HOW THE ILLEGAL SALE OF DRUGS SAVED BANKS

HOW THE ILLEGAL SALE OF DRUGS SAVED BANKS DURING THE 2008/9 FINANCIAL CRISIS

As the world slowly starts to look at legalisation as a solution to the drug problem, it’s interesting to remember a time when drug money saved the world. During the 2008 global banking crash, the black market played an enormous role in keeping capitalism afloat.

After financial deregulation, banks were eager to give out more mortgages to support an increased engagement in hedge fund trading. Bank workers were incentivised to give out more mortgages to clients by receiving a commission on every mortgage they sold. This paired with relaxed lending standards lead to subprime lending and over lending which fuelled a big housing bubble. When the bubble burst, the banks were left with huge debts. The Lehman Brothers became bankrupt which caused a domino effect on other banks, as well as lots of TNC’s. The following inevitable recession made liquid capital hard to access. Antonio Maria Costa* stated to the guardian “In the second half of 2008, liquidity was the banking system's main problem and hence liquid capital became an important factor."

Banks stopped lending money, and people were hesitant to spend. Governments were still working to curtail the drug supply and imprison those responsible, but money from the illegal drug trade made up a large percentage of the small amount of liquid capital in circulation. Profits from organised crime therefore constituted the only liquid capital which was available to banks nearing collapse*. The estimated global value of the illegal drugs market was $352bn at the time, and it is believed that the majority of this money was absorbed back into the economy. However, this money was buried even further into the financial markets by way of loans between banks. As Costa explains: "Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities ... There were signs that some banks were rescued that way." Ironically, far more effort was being put into crime prevention. In the fiscal year of 2008, America’s DEA (Drug Enforcement Agency) seized $12.5 million in assets. As well as this, FBI statistics show that just over 1.2 million Americans were arrested in 2008 for drug related crimes.

I am in no way arguing that the production or distribution of narcotics is a positive thing for society, however it is clearly good for the economy. The purchase of drugs in bulk with the ability to sell them easily for a very high mark-up is the reason why the illegal drugs market is so profitable. There were a number of lifelines preventing a complete financial breakdown but the illegal drugs trade was undeniably important in keeping capitalism from collapsing completely.

*This is according to prominent economist Antonio Maria Costa who, at the time, was the head of the United Nations Office on Drugs and Crime.