The crash, the bailout and us

Najma Sadeque
14-10-08

As if the killings and suicide bomber attacks and food crisis aren't bad enough, the media has been abuzz with the disconcerting around-the-clock coverage of the global financial crash. They tell you about the losses suffered, the social suffering, but don't explain why it happened. It's not reassuring when a banker or stockbroker acquaintance can't explain it to you either and how you may be affected, except in such incomprehensible terms so unconvincingly that you begin to suspect they don't understand either or have something to hide.
Only a minority dabble in the stock market, but most people, at least of the salaried, middle and upper income groups, have bank accounts; whereas, usually only people with extra money to spare, take risks with rising and falling values. But since all banks invest money elsewhere - done with our full acceptance in exchange for giving our money safe haven, even paying us some profit on long-term deposits - shouldn't we be concerned about where exactly our banks invest our money? But we can't, because banks are under no obligation to do so. In any case it would be impossible because they don't invest our money on an individual basis but with pooled funds which can be broken up in any manner to lend to countless others.
We even had the fifth biggest bank in our country reassuring the public against worry, since the disaster in America largely was an outcome of hedge funds and 'derivatives' which are not allowed here - pure speculation more correctly defined as gambling, that too with millions of other people's money, taking excessive risk with hundreds of billions of dollars to try and make trillions. It's not the first time that America has suffered a devastating financial crash for similar reasons. They mostly did not reach global proportions, affecting only some companies or a sector.
The first and the worst (until now) occurred in 1933 when many people who overnight lost their fortunes committed suicide and millions were left jobless. President Franklin Delano Roosevelt had to explain that, "Some of our bankers had shown themselves either incompetent or dishonest in the handling of people's funds. They had used the money entrusted to them in speculations and unwise loans."
However, Roosevelt did not make taxpayers pay the price. Instead he created the solution - a "New Deal", to get both the citizens and the government out of the mess. As he said, he, "reorganised, simplified, and made more fair and just our monetary system." His administration spent $500 billion (in today's dollars) for a range of public-works programmes (including 72,000 schools) that created widespread employment and opportunities and steadily brought America back to prosperity.
What Roosevelt did stands in sharp contrast to what Bush -- whose calibre does not extend to economic and financial matters - has allowed to happen now: a bailout of $850 billion (rather than $700 billion) to save the necks of those directly responsible for the crash and which the taxpayers will ultimately have to pay up. One new executive was paid several million for his few weeks on the job! Another company immediately spent $400,000 dollars of the money they received to reward their topmost executives to a foreign holiday! Such is modern 'free-market' American democracy - it takes from the poor to give to the rich!
It was President Reagan who started pushing deregulation and boosting his corporate backers. Previously, under the New Deal, banks, brokerage firms and insurance companies were barred by financial controls. These controls were completely lifted in 1999. It has taken less than a decade for disaster to follow.
If the same kind of financial indulgences don't exist here, why then are prices soaring and businesses collapsing even after the price of oil is finally receding? Is it because the value of our money is linked - whether we like it or not - to the dollar which is rapidly losing its worth and been cartooned as toilet paper, and expected to drop further to almost half its previous value by next year?
There are of course not just one or two but a whole range of reasons that operate in tandem, some more lethally than others. But the loudest grumblings that come across cite unregulated globalisation, and within it the secretive and unaccountable global financial system, plus the unethical commodification of something as basic as food in world trade.
When anything is left unmonitored in any sphere of life, the opportunists and the dishonest will take advantage. That's a common sense fact of life since humans are imperfect beings making a crime-free world impossible, although crime can be contained to a tolerable minimum. If a building full of riches is left poorly guarded, the robbers will come. If the financial system is left unregulated with no questions asked, and unlimited money pours through the hands of those who invest on others' behalf, the temptation is too great not to try and make an extra buck. That is what happens with hedge funds and derivatives. It is amazing that the Barings crash is so quickly forgotten.
It is not for nothing that Islam forbids usury or compound interest - obtaining interest from interest, not just from the principal amount. Hedge funds and derivatives have stretched this into all kinds of outrageous variations. Even the Chairman of the South African New Economics Network actually defines it as Usury Finance, "a money fiction out of debt on the basis of debt as collateral in a manner delinked from real economics."
In simple interest, a certain percentage is charged of the principal amount borrowed. When a part of the loan is paid off, the subsequent interest charged is only on the balance of the principal. Derivatives however 'derive' further interest from interest; not from the same source, but piling new interest from each added layer of interest through an additional gamble on yet another venture, or rather, misadventure.
On paper or in electronic computerised money, it can go on and on. Even though the initial interest charged may seem a tiny percentage, it comes to a lot on the average minimum of a million dollars. -- And as each interest-due date comes round, the total interest payable gets bigger and bigger. It continues until someone can't come up with the wild supposed windfalls. The companies being risked may not even know what was going on. The truth is that new non-existent credit was constantly being created from non-existent credit. - All an illusion.
The problem with this form of fictitious money-making is that in the real world of manufacturing and services, income takes time to be earned; it isn't made instantly with the push of a computer key. All the multiple interest-based profits ultimately have to be paid for with real goods and services; this very fact makes the system dishonest. No matter how good business is, there will be slowdowns sometimes; some unforeseen problem maybe. But even otherwise, sooner or later, the relentless pace of investment - that is, the interest attached - soon overtakes the slower pace of the real economy. What one ends up with when a crash comes, is a lot of meaningless, valueless, paper or electronic money and nothing tangible obtainable with it. And the effects can stretch around the world, unknowingly hitting businesses whose shares are being betted on from afar.
It is also a matter of too much 'money' chasing too few goods and services. The minority who possess excess wealth can buy up anything they want including others' rightful share of property and benefits, even causing producers to cater only to the moneyed, leaving the rest in poverty including those who were never poor before. They may turn to upper-rung markets, such as real estate, leisure-related businesses, and superfluous hi-tech. But the scope for earning gets narrower and narrower, while the volume of worthless money gets bigger and bigger. A crash becomes inevitable.
The scale of the current crash is so vast and complex, many working in the industrialised-countries financial system don't understand it either because few are in the habit of dabbling in the dubious. But since, especially under Bush, speculators have been unleashed and not been monitored or controlled, they felt emboldened to overstretch themselves.
It is this gambling with other people's assets around the world, behind their backs and without their leave, that is corrupt as well as a violation of fundamental rights. Economist David Korten, who exposed USA's predatory activities around the world in his books, wrote over a decade earlier: "…even the world's most powerful corporations have become captives of the forces of a globalized financial system that has delinked the creation of money from the creation of real wealth, and rewards extractive over productive investment. The big winners are the corporate raiders who strip sound companies of their assets for short-term gain and the speculators who capitalize on market volatility to extract a private tax from those who are engaged in productive work and investment."
So it doesn't necessarily pay to be listed on international stock exchanges!
The most modest estimate finds thirty times more bank-created 'money' as there are real goods in the world. With inequities already existing in all societies, it causes a degree of extremes of rich and poor. But when it comes to hedge funds and derivatives, it is far worse -- over one thousand times as much fictitious money as there is real goods and services! In the real world it appears as inflation, thanks to the recklessness of a few.
The crash should not have happened again, but it did, driven by the extremes of deregulation that the WTO and the US pushed the world's economies into, leaving no protection for ordinary citizens' money and giving corporations and speculators a free hand. Nor did Bush and his cronies, unlike Roosevelt, make any attempt to save millions of victims with some kind of social and economic programme, not even in saving the countless small home-owners who can no longer pay their mortgages -- although they only needed to have their loans restructured to give more time to repay, instead of being evicted and made penniless while predatory debt-collectors pick up their real estate for a fraction of their real worth.
As former World Bank economist-whistleblower Joseph Stiglitz points out, "The objective of the bailout should not be to protect the banks' shareholders, or even their creditors who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages….We need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness."
The US was already over $9 trillion in debt, further aggravated by war. In the meantime, its corporations with no loyalties towards their own country, maintaining offshore accounts and paying almost no taxes -- have outsourced factories and jobs during the Bush years, creating unprecedented unemployment of too many millions of Americans. This makes it that much more difficult to earn and repay the $700 billion which experts have said is only the 'first instalment', as it will soon require at least that much more in bailout money. Surely we should not be further burdening ourselves with USA's worthless dollars?
Because gullible or purchasable decision-makers first burdened us with staggering World Bank/IMF and other IFI dollar-denominated loans (for which they never took public permission or informed citizens' advice) that has aided corruption for half a century, and then made us part of an unbridled globalised world of trade and finance, we are stuck with a diving dollar. We are unable to wholly or partially dump it as some countries with more moral fibre or guts or intelligence - such as Venezuela, Argentina, China, Iran - have done.
But individually we can at least use more of our common sense to protect ourselves. And our State Bank could, for example, create a domestic currency that is not linked to any international one, to help build up and strengthen a self-reliant local economy insulated from the destructive ups and downs of unjust and unstable globalised deregulation. As Roosevelt did, we too need our monetary system to be "reorganised, simplified, and made more fair and just."