In the article ‘Brexit, Brexit & More Brexit’ (January 2019), I pointed out that the British financial elite had long ago replaced the industrial and commercial elite as the dominant economic force within British capitalism. As such this sector has, through its lobbying and stipend-granting power, also been the dominant political force behind many things including the process of exiting the EU. The once realised claim of Britain being the ‘workshop of the world’ had been entirely negated by the time of the Second World War, but the ambition of remaining one of the great banking centres of the world had not. The ‘City of London’ (Banks, Merchant Banks and Insurance Offices) took over the mantle once worn by the nearby, and now defunct ‘Pool of London’ (Docks and Warehouses) and the attitude of being ‘great’ in Great Britain, found a replacement ‘container’ in the plush offices of those receiving and sending payments around the globe rather than those receiving and sending goods.
Nevertheless, the exaggerated sense of self-importance and power which still clings to the British elite in general, and the financial elite in particular, has being given a sharp rebuke by the leading representatives of the remaining 27 EU States. It seems the power and determination of a united elite political group of twenty seven is sufficient to stand up to the arrogant assumptions of one. This EU opposition has also clearly stimulated and exposed once again the fragile unity of the United Kingdom elites. To anyone not besotted by elite promoted nationalist pretentiousness, Britain is no longer ‘great‘ in its previous form as an empire, nor ‘united’ as when Scotland and Ireland were forcibly incorporated into its ‘kingdom‘. Its politicians being far from great. However, despite the current humiliation the British political elite are undergoing at the hands of the Brussels elite, we lower orders should not underestimate the power and ability of the British financial establishment to cause more future havoc. They are still second to none in their ability to facilitate fictitious capital and financial bubbles. The latter being devastating when they eventually burst.
Who creates and inflates financial bubbles?
It has long been known that in the capitalist dominated cycle of economic production, distribution and consumption, financial speculators have frequently been detrimental to the general circuit of production and commodity exchange. We need not think back very far to remind ourselves of this fact. In 2008 an international chain of bankruptcies and near bankruptcies rattled around the world’s banks, mortgage companies, Insurance institutions and investment funds. A sub-prime mortgage and housing bubble had been created, predominantly in the USA. House prices had been inflated way above their intrinsic value by cheap flexible loans and it was only a matter of time before the earnings of purchasers were not enough to service the monthly payments of the huge loans required to secure title to a house. When the financial bubble burst, defaults, home repossessions and much else occurred. Based upon past experience and historical knowledge, this eventuality was entirely predictable and I will explain why.
A bubble in financial terms occurs when the the price of something of value (referred to as an asset) is inflated by competitive investors to a point at which it drastically exceeds it’s real value. If any asset seems sound, starts to offer good returns and its price steadily increases, then it may attract many speculative investors. Such investors intend to buy the asset at the current price and sell it later at an increased price and thus make a profit. In general, people or institutions with lots of spare cash or access to sufficient credit are merely using these financial transactions to bet on changes in price (up or down) so as to either: A. Buy cheap and sell dear, or B. Sell dear and buy cheap. These are the foundations of usual financial market activity and the purpose of the continuous trading. However, an asset with a good return does not automatically create a bubble.
The financial bubbles considered here are those ‘trades’ inflated by speculators eagerly buying relatively cheap and selling relatively dear – the type designated as A above. The stage of a profitable asset becoming a bubble often begins when three further financial market symptoms coincide. First, even more investors notice the asset price rises; second, the returns (profits) being made by existing investors trading in the asset are good; and third, cheap credit, promoted by banking institutions and governments, is or becomes, readily available. These factors give more investors the confidence to buy and allows many of them to do so without having the means to pay. The calculation made in the use of credit to trade is that after agreeing to purchase they can sell the rising asset before their loan payment is due and so pay off the loan from the money then coming to them. If successful, they pocket the extra difference between the two amounts. In essence it amounts to – money for nothing – and the chits are free. (Circa; a Dire Straits lyric.)
The second stage of financial bubble inflation is based upon a continuation of the financial symptoms active during normal trading, but the successes of stage one, in particular, engender something of a frenzy of investment in the asset by new and existing participants entering or re-entering the speculative race. Investors begin dipping in and out of this trading cycle in order not to miss out on an almost certain profit by placing an order to buy and later to sell. This stage of bubble making speculative trading has been called an irrational exuberance (by Alan Greenspan, of the US, for example, in 2007) but I suggest this is an inaccurate and completely retrospective description. This definition needs challenging because in the early stages of bubble making it makes rational sense for greedy rich people and institutions to enter this race to buy and sell the rising asset.
It is rational, because in the early stages, there is practically no risk and very little effort required to begin making enormous profits. Indeed, what motivates some deliberately calculating investors has been scathingly described as pump and dump as they cynically play the asset and the ‘market’ conditions. Brisk trading can pump up the price then the asset can be dumped when it’s price increases. Speculation in financial markets which lead to the formation of bubbles is, therefore, more in the nature of individuals and institutional investors placing bets in a casino they have rigged. The game is rigged by the fact that the energetic trading itself automatically inflates up the price so that most of those betting continue to win their bets – until the bubble bursts. In other words, there is a period of time where the rising asset price has become a self – fulfilling prophecy. As long as enough of the herd (the Wolves of Wall Street, the foxes of the City of London and their counterparts globally) suggest it is a sound asset and the price keeps generally rising and enough people keep buying – then for a time – making a profit is a certainty.
The financial bubble can continue to inflate until some incident (a large default or asset sell off) or a re-assessment (possibly a negative rumour) takes place in which the third stage is entered. At that point more investors decide to get out, than continue to get in. When such private doubts set in the bubble formation has been slowed or is about to be punctured. Sooner or later, usually sooner, the scramble to buy stops and turns into a scramble to sell, before the price starts to fall below the price originally paid and a loss occurs. At that stage the bubble has been irreparably punctured and its deflation can be rapid. During this stage of accelerated price deflation those making the last bets lose everything or nearly everything. Apparently that happened to poor Isaac Newton during the South Sea bubble in 1720. It seems even clever scientists can be effectively blinded by the glint of free money.
So who else suffers?
I guess it will be hard for the reader to feel sorry for the millionaires, billionaires and random intellectuals, film stars, sports personalities, comedians and successful rock musicians, etc., who may have lost such insatiably greedy bets and seen their claims on wealth disappear or dissolve by a considerable amount. I share a similar lack of sympathy myself. However, a word of caution, before dismissing their losses – past, present or those to come in the future – for these are only the first links of a chain of problems to follow. The losers are connected to the rest of the economy and citizens by their hold on the means of exchange, which the rest of us use. And my simplified version sketched above gets even more complex when ‘financial instruments’ (MBS’s, ABS’s and CDO’s, etc. descriptions of these below) are involved in the financial market dealings.
So whilst it is a fact that the financial speculating ‘wizards’ and mathematical alchemists who conjure up the various Mortgage Backed Securities, other Asset Backed Securities and Collatoralised Debt Obligations etc., are not the only ones who can lose out. The investment staff at pension companies and other institutions collecting the hard earned savings of blue and white collar working people and charities are frequently playing at the same asset-gambling ‘market’ casino and placing similar speculative bubble inducing bets. So it’s our pensions or savings schemes and even the charities we donate to which can and do suffer loss. And there is even a further knock on effect which devastates ordinary people’s lives. Don’t just take my word for it, read what the following pro-capitalist economist has written.
“The Ifo Institute (a German economic research institute RR) has monitored the economy for more than sixty years and has never observed a crisis as severe as the one that hit the world economy in 2008 and 2009. North America, Western Europe, Japan, Latin America, and the countries of the former Soviet Union were all in recession. The recession was accompanied by a financial crisis, the likes of which the world has not seen since the Great Depression. In the course of 2008, more than 100 American and British financial institutions disappeared or were nationalized in part or entirely. In Iceland all the banks were nationalized, and for all practical purposes, the country is bankrupt. Ireland, Hungary, and Greece have payment difficulties, and many think that Great Britain and Italy will also face serious difficulties. And many East European countries within and outside the EU are in trouble. At the time of giving this text a final polish, in January 2010, the recession has ended, but this may only be a temporary relief, as the banking crisis is still far from being overcome and a public debt crisis is looming.” (Casino Capitalism. Hans-Werner Sinn.)
In the wake of such large-scale, bubble-bursting events, bankruptcies, industry closures, desperate takeovers and nationalisations follow, which also shake the real economy. The results of the 2008 housing bubble collapse, for example, also devastated the lives of millions of working and middle class people around the world, who lost homes, jobs, and savings. And this was not the first time. There have been an estimated ten serious financial bubble events reported since 1929 and there were bubbles decades before then, most notably in South Sea shares (mentioned above) and buying individual Tulip Bulbs for loads of money. (Don’t laugh, that’s not fake history.) In other words enough bubbles have happened to be a warning and to be included in pro-capitalist economic theory of the 20th century. Eg.
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activity of a casino, the job is likely to be ill done.” (Meynard Keynes. ‘The General Theory of Unemployment, Interest and Money. Macmillan. P 159)
Although in many ways the quote above is an amazing understatement of the huge problems encountered in 1929 and again in 2008, it does indicate the negative consequences of speculation, particularly when this creates financial bubbles. The fact that the lessons of the 1929 Wall Street Crash had not been learned and were repeated in 2008 shows that perhaps the ardent pro-capitalist economist Keynes had wasted his time and energy by helpfully publishing his carefully considered findings. The captains and the accountants of the finance capital sector clearly did not take much notice of Karl Marx 19th century rigorously detailed analysis, or of Keynes in his 20th century General Theory, nor of the warnings voiced in 2000 and 2003. It would seem those in the finance-capital sector just can’t help themselves! They have acquired a form of financial addiction in which the addicts are either insensitive or oblivious to the wider implications of their collective illness.
So who gets rescued?
Well its not the pensioners, not the unemployed, not the zero-hours workers and certainly not the homeless. Despite the above noted greed, professional neglect and serious antisocial behaviour, with the exception of Iceland, the well heeled fortunes and institutions of the bankers and many finance houses were bailed out of the debt crisis they and their elite clients had brought upon themselves and us. Their buddies in politics and government had their backs and made good many of the 181 billion dollar estimated losses, from the general tax payers purse. Yes, by various means, we were all forced to pay for their bailout. The neo-liberal political and governing elite for once openly revealed their dualistic favouritism and exposed the normally hidden economic dialectic; financial profits are privatised, but financial losses are frequently socialised.
In other words, the exclusive coterie of financial speculation addicts were (and still are) comforted and supported in their addiction by the political and institutional leaders of the welfare state who use it (or rather abuse it) to support the wealthfare of their own elite class. Instead of being punished in Europe, the US and elsewhere those responsible were treated as unfortunate casualties who needed to be nursed back to health by doses of public cash, huge cheap loans and returned to their investment ‘high’ of choice. This double standard cannot be surprising since much of the establishment in the UK (as elsewhere) is not just eager to take part in and listen to the fantasy desires of the banking lobby, they have long been aiming to be the banking lobby and have largely achieved it within the British Parliament and Government. There were early warnings of that general possibility also. Eg.
“Each central bank…sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” (C. Quigley. ‘Tragedy and Hope’. 1966)
For those with the time or inclination to explore these subsequent economic rewards in the business world I suggest dipping into ‘Parliament Ltd‘ by Martin Williams, which reveals the “dark heart of British politics” and much else.
So are more bubbles on the way?
As noted above, business as usual in the financial sector has always produced bubbles, even though they don’t happen every day or even every year, but sooner or later one or more will be inflated and burst. The logic of the capitalist mode of production makes it inevitable. This is because the function of economic activity is primarily to make vast profits for the class which own and/or control the means of production – land, buildings, machinery and labour. Historically, when the accumulated profits from industry and commerce reached such a magnitude that there were not enough profitable industrial and commercial ventures left to absorb these profits for investment purposes, other forms of investment were sought. This has increasingly been the case since the 18th century, which saw the eventual domination of the financial sector over the industrial and commercial sectors of many national economies, particularly, but not exclusively, Britain and the USA.
This symptom of financial domination continues in the 21st century. It’s direct influence was behind the not so hidden agenda of the David Cameron negotiations with the EU in 2005/6 in his attempt to shield the City of London banking empire, from EU regulations. The ‘opt out’ and safeguard clauses requested were rejected by the EU then, as now. That particular Cameron banking-version of the ‘national interest’, is still the less advertised strategy of many ‘Brexit’ politicians in the UK. Their predominant concerns include freedom for the British based finance-capital sector to do what it does best – make money for those with lots of it already. That is something the sector has been doing for a generation or two so the habit and routines of investment banking have become a set of well-honed professional (sic) skills. How these institutions take large tranches of money or credit on deposit and return it to the owners or controllers with a large dollop of extra money or credit attached to it, has been slightly sketched above.
However, in case I have insufficiently stressed the interlocked process of it’s spurious logic I will try to do so again by involving the reader in a little thought experiment. Let you, the reader, suppose that you had several millions of your countries currency in a bank account and you were not content to leave this fortune at rest, but wanted to use it to gain even more. What could you do, or who would you ask for advice? You would soon discover that the finance sector have specialists who will not only advise you for a fee, but this sector also have other specialists who design ‘financial instruments’ which you can also purchase for a fee. Now put yourself in the position of the first category of these financial consultants. They have families and standards of living to support so the first lot will do their best to recommend investment opportunities which pay a good fee to them, and if they are entirely honest (sic) and not purveyors of dodgy schemes, also offer a good return for you.
The second group, the designers of special financial vehicles and financial instruments, also have families and ambitions, so will invent or design as many investment vehicles and instruments as possible and link them directly or indirectly to some real or imagined asset. They will do so in order to obtain their salaries and considerable bonuses. Those of similar circumstances (and even better circumstances) along with institutional investors will be offered one one or more of these investment opportunities to consider. Thought experiment nearly over; but remember there are many such investors, nationally and internationally. The casinos are linked globally and the gamblers are super rich. And the above noted game is still in play every day. Now given that the world is still in a period of lower production, lower wages and higher unemployment (ie austerity) and will be for some extended time, then it is unlikely that many opportunities for investment in the production of commodities or services will be available. So in these circumstances what kind of assets are there available to the specialists, now and in the future, for them to recommend?
What kind of bubbles might emerge?
The answer is already in evidence. The obvious ones for asset-based securities are gold, silver, copper, zinc, oil etc., and some crypto – currencies, (how dodgy is BitCoin for example) whose value is likely to rise, at least in the short time. Incidentally, bubbles are probably slowly or even quickly forming in all these financialised assets as you read this article. Also the value of certain foreign currencies may stay stable or increase. Forex linked investors play at that particular crap table. [Remember the run on the British pound by the ‘short’ selling Georges Soros in 1992, a process which caused it’s devaluation and made everything we buy more expensive?] There may also be other assets categories, which emerge similar to the dot.com companies such as Facebook, Amazon, Airbnb etc., and from being good (sic) investments may become potential and actual bubbles.
Other asset probabilities such as car loan agreements, student loan agreements, pay-day loan agreements and credit card loans, can be used on the basis that most loans will be repaid. If some rich punter buys a group of these loans they can reason they will get more than the purchase price they paid. These loan commitments can be bundled into paper instruments and layered or tiered so that a mix of prime loans (highly probable repayment) and median loans (fairly probable) and sub-prime loans (high risk of default) appear on them. These, or others may become the complex asset – backed securities (ABS’s) which will be offered to those with sufficient spare cash or credit to purchase them. Interestingly, there are two reasons why loans are a probable (and attractive) asset for blinkered financiers to bundle now and in the future, particularly in the advanced countries.
First, is the fact that in a period of low pay, precarious employment and austerity, loans are a common means used by working people, to prop up family budgets. Second, the majority of people taking out loans, even those at the poorest economic level, will make practically every sacrifice possible before they will default. Second and third jobs, begging, stealing, drug – dealing and even prostitution may all be resorted to rather than have the stigma and existential consequences of defaulting on a loan. This means that a significant number of even sub-prime (pay day type) loans may offer good returns to investors in them, while those struggling to make the weekly or monthly payments to the already rich are descending into a living hell of poverty, stress and even destitution.
This scenario ensures the almost certain probability that a future bubble will be inflated in one or more of these asset groups or others not here identified or some even yet to be invented. But just as inevitably any bubble formed will eventually burst by a series of investment withdrawals and/or defaults. It is possible to say this with a high degree of certainty because we know this is exactly what happened in the case of the sub-prime housing bubble in the USA, before the final bursting of it in 2007 and the subsequent 2008 financial crisis. And actually nothing has really changed in the finance sector or the political. Revealingly, and crucially, the addicts in search of speculative investments are still cruising the financial markets and the dealers in financial instruments are still busy devising and pushing their speculative wares.
It might be tempting for some observers to think that the highly paid specialists in the regulatory bodies set up by governments to prevent such problems will, in the future, spot them before they detrimentally explode. However, it makes no rational sense to be hopeful or so trusting. Think for a moment of the confused and detrimental mess the governing classes have got themselves in over Brexit here and building a wall or fence in the US. Even the oxymoronic statements such as Brexit means Brexit soon after the referendum here in the UK, revealed an amazing lack of rationality as well as detail. It was the equivalent of stating that ‘cheese means cheese’, whilst everyone needed to know kind of cheese they were being offered; Lancashire, Cheshire, Cheddar etc., or Camembert, Brie, Feta etc.
If politicians, such such as Brexit means Brexit May, also think that the proposal by the EU negotiators is already an agreement before Parliament has agreed to it, we can’t expect much from them or those they appoint. Also bear in mind that the same UK elite have managed to accrue government debt to the tune of almost 13 billion dollars. Technically speaking a succession of these Oxford and Cambridge ‘suits’ and assorted British aristocrats have managed to bankrupt their former empire and one of the most wealth accumulating countries in history. [Their equivalents in the US are no better.] But there is another reason why regulation of financial instruments will be ineffectual – the complexity (often mathematically so) of the financial instruments themselves. A rare confession by regulators of failing to understand what was involved was revealed in the above quoted book Casino Capitalism.
“We had resolved to approve a financial product only if at least one of us understood how it worked. We were unable to adhere to this principle, however, as we always had to fear that it would then be approved by the English or German authorities. So we closed our eyes and gave the approval.”(quoted in Casino Capitalism. Hans-Werner Sinn. Emphasis added. RR)
Reduced to bafflement at the maths involved in the complex construction of financial instrument viability (ie the calculus based betting slips) the amply salaried regulators on both sides of the Atlantic, where not actually complicit in their construction, closed their eyes and gave approval. No further comments are needed than these along with those made above on the future economic and financial prospects for countries dominated by the capitalist mode of production. And that is without elaborating the patriarchal links between finance, arms dealing, war, pollution and ecological destruction.
The examples of Britain and North America have demonstrated to humanity what ambitious and hegemonic capitalist elites can do to people, animal life and the ecological balance of the planet within just a few hundred years of complete domination by capital in all its forms. It cannot be reassuring that there are a growing number of imitators of the UK, EU and US elite career path in the rest of the world. Chinese elites, for example can’t wait to replace the current Anglo-Saxon oligarchs as the dominant military, political and economic forces throughout the world. If that thought doesn’t motivate more intellectual resistance to the present capitalist mode of production among those who bother to think about it, I am not sure – as yet – what will.
R. Ratcliffe (February 2019)