 (p. 92-93).
The problem, of course, with this kind of money (The total GDP of the world was $65 trillion) is that it produces institutional incentives that are perverse. As Mason points out, quickly conflicts of interest arose between creditors and ratings agencies as everybody in the finance sector sought to cash in: "bond issuers [were] paying to have their own products to be rated," and rating agencies never had a reliable method for calculating risk (p. 94).

Thus when the subprime mortgage market went bust, and investors sought to cash in on their insurance on defaults, banks had to curb their short-term lending to hold more capital on hand to pay out on bad debt and maintain investor confidence. The sheer size of the default market amplified this problem, and soon, it became impossible to put a value on much of the paper (toxic debts, as it were) they were pushing around.

What came next is what Mason calls the credit freeze (which he pinpoints to August 7, 2007): a bank would look at their stack of toxic debt, and realized that if their trading partners had the same problem, they would not get back the money they had lent them. This lack of confidence was based on the fact that CDOs were layered, or structured, with debt possessing various levels of risk, and if the riskier debt was spread around (across the globe, actually), very few of the main players would be able to avoid the consequences of debt default. Soon short-term credit dried up, which made it more difficult to finance the long-term debt. This situation was compounded with a commodities bubble driven by speculation, which resulted in the global economy entering a period of both inflation (due to the increased price of oil and other commodities from August 2007 to September 2008) and tighter credit, and finally, the financial system melted down (pp. 99-117).

Overall, Mason's analyses are clear and critical. Perhaps the most obvious shortcoming of Meltdown is his confidence that we have reached an 'end of the age of greed.' For Mason, the partial nationalization of banks is evidence that neoliberal ideology, with its emphasis on minimal government intervention in the market has been discredited. But, as David Harvey argues, in practice proponents of neoliberalism don't mind if private risk is shifted to the public. Perhaps this sounds familiar:
neoliberal states typically favor the integrity of the financial system and the solvency of financial institutions over the well-being of the population or environmental quality (pp. 70-71).
Does that sound similar to any country's bailout plan that we can think of? Only a year after the the meltdown began and, apparently, as the headline says, "Credit Swaps Lose Stigma as Confidence Returns." Revisionism has already begun:

“A functioning credit-default swaps market contributes to more efficient extension of credit” by giving investors and lenders confidence that the industry won’t implode, said Alexander Yavorsky, a senior analyst at Moody’s Investors Service in New York. The consequences of Lehman’s failure “were astronomical, broadly speaking, but the CDS market worked well,” he said.
Worked well, of course, for those who continue to profit, but the rest of us? Must have something to do with the "astronomical" part. So apparently, those in the industry haven't really learned their lesson, requiring, as Mason points out, state intervention and stricter, even more aggressive regulation. But it is not an end to the age of greed. Neoliberal practice does not abhor a crisis, in fact, crises (as Mason observes) are built into the system. Yet the term 'greed' makes it sound the meltdown was the product of ill behaving individuals, when, as Harvey argues, the transfer of wealth from the state and world's poor to the world's richest is part of the design of neoliberalism itself. The first step to a more egalitarian system, aside from regulation, is to close the revolving door between finance capitalism and government, a move neither party in the USA seems able or willing to do.

No comments: