Wednesday, October 10, 2012

The Financial Crisis and the Shock Doctrine

Emerging in the aftermath of the global financial crisis that began in late 2007 is a world order dominated by a few governments and corporations with unprecedented control over global resources. These power appear to have little-to-no-regard for the welfare of the vast majority of the world’s populace, even within developed economies such as the U.S. and Japan. Within the U.S., government prioritization of corporate interests over public welfare during the financial crisis was reflected in the lopsided allocation of funds to banks, including the bailout of investment banks that should not have been eligible for relief, and the unlimited backstopping of AIG’s credit default swaps while average Americans, who saw work hours and income collapse, received little-to-no support. Financial sector fraud and corruption have prevailed in the four years following the bailouts. ORIGINS OF THE CRISIS Prioritization by government of corporate over social welfare during and after the financial crisis was a predictable outcome of three decades of neoliberal philosophical and market rule. Neoliberal philosophies and policies stemming from the Chicago school essentially re-made national and global financial infrastructures in the 1980s and 1990s. The strong laissez-faire ethos promoted by neoliberal advocates resulted in de-regulation and rapid expansion of the US financial system and liberalization of international trade and currency transactions. The effects of neoliberal policies were greater economic turbulence and growing inequality even prior to the great recession that officially began in December of 2007. The reign of neoliberal financialization also adversely impacted industrial production in the US and contributed to the rapid outsourcing and globalization of production. Liberalization of trade and cross-border currency transactions facilitated globalization of production, as did advances in computerization. Financial corporations in western economies have benefited disproportionately from neoliberal de-regulation and globalization. Within the US a series of legislative acts, especially the Graham-Bleach-Bliley Act of 1996 and the Commodities Futures Modernization Act of 2000, relaxed banking regulations and de-regulated derivatives trading. The power of the financial industry grew exponentially, particularly through the strategic uses of derivatives and high frequency trading. These strategic technologies allowed unprecedented influence as western banking interests, particularly within the US and UK (City of London) shaped industrial policy and economic development in domestic economies and played an important role in promoting financial de-regulation and liberalization policies in the developing world. The growth of the financial sector contributed to growing inequality within and across nations. For example, the top .1% of the U.S. population, about 315,000 individuals, receives half of all capital gains on the sale of shares or property and these gains constitute sixty percent of the total income made by the Forbes 400.[i] The top 20 percent of US households owns 89% of all equities.[ii] Monopolization of wealth and power has been a deliberate strategy pursued by elite groups and structural adjustment has been one of the most efficacious macro-economic policies for shifting wealth upwards. Consolidation of wealth and power among individuals and corporations resulted in strong pressure for dismantling of policies and laws viewed as restrictive and/or costly. The de-regulation of finance is a very good example of how special interests dictated law and government policy. Consolidated wealth also finds current levels of social-welfare and education spending to be problematic, although war and surveillance spending are allowed to remain intact. Structural adjustment programs, not unlike those that were imposed upon the developing world in the 1980s, are now being imposed upon advanced western economies, such as the U.S., Ireland, Greece, Spain, and countries within Eastern Europe. PRIVATIZED PROFITS AND SOCIALIZED RISKS Naomi Klein concluded that "the crisis on Wall Street created by deregulated capitalism is not actually being solved, it's being moved. A private sector crisis is being turned into a public sector crisis" (Klein 2009 In 2011, Bloomberg news reported that “Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages” (Keoun and Kuntz 2011). Eventually it was revealed that secret Federal Reserve loans to the biggest banks totaled $7.7 trillion .[iii] Risk was transferred from financial speculators to public budgets by government bailout programs, especially through the backstopping of AIG and direct loan guarantees to banks, even those that had not been eligible through participation in the FDIC program. Graham Bowley observed in The New York Times that the federal financial “bailout helps fuel a new era of Wall Street wealth” enabling “hefty bonuses” to corporate Wall Street executives.[iv] Goldman Sachs alone received $70 billion in combined funds from TARP, the Federal Reserve, AIG, and the FDIC.[v] Perhaps most telling of who benefited and how lost in the crisis was the failure to prosecute those financial agents responsible for the crisis within these monopolists, many of which profited from rampant foreclosure fraud in the wake of the crisis. Reflecting on these data, Economist Simon Johnson observed: "The US increasingly displays characteristics that we have seen many times in middle-income “emerging markets” – new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged."[vi] For citizens of countries most directly impacted by the financial disaster, especially the US and the UK, one of the most galling aspects of the crisis has been the failure to bring criminal charges against the agents involved. For example, Jean Eaglesham asks in the Wall Street Journal: "It is a question that has been asked time and time again since the financial crisis: How many executives have been convicted of criminal wrongdoing related to the tumultuous events of 2008-2009? The Justice Department doesn't know the answer...." William Black, who was responsible for the Savings and Loan criminal prosecutions, asserts that neither the Bush nor the Obama administrations prosecuted any elite corporate executive officers for the “epidemic of mortgage fraud that drove the ongoing crisis” (Black “Holder and Obama on” 2012). In a November 2011 speech, “Recurring Crises Derive From Epidemics of Fraud Stemming from C Suite,” Black condemns the fraud for wiping out $11 trillion dollars in household wealth and for eliminating 6 million jobs and 5 million that would have been created. He observes that the FBI warned of the epidemic of mortgage fraud and accuses the government for promoting incompetence in order to assist the richest 1 percent of the population by failing to take action. CONSEQUENCES OF THE CRISIS Naomi Klein describes how natural or human-wrought disasters enable neoliberal opportunism and predatory capitalism, shifting wealth from the many to the few, through government reconstruction policies and programs. The policy playbooks used by many western governments in the wake of the shock of the financial crisis echo the neoliberal reforms described by Klein as occurring in the wake of natural disasters such as the Indonesian tsunami. For instance, the financial crisis opened the door for disaster capitalism in Eastern and Baltic European nations, including Hungary, Estonia and Latvia, as capital flight from these nations precipitated by the crisis forced reliance on IMF loans with structural adjustment contingencies.[vii] Eastern European nations were also denied the ability to engage in counter-cycle stimulus spending by creditors and lenders to combat recessionary deflation. Moreover, the current financial crisis in Greece illustrates how financial firms can deliberately cripple a nation, forcing it to privatize holdings and cuts social spending: In the early part of 2010, the country of Greece was subject to assault by investment banks and hedge funds that (naked) shorted Greek bonds, causing credit default swaps on Greek debt to skyrocket. Skyrocketing credit default swaps caused Greek interest rates to rise, which compromised the nation’s ability to roll over its bonds.[viii] The subsequent Euro-zone bailout was conditional upon severe Greek austerity, exacerbating economic contraction.[ix] The U.S. has also been subject to disaster capitalism and it has not been spared from austerity measures. U.S. states, counties and cities experienced significant declines in sales, corporate, and income tax revenues across 2008 through 2010. Although federal stimulus helped states plug education and health care spending in 2008 and 2009, states began massive public sector cuts to education, social-welfare and health spending, and infrastructural maintenance in 2010.[x] Additionally, it appears that states’ vulnerability has set them up for the same types of attacks launched against Greece. U.S. banks are currently being investigated by the SEC for deliberately short-selling and/or purchasing credit default swaps on municipal bonds sold to those banks’ investors.[xi] . .

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