The GFC: What have we learned? O
n Thursday, August 9, 2007 the Paris-based global bank, BNP Paribas, froze three of its funds claiming it could not value some weirdsounding assets it had acquired called collateralised debt obligations (CDOs). That day, the world changed. BNP Paribus was the first major bank to acknowledge the risk of CDOs - bundled collections of sub-prime mortgages made to dubious credit-worthy homebuyers in the US and sold to investors world-wide. Just over a year later, Lehman Brothers, one of the largest investment banks in the world - and one heavily involved in CDOs - filed for bankruptcy. The financial world panicked and the Global Financial Crisis (GFC) was upon us. More than eight years later its effects are everywhere. Trillions and trillions of dollars in potential output has been lost, lives have been ruined, businesses have gone bankrupt, indebted countries are at risk of failing and in some countries a whole generation may face permanent unemployment. Social unrest is rising. The GFC was disastrous for developed countries. The only consolation is that it might have been worse. We could have been plunged into another worldwide depression. So what have we learned? What caused the crisis and is it likely to happen again? Will things go back to the way they were? One major lesson is this: free market capitalism is dead – although not everyone agrees and some are trying to revive the corpse. For three decades the apostles of liberalisation and free market economics have been dominant in world policy-making. Think Thatcher and Reagan,
Spring 2015 healthspeak
Abbott and Howard and even Hawke and Keating in a limited way. At its most fundamental level this libertarian philosophy believes in the autonomous and self-reliant person and rejects any form of social or collective action. This philosophy spread to infiltrate the financial and economic sectors of western economies and increasingly in the east as well. Markets, they believe, are the best way to allocate resources. There was also an inherent belief that markets were
banks who tore up the regulations that had been imposed after the aftermath of the 1930s Great Depression. These officials believed they had it sorted with mathematical models to prove it. When the crisis hit, the trust in free markets evaporated - except amongst the libertarian diehards. Governments intervened, rescued the banks and pumped money into their economies. Regulations have been reintroduced, banks have been forced to meet new capital re-
quirements and limits placed on bonuses and incentives. But will it be enough to stop another crisis? According to many analysts the answer is no. Our financial system is designed to fail. Banks borrow short-term liquid assets in the form of deposits and use them to invest in long term, risky assets that are illiquid. In a time of crisis the depositors and other bank lenders want their money back - but all cannot be accommodated. Banks are then faced with a liquidity and a solvency crisis as their risky assets plunge in value. To try and prevent catastro-
phe governments are forced to intervene. But because of the huge debts incurred by governments in the latest rescue, their ability to intervene again is limited. But will we be able to eventually get back to the way things were? Again the answer is probably no. Large macroeconomic and social forces have changed economies around the world. In the west growth rates are likely to be much slower than before because the population is ageing and demand is falling due to growing inequality. As we know the workforce will decline. This means average incomes will decline (fewer workers, more mouths to feed) unless we can convince the young to work harder and more productively. In addition the libertarian economic philosophy – free trade, less regulation, flexible work force - has helped the spread of globalisation. While this has seen rapid growth in emerging economies, it has led to drastically higher income inequality in most developed countries. While highly trained people have done well, many jobs in the unskilled or semiskilled area have been automated or outsourced overseas. Because the rich spend a smaller proportion of their incomes (and save more), there is an overall fall in demand and consequently even higher unemployment. Are there any solutions? Yes, we need a drastic change in the financial sector and a concerted effort to redistribute income. But we will probably have to endure another crisis before there is enough momentum for this sort of change.
a publication of North Coast Primary Health Network
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Invasive species Fact Sheet
Common name: Area affected: Cause: Impact: Control:
finance David Tomlinson
The Wolf of Wall Street Global Free Market Capitalism Exploits the Free Market to take advantage of the human populace for own financial gain Drastic change in Financial Sect or
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self-correcting, efficient and stable. Well, the GFC proved this wrong. While a number of events contributed to the crisis, its seeds were born and nurtured by the financial system itself. The libertarian philosophy promoted a generation of financial gurus who indulged in excessive risk taking, promoted everhigher levels of debt and created complex financial products even they did not understand. There was unbelievable greed and even fraud. They were assisted by government officials and the central