Economic suicide - "The markets" are destroying society.
What are "The Markets?"
Since the massive financial crash of 2008/9, we have heard a lot about "The Markets" It appears that they demand massive austerity programmes in countries that succumbed to suicidal levels of public and private debt. Then, they fret about the lack of growth in economies that have cut back violently on employment and investment in order to reduce levels of debt. Such austerity means that it will be impossible to raise the levels of public finance to repay the debts. These cycles of destructive and manic behaviour should cause reflection on what the "Markets "really are. In simple terms, they are the collections of bond traders, investment bankers, institutional investors, private equity investors, Hedge Fund speculators and Ratings Agencies that got us into the financial mess in the first place. The ratings agencies have an important role. They purport to assess financial risk and a reduction in rating has a marked effect on borrowing costs for governments. Politicians, media and "The Markets" hang on their word. The fact that they totally missed the oncoming Bust and continued to rate suicidal risks by banks positively in 2007/8 - and are financially entwined with the banking system should give cause for concern about their judgments and ethical positions. This part of the system also needs radical reform.
The collective psychology of these people tends towards obsessive self-centredness, leading to bouts of grandiose self-congratulation, speculation, rampant greed and the pursuit of short-term gratification. "The Markets" have no conscience, regard themselves as beholden to nobody and will seek to buy or bully all who might get in the way of their quest for profit and huge rewards. (See The poisonous culture of Investment Banking - A psychologist's assessment in this website).
Cycles of Destruction
Since the 1980's the free world has experienced an uninterrupted period of free market economics. The deregulation of the London financial market and the repeal of the US Glass-Steagall Act, enabling the development of massive global integrated investment banks have been two important events on the road to ruin.
These events and the unchallenged primacy of market fundamentalism as the dominant economic dogma have led us to the world financial crisis that is causing untold individual misery and destruction of communities.
The Current Financial Cycle 2008 -??
This was fuelled by a massive growth in consumer spending in the US and UK particularly on housing and other goods. The boom was encouraged by politicians but particularly by large consumer products and financial corporations supported by huge advertising and a cheering media industry. These out of control behaviours were a particular feature of "Anglo-Saxon" markets. (In the UK for example, levels of consumer expenditure roared ahead, but industrial investment languished at a disastrously low level). A cruel twist was (and is) the fact that real wages for many people in the US and UK in particular are in secular decline as the portion of wealth going to capital has grown and that to labour (the general workforce) shrunk.
The effect of this was to cause massive increases in consumer debt in order to fulfil the insatiable demands for housing and consumer goods.
These booms were fed by the finance industries which indulged in orgies of irresponsible lending. The investment banks hid the oncoming disaster by creating obscure financial instruments that packaged risk so that nobody could understand where the landmines lay. (This was known in banking circles as "creativity") The banks were supported by politicians of all colours who encouraged the ideas that the boom could go on for ever and exercised no real scrutiny over the antics of the finance industries.
The massive explosions of credit, irresponsible lending and the growth of unsustainable levels of debt finally resulted in a massive financial crisis. Investment banks went bust to cries of horror and surprise from politicians, central bankers and most economists.
Faced by no real alternative, governments moved in and used the peoples' money to save the banks from bankruptcy. This massive injection of public cash into the banking system, the cause of the problem in the first place, increased levels of sovereign debt to high levels. At this point, step forward "The Markets", demanding security for lending to governments and raising lending rates for some countries to impossible levels . A ludicrous twist in this tale is that the high levels of lending to governments were caused by the original bail-out of the banks! But no matter, bankers rewarded themselves richly for this lending bonanza.
The Cycle of Destruction - Austerity is self-defeating
Now we are faced with a further bizarre and dangerous Cycle, which is drawing many economies towards a mire of long term decline and many people to hardship and misery.
The dynamics of this vortex of decline are simple. In order to placate the Markets, many countries are driving to reduce their debt levels at breakneck pace. This means massive cut-backs in public expenditure, employment and investment. The decline in economic activity so caused reduces public revenues, thus making it impossible to repay the debt. So the cycle of madness requires further reductions in public services and investment - and probably so on to perdition. Some right wing politicians are trying to persuade us that when the "virtuous" slashing of expenditure, employment and investment have really bitten, then the "Market" will step in and somehow the private sector will create a cycle of growth and investment. In Britain at least, the fact that the private sector, including banking, didn't do this at the top of the boom seems to escape the notice of these people.
A final twist in this story of madness is that "The Markets" are now alarmed at the lack of economic growth and are downgrading the prospects of the economies that followed their austerity programmes most enthusiastically.
The Big Con
The greatest tragedy of all is the lack of any real understanding of what is being done to them on the part of the general population. This is understandable because, on top of massive consumer advertising, they are fed a constant diet of propaganda from right wing politicians supported by a massive free market propaganda industry that constantly pumps out market fundamentalist dogma, blaming government for all the ills actually caused by the financial system and consumerism. See Our media have become mass producers of distortion and Spreading the True Faith in the IDEAS THAT DRIVE OUR FINANCIAL SYSTEM section, both in this website.
So the large parts of populace seem to believe the "Credit Card" analogy (which erroneously equates public finance and private debt), and support austerity measures that will cripple the economy in the belief that somewhere beyond the rainbow of destruction lies another crock of gold - and the good times will roll again.
Some sensible economists have been proposing other ways of getting out of the mess, and more commentators are beginning to stare over the austerity abyss and not like what they see. What is lacking is a convincing narrative from the centre and centre-left of the political spectrum; combining social justice with economic virility.
The alternative to plunging into the vortex of misery and decline will contain the following ingredients:
- Markedly slowing the rates of debt repayment, so that economies do not fall into self-destructive cycles of decline
- Radically increasing and directing investment in economically useful infrastructure, technology and environmental projects focused on increasing employment and creating a base for economic rebalancing and growth. Such expenditure will also increase employment and public revenues rather than the opposite
- Focusing tax relief on the less well-off, who will spend the extra money, thus increasing economic activity. Tax reductions for the very rich do not do this, as some of the very rich are pointing out to their credit.
- Acting vigorously to reduce massive and growing inequality, which jeopardises public health, education and fuels social unrest.
- Seriously reforming the banking and finance industries, reducing the size of the massively over-powerful investment banks and creating distinctly separate retail banks which will receive savings and extend finance to individuals and small businesses.
- Encouraging, with governmental support, the creation of many more diverse financial and banking institutions with the focus on mutual, co-operative and local institutions.
- Tackling the evil of commodity speculation, which destroys smaller producers in vulnerable countries and destabilises prices of essential foods and fuels.
- Creating sovereign investment institutions in countries like Britain that signally lack them. The experiences of countries like Germany, the Scandinavian nations, South Korea and even China can serve as an example of how nascent and innovative technologies need directed investment. It is strange how governments have become reviled by market fundamentalists as midwives of economic growth. The development of the economies of America, Britain and Japan, as well as many other countries, happened originally because of constructive partnerships between government and entrepreneurs. Fact is; partnership, not solely free-market or central direction is what has been proven to work. And let's keep party politicians out of it!
- Last, but not least, serious international collaboration to reduce the economic impact of "The Markets". There needs to be a redirection of the influence of such institutions as the IMF away from promoting market fundamentalist policies and a stringent regime of discouragement of speculation and economically useless financial activity that damages the fabric of Society. Finance needs to be harnessed for the good of people and communities.