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.

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.