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.
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.