Cyprus bailout: crazy and dangerous

ATMs emptied across Cyprus
ATMs were emptied across Cyprus yesterday: could this happen elsewhere?

You have to ask yourself, ‘Are these people bonkers?’  It certainly looks that way; the economists of the EU, European Central Bank and IMF who came up with the idea of relieving savers of up to 10% of their savings in Cypriot banks presumably regard themselves as rational beings. But this plan could have massive implications, politically as well as financially.

Until now it’s been a given that in tackling bank crises the savings of ordinary people should be protected – up to a high threshold of 100,000 euros in the European Union, for example. If there is a bailout, it’s the financial institutions which lent to banks by buying their bonds which should incur losses.  What is profoundly shocking about the Cyprus bailout is that it’s ordinary people who will see a portion of their savings snatched from them, without warning and not by a democratically agreed tax.  No party or politician would have dared, anyway, to suggest a tax of 10% on pensioners’ life savings.

It’s not just that confidence in European banks will be undermined (especially in Spain or Italy where potential bailouts loom), but that this will intensify what Mary Kaldor of the LSE calls – in a timely article on opendemocracy, ‘the new war in Europe’.  Kaldor argues that:

The European Union is a different kind of polity constructed in reaction to the risk of war and now, in reaction, to the risk of economic collapse. Economists argue that the monetary union was a big mistake in the absence of political union. But Beck points out that the point was just the opposite – to create a monetary union that would establish material interest in political union. Without a monetary union there would be no momentum for political union.

So far so good. But there is more to this story. In to-day’s Europe, economic and political logics are pulling in opposite directions. It is true that monetary union dictates the need for political union and everyone understands this at élite levels. But the consequences of monetary union and the neoliberal agenda with which it was associated is, at one and the same time, undermining what is known as the permissive consensus and greatly weakening the legitimacy of European élites and with that the European project.

She argues that the rules of the single market and the euro, along with associated neoliberal policies has led to increased inequality, insecurity and atomisation undermining community and cosmopolitan politics.  She concludes:

What Europe faces is a profound political crisis. This was the main conclusion of our report ‘The bubbling up of Subterranean Politics’. The protests and demonstrations, the new political initiatives and the new parties, are not necessarily a reaction to austerity. They were and are about a profound loss of trust in current political élites – a belief that these élites are locked into financial and media interests and unable to act on behalf of the public good, and a sense that representative democracy is no longer about participation, but about reproducing that élite.

The problem is that in the absence of a bottom-up emancipatory cosmopolitanism, a project of European solidarity, that lack of political trust can easily be manipulated by xenophobic, eurosceptic and exclusivist parties of various stripes. Parties like UKIP, the True Finns, the Dutch Freedom party, New Dawn and similar parties are making electoral inroads in nearly every European country. And the mainstream parties, preoccupied by short term electoral considerations, tend to pander to the sentiments expressed by these parties instead of voicing the longer term public interest.

The dangers for the cohesion of the European Union are clear to see in banner held by protesters outside the Cypriot parliament in Nicosia today.

People hold a banners outside the Cypriot parliament in Nicosia today

On the Londion Review of Books blog today, James Meek asks:

How is it that when real banks in Cyprus face actual financial collapse as a result of their conduct, it is not the banks themselves that suffer, nor the foolish rich who stashed their money there, but those savers of modest means who were promised their money was sacrosant?  Those who thought they were safe with the guarantee are now being hit with a tax of €6.75 for every hundred euros they have in savings, in order to save the banks that screwed them over. […] Neither side, it seems, dare consider asking the big foreign financial institutions foolish enough to lend Cyprus banks €1.7 billion over the years if they would mind taking a loss on that investment.

What’s happening in Cyprus is not, at its heart, about a government failing to pay its way, but about banks failing to pay their way, and having to be rescued by government. If there is a government failing it is not that it spent beyond its means but that it allowed the banking sector to swell to grotesque, unsustainable proportions, like some obscure organ of the body that has bloated up until it can’t be removed without destroying the host, and all the resources of the body are consumed by the need to carry it. In Cyprus, the less well-off face a deposit tax to pay for the rescue of their banks by Europe and the IMF; in Britain, we continue to endure spending cuts, higher VAT and the hidden tax of a weakened currency as a consequence of a bank rescue carried out from our own resources. We rescue our banks; who will rescue us?

See also

The state we’re in: journal entry 1,054

Towards the end of The Four-Gated City, the final volume in Doris Lessing’s Children of Violence sequence, Martha Quest starts to collect newspaper cuttings that reveal what, to her, are signs of an impending apocalypse:

local catastrophic occurrences – the poisoning of a country, or of an area; the death of part of the world; the contamination of an area for a certain period of time. These events will be the development of what is already happening…. All kinds of denials, evasions are made.  It can be taken as an axiom that all governments everywhere lie.

In these days, too, stories in the news seem to carry the same portentous inference: catastrophe and contamination, denials and evasions.

  • Item: ‘As the US suffers the worst drought in more than 50 years, analysts are warning that rising food prices could hit the world’s poorest countries, leading to shortages and social upheaval’. (Guardian)
  • Item: ‘The worst drought in a generation is hitting farmers across America’s corn belt far harder than government projections and forcing them to a heart-breaking decision: harvest what’s left of their shrivelled acres or abandon their entire crop’. (Guardian)
Illinois farmer gazes at a pond that used to water his cattle.
  • Item:  ‘If average temperatures increase, so will temperature extremes. As temperatures increase, so will evaporation. As evaporation increases, so will precipitation. As tropical seas get warmer, so will the increased hazard of cyclone, hurricane or typhoon. Nine of the 10 warmest years on record have occurred in this century. Last year was the second rainiest year on record worldwide; the winner of this dubious derby was 2010, which, with 2005, was also the warmest on record. …  Some of the most catastrophic floods and lethal heatwaves ever observed have claimed many thousands of lives in the last decade, and the increasing probability of such extremes has been predicted again and again: by the World Meteorological Organisation; by the Intergovernmental Panel on Climate Change; by the UN’s inter-agency secretariat for disaster reduction; and by researchers at the Potsdam Institute for Climate Impact Research in Germany who have listed the 19 hottest, wettest or stormiest ever events, all in the last decade. There are other, less direct indicators. The northern hemisphere growing season has expanded by 12 days since 1988. Sea levels are rising. Higher sea levels make storm surges – and consequent catastrophic floods in estuaries, flood plains and coastal cities – more likely, more costly and more deadly. The signals are clear enough. Climate is changing, and local weather patterns are responding. Conditions that seem bad now may be regarded as relatively benign in decades to come…. Weakened by successive disasters and a mix of ugly reasons that include corruption, civil war and endemic poverty, governments are less able to respond. The long-term forecast is not promising’. (Guardian editorial)

  • Item: ‘[The Arctic] is home to a quarter of the planet’s oil and natural gas reserves, yet humans have hardly touched these resources in the far north. But in a few days that could change dramatically if Shell receives approval to drill for oil in the Arctic. … Exploiting the Arctic’s vast oil reserves is just one cause of environmental unease, however. The far north is melting and far faster than predicted. Global temperatures have risen 0.7C since 1951. In Greenland, the average temperature has gone up by 1.5C. Its ice cap is losing an estimated 200bn tonnes a year as a result. And further rises are now deemed inevitable, causing the region’s ice to disappear long before the century’s end’. (Observer)
Arctic melting is a clear sign of global warming: temperatures have risen faster than elsewhere on the globe.
  • Item:  ‘The former head of the UN Office on Drugs and Crime, Antonio Maria Costa, posited that four pillars of the international banking system are: drug-money laundering, sanctions busting, tax evasion and arms trafficking.  The response of politicians is to cower from any serious legal assault on this reality, for the simple reasons that the money is too big (plus consultancies to be had after leaving office). Herein … lies the problem. We don’t think of those banking barons as the financial services wing of the Sinaloa [Mexican drug] cartel. The stark truth is that the cartels’ best friends are those people in pin-stripes who, after a rap on the knuckles, return to their golf in Connecticut and drinks parties in Holland Park. The notion of any dichotomy between the global criminal economy and the “legal” one is fantasy. Worse, it is a lie. They are seamless, mutually interdependent – one and the same’. (Ed Vulliamy, The Observer)
  • Item: ‘This week evidence emerged that HSBC abetted massive money laundering by Iran, terrorist organisations, drug cartels and organised criminals. By this point, should this surprise us? Selling defective mortgage securities during the housing bubble; creating and selling securities to bet on their failure; bringing the world to the brink of collapse; colluding to manipulate interest rates; hyping your failing company while secretly selling your own stock; cooking the books; assisting Bernard Madoff. For many people in banking, it would seem, securities fraud, accounting fraud, perjury and conspiracy are just another day at the office’. (Charles Ferguson, director of the best documentary in this decade, Inside Job, in The Guardian)

  • Item: ‘A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network’. (Observer)
  • Item: ‘Interest rates on Spain’s 10-year borrowing rose to the highest since the euro was created … following fresh bad news about the financial health of the country’s regions. … What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix. …The cost of bailing out Spain would dwarf the packages already agreed for the three smaller eurozone countries – Greece, Ireland and Portugal – and would heap pressure on monetary union’s third biggest economy Italy’. (Guardian)
Protest march in Madrid against the Spanish government’s austerity measures

John Gray the philosopher (who once wrote, in Straw Dogs, ‘humans … cannot destroy the Earth, but they can easily wreck the environment that sustains them.’) gave an provocative response to the question ‘what would Maynard Keynes do in the current situation?’ in his BBC Radio 4 Point of View essay last week:

We do not find ourselves today struggling with the aftermath of a catastrophic world war. Yet the situation in Europe poses risks that may be as great as they were in 1919. A deepening slump there would increase the risk of a hard landing in China – on whose growth the world has come to depend. In Europe itself, a downward spiral would energise toxic political movements – such as the neo-Nazi Golden Dawn, which won seats in parliament in the last election in Greece. Facing these dangers, Keynes’s disciples insist that the only way forward is through governments stimulating the economy and returning it to growth.

It’s hard to imagine Keynes sharing such a simple-minded view. As he would surely recognise, the problem isn’t just a deepening recession, however serious. We face a conjunction of three large events – the implosion of the debt-based finance-capitalism that developed over the past twenty years or so, a fracturing of the euro resulting from fatal faults in its design, and the ongoing shift of economic power from the west to the fast-developing countries of the east and south.

Interacting with each other, these crises have created a global crisis that old-fashioned Keynesian policies cannot deal with. Yet it’s still Keynes from whom we have most to learn. Not Keynes the economic engineer, who is invoked by his disciples today. But Keynes the sceptic, who understood that markets are as prone to fits of madness as any other human institution and who tried to envisage a more intelligent variety of capitalism.

Keynes condemned Britain’s return in 1925 to the gold standard, which famously he described as a barbarous relic. Would he not also condemn the determination of European governments to save the euro? Might he not think they would be better advised to begin a planned dismantlement of this primitive relic of 20th Century utopian thinking?

I suspect Keynes would be just as sceptical about the prospect of returning to growth. With our ageing populations and overhang of debt, there’s little prospect of developed societies keeping up with the rapid expansion that is going on in emerging countries. Wouldn’t we be better off thinking about how we can enjoy a good life in conditions of low growth?

Keeping Quiet by Pablo Neruda

And now we will count to twelve
and we will all keep still.

For once on the face of the earth
let’s not speak in any language,
let’s stop for one second,
and not move our arms so much.

It would be an exotic moment
without rush, without engines,
we would all be together
in a sudden strangeness.

Fisherman in the cold sea
would not harm whales
and the man gathering salt
would not look at his hurt hands.

Those who prepare green wars,
wars with gas, wars with fire,
victory with no survivors,
would put on clean clothes
and walk about with their brothers
in the shade, doing nothing.

What I want should not be confused
with total inactivity.
Life is what it is about,
I want no truck with death.

If we were not so single-minded
about keeping our lives moving,
and for once could do nothing,
perhaps a huge silence
might interrupt this sadness
of never understanding ourselves
and of threatening ourselves with death.

Perhaps the earth can teach us
as when everything seems dead
and later proves to be alive.

Now I’ll count up to twelve,
and you keep quiet and I will go.

In the closing words of The Four-Gated City, Martha Quest struggles to come to terms with our predicament on this planet:

 Now the voices and the sound of movement were gone, and the stream could be heard running quietly under its banks.  The air was full of the scent of water and of flowers.  She walked, quiet… She walked beside the river… She thought, with the dove’s voices of her solitude: Where? But where. How? Who?  No, but where, where …Then silence and the birth of a repetition.  Where? Here.  Here?

Here, where else, you fool, you poor fool, where else has it been, ever?

See also

It’s a Wonderful Life: thoughts on banks and ethics

Our annual Christmas Eve ritual: escaping Pottersville to spend 90 minutes in Bedford Falls.  We join the audience packing the Philharmonic Hall to watch It’s a Wonderful Life, a film that has gained resonance since the banking crash of 2008.

But wait – isn’t the hero of this film a banker? Ah, yes, but the Scrooge-like villain,  Henry F. Potter is a banker, too – albeit of a rather different cut. But what kind of banker is George Bailey?  Watching the film, I found myself musing on this, perhaps as a result of having just finished John Lanchester’s brilliant account of the origins of the credit crunch in 2008, Whoops!: Why everyone owes everyone and no one can pay.

Because what lies at the heart of Frank Capra’s film – dressed up in the admittedly sentimental Christmas angel story – is the same question that Lanchester pursues in his book: What are banks for and what social purpose do they serve?

Potter represents the malignant, rapacious side of banking, while Bailey Building and Loan is a bank that is responsible and benevolent, and serves the needs of the local community. This dichotomy is presented most clearly in what is, perhaps, the best scene of the film and the one that most people recall most vividly: the bank run.

George Bailey has just married his childhood sweetheart Mary. As they are leaving town for their honeymoon, they witness a run on the bank that leaves Bailey Building and Loan in danger of collapse. The couple quell the depositors’ panic with a personal bail-out –  the $2,000 earmarked for their honeymoon. George gets up and makes a speech that defines the ethics of socially responsible banking:

Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.

In a little lesson on balance sheet accounting, George explains to the crowd that their money isn’t at Bailey Building and Loan:  it’s invested in another person’s house and another’s loan.  ‘You’re thinking of this place all wrong’, he says. ‘Your money is in Joe’s house, that’s right next to yours and in the Kennedy house and Mrs. Macklin’s house and a hundred others. You’re loaning them the money to build and they’ll pay it back’.

Bailey Building and Loan survives because George and Mary and all the depositors of Bailey’s Building and Loan stick together; the bank is saved by contributions from ordinary townspeople. In the 2007-8 remake, it was pretty much the same thing, but on a vaster scale: governments bailed out the banks, using taxpayers’ money. When the big banks required a ‘guardian angel’, they got a bailout, but they were not George Bailey nor are they any longer an integral part of local communities like Bailey Building and Loan was in Bedford Falls.

Remember how it all kicked off, back in September 2007?  The UK’s 5th largest lender Northern Rock experienced a good old fashioned bank-run. People expecting Northern Rock to become insolvent camped outside overnight. The Bank of England had to step in and promise to provide liquidity to Northern Rock, which was taken into public ownership.

It’s pertinent to recall that moment, because Northern Rock was, like  Bailey Building and Loan, a former building society (they call them Savings and Loans in the States), with its roots in the 19th century heyday of building society formation.  Savings and Loans or building societies emerged in the 19th century as small banks that accepted cash deposits from customers and made loans to borrowers in the community, replacing the extended family as a source of capital.  They were democratic in a way that banks were not since they were ‘mutual’ – the depositors controlled the investment strategy deployed by management.  In their UK heyday, there were hundreds of building societies, with just about every town in the country having a building society named after the town.  In contrast, equity investors (such as Potter), usually with no connection to the deposit community, controlled the management of banks.

Borrowers and depositors seem to have genuinely respected these institutions, because the interests of the bank were at one with the local community on which it depended. But It’s a Wonderful Life reminds us that not all banks are so constituted.  Potter, the greedy banker, stokes the run on Bailey Building and Loan, by offering depositors 50 cents on the dollar for their shares (and, later in the film, causes the second, climatic crisis by stealing some of Bailey’s cash).  Unlike Bailey, Potter sees Bedford Falls as a resource to exploit for his own gain.  If he could eliminate Bailey’s, he would  monopolize both the local banking and housing markets and use his market power to grind the faces of the poor.

George has earlier established Bailey Park, an affordable housing project. The residents no longer have to pay extortionate rents to slum landlord Potter, who as the majority shareholder in Bailey Building and Loan, tries to persuade the board of directors to stop providing home loans to the working poor. George talks them into rejecting Potter’s proposal, but it’s at the cost of his dream of leaving Bedford Falls to pursue a college education.The board agree only on the condition that George himself run the Building and Loan.

This episode, too, has its parallels in the events of the credit crunch.  In Whoops! John Lanchester describes in the most intelligible and entertaining manner how the creation by financial engineers of new mathematical formulas underpinned the explosive growth of credit default swaps that seemed to magic away any risk involved in advancing mortgages to people without the means or inclination to repay.  Without the risk, these sub-prime loans, with their high interest rates, became deeply attractive.  In the book, Lanchester quotes a lawyer trying to protect home-owners caught up in the American foreclosure hurricane:

Remember It’s a Wonderful Life?  It’s not like that any more.  They don’t care about you.  If they did, they wouldn’t give you a $300,000 loan if you didn’t have a job and had no chance of paying it back’.

Except Potter would have – if credit default swaps had existed back in the 1930s; and, if they had fallen behind on their repayments, he’d have foreclosed:

– Times are bad, Mr. Potter. A lot of these people are out of work.

– Then foreclose!

– I can’t do that. These families have children.

– They’re not my children

– But they’re somebody’s children, Mr. Potter.

– Are you running a business or a charity ward?

But there is one crucial way in which it’s not like the film any more: there are very few building societies left.  In explaining the roots of the present crisis in Whoops!, Lanchester winds the clock right back to 1980s. In that decade, the end of the Cold War and the collapse of communism, coupled with the re-emergence of a virulent form of free market economic promoted by Thatcher and Reagan,  produced a climate – ‘a victory party of free market capitalism’.  That climate underpinned the deregulation and privatisation mania of the following two decades – one notable feature of which was the demutualisation of the building societies, now free to offer any of the banking services provided by normal banks.  As John Lanchester puts it in Whoops!:

It began with Northern Rock, done in by Britain’s first bank run in 150 years. The bank was a demutualised former mutual society. It had adopted a groovy, go-go financial strategy: only 27 per cent of its funds came from money deposited in its accounts by savers; the rest came from short-term borrowing, on an as-and-when-needed basis, from the international money markets. When those markets choked up the Rock sought emergency funding from the Bank of England, which acted too slowly and by doing so triggered the run on the Rock, which led, after a certain amount of governmental faffing about, to its nationalisation on 17 February.

Note that the Rock wasn’t destroyed by risky lending. Some of its loans were risky: a banker contact of mine told me that there was trouble with a ‘book’ of mortgage loans for 120 per cent of the value of homes. (Why would any sane person want to borrow 120 per cent of the value of the thing they wanted to buy? I can just about answer that question: because they want to do the place up, or spend the extra on a new car, and because all parties involved are mortally certain that the price is going to go up. But it’s still crazily reckless. Why would any sane lender lend the money? No idea.) But while loans like this did nothing to help the Rock, what ruined the bank was its exposure to the now malfunctioning money markets.

If you want a book that will explain derivatives, leveraging ratios,the difference between a CDO and a CDS, the significance of the Var statistical tool, and many other arcane mysteries of the banking stratosphere that contributed to the great crash of 2008, in a highly readable and often humourous manner that even enumerate people like me can grasp, then Whoops! is the book to read. Lanchester’s book reveals clearly how the mathematical models that the ‘quants’ working for the big banks developed in the 1990s were a mistake that ultimately led to the 2008 collapse. They were a mistake because they violated practical common-sense rules of risk management; they proved a disaster because neither the bankers themselves nor the regulators properly understood them.

In summary, Lanchester’s analysis is that ‘the credit crunch was based on a climate (the post-Cold War victory party of free market capitalism), a problem (the sub-prime mortgages), a mistake (the mathematical models of risk) and a failure, that of the regulators’.  He is explicit about the crucial importance of contemporary banking culture – Potteresque in its brutal, money-grubbing lack of ethics:

Doctors don’t, for the most part, pride themselves on saying, ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’ … But the culture of modern banking is not like that; in fact, it’s close to the opposite of that.  The bankers’ slogan is something closer to ‘We’re not that fussed about safety, because if we have an accident, it’s you who pays’.

Lanchester illustrates this point with the most spectacular example:

Goldman Sachs … went from having to end its status  as an investment bank and take federal support, in September 2008, to declaring all-time record profits – with bonuses to match – in July 2009.  The bank which would have gone under without government help, and had to borrow $10 billion from the taxpayer, was less than a year later setting aside $16.8 billion in pay, bonuses and benefits for itself.

He concludes that the Anglo-Saxon model of capitalism has failed – it only survives because of the huge government bailouts.  ‘The amount of state intervention in the US and UK at this moment is at a level comparable with wartime.  We have in effect had to declare war to get us out of the hole created by our economic system. … It is a 100 per cent pure form of socialism for the rich’.  Two decades after the end of the Cold war, capitalism, Lanchester says, ‘has found a deadly opponent; but the problem is that the opponent is capitalism itself’.

Back in the 1940s, there were some who perceived that It’s a Wonderful Life amounted to more than a syrupy, feel good Christmas film.  The May, 1947 FBI memorandum to the McCarthy committee concerning Communist infiltration of the motion picture industry stated:

In addition, [redacted] stated that, in his opinion, this picture deliberately maligned the upper class, attempting to show the people who had money were mean and despicable characters. [redacted] related that if he made this picture portraying the banker, he would have shown this individual to have been following the rules as laid down by the State Bank Examiner in connection with making loans. Further, [redacted] stated that the scene wouldn’t have “suffered at all” in portraying the banker as a man who was protecting funds put in his care by private individuals and adhering to the rules governing the loan of that money rather than portraying the part as it was shown. In summary, [redacted] stated that it was not necessary to make the banker such a mean character and “I would never have done it that way.”

In Whoops!, Lanchester kicks around some ideas about where we go now. Tighter regulation of banks, splitting ‘casino banking’ off from what he calls the ‘piggy bank’ role (something like the service provided by George Bailey), transparency with regard to pay and rewards and the ratio of pay between top and bottom, and so on. Perhaps most dramatically he argues that if a bank receives any taxpayers’ money, the existing shareholders should be wiped out. That’s what happens, he argues to investors in other institutions: if the firm you’ve bought shares in goes broke, you lose your money.  At the moment, it doesn’t happen with banks (because of the ‘too big to fail’ problem).  But, Lanchester argues, this simple and  brutal change in the law would ensure that banks managed their risks properly.

Maybe, I thought as I watched James Stewart fight to save his community bank, we should have a re-mutualisation process, re-establishing the concept of the building society.  Or, as Will Hutton proposed in his 1995 bestseller The State We’re In, a German-type system of regional banks that would demonstrate commitment to local industry by investing for the long term, rather than for short term profit. Then there’s the credit union model: cooperative financial organisations that are owned and controlled by their members, providing credit at competitive rates, and often furthering community development. At the end of 2010 there were 52,945 credit unions in 100 countries around the world. Collectively they served 188 million members and oversaw $1.5 trillion in assets.

In the end, in It’s a Wonderful Life, George Bailey represents the triumph of  ‘good’ capitalism over the predatory capitalism of  Potter, who espouses the philosophy of the rampant free market at its most rapacious. Potter almost succeeds. But Bailey’s customers recognise that his loyalty to them and their families and to the community of Bedford Falls means more than the get rich at any cost philosophy of Potter. In the memorable closing scene they flock back to the bank with their deposits.  The film’s closing line – ‘to George Bailey, the richest man in town’ – appeals to something buried deep within us – an understanding that real wealth cannot be measured in terms of money.

Lanchester concludes Whoops! on a similar note, re-emphasising his argument about the cultural roots of the crisis. But though he makes the point that a tiny minority of rich people were directly responsible for financial shenanigans behind the crash, and that everyone else is having to pick up the bill, he goes further.  He quotes ‘the greatest economist who ever lived’, John Maynard Keynes, in an essay he wrote in 1930 ‘Economic Possibilities for our Grandchildren’:

The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will [in a century’s time] be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disorder.

For himself, Lanchester concludes:

Free-market capitalism’s victory party lasted for two decades: now it’s time to slow down, calm down and decide how to make the finance industry back into something which serves the rest of society, rather than predating on it.  And the level of our individual response is just as important. On that level, we have to start thinking about when we have sufficient – sufficient money, sufficient stuff – and whether we really need the things we do, beyond what we already have.  In a world running out of resources, the most important ethical and political and ecological idea can be summed up in one simple word: ‘enough’.

As we file out from It’s a Wonderful Life, it’s this truth, I think, that Frank Capra’s film speaks to – and to a yearning by its audience for life in 2012 to be a bit more akin to Bedford Falls and a lot less like Pottersville.  But here’s the rub: Potter keeps the $8000 he stole!  At the core of a film some regard as sentimental is a cold, hard, harsh truth.

See also

Bankers are the dictators of the West: Robert Fisk

For once I’m going to reproduce an entire article because of its excellence and importance.  This is Robert Fisk in today’s Independent:

Writing from the very region that produces more clichés per square foot than any other “story” – the Middle East – I should perhaps pause before I say I have never read so much garbage, so much utter drivel, as I have about the world financial crisis. But I will not hold my fire. It seems to me that the reporting of the collapse of capitalism has reached a new low which even the Middle East cannot surpass for sheer unadulterated obedience to the very institutions and Harvard “experts” who have helped to bring about the whole criminal disaster.

Let’s kick off with the “Arab Spring” – in itself a grotesque verbal distortion of the great Arab/Muslim awakening which is shaking the Middle East – and the trashy parallels with the social protests in Western capitals. We’ve been deluged with reports of how the poor or the disadvantaged in the West have “taken a leaf” out of the “Arab spring” book, how demonstrators in America, Canada, Britain, Spain and Greece have been “inspired” by the huge demonstrations that brought down the regimes in Egypt, Tunisia and – up to a point – Libya. But this is nonsense.The real comparison, needless to say, has been dodged by Western reporters, so keen to extol the anti-dictator rebellions of the Arabs, so anxious to ignore protests against “democratic” Western governments, so desperate to disparage these demonstrations, to suggest that they are merely picking up on the latest fad in the Arab world. The truth is somewhat different. What drove the Arabs in their tens of thousands and then their millions on to the streets of Middle East capitals was a demand for dignity and a refusal to accept that the local family-ruled dictators actually owned their countries. The Mubaraks and the Ben Alis and the Gaddafis and the kings and emirs of the Gulf (and Jordan) and the Assads all believed that they had property rights to their entire nations. Egypt belonged to Mubarak Inc, Tunisia to Ben Ali Inc (and the Traboulsi family), Libya to Gaddafi Inc. And so on. The Arab martyrs against dictatorship died to prove that their countries belonged to their own people.

And that is the true parallel in the West. The protest movements are indeed against Big Business – a perfectly justified cause – and against “governments”. What they have really divined, however, albeit a bit late in the day, is that they have for decades bought into a fraudulent democracy: they dutifully vote for political parties – which then hand their democratic mandate and people’s power to the banks and the derivative traders and the rating agencies, all three backed up by the slovenly and dishonest coterie of “experts” from America’s top universities and “think tanks”, who maintain the fiction that this is a crisis of globalisation rather than a massive financial con trick foisted on the voters.

The banks and the rating agencies have become the dictators of the West. Like the Mubaraks and Ben Alis, the banks believed – and still believe – they are owners of their countries. The elections which give them power have – through the gutlessness and collusion of governments – become as false as the polls to which the Arabs were forced to troop decade after decade to anoint their own national property owners. Goldman Sachs and the Royal Bank of Scotland became the Mubaraks and Ben Alis of the US and the UK, each gobbling up the people’s wealth in bogus rewards and bonuses for their vicious bosses on a scale infinitely more rapacious than their greedy Arab dictator-brothers could imagine.

I didn’t need Charles Ferguson’s Inside Job on BBC2 this week – though it helped – to teach me that the ratings agencies and the US banks are interchangeable, that their personnel move seamlessly between agency, bank and US government. The ratings lads (almost always lads, of course) who AAA-rated sub-prime loans and derivatives in America are now – via their poisonous influence on the markets – clawing down the people of Europe by threatening to lower or withdraw the very same ratings from European nations which they lavished upon criminals before the financial crash in the US. I believe that understatement tends to win arguments. But, forgive me, who are these creatures whose ratings agencies now put more fear into the French than Rommel did in 1940?

Why don’t my journalist mates in Wall Street tell me? How come the BBC and CNN and – oh, dear, even al-Jazeera – treat these criminal communities as unquestionable institutions of power? Why no investigations – Inside Job started along the path – into these scandalous double-dealers? It reminds me so much of the equally craven way that so many American reporters cover the Middle East, eerily avoiding any direct criticism of Israel, abetted by an army of pro-Likud lobbyists to explain to viewers why American “peacemaking” in the Israeli-Palestinian conflict can be trusted, why the good guys are “moderates”, the bad guys “terrorists”.

The Arabs have at least begun to shrug off this nonsense. But when the Wall Street protesters do the same, they become “anarchists”, the social “terrorists” of American streets who dare to demand that the Bernankes and Geithners should face the same kind of trial as Hosni Mubarak. We in the West – our governments – have created our dictators. But, unlike the Arabs, we can’t touch them.

The Irish Taoiseach, Enda Kenny, solemnly informed his people this week that they were not responsible for the crisis in which they found themselves. They already knew that, of course. What he did not tell them was who was to blame. Isn’t it time he and his fellow EU prime ministers did tell us? And our reporters, too?

Remember this? (BBC News, 26 September 2011)

See also

Where are we headed?

Greek trade unionists block the entrance of the Greek Labour ministry in Athens

It’s the strangest sensation – for week after week, watching as the global financial system inches steadily closer to the abyss and the world’s politicians repeatedly kick a resolution to the European debt crisis a few weeks or months down the road.  Today, the Greeks are on general strike, battling to resist  measures that have pushed Greeks to the brink of penury. How bad can things get?  Your salary halved (if you’re a public sector worker)? The imposition out of the blue of a property tax of €1,500, payable this month, and if you don’t pay your electricity gets cut off (everyone)?

Larry Elliott’s piece in today’s Guardian was jaw-droppingly apocalyptic:

Welcome to the new normal. Billions of pounds were wiped off the value of shares in London on Tuesday 4 October. Dexia, a bank jointly owned by the French and the Belgians, teetered on the brink of collapse. One of the main barometers of Wall Street sentiment slid into bear-market territory. An emergency press conference called by Greece’s finance minister was delayed because the building was being picketed by civil servants. […]

The panic-stricken reaction of the markets over the past few days reflects a growing mood in the financial markets that the default will not be managed and orderly but messy, with knock-on effects not just for the rest of the eurozone but for the entire world economy.

Banks will go bust, credit will dry up, trade will wither, jobs will be shed. Greece, Lehman Brothers 2.0, will be the prelude to the second Great Depression, something policy-makers were congratulating themselves on avoiding only a few months ago. […]

Hence the concern about the alternative, much darker scenario in which the financial market pressure on Greece becomes intolerable and triggers a default for which the politicians are not prepared. Market interest rates for the other struggling eurozone countries go through the roof. Banks in the US refuse to extend lines of credit to Europe, where the banks go down like ninepins. Greece decides that the only long-term solution to its problems is to leave the euro, thus triggering a rapid unravelling of monetary union. As in the 1930s, deep economic distress has profound political consequences, fostering the growth of extreme nationalist parties.  This is the doomsday option, and over the coming weeks and months finance ministers and central bank governors will do all in their power to prevent it from coming to pass.

Who is to blame for this crisis?  Politicians?  Banks?  Speculators? Regulators? It surely isn’t your ordinary joe or josephine, Greek, American, Irish, Italian, or a citizen of wherever.  There was a clue, maybe, in an interview the BBC broadcast last week with some sort of trader, Alessio Rastani, who spoke with such brutal honesty from the perspective of a speculator, that his interview was initially suspected to be a Yes Men hoax (it appears it wasn’t):

The governments don’t rule the world, Goldman Sachs rules the world.

The savings of millions of people are going to vanish in less than a year

For most traders we don’t really care about having a fixed economy, having a fixed situation, our job is to make money from it. Personally, I’ve been dreaming of this moment for three years. I go to bed every night and I dream of another recession.

When the market crashes… if you know what to do, if you have the right plan set up, you can make a lot of money from this.

The Yes Men later issued a statement:

Who in big banking doesn’t bet against the interests of the poor and find themselves massively recompensed – if not by the market, then by humongous taxpayer bailouts? Rastani’s approach has been completely mainstream for several years now; we must thank him for putting a human face on it yesterday.

If  we don’t know who caused this whole mess, we certainly know who are getting it in the neck: the 99 percent.  That’s the number (the 99% of Americans who together own only twice as much wealth as the other 1%) that is now galvanising a movement that began with the Occupy Wall Street sit-in (now three weeks old) and is now spreading worldwide.   They say:

We are the 99 percent. We are getting kicked out of our homes. We are forced to choose between groceries and rent. We are denied quality medical care. We are suffering from environmental pollution. We are working long hours for little pay and no rights, if we’re working at all. We are getting nothing while the other 1 percent is getting everything. We are the 99 percent.

The 99 percent website features lots of images like this one – handwritten summaries of lives devastated, held up to the camera by the victims of what may turn out to be the second Great Depression.  They say:

Who are we? Well, who are you? If you’re reading this, there’s a 99 percent chance that you’re one of us.

You’re someone who doesn’t know whether there’s going to be enough money to make this month’s rent. You’re someone who gets sick and toughs it out because you’ll never afford the hospital bills. You’re someone who’s trying to move a mountain of debt that never seems to get any smaller no matter how hard you try. You do all the things you’re supposed to do. You buy store brands. You get a second job. You take classes to improve your skills. But it’s not enough. It’s never enough. The anxiety, the frustration, the powerlessness is still there, hovering like a storm crow. Every month you make it is a victory, but a Pyrrhic one — once you’re over the hump, all you can do is think about the next one and how much harder it’s all going to be.

They say it’s because you’re lazy. They say it’s because you make poor choices. They say it’s because you’re spoiled. If you’d only apply yourself a little more, worked a little harder, planned a little better, things would go well for you. Why do you need more help? Haven’t they helped you enough? They say you have no one to blame but yourself. They say it’s all your fault.

They are the 1 percent. They are the banks, the mortgage industry, the insurance industry. They are the important ones. They need help and get bailed out and are praised as job creators. We need help and get nothing and are called entitled. We live in a society made for them, not for us. It’s their world, not ours. If we’re lucky, they’ll let us work in it so long as we don’t question the extent of their charity.

We are the 99 percent. We are everyone else. And we will no longer be silent. It’s time the 1 percent got to know us a little better. On Sept. 17, 2011, the 99 percent will converge on Wall Street to let the 1 percent know just how frustrated they are with living in a world made for someone else. Let us know why you’ll be there. Let us know how you are the 99 percent.

Three weeks ago, a few hundred people rolled out their sleeping bags in a park in New York’s financial district in a protest against corporate greed and corruption, now there are thousands, and they are gaining the backing of trade unions.  A union-backed coalition will today rally in support of the protesters, and they are being joined by supporters in cities across the US and beyond.  The core group, Occupy Wall Street (OWS), claims people will take part in demonstrations in as many as 147 US cities this month, while the website occupytogether.org lists 47 US states as being involved. Around the world, protests in Canada, the UK, Germany and Sweden are also planned.

And it looks like the movement is heading this way: Liverpool will host its own protest, Occupy Liverpool,on Saturday 15th October.  Wonder if the financial system will have crashed by then?

Inside Job: beware apoplexy

Don’t watch this film if you have high blood-pressure!

Inside Job, which I watched in a packed lunchtime screening today, is a full-length documentary on the origins of the global financial meltdown in September 2008, written and directed by Charles Ferguson.  Watching this film made me realise how far big-screen documentaries have come in the last few years: it’s as gripping as a thriller, as beautifully photographed as any widescreen epic and skilfully edited to emphasise Ferguson’s case.

And Ferguson’s argument (which focusses largely on America) is that there is a revolving door between the banks, the financial regulatory bodies, government and universities.  It is this central fact that explains how, as the banks raked in billions from ever-more flakey financial products, politicians, regulators and economists turned a blind eye and cheered them on.

Ferguson does not make films in the Michael Moore style (which has been wearing decidedly thin of late).  There are no gimmicks or stunts – just testimony from talking heads, news video clips and careful documentation.  Narrated by Matt Damon, the documentary presents the case that, beginning with the Reagan administration and continuing under every subsequent US presidency (including Obama’s), the big American banks developed increasingly risky and criminal devices to swell their profits.  Using charts and diagrams to reinforce the narrative, the film manages to explain such complex financial mechanisms as derivatives, collateralized debt obligations and credit-default swaps very clearly indeed.  This film is rare in that it manages to combine lucid exposition with passion and rage.

In a pre-credit sequence, the crisis is exemplified in miniature by Iceland, a pleasant, well-ordered country that went mad, selling off beautiful and environmentally-fragile land to be exploited and despoiled by American corporations, privatising the three largest banks (which were tiny, but grew to be European giants) and allowing them to borrow money that amounted to three times the size of Iceland’s GNP.

The film shows how banks aggressively promoted mortgages to people who could not afford them. These bad mortgages were then sliced and diced into derivatives packages that disguised their risk. They were carried on the books as tangible assets – but they were worthless. The institutions assembling them hedged their loans by betting against them (in CDOs or collateralized debt obligations). When the mortgages failed, the banks still made profits – despite and because of their failure. Ferguson shows convincingly how financial reform measures that would prevent such practices have been shunned by politicians because of the aforesaid revolving door.  The most dangerous part of the film as far as one’s blood pressure is concerned is that which shows how big bankers slid into the most senior positions in government and the financial regulators – and vice-versa.

Speaking of vice, an illuminating section of the film deals with the close links between Wall Street and criminal activities involved in procuring prostitutes and drugs – and then claiming it all on expenses.  Also exposed are academic economists,  and the universities they work for, as being beholden and corrupted by their ties to big business. These include Glenn Hubbard, the dean of Columbia University’s business school, who was the chief economic advisor to the Bush administration, and instrumental in the design of the 2003 tax cuts for the rich. He is on the board of several financial institutions, and remains a staunch advocate of the deregulation of financial services. Then there’s Frederic Mishkin, professor at the Columbia Business School and a former member of the Federal Reserve Board of Governors, who resigned a month before the crash.  Why? Ferguson asks. So that I could revise a textbook, replies Mishkin. ‘I’m sorry, I’m sure that your textbook is important and widely read’, Ferguson snaps, ‘But didn’t you think that more important things were going on in the world?’.

This is also the guy who in 2006 was paid $124,000 by the Icelandic Chamber of Commerce to write a report in response to critical coverage of the Icelandic economy and certain Icelandic companies in the international business media. The report – Financial Stability in Iceland –  praised Iceland’s financial sector.  Iceland’s banks collapsed spectacularly within a year of Mishkin’s report. Inside Job reveals that on Mishkin’s CV the title of the report has been changed to Financial Instability in Iceland.

This is an intelligent, riveting and informative film, which I highly recommend. Every so often during the screening there was the audible sound of  jaws dropping – much like that of Christine Lagarde, the French minister of finance, when she was told about the collapse of Lehman Brothers: ‘Holy cow!’

Most of those who created the crisis that brought impoverishment and unemployment to millions are still in power, and still helping themselves (or have been paid off handsomely for their failure). The Obama administration hasn’t launched a single criminal investigation related to the crash. Meanwhile, the severance package Merrill Lynch’s former CEO received could pay the average yearly salaries of more than 5,000 typical workers. The film offers no solutions (apart from that of one interviewee who hints that bankers could be brought low if threatened with legal actions that drew on evidence of  their systemic addiction to drugs and prostitutes).

That’s as likely as a snowball in hell – but what is happening this week in Madison, Wisconsin, is that tens of thousands of trade unionists have been occupying the state capitol building day and night in the biggest demonstration in the US since the Vietnam war, united against a bill backed by the state’s Republican governor to end collective bargaining and other union rights for public sector workers in order to push through spending cuts and job losses in the fallout from the crash.  It’s the culmination of twelve days of continuous protest by teachers, students, steelworkers, pensioners, nurses and others – and it’s not a Tea Party.

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