International seminar: A coherent civil society response to the global financial crisis

Bretton Woods Project, October 30, 2008

On 28 October, more than 40 representatives of NGOs, development organisations, labour unions, think tanks, academia and the media came together in London to discuss how to take forward demands for a fundamental redesign of the international financial system. The participants included not only British organisations but also others from around Europe.

The main themes for the day were about creating a system that works to improve people’s live, reduce poverty, and protect the environment. The meeting follows calls from European leaders Nicholas Sarkozy, Gordon Brown, and Angela Merkel for an international summit on the crisis. Those calls have been seized upon by US president George Bush to organise a meeting of the G-20 leaders in Washington DC on 15 November. Bush ignored an offer from UN secretary-general Ban Ki-Moon for the United Nations to host the summit in New York.

The seminar started with the finding that the currently proposed international summit is too exclusive if a new financial architecture is going to be fashioned. A statement on the global summit was presented, demanding that the process be much more inclusive not only of developing countries, but also civil society and other external stakeholders. That statement, signed by more than 630 civil society organisations around the world and launched at the end of the day on the 28th, demanded: “a major international conference convened by the UN to review the international financial and monetary architecture.”

It also called for “full use to be made of the new UN task force on the global financial system, the upcoming UN Financing for Development meeting and other UN instances to begin preparing such a global meeting.”

Further presentations were made by researchers on the causes and consequences of the crisis. While the proximate causes were easily recognisable as the new lending instruments, lax regulation, excessive use of leverage and low interest rates; the academics indentified two fundamental causes: (1) the financialisation of the economy; and (2) the inequality that has been generated by a rising share of income going to capital rather than labour.

They identified the breaking of the link between corporations and banks as a key factor. As corporations accessed finance on capital markets as opposed to through banks, individuals were drawn into deeper relationships with the financial system. The increasing indebtedness of households, partly caused by a withdrawal of public service, served the banks need for a new market.

On top of this, further detail was given on the de-regulation that has occurred as countries raced to compete for financial capital. A key component has been tax havens which punched both regulatory and transparency holes in the international financial system. They have been fundamental to the subprime lending crisis in the US, as the securitised loans are held in special purpose vehicles located in tax havens. One element of a reformed system must be reduced complexity with more transparency and return to trust in the system.

Another international angle has been the liberalisation of capital flows and how this has fuelled the risks being taken in financial markets in the rich world, as well as created a contagion mechanism for transmitting instability to developing countries. While the IMF has been instrumental, this has also been pushed by the World Bank and especially its private sector arm the International Finance Corporation (IFC). Through a programme of research, policy advice and lending, the Bank and the IFC have pushed open banking markets in developing countries and brought increased foreign bank presence.

With these analyses of the problem in mind, participants turned in the afternoon session to discussion how civil society should respond. It was clear that hundreds if not thousands of proposals would be put forwarded, discussed, and debated over the course of any reform of the system; but the people in the room stressed again and again the need to fundamentally rethink the mechanisms by which we govern the international financial system.

Much stress was placed on not letting the institutions that created this crisis, simply try to fix it. The break we are seeing and opportunity for reform should push us to throw out the old models of governance and the old institutions which have failed in favour of new ones which are more democratically controlled and more accountable. The participants felt that we must not let the elites and those who have benefit from the failed system save it in order to save their own position within it.

One key conclusion was that there is now a real alignment of the interests of working people and ordinary citizens in the rich countries with the interests of those in poor and developing countries. Both need a root and branch reform of the international financial system that is people-centred and development-friendly.

In response to the impact on the real economy in the developed world, social mobilisation must focus on developing a new economic paradigm and a vision of a system of global social democracy. The conclusion was a need for much stronger social movements, and more activism, but that this must happen locally and nationally and also be linked globally to movements in the South and in other rich countries for a more just and equitable system.

There was discussion of numerous ideas, including whether there could be a single international financial regulatory institution, an independent institution to deal with problems of debt, the increasing financialisation of the environment and how climate change must be incorporated into the debate. The participants agreed that cooperation must increase across different kinds of movements, sectors, and organisations in order to better develop strategies and tactics. And most importantly that we must seize this opportunity and commit our time and resources to pushing the reforms we demand.

We give links here to a limited selection of video from the full-day long seminar. If you want the full unedited video of the full day of discussions please contact Zoe Young.

Jesse Griffiths introduces BWP seminar on the Financial Crisis

Welcome to a world without rules: How tax havens and secrecy contributed to the financial crisis , John Christensen, Tax Justice Network

The Financial Crisis Of 2007-8: Why And What Next?, Costas Lapavitsas, SOAS

On the Market and Policy Origins of the International Financial Crisis, Paulo dos Santos, SOAS

Financial Crisis Impacts, Sargon Nissan, new economics foundation

Discussion and questions (not yet available)

Please find below links to the presentations:

• Welcome to a world without rules: How tax havens and secrecy contributed to the financial crisis , John Christensen, Tax Justice Network
• The Financial Crisis Of 2007-8: Why And What Next?, Costas Lapavitsas, SOAS
• On the Market and Policy Origins of the International Financial Crisis, Paulo dos Santos, SOAS
• Financial Crisis Impacts, Sargon Nissan, new economics foundation

1. Bretton Woods II conference FAQ (Eurodad and Halifax Initiative)
2. Statement on the global summit
3. ATTAC statement on the financial crisis
4. Casinocrash.org statement on the financial crisis
5. Dangerous derivatives – a 2 page briefing (Eurodad)
6. Food speculation – a 2 page briefing (WEED)
7. A European agenda on capital flight – a 2 page briefing (CRBM and Eurodad)
8. A (Crumbling) Wall of Money Financial Bricolage, Derivatives and Power (Cornerhouse)
9. Taking it Private: Consequences of the Global Growth of Private Equity (Cornerhouse)
10. Alternative Investments and Secrecy Jurisdictions: Environmental, Social and Governance Issues in the Context of the Financial Crisis (Cornerhouse)
11. Addressing development’s black hole: Regulating capital flight (Eurodad)

The Global Economic Crisis: An Historic Opportunity for Transformation

Preamble

Taking advantage of the opportunity of so many people from movements gathering in Beijing during the Asia-Europe People’s Forum, the Transnational Institute and Focus on the Global South convened informal nightly meetings between 13 and 15 October 2008. We took stock of the meaning of the unfolding global economic crisis and the opportunity it presents for us to put into the public domain some of the inspiring and feasible alternatives many of us have been working on for decades. This statement represents the collective outcome of our Beijing nights. We, the initial signatories, mean this to be a contribution towards efforts to formulate proposals around which our movements can organise as the basis for a radically different kind of political and economic order.

Please sign on to this statement at http://www.casinocrash.org

The Crisis

The global financial system is unravelling at great speed. This is happening in the midst of a multiplicity of crises in relation to food, climate and energy. It severely weakens the power of the US and the EU, and the global institutions they dominate, particularly the International Monetary Fund, the World Bank and the World Trade Organisation. Not only is the legitimacy of the neo-liberal paradigm in question, but the very future of capitalism itself.

Such is the chaos in the global financial system that Northern governments have resorted to measures progressive movements have advocated for years, such as nationalisation of banks.  These moves are intended, however, as short-term stabilisation measures and once the storm clears, they are likely to return the banks to the private sector. We have a short window of opportunity to mobilise so that they are not.

The challenge and the opportunity

We are entering uncharted terrain with this conjuncture of profound crises – the fall out from the financial crisis will be severe. People are being thrown into a deep sense of insecurity; misery and hardship will increase for many poorer people everywhere. We should not cede this moment to fascist, right wing populist, xenophobic groups, who will surely try to take advantage of people’s fear and anger for reactionary ends. 

Powerful movements against neo-liberalism have been built over many decades. This will grow as critical coverage of the crisis enlightens more people, who are already angry at public funds being diverted to pay for problems they are not responsible for creating, and already concerned about the ecological crisis and rising prices – especially of food and energy. The movements will grow further as recession starts to bite and economies start sinking into depression. 

There is a new openness to alternatives. To capture people’s attention and support, they must be practical and immediately feasible. We have convincing alternatives that are already underway, and we have many other good ideas attempted in the past, but defeated. Our alternatives put the well-being of people and the planet at their centre. For this, democratic control over financial and economic institutions are required. This is the “red thread” connecting up the proposals presented below.

Proposals for debate, elaboration and action

Finance
•    Introduce full-scale socialisation of banks, not just nationalisation of bad assets.
•    Create people-based banking institutions and strengthen existing popular forms of lending based on mutuality and solidarity.
•    Institutionalise full transparency within the financial system through the opening of the books to the public, to be facilitated by citizen and worker organisations.
•    Introduce parliamentary and citizens’ oversight of the existing banking system
•    Apply social ( including conditions of  labour) and environmental criteria to all lending, including for business purposes 
•    Prioritise lending, at minimum rates of interest, to meet social and environmental needs and to expand the already growing social economy 
•    Overhaul central banks in line with democratically determined social, environmental and expansionary (to counter the recession) objectives, and make them publicly accountable institutions.
•    Safeguard migrant remittances to their families and introduce legislation to restrict charges and taxes on transfers

Taxation
•    Close all tax havens
•    End tax breaks for fossil fuel and nuclear energy companies
•    Apply stringent progressive tax systems
•    Introduce a global taxation system to prevent transfer pricing and tax evasion
•    Introduce a levy on nationalised bank profits with which to establish citizen investment funds (see below)
•    Impose stringent progressive carbon taxes on those with the biggest carbon footprints
•    Adopt controls, such as Tobin taxes, on the movements of speculative capital
•    Re-introduce tariffs and duties on imports of luxury goods and other goods already produced locally as a means of increasing the state’s fiscal base, as well as a means to support local production and thereby reduce carbon emissions globally

Public Spending and Investment
•    Radically reduce military spending
•    Redirect government spending from bailing out bankers to guaranteeing basic incomes and social security, and providing universally accessible basic social services such as housing, water, electricity, health, education, child care, and access to the internet and other public communications facilities.
•    Use citizen funds (see above) to support very poor communities
•    Ensure that people at risk of losing their homes due to defaults on mortgages caused by the crisis are offered renegotiated terms of payment
•    Stop privatisations of public services
•    Establish public enterprises under the control of parliaments, local communities and/or workers to increase employment
•    Improve the performance of public enterprises through democratizing management – encourage public service managers, staff, unions and consumer organisations to collaborate to this end
•    Introduce participatory budgeting over public finances at all feasible levels 
•    Invest massively in improved energy efficiency, low carbon emitting public transport, renewable energy and environmental repair 
•    Control or subsidise the prices of basic commodities

International Trade and Finance
•    Introduce a permanent global ban on short-selling of stock and shares 
•    Ban on trade in derivatives
•    Ban all speculation on staple food commodities
•    Cancel the debt of all developing countries – debt is mounting as the crisis causes the value of Southern currencies to fall
•    Support the United Nations call to be involved in discussions about how the to resolve the crisis, which is going to have a much bigger impact on Southern economies than is currently being acknowledged 
•    Phase out the World Bank, International Monetary Fund, and World Trade Organisation
•    Phase out the US dollar as the international reserve currency
•    Establish a people’s inquiry into the mechanisms necessary for a just international monetary system.
•    Ensure aid transfers do not fall as a result of the crisis
•    Abolish tied aid
•    Abolish neo-liberal aid conditionalities
•    Phase out the paradigm of export-led development, and refocus sustainable development on production for the local and regional market
•    Introduce incentives for products produced for sale closest to the local market
•    Cancel all negotiations for bilateral free trade and economic partnership agreements
•    Promote regional economic co-operation arrangements, such as UNASUR, the Bolivarian Alternative for the Americas (ALBA), the Trade Treaty of the Peoples and others, that encourage genuine development and an end to poverty.

Environment
•    Introduce a global system of compensation for countries which do not exploit fossil fuel reserves in the global interests of limiting effects on the climate, such as Ecuador has proposed.
•    Pay reparations to Southern countries for the ecological destruction wrought by the North to assist peoples of the South to deal with climate change and other environmental crises.
•    Strictly implement the “precautionary principle” of the UN Declaration on the Right to Development as a condition for all developmental and environmental projects.
•    End lending for projects under the Kyoto Protocol’s “Clean Development Mechanism” that are environmentally destructive, such as monoculture plantations of eucalyptus, soya and palm oil.
•    Stop the development of carbon trading and other environmentally counter-productive techno-fixes, such as carbon capture and sequestration, agrofuels, nuclear power and ‘clean coal’ technology.
•    Adopt strategies to radically reduce consumption in the rich countries, while promoting sustainable development in poorer countries
•    Introduce democratic management of all international funding mechanisms for climate change mitigation, with strong participation from Southern countries and civil society.

Agriculture and Industry
•    Phase out the pernicious paradigm of industry-led development, where the rural sector is squeezed to provide the resources necessary to support industrialisation and urbanisation
•    Promote agricultural strategies aimed at achieving food security, food sovereignty and sustainable farming.
•    Promote land reforms and other measures which support small holder agriculture and sustain peasant and indigenous communities
•    Stop the spread of socially and environmentally destructive mono-cultural enterprises.
•    Stop labour law reforms aimed at extending hours of work and making it easier for employers to fire or retrench workers
•    Secure jobs through outlawing precarious low paid work
•    Guarantee equal pay for equal work for women – as a basic principle and to help counter the coming recession by increasing workers’ capacity to consume.
•    Protect the rights of migrant workers in the event of job losses, ensuring their safe return to and reintegration into their home countries. For those who cannot return, there should be no forced return, their security should be guaranteed, and they should be provided with employment or a basic minimum income.

Conclusion
These are all practical, common sense proposals. Some are initiatives already underway and demonstrably feasible. Their successes need to be publicised and popularised so as to inspire reproduction. Others are unlikely to be implemented on their objective merits alone. Political will is required. By implication, therefore, every proposal is a call to action. 

We have written what we see as a living document to be developed and enriched by us all.

Please sign on to this statement at http://www.casinocrash.org.

A future occasion to come together to work on the actions needed to make these ideas and others a reality will be the World Social Forum in Belem, Brazil at the end of January 2009.  

We have the experience and the ideas – let’s meet the challenge of the present ruling disorder and keep the momentum towards an alternative rolling!!

Statement on the proposed “Global Summit” to reform the international financial system

Click to sign on to the following statement by Tuesday October 28th 2008. 

Background

The past few months have seen one of the most significant financial crises in North American and European history. The response was just as historic. To stave off regional and global recessions and restore stability and confidence in the market, northern governments are pursuing a massive and unprecedented program of government intervention, nationalizing banks, injecting massive subsidies into ailing institutions and re-regulating their financial sectors.

This response sits in direct contrast to the austere neoliberal policies pressed on developing countries by the World Bank, International Monetary Fund and developed countries for the past thirty years. Governments have been pushed to liberalize trade barriers, deregulate financial and labour markets, privatize national industries, abolish subsidies, and reduce social and economic spending. The state saw its role severely reduced.

This double standard is not only unacceptable, but it also signals the demise of free-market fundamentalism. The international financial system, its architecture and its institutions have been completely overwhelmed by the scale of the current financial and economic crisis. The financial system, its architecture and its institutions must be completely rethought.

A truly global response to a global crisis

In recent weeks, leaders worldwide have recognized the deficiencies of the existing system and the need to meet to address a broader set of proposals to reform the global financial system and its institutions. The G20 are now set to meet in Washington DC on November 15 to begin the discussions. It is of course imperative to agree on immediate measures to address the crisis, and we emphasize that priority must be given to responses to the impacts on ordinary employees and workers, low-income households, pensioners and other extremely vulnerable sectors. But we are deeply concerned that the proposed meetings will be carried out in a rushed and non-inclusive manner, and as a result, not address the comprehensive range of changes needed, nor fairly allocate their burden.

Though the crisis originated in northern countries, the impacts are likely to be greatest in developing countries.  It is therefore critical that all countries have a say in the process to change the international financial architecture. No equitable and sustainable solutions to transforming the current system will come out of a conference that is rapidly-prepared and excludes many countries and civil society. Such efforts are in fact more likely to further undermine public trust and confidence and to further disenfranchise countries that are already opting for regional solutions over a stronger, more coherent and fairer international financial system.

Our demands –time for a fundamental rethink

We, the undersigned civil society organizations, support the fundamental and far-reaching transformation of the international financial and economic system. To serve this purpose, we support a major international conference convened by the UN to review the international financial and monetary architecture, its institutions and its governance, but only if the meeting follows a process that: 

1. is inclusive and participatory of all governments of the world;
2. includes representatives from civil society, citizen’s groups, social movements and other stakeholders;
3. has a clear timeline and process for regional consultations, particularly with those most affected by the crisis;
4. is comprehensive in scope, tackling the full array of issues and institutions;
5. is transparent, with proposals and draft outcome documents made publicly available and discussed well in advance of the meeting.

Full use should be made of the new UN task force on the global financial system, the upcoming UN Financing for Development meeting and other UN instances to begin preparing such a global meeting.

There are no quick fixes in the transition from the current system – which has fostered instability and inequity – towards a just, sustainable and accountable one, which yields benefits for the majority of the world’s people.

The time has come: Let’s shut down the financial casino

ATTAC’s statement on the financial crisis and democratic alternatives

Download the statement as PDF file

October 2008

“Disarm the markets!” When Attac was founded in 1998, this slogan was formulated against the background of the financial crash in East Asia. In the meantime, we have witnessed other crises triggered by financial markets: in Russia, Brazil, Turkey, Argentina and the burst of the “New Economy” bubble in 2001.

At present, the rich world is in the middle of a crisis, which is the heaviest since the Great Depression in 1929. The crash at Wall Street in September 2008 marks the end of a historical period: the system of financial capitalism, a system driven by the only search for maximum profit, has collapsed. It destroyed itself as a result of its own inherent contradictions. The financial shock waves have just reached the real economy. The US has entered into a recession, the EU is following. The entire global economy will be affected.

The contraction of economic activity will increase unemployment and inequality. New pressure will be put on wage-earners to accept more “flexibility on labor markets” implying lower wages and weaker social protection. The decrease in aggregate demand from the rich countries will also hit the vulnerable economies of the developing world and increase poverty. The Millennium Development Goals and the goals of a socially and environmentally friendly sustainable development worldwide will get completely out of reach.

The financial crash and the recession converge with a sharp increase in prices for oil and food which has led to severe social crisis in several developing countries and generated hunger revolts. Both, commodity and food price increases have multiple causes. But again as with the several financial crises, speculation by hedge funds and other institutional investors has considerably contributed to the price peaks and instability.

The trigger of the current crisis was the excessive lending of subprime mortgages to US households, and the corresponding flawed procedures of securitization through which these risky loans were sold to financial institutions and households, in the United States and worldwide. The ongoing wave of defaults had dramatic consequences on financial institutions such as investment and commercial banks, or hedge funds. Now, also the non-financial sector is affected tremendously. The economic, social and environmental outlook for 2009 is bleak for quite some parts of the world.

One should have known better. The crash unfortunately confirms the forecasts by heterodox experts such as Nobel Prize laureate Joseph Stiglitz, by Attac, by social movements and by other critics. Even supervisors knew that the system was risky, but there was no willingness to act due to the dominant belief in the self-regulation of the market.

Now, under the pressure of the crisis, even the mainstream of the financial community is calling for reforms. However, these proposals do not go far enough since they do not tackle the systemic problems behind the crisis. They are mainly aimed at the financial industry and oriented at issues of stability. This is not enough. Financial capitalism has also disastrous consequences on distribution and democracy. Bankers call for state intervention, what they mean is socialising losses, while keeping profits in private pockets. The rescue actions by the US over 700 billion – the biggest in human history – the rescue packages in the UK, Germany and other countries clearly show this logic. When the financial community talks about reform they, at best, mean a piece-meal (re)regulation and short term crisis management, trying to save the neo-liberal course and to return to business as usual after a while.

What is needed in the interest of the large majority of the people are real changes towards another paradigm, where finance has to contribute to social justice, economic stability and sustainable development. We cannot allow to return to the status quo ante in the years to come.

The crisis is not the result of some unfortunate circumstances, nor can it be reduced to the failure of supervision, rating agencies or misbehaviour of single actors. It has systemic roots, and hence the structure and the mechanisms of the system in general are at stake.

The financial markets constitute the centre and the driving force of neo-liberal globalisation. The finance sector evolved to become dominant over the economy after the introduction of free floating exchange rates between the major currencies in 1973, the abolishment of capital controls and the subsequent liberalisation and deregulation of financial markets and the financial industry, including making supervisors so called independent, but in practice subject to heavy and successful lobbying from the financial industry. Since then, the financial industry and mechanisms have experienced a phase of rapid expansion; the masses of financial assets, debts and world wide search of financial profits grew in tandem. It is also important to remember the sharp acceleration of this process in the aftermath of 2001, when the US economy recovered from the dot.com-crisis in particular the dramatic rise of both the domestic debt of the United States (notably household debt), and the growing external deficit of this country, financed by the rest of the world.

Together, these trends have led to the establishment of a new economic model, a new form of capitalism, which by some is called financial globalisation, some call it financial capitalism and others speak of shareholder capitalism. However you name it, one thing is clear: whereas in previous times financial markets had a subordinate and instrumental role to the real economy, this relationship has been turned around. The grasp of “financial interests” on the “real” economy increased tremendously by making all economic activities subservient to profits in the financial markets and creating financial instruments to make profits only through the financial markets, while at the same time failing to serve sustainable production and farming, and stable savings by ‘normal’ customers. The logics and dynamics of short-termed profit maximization have penetrated into all pores of economic and social life. The perfect mobility of financial capital, which is the result of neoliberal policies, plays a crucial role in the world economy, today. It creates global competition not only among multinational firms, but also among nation states, their social and fiscal systems and among workers of different parts of the planet. By creating a power relationship in favor of corporations relative to their workers, this domination of capital has led to rising inequalities, to decreasing labor, social and environmental standards as well as to the privatization of public goods and services.

Shortly, the “freedom” of financial actors has been extended at the expense of the huge majority of people and has lead to economic activities that degrade the environment. The failure of this model has never been as obvious as today in the food crisis, the climate crisis and energy crisis. This model that was supported by governments worldwide is completely discredited. Therefore clear consequences must be drawn so that political and economic decision-makers fully turn around this unsustainable and un-equitable financial system towards the needs of people, equity and sustainability.

A historic window of opportunity is opening. It will depend on pressure from public opinion whether a real change of course is achieved.

Another finance system is possible: Stability and solidarity before profits

Due to the complexity of the present finance system, it is impossible to resolve the problems with only one instrument. There is no Archimedean point. A whole box of instruments will be necessary. However, in view of the hundreds of single proposals which will come up in the near future and which all will be controversial, we can define some basic requirements which have to be met in order for single proposals to be acceptable as emancipatory reforms:

A. Systemic changes instead of piecemeal repair

The whole finance system in its neo-liberal form has proven to be economically unstable and inefficient as well as harmful to equality, general welfare and democracy. Therefore, systemic changes are necessary. One of our major goals is to break down the pillars of neoliberalism, in particular the worldwide mobility of capital. Some regulatory measures aimed at maintaining asset-driven capital accumulation and pure financial stability, protecting the wealthy, and superficial reforms aiming e. g. at mere “transparency” are unacceptable.

B. A new Bretton Woods instead of “self-regulating market forces”

The crisis shows that markets left alone without political regulation and democratic accountability lead to disastrous results. Therefore, democratic control is required as well as international cooperation instead of destructive competition between national economies. In economic and financial decision-making, priority has to be given to sustainable development and to the human rights of all three generations.

An appropriate institutional setting under the auspices of the UN has to be set up to strictly regulate and re-orient the financial system. Due care will need to be taken to make such a setting accountable and pro-active towards equity and sustainability, and capable of preventing (rather than reacting to) financial crises. For instance, discussions to give theIMF a mandate to monitor the link between financial markets and the real economy should be given to the UN, and should assess the link between the financial markets and poverty and sustainable development. It should support strong international intervention to prevent build up of huge trade surpluses / current account surpluses in some countries and huge trade deficits/ debt / current account deficits in other countries (currently US vs China). Such a UN body would also be the forum for decision-making about the extent to which financial services companies, financial products/services would be liberalized and freedom of capital movements is being limited. This would mean that such decisions would not be taken in the WTO/GATS and free trade agreements (FTA) as is currently the case.

National supervision and international cooperation between regulatory and supervisory bodies, especially at the EU level, have to be strengthened, made democratic and broadened with a mandate to serve societal needs. The participation of trade unions, consumers and other stakeholders in regulation has to be assured. Rating has to become a part of public supervision with a mandate to also assess the impact on society (e.g. avoid financial products, loans and companies that destroy the environment).

For the immediate crisis management, close international cooperation is needed on European level, including Switzerland and Russia and on transatlantic level.

Limits must be placed on unrestricted free trade and free capital mobility worldwide. The dogmatic “openness” of goods, services and financial in- and outflows must be substituted by a more differentiated approach. New international agreements must put other goals – like financial stability, tax justice, or social justice and sustainability- over the free flow of capital, goods and services. Social rights and historical conquests of workers must not be endangered by these treaties; on the contrary, they should foster international solidarity instead of competition.

C. Breaking the dominance of financial markets

The basic orientation for a real change has to aim at breaking the dominance of financial markets over the real economy. Some suitable instruments for that purpose are:

– Taxation of all kinds of financial transfers including currency transactions, in order to finish with speculation, to slow down the speed of financial markets and to end short termism while financing fair and sustainable trade, production and consumption should be stimulated. This includes a multilateral tax on all currency transactions to discourage short-term speculative transactions across borders.

Second, national authorities should unilaterally impose an appropiate taxation on national stock exchange transactions in order to stop speculation and ensure a more progressive taxation.

– Prohibition of the creation of (worldwide) financial industry conglomerates which are too big to fail, or too internconnected to fail, and too complex to manage all potential risks.

– Progressive taxation of capital income. A main factor contributing to the swelling of financial markets is the concentration of wealth. Thus, in order to slow down and stabilize financial markets, substantial redistribution of income and wealth from the rich to the poor is required as well as reducing incentives for excessive profit making and taxation evasion mechanisms used by the rich and even the financial industry itself.

– Before redistribution, economic policy has to provide for just distribution: Wages must not grow slower than productivity and work has to be shared fairly.

– Privatisation of social systems and of important infrastructure such as energy and railways has to be stopped and reversed where it already happened. The privatization of pension funds has to be revised as they have lead to the creation of capital roaming the world for high profits and investing in company shares that are socially and environmentally irresponsible.

D. Mitigating the effect of the crisis on real economy and “speculator pays principle”

As the current financial system and the crash have affected the real economy and society, emergency programmes to mitigate its effects on the real economy and society are urgently needed..

Given the depth of the crisis, bail out packages might be inevitable in order to prevent the total collapse of the financial system. However, these rescue packages must be linked to strict conditionality, excluding any moral hazard. In cases, where bail outs are successful without nationalization, its costs have to be repaid by the shareholders – including interests. Where this is not possible, the state acquires shares or nationalizes completely the enterprise.

The overall costs of liquidity injections, bail outs and mitigating measures should be paid primarily by those who are responsible for the crisis and have amassed fortunes. Therefore a special crisis fund should be set up in each country. The fund is fed by a one-off extra duty on all capital income above 50.000 Euro and a 1% extra tax on all corporate profits in the financial sector.

A share of this fund should be used internationally for the assistance to those poor countries which suffer from the crash and are hit by the food and commodity price crisis.

In addition, substantial public investment should be undertaken into the social infrastructure, education, culture and environment as these sectors sufferend from under-investment and will create employment and support sustainable development.

E. Reforming the EU, democratic control over the European Central Bank

Special attention has to be given to the EU. The financial dimensions in the Lisbon and other treaties are shaped according to neo-liberal dogma. Article 63 of the Treaty on the Functioning of the European Union (ex art. 56 ECT), which forbids any restrictions on capital flows not only within the EU, but also to all third countries and thus sets the perfect conditions for the overwhelming hold of finance on society, must be changed: There are good reasons to partly restrict the movement of capital: to guarantee financial stability; to avoid tax evasion and tax competition; to exercise an employment-friendly monetary policy without risking capital flight. We also call for restriction of the freedom of establishment (art. 49), leaving capital free to migrate wherever conditions are most favourable and financial institutions free to seek asylum in the City of London or anywhere else they choose.

The decision-making on financial regulations and supervision at the EU level and in EU member states needs to be fully revised and reoriented away from mainly supporting the growth and competitiveness of the financial industry. A common system of regulation and supervision should be set up, which is shaped according to the highest standards and not in the logics of a race to the bottom.

Parliaments need to regularly assess if the right regulations on the financial markets and on the financial industry are in place. The European Parliament needs to have the right to introduce regulation. EU regulations should set all necessary criteria for the financial industry (for lending, risk assessment, investment, issuing of equities/investment banking activities) so that financial means and services are only provided to sustainable activities and poverty eradication.

Furthermore, it is necessary to alter the monetary policy of the ECB. The bank is at the very centre of neo-liberalism in Europe. It completely rests upon the monetarist ideology by committing itself primarily to price stability at the expense of employment, social justice and economic stability. Consistent with the neo-liberal ideology, it is so-called independent and not at all subject to democratic control. We demand the democratic control over this institution, whose policies influence dramatically the fate of citizens. We disagree with the focus of the ECB on keeping consumer price inflation under 2% – this is a central pillar of neoliberal policy. Instead, we want the ECB to focus on employment and just distribution. Even the annual report of the Bank of International Settlements (BIS, June 2008) advises that the interest rate policy by Central banks should not only look at inflation figures to keep interest rates low but also assess the impact of interest rates on “excessive and imprudent credit growth”, the creation of bubbles, and spending and production patterns which are excessive.

The increase of the interest rate by the ECB as reaction to the oil price hike was fully in the line of the neo-liberal dogma. Although the increase of relative prices, as in the case of oil, should not be confused with inflation (which is an increase of all prices), Frankfurt was painting the spectre of inflation on the wall. However, in the present conjuncture inflation is not the problem, but recession and unemployment. The ECB’s policy is accelerating and deepening the crisis to which the EU is heading.

Society friendly financial, monetary and economic decision-making will be improved when full control and transparency of lobby and “consultations” by the financial industry and other large corporations will be restricted and made accountable (to start with full transparency).

F. Reforms in central parts of the system

In light of the crisis, some cornerstones of the present system require special attention, such as:

a. Capital requirements and prudential practices in the banking sector

Capital requirements for banks have to be upgraded. In that respect Basle II was a step in the wrong direction. Therefore Basle III is needed, drawing consequences from the crash. Off-balance deals which are at the heart of the current crisis must be banned.

The procedures of securitization must be restricted to institutions under the strict control of governments. Risky procedures of securitization, as in Collateralized Debt Obligations whose purpose was the massive resale of subprime loans, must be prohibited.

Speculative financial products should be prohibited, especially in food and where they have a destabilizing effect. At the very minimum: the bigger the financial conglomerate, the lesser speculative products it can sell or trade in.

All new financial products need to be tested by supervisors for their impact on financial stability and on society before being allowed.

Investment banking has to be shrinked to an extent, where its volume does not constitute any more systemic risk. What remains from investment banking is fully brought under regulation and supervision, and separated from other financial services. All investment banking activities should include criteria that promote sustainable development of societies e.g. promoting shares of companies that produce environmentally friendly products.

All financial-conglomerates covering retail and investment banking, securites trading and insurance need to be restructured or separated and supervision fully adapted to the remaining conglomerate structures.

The high bonus system should be forbidden as it incites risky behaviour up to the top management, without accountability when high losses are made by the financial company or by (its poor) clients.

b. Strengthening of the public and not-for-profit banking sector

After World War II, in Europe, the locally orientated, not-for-profit and public banking sector did a good job. Over the last two decades, these banks increasingly merged and transformed into for-profit commercial banks whose shares were traded on the stockmarket, developing towards the Anglo-Saxon marked-based financial system. This trend hast to be inverted; public and not-for-profit banks must be strengthened and exempted from EU competition law. The public should own at least some of the key banks to provide stable finance for sustainable and just development.

The re-nationalised banks and banks where the state has acquired shares as a consequence of bail outs should be restructured to service the needs of society, including affordable credit for sustainable projects and enterprises, universal access to good basic financial services, etc.

c. Rating agencies under public control

Rating agencies – which failed badly in the current crisis as well as in almost all crises in the last few decades – should come under public control. They should no longer be paid by the firms they rate – instead they should be financed out of a fund paid for by all users of the ratings and issuers of financial products. They should not only rate the financial aspects but also take into consideration social and environmental risks.

Accountants have failed to expose the weaknesses of the risk control systems of financial institutions. The accountants allowed some activities in the subprime mortgage market, derivatives and other assets to be off balance. Accountant rule settings needs to become again a(n inter)governmental matter.

d. Regulating funds, especially hedge funds and private equity funds

Who needs hedge funds and what is their benefit for the economy? When at the 2007 G8 the Germans asked for more transparency for Hedge Funds, it was argued that these funds have a useful function because they take risks that others are not ready to take. In reality, these risks are the risks of speculation only at the service of maximum profit. There is no benefit for the economy stemming from these operations, on the contrary they destabilise the system. Due to the practices of leverage the risk is transferred to the banks. This is why they should not take place at all, and the current prohibition of short selling is unsufficient. Declaring hedge funds as an instrument of risk prevention is the same as giving a pyromaniac the task of fire protection. Hedge Funds have to be banned. Regulators and supervisors have to prevent banks from doing business with hedge funds who are located in fiscal paradises. Nobody needs hedge funds except rich individuals and institutional investors in search of high-risk maximum profit.

Private Equity Funds, too, have proven to be a stability risk and have served as a conveyor belt of shareholder capitalism to real economy. This untransparent business model has to be stopped. As an alternative, incentives have to be created to involve banks much more into company financing and venture capital, in particular for small and medium sized enterprises. The public banks have to play a lead role in company financing.

More generally, the EU should regulate all kind of funds with a directive: All funds must publish their investment strategies and management fees. Certain investment strategies shall be forbidden (e. g. naked sales), the credit borrowing (leverage effect) must be limited and a ceiling of assets under control must be set. Profits made by funds must be taxed more than labour income. Funds that have no legal seat in the EU (e. g. in offshore centres) or that do not comply with EU standards should not get access to the EU market.

e. Limiting strongly derivatives.

Financial derivatives should only be traded at the stock exchange, standardized and authorized by a supervisory body like pharmaceutical products are being assessed for their (long term) negative impacts. When of pure speculative nature, derivatives should be banned. Trade over the counter (OTC) should be banned.

f. Offshore Centres

Who needs offshore banking centres (OFCs) and fiscal paradises? Only rich individuals and institutional investors who want to hide their assets from tax authorities, the mafia, terrorists, arms traders and other criminal forces who want to launder money. There is no reasonable economic argument in favour of maintaining the economic status of such territories. Therefore their economic function should be completely closed down.

As long as this is not possible, because some big rich countries maintain themselves asOFCs and protect others, a set of unilateral measures can be used, ranging from lifting the bank secrecy of the banks under their sovereignty, via obliging banks which maintain branches in tax heavens to close them, to putting a high levy on transactions with OFCs.

The “Savings Directive” of the EU has to be extended to all capital incomes (at present only interest payments), to legal persons (at present only natural persons) and the automatic exchange of information mechanism to Austria, Belgium and Luxembourg (at present 24 countries). The closure of these loopholes is a condition to exercise credible pressure on other tax heavens like Switzerland or Liechtenstein to give up their bank secrecy and cooperate in an international information exchange.

g. Measures against short term shareholder value policies

John Maynard Keynes recommended to “marry investors to their assets” in order to encourage long term investment and impede harmful short term speculation. The power of short term oriented shareholders could be limited by coupling the share voting rights to a minimum period of share holding (5 – 10 years) and by the prohibition of stock options (which incite managers to only care for the share price).

Instead the management fees should be ceiled and partly coupled to an indicator of general welfare. Furthermore, trade unions, consumers and other stakeholders must be given effective participation rights in corporate decision making.

h. Regulating indebtedness of households

Regulatory limits must be placed on indebtedness, first concerning households, by the imposition of ceilings on the ratio of repayments and interests to income in every country. The housing of social strata with lower purchasing power is one component of social programs on the part of Governments. It must not become the privilege of the worst segments of private financial institutions. We strongly support proposals to set up a new procedure of foreclosure which would allow over-debted home owners to become tenants. However, access to individual home ownership should not remain the main objective of social programs. We demand a real public social housing development, with high social diversity and ecological standards.

Attac Austria, Attac Denmark, Attac Finland, Attac Flanders, Attac France, Attac Germany, Attac Hungary, Attac Italy, Attac Morocco, Attac Norway, Attac Poland, Attac Spain, Attac Sweden, Attac Switzerland

Goldman Sachs socialism

The Real News, October 13, 2008

World markets – and top economists – dismiss the Wall Street bailout.

Worldwide Financial Fiasco

The Real News, October 7, 2008

Markets around the world hammered by credit crunch as Governments move to secure bank deposits

America pays the piper, big time

The Real News, October 3, 2008

The financial meltdown on wall street and the handouts to bankers has caused many to question the blind faith in a deregulated market.

Watch the video (part 1)

A Primer on the Wall Street Meltdown

By Walden Bello, Focus on the Global South

September 2008

Latest: The Transnational Institute has launched a special blog, “Casino Crash” to provide a space for critical analysis of the financial crisis.

Many on Wall Street are still digesting the momentous events of the last ten days:

• 1-3 trillion dollars worth of financial assets wiped out.
• Wall Street effectively nationalized, with the Federal Reserve and the Treasury Department making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the US government now runs the world’s biggest insurance company.
• The biggest bailout since the Great Depression, with $700 billion, being desperately put together to save the global financial system.

The usual explanations no longer suffice.  Extraordinary events demand extraordinary explanations.  But first…

Is the worst over?

No, if anything is clear from the contradictory moves of the last week—allowing Lehman Brothers to collapse while taking over AIG, and engineering Bank of America’s takeover of Merrill Lynch–there is no strategy to deal with the crisis, just tactical responses, like the fire department’s response to a conflagration.

The $700 billion buyout of banks’ bad mortgaged-backed securities is not a strategy but mainly a desperate effort to shore up confidence in the system, to prevent the erosion of trust in the banks and other financial institutions and preventing a massive bank run such as the one that triggered the Great Depression of 1929.

What caused the collapse of global capitalism’s nerve center?  Was it greed?
    
Good old fashioned greed played a part.  This is what Klaus Schwab, the organizer of the World Economic Forum, the yearly global elite jamboree in the Swiss Alps, meant when he told his clientele in Davos earlier this year: “We have to pay for the sins of the past.”

Was this a case of Wall Street outsmarting itself?

Definitely. Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk—including exotic futures instruments as “credit default swaps” that enable investors to bet on the odds that the banks’ own corporate borrowers would not be able to pay their debts!  This is the unregulated multitrillion dollar trade that brought down AIG.

On December 17, 2005, when International Financing Review (IFR) announced its 2005 Annual Awards — one of the securities industry’s most prestigious awards programs—it had this to say: “[Lehman Brothers] not only maintained its overall market presence, but also led the charge into the preferred space by … developing new products and tailoring transactions to fit borrowers’ needs…Lehman Brothers is the most innovative in the preferred space, just doing things you won’t see elsewhere.”

No comment.

Was it lack of regulation?

Yes—everyone acknowledges by now that Wall Street’s capacity to innovate and turn out more and more sophisticated financial instruments had run far ahead of government’s regulatory capability, not because government was not capable of regulating but because the dominant neoliberal, laissez-faire attitude prevented government from devising effective mechanisms with which to regulate.

But isn’t there something more that is happening? Something systemic?

Well, George Soros, who saw this coming, says what we are going through is the crisis of the financial system is the crisis of the “gigantic circulatory system” of a “global capitalist system that is…coming apart at the seams.”

To elaborate on the arch-speculator’s insight, what we are seeing is the intensification of one of the central crises or contradictions of global capitalism which is the crisis of overproduction, also known as overaccumulation or overcapacity.  

This is the tendency for capitalism to build up tremendous productive capacity that outruns the population’s capacity to consume owing to social inequalities that limit popular purchasing power, thus eroding profitability.

But what does the crisis of overproduction have to do with recent events?

Plenty.  But to understand the connections, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975.

This was a period of rapid growth both in the center economies and in the underdeveloped economies—one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of the Second World War, and partly by the new socio-economic arrangements that were institutionalized under the new Keynesian state.  Key among the latter were strong state controls over     market activity, aggressive use of fiscal and monetary policy to minimize inflation and recession, and a regime of relatively high wages to stimulate and maintain demand.

So what went wrong?

Well, this period of high growth came to an end in the mid-seventies, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which was not supposed to happen under neoclassical economics.

Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while social within countries and between countries globally limited the growth of purchasing power and demand, thus eroding profitability. This was aggravated by the massive oil price rises of the seventies.

How did capitalism try to solve the crisis of overproduction?

Capital tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization.

What was neoliberal restructuring all about?

Neoliberal restructuring  took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South.  The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistribute income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.

The problem with this formula was that in redistributing income to the rich, you were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production.

In fact, neoliberal restructuring, which was generalized in the North and south during the eighties and nineties, had a poor record in terms of growth: global growth averaged 1.1 per cent in the nineties and 1.4 in the eighties, whereas it averaged 3.5 per cent in the 1960’s and 2.4 per cent in the seventies, when state interventionist policies were dominant.  Neoliberal restructuring could not shake off stagnation.

How was globalization a response to the crisis?

The second escape route global capital took to counter stagnation was “extensive accumulation” or globalization, or the rapid integration of semi-capitalist, non-capitalist, or precapitalist areas into the global market economy.  Rosa Luxemburg, the famous German revolutionary economist, saw this long ago as necessary to shore up the rate of profit in the metropolitan economies.  How?  By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in  infrastructure.  Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital, and abolishing barriers to foreign investment.

China is, of course, the most prominent case ofa non-capitalist area to be integrated into the global capitalist economy over the last 25 years.             

To counter their declining profits, a sizable number of the Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called “China Price”—the cost advantage deriving from China’s seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly 40 t0 50 per cent of the profits of US corporations were derived from their operations and sales abroad, especially China.

Why didn’t globalization surmount the crisis?

The problem with this escape route from stagnation is that it exacerbates the problem of overproduction because it adds to productive capacity.  A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits.  Not surprisingly, by around 1997, the profits of US corporations stopped growing.  According to one index, the profit rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to 1.32 in 2000-2002.

What about financialization?

Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route became very critical for maintaining and raising profitability: financialization.

In the ideal world of neoclassical economics, the financial system is the mechanism by which the savers or those with surplus funds are joined with the entrepreneurs who have need of their funds to invest in production.  In the real world of late capitalism, with investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds are circulating and being invested and reinvested in the financial sector—that is the financial sector is turning in on itself. 

The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy.  As one financial executive notes, “there has been an increasing disconnect between the real and financial economies in the last few years.  The real economy has grown…but nothing like that of the financial economy—until it imploded.”

What this observer does not tell us is that the disconnect between the real and the financial economy is not accidental—that the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy.

What were the problems with financialization as an escape route?

The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value.  It may create profit, yes, but it does not create new value—only industry, agricultural, trade, and services create new value.  Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value—for instance, the stock of Internet startups that keep on rising, driven mainly by upwardly spiraling financial valuations, that then crash. Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction,” that is a crash back to real values.  The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.

Why is financialization so volatile?

Profitability being dependent on speculative coups, it is not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another.

Because it is driven by speculative mania, finance driven capitalism has experienced about scores of financial crises since capital markets were deregulated and liberalized in the 1980’s.

Prior to the current Wall Street meltdown, the most explosive of these were the Mexican Financial Crisis of 1994-95, the Asian Financial Crisis of 1997-1998, the Russian Financial Crisis of 1996, the Wall Street Stock Market Collapse of 2001, and the Argentine Financial Collapse of 2002.

Bill Clinton’s Treasury Secretary, Wall Streeter Robert Rubin, predicted five years ago that “future financial crises are almost surely inevitable and could be even more severe.”

How do bubbles form, grow, and burst?

Let’s first use the Asian Financial Crisis of 1997-98, as an example.     

• First, capital account and financial liberalization at the urging of the IMF and the US Treasury Dept.;
• Then, entry of foreign funds seeking quick and high returns, meaning they went to real estate and the stock market;
• Overinvestment, leading to fall in stock and real estate prices, leading to panicky withdrawal of funds—in 1997, $100 billion left the East Asian economies in a few weeks;
• Bailout of foreign speculators by the IMF;
• Collapse of the real economy—recession throughout East Asia in 1998;
• Despite massive destabilization, efforts to impose both national and global regulation of financial system were opposed on ideological grounds.

Let’s go to the current bubble.  How did it form?

The current Wall Street collapse has its roots in the Technology Bubble of the late 1990’s, when the price of the stocks of Internet startups skyrocketed, then collapsed, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002.

The loose money policies of the Fed under Alan Greenspan had encouraged the Technology Bubble, and when it collapsed into a recession, Greenspan, to try to counter a long recession, cut the prime rate to a 45-year-low of 1 per cent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble—the real estate bubble. 

As early as 2002, progressive economists such as Dean Baker of the Center for Economic Policy Research were warning about the real estate bubble. However, as late as 2005, then Council of Economic Adviser Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative activity.  Is it any wonder that he was caught completely off guard when the Subprime Crisis broke in the summer of 2007?

And how did it grow?

Let’s hear it from one key market player himself, George Soros:  “Mortgage institutions encouraged mortgage holders to refinance their mortgages and withdraw their excess equity.  They lowered their lending standards and introduced new products, such as adjustable mortgages (ARMs), “interest only” mortgages, and promotional teaser rates.”  All this encouraged speculation in residential housing units.  House prices started to rise in double digit rates.  This served to reinforce speculation, and the rise in house prices made the owners feel rich; the result was a consumption boom that has sustained the economy in recent years.”

Looking at the process more closely, the subprime mortgage crisis was not a case of supply outrunning real demand.  The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade.   Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners.  

But how could subprime mortgages going sour turn into such a big problem?

Because these assets were then “securitized” with other assets into complex derivative products called “collateralized debt obligations” (CDO’s) by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors.  These institutions in turn offloaded these securities onto other banks and foreign financial institutions.  

When the interest rates were raised on the subprime loans, adjustable mortgage and other housing loans, the game was up. There are about six million subprime mortgages outstanding, 40 percent of which will likely go into default in the next two years, Soros estimates. 

And five million more defaults from adjustable rate mortgages and other “flexible loans” will occur over the next several years.  But securities the value of which run into trillions of dollars have already been injected, like virus, into the global financial system.  Global capitalism’s gigantic circulatory system was fatally infected.

But how could Wall Street titans collapse like a house of cards?

For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, and Bear Stearns, the losses represented by these toxic securities simply overwhelmed their reserves and brought them down.  And more are likely to fall once their books—since lots of these holdings are recorded “off the balance sheet”– are corrected to reflect their actual holdings of these assets.  

And many others will join them as other speculative operations such as credit cards and different varieties of risk insurance seize up.  The American International Group (AIG) was felled by its massive exposure in the unregulated area of credit default swaps, derivatives  that make it possible for investors to bet on the possibility that companies will default on repaying loans. Such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US government bond market.  The mega-size of the assets that could go bad should AIG collapse was what made Washington change its mind and salvage it after it let Lehman Brothers collapse.

What’s going to happen now?

We can safely say then that there will be more bankruptcies and government takeovers, with foreign banks and institutions joining their US counterparts, that Wall Street’s collapse will deepen and prolong the US recession, and that in Asia and elsewhere, a US recession will translate into a recession, if not worse.  The reason for the last point is that China’s main foreign market is the US and China in turn imports raw materials and intermediate goods that it uses for its exports to the US from Japan, Korea, and Southeast Asia.  Globalization has made “decoupling” impossible.  The US, China, and East Asia are like three prisoners bound together in a chain-gang.

In a nutshell…?

The Wall Street meltdown is not only due to greed and to the lack of government regulation of a hyperactive sector. The Wall Street collapse stems ultimately from the crisis of overproduction that has plagued global capitalism since the mid-seventies.  

Financialization of investment activity has been one of the escape routes from stagnation, the other two being neoliberal restructuring and globalization. With neoliberal restructuring and globalization providing limited relief, financialization became attractive as a mechanism to shore up profitability. But financialization has proven to be a dangerous road, leading to speculative bubbles that lead to the temporary prosperity of a few but which ultimately end up in corporate collapse and in recession in the real economy.  

The key questions now are: How deep and long will this recession be? Does the US economy need another speculative bubble to drag itself out of this recession.  And if it does, where will the next bubble form?  Some people say the military-industrial complex or the “disaster capitalism complex” that Naomi Klein writes about is the next one, but that’s another story?