The market-panic of 9 August 2007 signalled the end of the neo-liberal era of financial excess. But the world is still paying for the consequences, says Ann Pettifor.
(This article was first published on 10 August 2009)
"A single day, 9 August 2007, will go down in history as ‘debtonation day' - the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation." I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation (see "Debtonation: how globalisation dies", 15 August 2009).
So it has proved.
On that fateful day, some American and German banks were unable to meet their short-term credit obligations, and France's BNP Paribas admitted it was facing difficulty in meeting some of its short-term mortgaging commitments. Bankers - most, until then, asleep at the wheel - woke up; realised the scale of debts on their counterparts' balance-sheets as well as their own; and in a panic, froze lending. Credit crunched. The conservative European Central Bank (ECB) and Washington's Federal Reserve pumped $90 billion into the system on 9 August 2007 alone - the first of many state-backed actions designed to protect the private financial sector from the ferocious discipline of the market's "invisible hand".
These desperate measures have been unable to avert the series of epic events in the world economy that have followed. These radiated out from the United States's sub-prime mortgage crisis and subsequent financial-institution collapses and bailouts of 2008: among them Bear Stearns, Morgan Stanley, Lehman Brothers, Fannie Mae and Freddie Mac. The impact has spread from the financial economy to the "real" one - damaging the lives of millions around the world through lost jobs, repossessed homes, food insecurity, health vulnerability, and many other social consequences.
The global cost
The stalling of financial liberalisation, one of the defining features of the form of globalisation that had taken root in leading world economies and institutions since the 1980s, is a major index of the new situation. Deregulated, cross-border lending flows have ground to a halt and may even be in reverse (see Peter Brierley, The UK Special Resolution Regime for failing banks in an international context [Bank of England, 28 July 2009]). The total financial losses on debt-securities and equities since the start of the crisis had by mid-March 2009 reached an astounding $25 trillion - nearly twice the United States's annual gross domestic product. These huge global losses have entailed a collapse in transnational lending and a severe shortage of capital in many of the world's poorer countries (as well as mid-level states such as Brazil and South Africa).
The globalisation project had been driven by easy, if often onerously expensive, access to internationally mobile capital. Deregulated credit, not trade, was at the centre of globalisation - even if an orgy of speculation in world trade was among the results. Many analysts and activists alike, misled into ignoring the role of finance in the global economy, got this order wrong. Their belief was that trade was the engine of the integration of national economies into the international economy. The anti-globalisation movement too became fixated on trade, neglecting the finance sector. As a result, many campaigners - like orthodox economists - were caught unawares by "debtonation-day".
Two years on the world remains in recession, albeit with considerable regional variations. The vast credit surpluses built up by countries such as China have created space for national-regeneration policies, but credit overall is no longer so easily available nor so mobile. Even after the extraordinary reductions in base rates by central banks, it is hard for households, businesses, individuals or many nation-states to access credit. Indeed amid rising bankruptcies and unemployment and falling wages and prices, fall, the cost of debt continues to increase. Bank of England data suggests that around 30% of medium-sized companies in Britain pay more than 9% above the base rate for loans. Many such companies remain exposed to the parasitic behaviour of banks desperate to clean up their balance-sheets.
Since 9 August, 2007, many banks in the newly-defined space of the Group of Twenty (G20) economies have been directly or effectively nationalised (in the latter case, having their losses and risks guaranteed by the state). Trillions of dollars have been conjured out of thin air - through a process known as "quantitative easing" (or "queasing") - to ensure the banks' survival. These bailouts have now been transformed into taxpayer liabilities on government balance-sheets; the Bank for International Settlements is among those noting how unprecedented is this scale of support.
The bankers that declined the state's - that is, citizens' and taxpayers' - generous bounty have still benefited from the protection afforded by publicly-owned central banks. Such traditional investment-banks as Goldman Sachs, American Express, CIT Group and the General Motors Acceptance Corporation successfully converted themselves into bank-holding companies in order to gain access to Federal Reserve protection, liquidity and funding.
Many are now repairing their balance-sheets by borrowing cheap from central banks - and lending dear. In the world of nationalised, protectionist finance, there is a relatively clear path to renewed riches for the likes of Goldman Sachs.
The shipping news
This is how globalisation dies. The phenomenon was, again, believed by many to have become a permanent feature of the world's economy. But the globalisation of the neo-liberal era always existed only ephemerally within a vastly extended global bubble of deregulated credit (as opposed to the post-1945 era of tightly regulated credit.) As the credit-bubble burst on 9 August 2007, so did globalisation.
The collapse of the credit-bubble was accompanied by that of world trade, which shows no sign of easing. A World Trade Organisation (WTO) report n July 2009 forecasts a 10% fall in trade in 2009, which would be the biggest since 1945. Nowhere has the decline in trade been felt more keenly than in the shipping industry. In 2009, ships are travelling for months at half-speed in order to make voyages last longer and hide their excess capacity, while around 500 container-ships and their thousands of crew-members are idly stationed in creeks and estuaries around the world. For the finance sector, writes Anthony Hilton, "shipping was just another asset class, a bet on the world economy and an income stream which the financial models said could only go one way" (see Anthony Hilton, "Shipping puts all our problems in the shade", Evening Standard, 29 July 2009).
Yet the pre-"debtonation-day" credit-fuelled shipbuilding boom ensures further over-capacity. The soft loans to the shipping industry by (for example) the Chinese and Korean governments ensure that new ships are about to slip out of the yards of their shipbuilders, adding 30%-50% to global capacity. This at a time when when half the existing world fleet is less than five years old, and falling prices for steel and scrap-metal mean that there is little incentive to send older ships to the break-yards.
The long shadow
The plight of the shipping industry offers a clue about the chances of revival in the world economy. Many economists and commentators place great faith in China's massive fiscal stimulus and its increasingly reckless expansion in bank-lendin, as the instrument of global recovery. But any near-term expectation that China could play this role is delusional (see Bill Powell, "Can China Save the World?", Time, 10 August 2009). The International Monetary Fund (IMF) estimates that even on the most optimistic assumptions, China's economy will in 2009 amount to around 9% of global GDP, whereas the United States and the European Union combined will contribute 52%. A sustained recovery in both these regions, rather than the efforts of a billion (and still mostly very much poorer) Chinese will be necessary to pull the global economy out of recession.
On 9 August 2007, the world changed. Everyone - individuals, households, corporations, banks, governments, international institutions - is living with the consequences. "Debtonation-day", the culmination of the economic failures of the previous generation as well as the opening to a new period of crisis, continues to cast its shadow.
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