Global financial crisis: stage two.There was always going to be a second round to the financial crisis that has enveloped global markets over the last nine months. The first stage, which ended in March, was followed by a period of consolidation, often interpreted as a sign that the worst was over. The logic of the first stage was countered by the intervention of Central Banks, especially the US Federal Reserve, ensuring that short-term liquidity was shored up by securing huge amounts of bank debt. Even the investment banks have been brought under the umbrella of the Reserve for the first time.
However the success of the US Reserve strategy may be judged, that first stage was serious enough to puncture some core illusions of the system of global markets taken for granted since the explosion of global financial institutions in the 1980s, set in train by the silicon revolution of the 1970s. The new financial markets, drawing on the powers of high-tech, created an avalanche of cheap money for over twenty years. The idea that there could be an endless expansion of wealth, demonstrating the genius of neo-liberalism, had become a commonplace, but now it is an embarrassment. Credit, once shoved down the throats of anyone who moved, is suddenly scarce, and there are growing concerns for the 'real' economy. What has happened to this unstoppable revolution? Obviously, a lot more than simply a sub-prime crisis.
We do have answers of a kind from investigations into previous credit crises--in Adam Smith's comments about markets and their limits, what he called 'animal spirits', or George Soros calls the 'madness of crowds', or as contained in Robert Shiller's notion of 'irrational exhuberance'. Karl Marx, with more analytical insight, found the problem of credit crises in the social nature of the market itself. But the social character of global finance also calls into being new limitations which are more complex than those associated with the money markets of previous times. And these demand a different account, an account that provides insight into the nature of the social world today and its quite particular dangers.
In an immediate sense one important element in understanding what is happening today is the demise of leverage, which is to say the demise of cheap debt which allows one to borrow and buy more substantial assets than would otherwise be possible. The period of historically high leverage via a great variety of financial developments--including what is called securitisation (such as the collateralised debt obligations now mentioned daily in our newspapers), hedge funds and private equity--has now gone into reverse.
The profits made possible by leverage in rising markets turn into stunning losses in falling markets. If a person spends $1 million on a house and borrows $900,000, then an increase in house value to $1.2 million turns $100,000 invested into $300,000 if sold. But if the value falls to $700,000, this turns $100,000 invested into a $300,000 loss. When debt is cheap, in an economy of self-seeking individuals, its use multiplies and this by itself has the effect of pushing up asset values. Because more money is available for scarce assets it generates a self-fulfilling frenzy, until something snaps. And today debt is no longer cheap, and there is good reason to think that this is not a temporary change.
The National Australia Bank (NAB) reports that it now has to treat as bad debts what were formerly AAA-rated 'collateralised debt obligations'. This is a form of debt that illustrates a particular characteristic of global markets today: the use of financial 'instruments' that are essentially opaque. Old attitudes to risk and moral lessons associated with money--for example, that knowable, tangible people, as the agents of exchange, need to be assessed and made responsible for money lent--have been abandoned in the new global markets: dispersed into a more universal and abstract 'responsibility' maintained by the ratings agencies. In this Kafkaesque world, thanks to high-tech, the NAB does not know who owes what or what portion of debt is likely to deteriorate.
In this instance the AAA rating of NAB debt indicates that the debt was substantially prime mortgage, not sub-prime. It illustrates the rapid turnaround that has now hit prime real estate, whereby its propping up and excessive valuation on the basis of leverage has quickly converted into its opposite, so that as little as half the value of such mortgages is now being retrieved if there is a default. AAA ratings have suddenly become ZZZ. Three days after NAB made its announcement, ANZ faced even more intense music. It is ironic that both NAB and ANZ defended themselves and argued their continued solidity in terms of their high credit rating. The big question becomes, who is going to rate the credit raters?
The more important point for the security of the financial system is that if AAA can quickly turn into ZZZ, what faith can one put in the banks? The NAB has another $13 billion of collateralised debt obligations. For the moment these are not subject to the same doubts, or the same deteriorating process, because they arise from corporate rather than mortgage-based loans. But time can be a terrible thing in such matters. It is true that real estate mortgages are collapsing under the impact of falling house values, but it is not just house values that have benefitted from debt leverage over the last twenty years. There is a logic unfolding here. As the cost of credit increases and credit itself is restricted, it will pressure many other asset values and in turn the value of debt vehicles such as collateralised debt obligations and derivatives more generally. As Adele Ferguson of The Australian dramatically points out, the Australian banking sector exposure to derivatives is $9.8 trillion and if 1 per cent of these were to turn into bad debts it would wipe out all Australian banks. Societies based around money exchange are fragile at the best of times. This fragility is multiplied when money becomes high-tech info-money.
Whatever the case within the Australian banking sector, the crisis is much worse in the United States. There the collapse in asset values is more disturbing and the unavailability of credit for relatively safe borrowers is a huge and growing burden on the economy and preoccupation of central bankers. We are still in the phase where these losses are largely being declared. But such transparency should not be taken for granted. The example of the Japanese banks in the 1990s after the collapse of their property bubble is instructive. There the losses became so large that they had to be concealed to save the financial system, to give it time to accommodate to the losses. The banks had to be propped up and this had the effect of radically weakening Japanese banking and credit formation throughout the 1990s and into the next decade, ushering in a backdoor version of zero growth for a decade. At the time, the bankers of North America had little sympathy for Japan's dilemma. Japanese handling of the bubble debt crisis was regarded by US bankers as a sign of immaturity--of the Japanese not being able to face the facts and resorting to practices that from a market culture standpoint were 'moral hazards'.
But all the signs are there that US bankers are now starting to feel a little immature, such moral hazardous behaviour calling to them seductively. Given the logic and scale of the present crisis, they feel a need to conceal the losses buried in the 'assets' in their balance sheets or, as with Enron, not even recorded on their balance sheets. This seems to be one likely, even necessary path for the United States, if not for all the economies of the world. If this produces a variation of Japanese zero growth, needless to say it will not be embedded within a way of life or culture or economy properly adjusted to zero growth. There is only one thing worse than a growth economy with hyper-individualistic self-seeking behaviour sweeping everything before it: a growth economy of entrepreneurial individuals, with attendant motivations and destructive social relations, frustrated to the point of deep strains brought on by zero growth or worse. It takes no Einstein to guess where such frustrations might lead.
For all of this drama now occupying the pages of the daily newspapers, there is still little reflection on how the world has got to this point. Indeed most commentators still want to take for granted in their accounts of this crisis exactly what must be reflected upon. That is, how this crisis is an expression of the limitations and contradictions of a unique social development: the emergence of a new relation between the high sciences and the social world. Of course this is not the way this historic development is usually described. At best, commentators refer to the rise of the new financial markets in the 1980s. But those markets are just one aspect of a more profound development: a society increasingly composed of social relations where the social other is at a distance, only available to us via technological mediation. The problems of the markets take their shape from that broader society.
Despite continuities with the past, this society takes its special shape today because contemporary communications technologies allow a radical elaboration of socially distant relations. Individuals formed predominantly by these extended relations no longer experience themselves as being shaped by and with social others and can see no greater truth than self-seeking behaviour. When these distance relations are combined with the expansive possibilities of high-tech based production it leads to a society of a new kind: one that is global and mobile and oriented to individual consumption in unique and novel ways. Movement of individuals and objects around the world is its distinctive trademark, with the internet, global markets and transport facilitating its elaboration. This is the social basis of the whole experiment in globalisation.
This social development undermines all social institutions that depend upon tangible associations between people. Local community is emptied out and replaced by individual consumption and fleeting relations that place little store in more stable face-to-face associations. Localised trade is increasingly displaced by global trade, and as we have seen with the global financial crisis, debt commitments between tangible others are increasingly displaced by global debts that are no longer able to be easily attached to knowable entities. Info-money differs from money in the times of Marx and Smith. Supercharged by high-tech, it is made both more powerful and more ephemeral and abstract. Debt divorced from real people leaves it open to further manipulation, as found in collateralised debt obligations. Info-money and local community or local production are mirror opposites.
In other words, today's financial crisis is an aspect of a larger process in which the limits and contradictions of distance relations are increasingly coming to the fore. This social development has gone out onto an evolutionary limb, committed as it is to unsustainable practices on a grand scale. Here global finance is only one of a raft of such examples. The problems of global finance or the distance society more generally are not problems to be solved by shifts in policy. By and large they are structural problems that draw our attention to the nature of the society as such. What is the future for identity where others are no longer available to us except at a distance and where bio-technology promises a high-tech world of self-body elaboration beyond the human? What is the future for global trade and the global movement of people when they are dependent on energy resources that are not only in decline but where prices are tending to spiral out of control? How can global neo-liberalism turn around the massive forces of environmental destruction when it is defined by global movement, global consumption and the glories of growth? The need to reconstruct social institutions in their basics now stares us in the face. The present financial crisis may even open some of the necessary doors to such reform. If it doesn't, there will be no shortage of stimulants in the near future. The end of neo-liberalism is only a matter of time.
John Hinkson is an Arena Publications editor.