A Predictable Disaster: Exposing the Roots of the 2008 Financial CrisisColin Jenkins I Social Economics I Analysis I June 7th, 2013
The 2008 financial crisis swept through the global landscape much like a midnight train passes over a sleepless city: violent and sudden, yet peculiarly unnoticed. However, unlike the hardened city dwellers who have become accustomed to their frequent inconvenience, financial "experts" struggled to realize the lasting effects and potential permanency of what quickly developed into a global, financial train wreck. Five years later, despite soaring corporate profits and a record-breaking Dow Jones industrial average, people continue to find themselves jobless, homeless and hopeless as the result of a world financial crisis whose warning signs were largely ignored for the better part of a decade.
The immense magnitude of this crisis was marked by its effect on the western industrialized bloc of nations who have for years experienced unprecedented growth and prosperity under the blanket of "free-market" (though far from "free") ideology. As with most fragile theories, theirs was turned on its head by limited sources of exploitation and waves of illegitimate credit schemes that inevitably overstayed their welcome in this quasi-capitalist system. After enjoying unprecedented gains in corporate profit and personal wealth since the 1980s, multi-national corporate executives found themselves at the mercy of government "bailouts." Nobody was immune from this sudden shift into "survival mode," and in those tough times, even the staunchest free-marketeer seemed willing to consider the possibilities of nationalization, at least in some form or another. The air on the economic landscape was thick with irony - so much so that Marxists could not help but think, "I told you so," as they navigated through the remnants of a disastrous capitalist endeavor.
The aftermath of this disaster was littered with questions - and as we turned on our televisions, picked up our newspapers, listened to our radios, or explored our favorite Internet news sites, we were bombarded with "experts" commenting on the crisis, speculating its roots, and pondering potential solutions. Like shepherds, they faithfully guided their herd with obtuse and irrelevant analyses that evaded the broad picture and its historical context. In order to satisfy their "target audiences" and corporate partners, they ignored the existence of millions of multi-generational working poor while catering to upper and middle-class egoism with tales of stock plunges, deficits and credit crunches. With the absence of a substantial welfare system to blame, some pointed to the "audacity" of labor unions that demanded livable wages for its workers while at the same time ignoring the multi-million dollar escapades of 'corporateers' and financiers. And with stubbornness that would make a mule envious, others demanded an intensification of the same deregulation that allowed for three decades of extravagant romps through Wall Street, Paternoster Square and Nihonbashi. Regardless of the argument presented, all were surely gutted of any substance long before hitting the airwaves, ultimately leaving readers and listeners unknowingly starved for meaningful information.
The Birth of Globalization and Neoliberalism
When searching for answers to the current predicament, one needs to look no further than the developments that occurred at and around the conclusion of the Second World War - a period that officially signified the birth of the "modern international financial system" - when a band of victors that operated under the archetype of "western industrialization" promptly seized the opportunity to construct a new global structure by introducing the highly regulated Bretton Woods system.
The process of "globalization," which was viewed as the pinnacle of capitalist expansion, was kick-started through a concerted effort put forth by the increasingly interchangeable corporate-governments of the "industrialized/capitalist" bloc. Through the construction of various international "mediating" organizations and agreements such as the IMF, the World Bank, the ITO, GATT, and the WTO, the "First World" was able to find a relatively non-militaristic method to exploit "Third World" resources - both natural and human. What followed was a continuation of centuries of western imperialism throughout the most underdeveloped nations, many of which were located throughout Africa and Latin America.
The birth of the "modern international financial system" and the current crisis are tied through a series of developments that occurred under the blanket of neoliberal ideology. If an explanation of the current global crisis represented a puzzle yet to be filled, the Bretton Woods system and all of its components would surely embody its largest pieces. And when placed together, these pieces would combine to create a masterpiece of financial disaster that, while fueling and prolonging the corporate-based financial system, has led to a complete ravaging of unsuspecting working classes throughout the world. The unraveling of this fragile system has been primed by unnatural developments characterized by predatory lending practices and a stubborn reliance on false capital (credit), both of which represent modern means of prolonging the inevitable demise of capitalism.
Assimilation Through International Loans
The most important aspect found in the implementation of the modern global financial system was its allowance for forced participation through the deployment of what have become referred to as "predatory loans." The original form of these loans represented a tool for "the western bloc," through the guise of global mediating agencies such as the World Bank, to issue loans to "developing" and colonized nations, and in doing so, require such nations to participate within the parameters set by global capitalism. Immediately following the agreements at Bretton Woods, the industrialized capitalist bloc began providing monetary assistance to needy governments. These loans were seen as a way to battle the spread of international Communism through forced participation in the capitalist system. With unprecedented bravado, international bankers, operating through guidelines established under the neoliberal agenda, swept through the global slums with false promises of growth and prosperity. In reality, the "predatory" system that was often carried out under the guise of international goodwill was nothing more than an attempt to expand the class-based socioeconomic systems of various nations into a global system of the same sort. In short, it was the next major step within capitalism's natural (and limited) evolution. The driving force behind this substantial expansion was the restrictive and exploitative nature of these international "loans," which did nothing more than widen the gap between the industrialized capitalist bloc and the underdeveloped world through the creation of economic dependency.
For capitalists, predatory lending allowed for the most efficient path towards an ideal environment for profiteering by opening a global market that was ripe for the picking. The process was simple - provide international loans to needy governments who in turn agree to make their nation's resources, whether natural or human, available to foreign corporations. The outcome: an ever-expanding and extremely profitable market for corporations based in industrialized nations; corrupt Third World dictatorships who sacrifice the common good of their fragile societies for personal wealth; and increasing measures of impoverishment for those who lack means of production and therefore must rely on a labor market that pays less-than-livable wages (a natural byproduct of the "profitable market").
Within this process, there have been clear winners and losers - the winners being multinational corporations, government officials (whether industrialized, colonized or "developing") and international bankers; the losers being nearly everyone else. However, while such practices have certainly yielded powerful results for big business (many corporations reported record profits in the years leading up to 2008), there was one major detriment that loomed over the heads of its beneficiaries: such practices are ultimately finite in their existence. Therefore, while the profits earned during this process had been immense, they had also met their limits. Why? Because the irregularities that were artificially introduced into the market intensified not only the potentiality of profit-making but also the inherently cyclical nature of capitalism, and to a point where, after decades of intense exploitation, the "Third World" had been completely tapped.
In other words - it's capitalism, stupid. A system that is reliant on such give-and-take tactics is naturally limited in its existence. Fundamentally, capitalism's survival requires the constant presence of an exploited player - for without this element, the system becomes stagnant and capitalists are forced to become financial cannibals - eventually turning on one another for personal gain. However, this form of cannibalism represents a desperate, "last resort" tactic; therefore, before submitting to such extreme measures, capitalists will doggedly pursue new avenues of exploitation. With the first stage of exploitation (the First World against the Third World) reaching its limits around the turn of this century, international corporate leaders were suddenly confronted with a quandary created by this loss. In an effort to tap a new target of exploitation, they quickly turned their attention back to national markets, which were dominated by middle class consumers who were more than eager to expand upon their frenzied consumerism.
Deregulation and Mortgage-Backed Securities
The next stage of globalization ironically targeted national consumer markets and was marked by the "predatory lending" practices that became commonplace throughout the industrialized capitalist bloc, and especially within the United States. This tactical shift changed the focus of exploitation from the international poor and working classes to the industrialized middle class, which had already begun a disappearing act of its own thanks to advantageous corporate policies that encouraged the widespread relocation of industries to overseas labor markets. However, despite the middle class stagnancy that accompanied the arrival of the post-industrial society, there remained an ample amount of expendable credit which proved worthy of attention. What ensued was a conscious targeting of the lower-tier of the post-industrialized middle classes, who were bombarded with enticing offers for home loans that seemed too good to be true. This second stage became synonymous with the widespread issuance of subprime mortgages, which allowed banks and financial institutions to create a "phantom" consumer market through the extension of faulty loans. Ironically, the corporate lenders and rating agencies that allowed for such processes to develop were found to be keenly aware of their limitations, and furthermore, were content with the immense short-term profit that was generated at the expense of an inevitable long-term meltdown. In this sense, this period served as a "grand finale" of sorts - a last ditch effort to capitalize off a soon-to-be decayed system.
In order to understand this shift, it is important to ask how financial institutions were able to exploit national markets with such ease. After all, if these lenders were well aware of the limitations of such practices, they must also have been aware of the eventual crash. So, while a lot of people were prepared to make a lot of money, someone was going to eventually suffer the consequences, right? Well, the answer to this question became increasingly ambiguous in the United States during the 1980s and beyond, when widespread deregulation of the financial sector led to a new trend regarding home loans. Notable legislation was the 1982 Alternative Mortgage Transactions Parity Act (AMTPA), the repeal of the Glass-Steagall Act in 1999 , and the Commodity Futures Modernization Act of 2000, which essentially opened the door to free-game derivatives and the questionable use of credit default swaps. Ultimately, deregulation led to a virtual disappearance of accountability, and this disappearing act was made possible by a newly developed loan process that was characterized by a seemingly perpetual delegation of responsibility. Rather than hold a loan through its lifespan (common practice until this point), commercial banks began selling mortgages to investment banks, who in turn began pooling together hundreds and thousands of mortgages as mortgaged-backed securities. The investment banks then sold these mortgage-backed securities to hedge funds, pension funds, foreign investors, etc, essentially "passing the buck" of what were known by many to be toxic. Therefore, the "originators" of mortgages (commercial banks and mortgage companies) no longer had a financial incentive to make sure the homebuyers were "credit-worthy." Instead, they issued the mortgages and sold them off through securitization.
After the rapid exchange of hundreds and thousands of mortgages, those who were left with these massive "securities" held the ultimate stake in their future profitability. Therefore, in an effort to acquire "peace of mind," these groups depended on the bond rating agencies (Moody's, Standard and Poors) to evaluate the risks in the mortgage-based securities and assign ratings to them. The problem? Well, "rating agencies" are private, profit-making businesses that compete with one another for the rating business of the investment banks. This service became very lucrative during this time, so there was a very strong incentive for the rating agencies to give the highest AAA rating to even "risky" securities to ensure they would continue to get the business of the investment banks - ultimately, a perplexing conflict of interests. In summary, we had commercial banks issuing mortgages to "unworthy buyers" because it was suddenly profitable to do so after a series of deregulatory policies put forth by the federal government; and with the advent of mortgage-backed securities couple with corrupt ratings, there was literally no risk for those who made quick work of buying and selling. Buyers essentially washed their hands of all risk by pooling the mortgages and selling them off under the guise of "good" ratings.
Interestingly enough, the deployment of sub-prime mortgages were further spurred by post-9/11 monetary policy. In an effort to curb the consumer stagnation created by widespread fear, the U.S. Federal Reserve promptly lowered the federal interest rate to nearly one percent - subsequently offering this low rate through 2004. Therefore, with the combination of massive deregulation of the financial sector, low interest rates, and decreased levels of liquidity, the American housing market found itself embattled in a perfect storm of corporate exploitation. What ensued was a targeting of the working classes who were previously unable to obtain home loans - a tactic used to squeeze the remaining potentiality of profit from a system that was on life support.
The End Result
In summary, the modern (post-WWII) capitalist expansion facilitated by the Bretton Woods system may be traced to two periods of exploitation. The first stage was characterized by what came to be known as the neoliberal agenda, which dominated the latter half of the 20th century through its implementation of a coordinated global financial system that was based on the continued interests of multinational corporations and their reliance on "Third World" resources (both human and natural). The second stage was characterized by an effort to stimulate continued profit through the exploitation of the industrialized (or "First World") middle classes via "financialization." Both stages were marked by an intense deployment of predatory loans, which were largely facilitated through the creation of seemingly never-ending amounts of "fictitious capital" (credit).
Up until the end of the 20th century, the disastrous effects of neoliberalism went largely unnoticed among the industrialized bloc of nations - a phenomenon tied to the effects of Third World exploitation (imperialism), which indirectly benefited the industrialized "middle classes." The result of this initial stage of exploitation was exacerbated conditions in underdeveloped nations and the simultaneous super-development of industrialized nations and multinational corporations. The second stage of this agenda, which ironically turned its attention to the exploitative potential of the same groups that had initially benefited from globalization, ultimately led to the creation of a world economic crisis. The end result of this modern capitalist experiment was the near destruction (or at least massive reduction) of the industrialized middle classes through the creation of unemployment and underemployment (caused by the fusion of global labor markets), an unprecedented amount of home foreclosures, and an overall erosion of the credit for which most have come to rely on.
As we have witnessed over the past five years, world governments approached this situation in a brazenly obtuse manner by providing trillion-dollar bailouts to banks and multinational corporations while largely ignoring the desperation felt by the hundreds of millions of people who have been victimized by this agenda. Many have gone beyond mere indifference with aggressive assaults in the name of "austerity." The reason for this is obvious yet disturbing - for the fact remains that government officials and representatives within the so-called western "democracies" happen to be the same individuals who have benefited from this global misery. The opening stages of neoliberalism (Reaganism and Thatcherism) that dominated the 1980s through a systematic process of deregulation and "corporatization" naturally intensified the ongoing synthesis between financial and governmental elite. These developments have created a political landscape with very little accountability, as well as an alarming degree of conflicts of interest. In other words, governing offices and multinational corporate boardrooms are now revolving doors, where the same faces move from one end to the other, and back again.
In the U.S., grassroots movements have sprung from this disaster. Ron Paul's "libertarian" movement has been characterized by the very demographic which felt the brunt of this process - the middle class in the United States. Accustomed to their privileges (white, upwardly mobile, professionals, homeowners, etc..), the Ron Paul crowd, burdened with flaws and inconsistencies, has evidently seen what is in store for them as capitalism reaches its final stages. And while their general analysis (differentiating capitalism from corporatism), main targets of blame (The Federal Reserve and deregulation) and indifference to crucial class and race dynamics leaves much to be desired, their mere questioning of the embedded corporate-political system can at the very least be viewed as a positive development from a demographic that has historically rested comfortably under the blanket of White and class privileges. In contrast to their "libertarian" counterparts, Occupy Wall Street has seemingly captured the correct vibe with a base that's oriented in a general class analysis, and has been relatively successful with sparking much-needed discourse on income inequality and corporate/government corruption. Occupy has also been effective with creating offshoot movements like Rolling Jubilee andStrike Debt, which just recently abolished $1.1 million of medical debt for 1,064 people. Though Occupy's presence has been nothing but positive, its apparent limitations, due to a tactical unwillingness to enter into the political arena, have been exposed. However, these "limitations" are inherent in a society that has just begun to question a system which has largely gone unchecked for decades, despite a disastrous post-WWII neoliberal agenda. In a corporatist landscape, where the political mechanisms are tapped into elite private interests, grassroots electoral movements are probably not the correct response - therefore, Occupy's strategy appears to be on point regarding this. At this time, what is needed is a growth of class consciousness and a series of direct actions stemming from this consciousness. Movements like Occupy have opened the door. Now we, the working class, must proceed.