economy – Pike & Hurricane

Going around in circles: Headed towards yet another financial crisis

Merle Emrich — Thu, 15 Nov 2018 15:09:39 +0000

Ten years ago, Lehman brothers collapsed. The shock waves of the financial crisis of 2008 could be felt throughout North America and Europe. One consequence was that trade finance trickled away and between 2008 and 2009 global trade and the stock market value decreased with a velocity not even observed during the Great Depression of the 1930s. To prevent another crisis of the same scale as the 2008 financial crash, provisions, i.e. mechanisms to monitor banks, were taken. The question, however, is: Are they sufficient?

What Awaits

Generally, the global economy was back on the path of recovery in 2012. Due to international cooperation, it is argued, international trade and foreign direct investment was improving. But while it may seem as if our economy is almost out of the metaphorical woods, with unemployment rates below the level of 2008 and the US economy being fairly strong, the next crisis is already looming on the horizon. And the structures we have in place might be far from helpful to prevent it or even soften the blow, not helped by an incomplete implementation of reforms decided upon after the Great Recession.

Inflation has, with nearly three percent, reached the highest level of the last six years, corporate debt is rising and with it the interest on that debt. In fact, global debt has reached a level three times higher than the global GDP and the Federal Reserve has already raised interest rates eight times since 2015. China is targeted by the US government’s trade war, as the dollar gets stronger it becomes increasingly difficult for emerging markets to repay their dollar debts (if there even is any chance of repayment at all). Pakistan requested a bail-out from the IMF, Turkey and Argentina are plunging head first into financial troubles, in 2018 the stock markets have recorded a decline due to US monetary policy and Brexit has left the UK vulnerable to a financial crisis. The list goes on.

And as if that was not enough, there are now ten banks that own more than fifty percent of the top hundred commercial banks’ assets. And the bigger the bank, the harder it falls when it falls. These ten biggest banks are so called ‘too-big-to-fail banks’. Their fall would send shudders through the economic world exceeding the seismographic scale, surpassing the extent of the Great Recession. And who will be left to clean up the rubble we have already seen in the aftermath of the 2008 crisis?

Economy and Populism

Unfortunately, financial troubles for banks, states, corporations and citizens are not the only consequence of the 2008 economic crisis. Not only has the crisis been linked to rise of suicide rates among the affected population, but to an increase of nationalist populism. In 2015 the Center for Economic Studies & Ifo Institute (CESifo) published a study showing that financial crises usually play into the hands of far-right parties, based on data of 100 financial crises and roughly 800 national elections in 20 democratic states since 1870.

Indeed, we can observe the surge of right-wing populism in the aftermath of the 2008 financial crisis. Since 2014, India has a nationalist government and recently Poland had to face repeated criticism by the European Union concerning their right-wing policies. Austria is governed by a coalition of the conservative party ÖVP and the right-wing populist FPÖ and only by a hair’s breadth elected Green Party politician Van der Bellen as president instead of right-wing candidate Hofer. Trump is the President of the United States, the right-wing populist Sweden Democrats (SD) have made it into parliament with almost 18% in the 2018 general elections. And while in German cities such as, perhaps most heard about, Chemnitz, the counter-protests are considerably bigger than the Nazi protests; the fact that these protests happened speaks for itself.

Tell Me Why

But why do financial crises lead to a surge of right-wing populism? One explanation might be that crises do not appear out of nowhere. Usually people made of flesh and blood can be found to have made mistakes or miscalculations leading to the crisis. In the case of the most recent financial crisis, that would be the political and economic elites. This opens the door for right-wing populists using a people versus elites rhetoric based on portraying identification with the disillusioned voter and a simple, familiarity-creating language, and promising stability, and law and order.

One might assume that elite-skeptic left-wing parties would gain votes as well. Yet they do not. In contrast to left-wing parties, right-wing politicians are more willing to use foreigners and minorities as their scapegoat, providing seemingly easy answers, and making use of and feeding people’s fears. The availability and skill to use television and social media to spread their ideology and creating polarisation plays into the hands of populist parties.

While voting patterns usually swing back to their pre-crisis status quo after about five years, that was not the case after 2008. The financial crash of 2008 was not only a great shock with effects exceeding their average duration, but it was merely one stumbling block in a ten years long series. And as if that was not enough, populists were able to utilise terrorist attacks and refugee flows to drive their wedge into society.

What Happens After the Next Crisis

As populist parties gain votes, government majorities decrease making it harder to make decisions and effective policies in parliament, and also making it more challenging to deal well with a possible future financial crisis. The consequences of the 2008 crisis could have been much worse, had it not been for international cooperation. The increase of right-wing populism, however, is likely to lead us on the path of protectionism, complicating international cooperation. And another financial crisis itself would be likely to trigger an even higher increase of far-right populism.

In an interview with the Economist philosopher Slavoj Žižek goes even further. He claims that “populism is simply a new way to imagine capitalism without its (…) socially disruptive effects” and explains modern populism as a reaction to experts’ expertise not working. As an example he gives the 2008 financial crisis that appeared to catch even experts off guard. This loss of trust in not only political elites but so-called experts has lead to the return of the “traditional authoritarian master”.

by Merle Emrich

Photo Credits

That was supposed to be going up, wasn’t it?, Rafael Matsunaga, CC BY 2.0

Occupy Wall Street -45, Esther Lee, CC BY 2.0

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For Whom the Bell Tolls

Vladislav Kaim — Sun, 07 Oct 2018 15:59:31 +0000

September 2018 marked the 10th anniversary of the collapse of Lehman Brothers that triggered the most destructive financial and economic crisis of the last 80 years. One of the most powerful US investment banks at the time collapsed in a handful of days. Meanwhile, not long before its filing for insolvency on September 14, leading credit rating agencies confirmed AAA rating for it. In fact, they attributed top rating to a walking corpse, whose assets were well overrated.

Digging a Grave for the Banking Corpse

Two people knew about the real state of affairs : Ben Bernanke -then head of Federal Reserve System – and Jimmie Dymon – CEO of JP Morgan – who was offered to take over the bank with so many problems. They preferred not to provoke panic but also had no option other than to bury this banking corpse. As Bernanke himself recognized, being already a fellow at Brookings Institute, saving Lehman Brothers on behalf of Fed either wouldn’t be legal or feasible economically.

However, a majority of the population didn’t bother to analyze what was happening to the investment bank. Living in an economic upturn that lasted without break since the end of recession in 2001, they were busy investing in main sources of wealth available to them – their houses. Two giants in the mortgage sphere – Fannie Mae and Freddie Mac – were creating new financial products that made houses available for those who in normal conditions would never allow a mortgage themselves. To cover the risks, they started issuing new bonds – credit default swaps (where seller assures the buyer that the latter will be paid in event of a default) and collateralized debt obligations (where in a event of the default holder of the obligation was given the collateral – house – as compensation). House prices were soaring. Not a single bank in the US collapsed in 2006-2007. Meanwhile, the most important “consumer” of new financial instruments was the bloating balance sheet of Lehman Brothers.

Professional market participants didn’t know where all this conjuncture would lead. Watching growth in all the most important indicators, they were unable to detect any ‘canaries in the wharf’, which led to a phenomenon called procyclical bias. Basically, banks and regulators were fooling themselves into thinking that the upturn in economic cycle would be here for long, and investment opportunities would be available for many. The choice of many was investing mainly in real estate. And no one bothered to ask themselves how they would repay the loans or how their bank would avoid collapse because of high exposure to new opaque bonds once house prices would start to fall.

The Great Recession

Everything changed on September 14, 2008 (in fact, though, first alarms were triggered in autumn of 2007). Six years of reckless credit expansion followed, which was an unstoppable destruction of wealth, called the Great Recession. Anger and anxiety of the people who realized they had been fooled about their future started spilling over the world, because the lies didn’t stop there.

On both parts of the Atlantic, states predictably were under significant pressure to save the ‘command heights’ of their economies i.e. main financial institutions and industrial giants. Special strain was put on Eurozone economies significantly dependant on foreign capital inflows and growth of construction industry – Ireland, Portugal, Spain, Italy and Greece. Their debt-to-GDP ratio skyrocketed, and the trust of markets eroded which was reflected onto higher yields . Soon the moment of reckoning came, and they had no one to appeal for an effective bailout rather than IMF, ECB and European Commission.

What followed remains the most egregious episode in the history of economic misinformation in the EU. In 2009, the then head of Greek Statistical Agency Andreas Georgiou refused to breach European best practices in the field by refusing to present inaccurate data of the Greek economy to the public and the European Commission. The politically appointed board of the institution insisted on submitting lies in order not to provoke fear of markets and the people. Georgiou was dismissed. The data was presented. However, the authorities were caught lying anyway.

Ironically enough, soon after trying to use manipulative data to show their (in fact, inexistent) strength, the Greek government used Georgiou’s accurate accounts to ask for a bailout from the Troika (ECB, IMF, EC) in 2012. Yet, in return, the statistician himself received a conviction for breach of trust, upheld by Greece’s highest court. This episode shocked the markets and European authorities, showing how shaky the foundation of trust in the Eurozone was in times of turmoil as in 2009-2012.

To the Grassroots of the Issue

More and more people are reconsidering their political allegiances in favor of populist parties because of their unresolved economic anxieties. What can we, then, make of the fact that governments are reporting with fanfare about exiting the recession and accelerating growth? Why is it not felt at the grassroots level? The most probable response to that, is that current metrics to present the state of national wellbeing are becoming more irrelevant and thus misinforming.

GDP was a great invention that in the time of the catastrophe of 1930s simplified economic discourse for the general public. But with growing economic and social inequality, and growing importance of factors other than material wellbeing it is time to reconsider. Stubbornly sticking to traditional toolkit of communication of economic data to the people will be met at least with indifference, if not with anger. Policymakers need to realize that just stating that the economy is growing is not enough if people don’t feel it in their pockets. Thus, publishing data on how the fruits of this growth are distributed among income quintiles would be prudent. As soon as scientists have more access to government data, they would be able to make the necessary conclusions and present them faster to the public.

In a post-GDP world, the indicators that would matter the most would be fairness of distribution, availability of jobs, progress in healthcare etc. People want to be sure that their children will live better lives than them, but this is not the case momentarily. Being fooled with false promises during both economic upturn, and Great Recession, they are perfectly right to demand new evidence, new measures and new accountability. The price of kicking the can down the road is the bell that tolls for democracy itself – plunging the world in a second iteration of ‘brown plague’ of neo-fascists born with disdain towards any evidence-based policy- and decision making.

By Vladislav Kaim

Photo Credits

Graph With Stacks of Coins, Ken Teegardin (CC BY-SA 2.0)

Historic Moment: the Fall of an Empire – 25 SEP. 2008, Alane Golden (CC BY-NC-ND 2.0)

Huge Euro Symbol – Frankfurt, Germany, Chris Goldberg, (CC BY-NC 2.0)

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