Economy — 11 August 2011
White Collar Riots?

A new sentence has been added to the usual greetings when speaking to friends or family in the UK: “Has there been rioting in your neighbourhood yet?”. Appallingly the riots spanned several days and spread beyond London. Beyond the flames and mindless violence perhaps my abiding image from the first night of riots in Tottenham is that of Police horses lined up in defense of a local bank. Not an historic landmark with families living in its upper floors, which was torched, but a bank! Accusations continue to fly of the tardiness of the government and police in initially dealing with the crisis, although thousands of officers were drafted in to quell the uprisings after the weekend, and the courts are working around the clock to prosecute the rioters.

A different form of uprising is unfolding in these first few days of August in the financial markets. The first week of August has seen anarchy in the global stock and commodity markets – the main equity indices are in freefall, Standard and Poor’s rating agency has for the first time downgraded US Sovereign debt from AAA to AA+, and the European Central Bank has relented and is now intervening in the sovereign debt crisis on behalf of Italy and Spain.

Following a messy and protracted public argument between the Republican and Democrat parties President Obama announced early last week that agreement had finally been made to increase the US debt ceiling, thereby allowing for a continuing gross miss-match between what America earns and spends. The deficit will now inexorably continue its rise by another 2 trillion dollars to over $16 trillion, and with little in the way of spending cuts and even less (nil) in the way of tax increases to bring the deficit under control. The US is effectively cocking a snook at the world and saying it is our currency and you cannot stop us spending (or indeed $ printing) what we will. The message to the world was that there is little political will to get to grips with their deficit, the economy is not improving and political squabbles scar the landscape. It looks as though this latter factor weighed heavily in the decision of Standard and Poor’s to downgrade the debt rating. It is ironic that the rating reflects the perceived ability to repay the debt and not its assessment of the value of the $ that will be used to repay the debt – which of course continues to devalue as the deficit rises and more debt is issued. So US debt ratings are down and the actual yield (return less inflation) is negative.

Despite massive media trailing of the landmark agreement on the debt ceiling, the markets responded with a massive thumbs down. The markets didn’t buy it and have crashed. Gold – the US dollar’s alter ego has taken off and reached new all time highs.

Coming in the same week was news that the US (and Euro zone ) economies are not growing as forecast. Despite historically low interest rates these economies are not picking up and now face a new recession. Policy makers have desperately tried every trick they know including lowered interest rates, numerous incentive spending schemes, bailout schemes, increasing government spending, quantitative easing (unbridled money printing) and nothing is working. When these have all failed the consequences are dire. The stock market crash this past week (15 to 20% declines) indicates a deepening gloom over the western economies. Investors no longer believe that politicians have the answers and that substantial growth will arrive any time soon.

But there are other narratives to explain the slow moving car crash our economies are experiencing. From Le Café Americain

“The repeal of Glass-Steagall and the growth of unregulated financial products, the co-opting of the regulatory agencies, the growth of corporate influence in Washington, and two unfunded and very costly wars of long duration, founded largely on lies and distortions following a despicable terror attack by a small group of people, coupled with tax cuts for the wealthy.

 

There is relatively little discussion, much less investigation, indictments and convictions, from one of the largest financial frauds in history.”

It will come as no surprise that the Financial sector is now leading the stock market crash with Banks to the fore in stock losses. Quite simply the banking sector is an out of control monster. It was allowed to grow largely unregulated, develop all manner of gambling “derivative” products to a value 20 times larger (greater than $1 quadrillion in size) than all of the worlds economy ($50 trillion) and expand credit (create money) to the tune of more than $100 trillion in the decade prior to the 2008 crash. Yet governments and regulators have been loath to investigate or even reign back in any meaningful way this industry. Perhaps this was exemplified best by the appalling decision taken by the US government to pressurize the Accounting standards board to allow banks to report derivatives on their balance sheets at “model” prices rather than actual “market” prices So the securities could be junk in the market but are allowed to be priced at a theoretical model price, thereby overstating financial statement values. Of course we cannot forget that the major banks were declared too large to fail and therefore deserving of more than a trillion dollars of bailout money in 2008 – money which was put on the neck of the taxpayers and the banks promptly invested for their own benefit rather than loaning back to needy businesses and individuals. Despite these government handouts there is a stunning lack of accountability for what they have done.

Who’s Riot

Like rioting its sometimes hard to identify an exact flash point in the economy – at what point, what date is it clear that confidence has gone and it all kicks off? The western economies are at a precarious point, the public investors are voting with their feet. Is the Obama debt deal, the Standard and Poor’s downgrade, or the European Sovereign Debt crisis the straw that breaks the camel’s back? Distrust of politicians and the banking industry either in popular media or the financial markets is not doubted. The sad matter is that as fast as action has been to quell rioting on the streets of London has undoubtedly been, a full 3 years after the major disruption of the financial crisis nothing has been done to curb the excesses of the financial industry, we are told no one did anything illegal and no one has been prosecuted. In full collusion with the politicians they have been bailed out, interest rates policy set for them and even their fraudulent activity in the prime mortgage fiasco covered up.

British politicians have had their public funded bank bailouts, expense claims scandals, media hacking and general distrust in recent months which add to the air of an “us and them” society. And while the reasons and analysis behind the recent riots is only just beginning, what we have witnessed this past week will be small compared to the public outpourings recently witnessed in Greece and which will escalate dramatically should we descend further into depression.

The horses in front of the London bank last Saturday may have been symbolic but the bank led economies are failing and it will take more than horses to save them.

 

Jamal Harwood is a regular contributor to New Civilisation.  He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.

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