Ten years after the Great Recession, nothing’s changed

A decade later, the crisis that threatened to take down the global financial order seems like a bad dream. Now it’s business as usual.

image: Alt-M

In Great Recession, banking institutions creaked and groaned under the weight of flawed investments. Mohamed El-Erian, CEO of a large U.S. investment management firm phoned his wife and asked her to withdraw as much money as she could from an ATM because he feared the banks wouldn’t open the next day. A hedge fund manager sent an email to a journalist during the meltdown saying: “It feels a little like the end of the world.”

But the problems have been fixed, haven’t they?  Yohann Koshy, editor for New Internationalist magazine, is not so sure:

“The world almost did end. And everything stayed the same. Time was borrowed in the form of nationalizations, cash injections and money-printing: space for the financial sector to breathe. But the air is getting thin again (July/August, 2018).”

How we got here.

We went from a stable financial period -one of the longest in centuries- to one designed to fail. The post-war era from the mid-1940s to the early 1970s brought prosperity to everyone: workers and employers alike.

This stable economic period was engineered by the Bretton Woods agreement in 1944 in which a system of monetary rules were applied to the United States, Canada, Western Europe, Australia, and Japan. A key feature of the agreement was a stable U.S. dollar to which many global currencies were pegged. The value of the dollar was linked to a quantity of gold held at Fort Knox.

“This ‘gold standard’ forced discipline on the financial system: it was much harder for banks to create credit out of thin air,” says Koshy.

Under Bretton Woods, money was tied to the value of gold and economies were tied to the goods they manufactured. The U.S., already tooled to produce military equipment, switched to produce the world’s goods.

The U.S. dollar became so popular as a global currency that not enough dollars could be printed. President Nixon ended the gold standard in 1971.

This ushered in the era of financialization. With the dollar having no tangible value, economies also became more abstract. Wall Street made money from the production of goods in other countries.

A recession was avoided in the 2000s by the lowering of interest rates. Financial institutions were awash in money and they invested it in exotic and dubious things like derivatives, credit default swaps and collateralized debt obligations. And banks gave mortgages to people to buy houses that they couldn’t afford.

As the world staggered towards financial calamity in 2008, governments injected massive amounts of money into banks to cover their bad investments. Bailouts were given to the very perpetrators of the dubious investments. The chair of Goldman Saks announced that the biggest beneficiary was “Wall Street itself.”

Nothing has been fixed. What will happen the next time the system teeters towards calamity? “Whatever the answer,” says Koshy, “the blame must not be laid at the feet of the migrants, workers and the marginalized, but on those enabling, creating and profiting from a rapacious and crisis-prone financial system.”

As the air gets a little thin in the stratospheric world of finance, we can only hope that the wizards of exotic investments remember 2008.

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The financialized self

We have become entrepreneurs in the era of globalization.

Each of us is a little business, left to navigate the risky world of investments and the stock market. As a consequence, the role that the state plays in the welfare of citizens has been reduced.

    image: Proxim Group

Now retirement depends on how well we strategize financial speculations. It used to be that pensions were determined by salary and years of service, now it’s risk management.

As financialized subjects, we must consider economic cost–benefit calculations as the natural criteria for evaluating life choices.

The ethos of the financialized self is one of expertise in planning and managing investments. The study of finance has become the key to success. Kyle Liao and Jonah Butovsky explain:

“In viewing their actions through the prism of financial literacy, the individual (entrepreneur) becomes personally and solely responsible for the day-to-day ‘business’ of their lives (CCPA Monitor, Nov/Dec, 2107).”

We are exposed to the machinations of capitalism. If we aren’t skilled in managing our finances, it’s not the fault of capitalism -it’s ours for not being shrewd investors. And when we seek financial advice, it’s from advisors who are also trying to claw their way to the top. We become keys to their success.

TV shows reflect the financialized self. They become grim lessons of what happens when you are not a shrewd manager. Money Moron and Til Debt Do Us Part profile the financial mistakes of ordinary families.

In CBC’s Dragon’s Den, aspiring entrepreneurs pitch business and investment ideas to a panel of venture capitalists (“Dragons”) in the hope of securing business financing and partnerships. U.S., contestants competed for a one-year $250,000 contract to run one of Donald Trump’s companies in The Apprentice. Trump’s pretence as an astute entrepreneur propelled him to the presidency.

The message in both shows is obvious: We, the clever people who have made it to the top, will judge you poor schmucks and your pathetic ideas. The format reminds me of the movie They Shoot Horses Don’t They? in which the lives of a group of contestants intertwine in an inhumanely gruelling dance marathon that is rigged for all to fail.

Of course, the rich are not always that clever. In the Great Recession of 2008, the geniuses who invented dubious investments brought the world to the brink of financial collapse. We, the reluctant citizen entrepreneurs, paid the price. The TSX lost 35 per cent of its value and it took five years just to get back where we started.

With interest rates so low on savings, and with wages that haven’t kept up with inflation, we have little option but to compete in the grim dance of capitalism. The FIRE industries (finance, insurance, and real estate) play the tunes.

Films, biographies, novels, television shows and online content about finance and financiers (lionized or demonized) are more popular than ever.

The inescapable logic of finance shapes public policy and social institutions, from hospitals and schools to scientific research labs, where the prime dictum is ‘risk management,’ ‘return on investment,’ and ‘market efficiency.’ The benefits of pure scientific research are abandoned.

The evolution into financialized citizens has had a profound effect on society. It reduces cooperation and treats everyone as competitors in the marketplace.

Basic income in the new world order

A basic income has been promoted from the left and right for years but nothing has come of it. Maybe new leaders and a new world order will change that.

  image: Steemit.com

Sometimes called a guaranteed annual income, it has been supported by progressives and neoliberals alike. Progressives argue that a basic income would help reduce poverty. Neoliberals say it decreases government bureaucracy by combining a number of social services like welfare, child benefits, employment insurance, and Old Age Security into one.

What politicians have failed to do, the leaders of technology may accomplish. They clearly see the loss of jobs due to automation. Innovators such Elon Musk, CEO of Tesla and Space X, says:

“There is a pretty good chance we end up with a universal basic income, or something like that, due to automation,” Musk told CNBC in an interview last year.

Facebook’s Mark Zuckerberg sees it differently. A vital society depends on everyone having the opportunity to create new ideas. That’s why billionaires like him should pay for a financial safety net that allows everyone to find their purpose.

“The greatest successes come from having the freedom to fail,” said Zuckerberg. “Now it’s our time to define a new social contract for our generation. We should explore ideas like universal basic income to give everyone a cushion to try new things.”

Zuckerberg is on to something when he suggests a new social contract. The failure to implement a basic income takes place in an old world order that values industrial jobs and resource extraction above those of human interaction. Industrial jobs have been reduced and more automation is on the way. Resource extraction is pushing the limits of what the earth can deliver, and pushing the conditions under which humans can live.

Jobs that involve human interaction, such as child and elder care workers, have been low-paying. What kind of crazy world order invented a system where monotonous, often dangerous, planet-threatening, industrial jobs pay more than jobs that nurture our future in children, and care for the frail and elderly?

A new world order would include Zuckerberg’s transfer to the poor through a new social contract and much more. Former Greek finance minister Yanis Varoufakis envisions an end to globalization and the start of a new era in which a basic income would be part:

“And we need a universal basic dividend that would be administered by the New Bretton Woods institutions and funded by a percentage of big tech shares deposited in a world wealth fund.”

By Bretton Woods Institutions, he means the World Bank and the International Monetary Fund. They helped rebuild the shattered postwar economy and to promote international economic cooperation.

Varoufakis is leading the post-globalization era in Europe with The Democracy in Europe Movement 2025. President Trump (don’t laugh) is leading the post-globalization era in the U.S.

Trump’s grip on reality may be somewhat tenuous but he does understand turmoil; he thrives on the thrill of the circus. His constituents have had it up to here with the existing order. Trump is tearing globalization apart with a world tariff-war.

These are exciting times. Where politicians failed, maybe tech leaders, global visionaries and clowns will excel.

 

Blockchain could revolutionize global banking

The era of globalization is drawing to a close. Evidence of that has been made clear by President Trump’s withdrawal from global affairs, his attempt to build an economic and physical wall around the United States. It’s a clumsy attempt to express the genuine concerns of Americans who have been left out of the prosperity reaped by a few.

     image: Urban Forex

Two billion people around the world have no access banking. They are unable to make loans to start small businesses; they have no credit, and no means of sending or receiving money.

And the rest of us have is rigged banking system. We are nickeled and dimed in every banking transaction and pay exorbitant interest rates on credit cards.

We are told that a healthy banking system is fundamental to a healthy economy. Yeah, right. Banking funnels money into the pockets of the rich who have so much that it just lays around in piles, uninvested, while worthwhile social programs and enterprises go threadbare.

When U.S. banks failed during the Great Recession of 2008 -because of bad business practices- they were bailed out with taxpayer’s dollars. They were rewarded for bad investments while homeowners who couldn’t pay bank-approved mortgages were thrown out on the street.

Not only is there an asymmetrical relationship between banks and clients in terms of wealth distribution, there is also an imbalance of transparency. While banks know exquisite details about us, we know practically nothing about them. Social scientist Shoshana Zuboff calls this one-sided, extractive interaction “surveillance capitalism.”

The technology of blockchain holds promise to restore balance and eliminate excessive fees through use of a universal digital currency, or cryptocurrency.

The first digital currency, Bitcoin, leaves people wondering. It has a reputation of being highly speculative.  But there are many versions of cryptocurrencies that would work and many possible versions of blockchains –the digital ledger which records transactions.

The advantages of cryptocurrencies over banking are that your money is held in a digital wallet and easily accessed; credit card payments are quicker and less expensive; you remain relatively anonymous (pseudonymous) with minimal information shared; you are the master of your money, there are no banks or boundaries to the flow of money.

If it all seems to be too good to be true, there are hurdles. One is just who controls access to your digital money. If banks control applications that access cryptocurrency wallets, we can expect business as usual. Cultural anthropologist Natalie Smolenski explains:

“This is the crux of blockchain’s catch-22: the public won’t use blockchains without user-friendly applications. But user-friendly applications often achieve that ease through centralization, which replicates the conditions of control that blockchains sought to circumvent (Scientific American, January, 2018)”

A new era would bring public control of cryptocurrencies. As Bitcoins have demonstrated, we already have a blockchain that is open-source and maintained by a global network of volunteer core developers. We have a network of individually-owned computers that process the indelible transactions –a process called “bitcoin mining.”

“Creating digital identities whose existence is independent from governments and corporations is the next grand challenge that blockchains both pose and could help solve,” says Smolenski.

With the dawn of the era of a “Universal New Deal,” cryptocurrencies could redistribute wealth and put money in the hands of those who will spend it.

The titans of technology have feet of clay

Technology seems unstoppable. The accumulated wealth of the Big Five: Apple, Alphabet (Google’s parent company), Microsoft, Facebook and Amazon, have a combined value of $4 trillion. That’s more than twice Canada’s annual GDP.

     image: Minneapolis/St.Paul Business Journal

Wall Street also looked unstoppable before the crash of 2008. Cryptic investments made amazing returns but finance wizardry also has feet of clay. Conor Sen, business columnist for Bloomberg Views, summarizes that vulnerability:

“Markets became irrational about how profitable the financial sector could become relative to the underlying economy, and in response to these market pressures, finance came up with increasingly elaborate schemes to make money that weren’t sustainable (Globe and Mail).”

Facebook and Google have the advertising world wrapped up. The clever duo don’t have to hire reporters to dig up news because users generate their own content.  Facebook and Google and benefit in three ways: by encouraging users to generate content, collecting detailed profiles of users, and then selling advertisements to those very users. Users happily post pictures of adorable kittens, videos, inflammatory and sometimes interesting comments (but not much actual news).

While Facebook and Google couldn’t care less about the loss of newspapers and other news sources, they should be worried about the financial health of their advertisers. Companies can afford to advertise only because they are viable. Amazon is profitable because third-party vendors choose to sell on Amazon.

“In other words,” says Sen, “for the most part, the big five tech companies exist at their current size and scale only because they serve a larger underlying economy of profitable companies.”

Tech giants exist in an economic ecosystem. There has to be a balance between the top predators and the health of the ecosystem which they feed. There’s going to be trouble for the big fish once the little fish stop feeding them.

Tech giants don’t just suck only advertising revenue from traditional sources. They also provide services that didn’t exist when newspapers ruled; like the cloud computing services provided by Amazon, Google and Microsoft. Cloud computing also depends on a viable economy.

The titans of technology could harm the very businesses they depend on. For example, Blue Apron, a meal-delivery company, has been a prolific online advertiser. What if Amazon were to establish a company and put Blue Apron out of business? It’s not inconceivable. Last year, Amazon bought Whole Foods for $17 billion and even the world’s biggest retailer Walmart took notice. Target is cutting advertising to stay in the game.

Fossil Group has been struggling lately. Sales of their watch have been dropping, perhaps because of the popularity of Apple Watch. If Fossil Group starts to cut back on advertising, Facebook and Google would lose ad revenue. Amazon would lose sales of the Fossil watch as well.

Owning a newspaper used to be a licence to print money. The marriage of news and advertising seemed solid. Now readers get “news” from the internet. Selling advertising on a medium where the content is generated by the target audience seems like a sure thing.

Amazon, Google and Facebook have a parasitic relationship to the economy. Other than advertising and marketing the products of others, their contribution to the economy is minimal.

The future of blockchain mining in B.C.

Blockchain mines look nothing like copper mines. They are banks of computer that toil away at solving complex calculations. Blockchain is the digital ledger used by many cryptocurrencies such as Bitcoin. Because the computers generate heat, they could be used to warm the greenhouses to grow the tonnes of marijuana needed for Canada’s budding legal market.

  image: coindesk.com

Blockchain is a revolutionary way of tracking secure, indelible transactions of any sort not just cryptocurrencies. Experts say it will revolutionize businesses in every field. Manav Gupta, chief technology officer of IBM Cloud Canada, is enthusiastic:

“We view blockchain as having the potential to change all of technological interactions the same way that the internet changed communication in the nineties (Walrus magazine, Jan/Feb, 2018).”

Where the value of Bitcoins is highly speculative, the value of blockchain is solid. Unfortunately, that doesn’t stop blockchain from being caught up in a goldrush mentality. Irrational investors are madly rushing into some dodgy speculations. Convinced that anything with “blockchain” in the title is “the next big thing,” investors threw $2 billion into blockchain startups worldwide. One company saw shares rise 394 per cent by just adding “blockchain” to its name.

Blockchain can be used to secure any vital records such as medical files, business deals, legal agreements, tracing shipping containers, farm-to-market food security; even professional and academic records which are now open to fraud. Walmart and Nestle have already invested in blockchain.

Bitcoin miners loan their computers to solve the complex blockchain calculations required for each transaction. Miners are paid in Bitcoins in return. Drew Taylor has a Bitcoin mining operation in his Montreal house. He earns about $3,000 a month and pays additional costs of $200 for electricity. The computers generate a lot of heat. “But essentially it is free heat for at least one room,” he told CBC Radio’s The Current.

The amount of power used for each Bitcoin transaction is shocking high. Alex de Vries monitors the power used in Bitcoin mining. Just one transaction uses as much energy as the average B.C. household uses in 13 days. That’s 300 kilowatt-hours for each transaction. Researchers are looking for ways to reduce the power consumption.

The best place to locate Bitcoin mines is in places where the electricity is cheap. Montreal has relatively cheap hydroelectricity. Iceland has a large mine because the majority of their energy comes from geothermal and steam. Unfortunately, not all cheap energy is as green. China and India do most of the mining where the electricity is cheap but produced by burning dirty coal.

Once B.C.’s Site C dam is completed we will have lots of cheap, surplus electricity that could be put to use in blockchain mining.

Blockchain mining is comparable to copper mining because both use a lot of electricity. Highland Valley mine near Kamloops uses as much electricity as 60,000 homes, about twice what Kamloops uses.

An advantage of blockchain mining is that a secondary industry could use the waste heat. Marijuana greenhouses could use the computers as heaters so that not one kilowatt hour would be wasted. In addition, blockchain mines could be located near the dam to avoid the cost of transmitting electricity.

The digital mine would employ workers close to home in small towns in B.C. Instead of using our dam power to run LNG compressors, we could put people to work mining digital dollars and growing marijuana for Canadian’s burgeoning market.

Minimum wage hike is boon to economy

Higher minimum wages are good for the economy but you would never know it from Ontario’s experience. Their hike to $14 dollars per hour has taken an ugly turn. Seattle’s experience was quite different.

image: Toronto Star

The upset in Ontario is centered on Tim Horton franchises. Cuts to benefits have triggered public outcry in support of employees. Demonstrations took place across Canada at Tim Horton shops last Friday organized by Leadnow.org.

The franchisees, themselves, have been abused by their owners: Brazil-based Restaurant Brands International Inc. RBI has been squeezing franchisees for more profits.

Franchisees in Canada have joined their American counterparts in suing the parent company. The Canadians formed the Great White North Franchisee Association and in their statement of claim, they complained:

“Since the time of the corporate takeover of Tim Hortons, the relationship between Tim Hortons and its franchisees has become more adversarial than amicable.”

It’s a toxic business plan that has left franchisees, employees, and customers with a bad taste in their mouth that a double-double won’t sweeten. The flap is damaging the iconic Tim Hortons brand.

Seattle’s experience was quite different. Employers took the wage increase to $15 dollars an hour as a challenge. Toronto-based Lending Loop surveyed of Seattle businesses. Their CEO Cato Pastoll explained: “It kind of forced people to make some just general good business decisions (Globe and Mail, October, 2017).”

Low wages discourage productivity because cheap labour can make inefficient businesses profitable. Higher productivity involves streamlining operations and introducing technology. It’s notable that these measures are changes that employers make -low productivity is not the result of “lazy” employees.

One Seattle furniture store eliminated low-wage entry level positions and empowered employees to become more productive. One employee was so motivated that he contacted condo owners and offered deals on furniture for new tenants. The store owner was pleased with the boost in morale: “Find out what makes your staff excited and empower them to be part of it with you,”

“It’s really easy to become angry and start acting in injudicious ways,” said an owner of a nail salon in Port Angeles, Washington. He and his wife could have cut back on staff, or turned them into commissioned workers, but they streamlined operations instead. The time taken for each procedure was standardized which meant that more clients could be booked. An automated time-keeping system eliminated the time to manually fill out time sheets. Under different circumstances, staff might have resented seeing more clients a day but with an increase in wages, they were more willing to focus on work.

Contrary to the calamity predicted by some doubtful business owners, higher minimum wages don’t result in more unemployment. Studies done by the Organization for Economic Co-operation and Development show those countries with higher wages shift employment from formerly low wage sectors such restaurants to higher wage areas such as technology.

The owners of Tim Hortons could improve profits though the introduction of technology.  I notice that McDonalds has automated kiosks where you can both order and pay for your meal.

Higher minimum wages are a boon to the economy because businesses save costs by keeping experienced workers and reducing training costs; productivity and profit margins are improved; and local economies are enhanced with worker’s new spending power.