by Paul Sutton

The financial crisis of 2008 was the single largest crisis of capitalism since the onset of the Great Depression in 1929. It was not foreseen and so came as a complete surprise requiring desperate and immediate measures to shore up finance capital and contain the crisis. Commitments to support the banks reached at least $7 trillion, around 10% of global gross domestic product (GDP). Unsurprisingly, the effects of this were felt worldwide with immediate down-turns in trade in nearly every country and significant losses of GDP in those most involved. These effects were further compounded by policies adopted to deal with the crisis, including austerity, which led to widening inequality and growing political opposition from across the political spectrum. Ten years on, the end result is that while capitalism has been temporarily ‘saved from itself’, the causes of the crisis have not been resolved and many of the financial practices that originally contributed to the crisis remain in place. Similarly, while Wall Street and the City of London were the main contributors to the crisis, both remain unreformed even though there is growing evidence that they fundamentally distort the economies of both countries, ending up costing both money.

THE 2008 CRISIS

The crisis was centred in the ‘transatlantic economy’ encompassing both the United States and the European Union, with Wall Street and the City of London at the core. “Never before”, as Adam Tooze writes in his exhaustive study of the crisis and its aftermath, “not even in the 1930s had the (capitalist) system come so close to total implosion” (Crashed: How a Decade of Financial Crises Changed the World, 2018). It did so because the banking systems of the ‘transatlantic economy’ had become so interconnected that a major crisis in one country or major bank impacted on them all, almost immediately, with substantially increased risks and massive costs: the so called ‘contagion effect’. This meant that although the immediate origins of the crisis were within the US domestic market and, in particular, the collapse of the ‘sub-prime mortgage market’ it was not only US banks that were put at risk. By 2008 roughly a quarter of such mortgages were held outside the US particularly in Europe and the UK. When the market for such mortgages began to drop in 2007 and became highly suspect, then toxic, many banks were soon affected. This led to the contraction of wholesale funding markets between financial institutions and the complete collapse of interbank credit. Bank failures inevitably followed.

While there were a number of these across the ‘transatlantic economy’ the two most important were in the US and the UK. The failure of the investment bank Lehman Brothers in New York on September 15, 2008 is widely regarded as the most dramatic. For the US Treasury Secretary, Hank Paulson, it was ‘an economic 9/11’. Everything began unwinding quickly and by the morning of 20th September, Paulson informed the US Congress “that unless they acted fast, $5.5 trillion in wealth would disappear by 2 pm ... and they faced the collapse of the world economy within 24 hours” (Tooze, p.162). Days later it was the turn of the UK. The bank most at risk here was the Royal Bank of Scotland (RBS), then the largest bank in the world. It demonstrably began to fail in early October. Alistair Darling, the

Chancellor of the Exchequer, recalls that he was phoned by its chairman on 7th October, who told him his bank was going bust that afternoon and what was he (Darling) going to do about it. 

RBS and Lloyds TSB-HBOS, also seriously at risk, were saved by partial nationalisations while the other major UK banks were required to recapitalise, with the UK government standing as guarantor. Similar action took place in other European countries which were also faced with bank collapse. But the most decisive action took place in the US. This involved a mix of government guarantees and private action to purchase financial institutions and recapitalise the banks. At first Congress opposed action but it was eventually passed as the TARP programme on 3rd October and ‘imposed’ on the nine largest US banks on 13th October. It was followed by further action by the US Federal Reserve to provide virtual unlimited access to US dollars to the central banks of the major capitalist countries, to stabilise exchange rates and avert currency crises.

The ‘transatlantic economy’ was rescued by the state in the form of the central banks and the government finance ministries, backed by the head of government. Remarkably few persons were involved and the key decisions were made between them and the bankers in small rooms. This was Marx’s ‘executive committee of the bourgeoisie’ for early twenty-first century capitalism. It dramatically exposed the nature of modern finance capitalism. This was based on an increasing concentration of finance in relatively few global banks and financial institutions (less than 100 worldwide). It was characterised “not in terms of an ‘island model’ of international economic interaction – national economy to national economy – but through the ‘interlocking matrix’ of corporate balance sheets – bank to bank” (Tooze, p.9). It necessarily meant that further global action to strengthen capitalism would need to be taken beyond the US and the UK. Among the most important was the identification of ‘systemically important financial institutions’ at the centre of the global system which were vital to its future survival. Twenty-nine were listed in 2011 with their headquarters in the US, Europe, Japan and China. Between them they held total assets of $46 trillion, roughly 22% of all financial assets worldwide. They would in future be subject to a special regime of oversight to provide future resilience to the global capitalist system if the banks again began to fail.

Within the ‘Eurozone’ (the countries of the EU that had adopted the euro as their currency), action was also taken to strengthen the European Central Bank (ECB). The financial crisis in the Eurozone did not impact quite so quickly as in the US and the UK. When it did, in 2010, the principal countries affected were Portugal, Ireland, and Spain with Italy at the margin and Greece the most severely impacted. Arguments between France and Germany on how to manage the crisis caused problems, particularly with the euro, which were only resolved in 2012 when the head of the ECB said he would do ‘whatever it takes’ to guarantee it. In the meantime, while there was stabilisation or slow recovery elsewhere in the Eurozone, Greece became increasingly impoverished by the austerity programmes imposed on it. Lastly, the crisis of 2008 would not have been contained unless China had taken decisive action in

2008 to stimulate its economy with an increase in spending amounting to 12.5% of GDP. This ‘Keynesian’ style policy kept its economy growing when others were in recession. As Tooze put it: “Together with the huge liquidity stimulus delivered by the US Federal Reserve, China’s combined fiscal and financial stimulus was the main force counteracting the global crisis. Though they were not coordinated policies, they made a real vision of a G2: China and America leading the world” (p.251).

THE CONSEQUENCES OF 2008

The rescue of the banks was pithily described in the US as ‘Main Street rescues Wall Street’. This pointed to the fact that it was the ‘average Joe’ in the US who bailed out the banks and that he/she has had to bear the cost. The same applies in the UK. Inequality has risen dramatically since 2008, driven by the bailouts and policies of austerity which have contributed to a slower economic recovery than that following the Great Depression. Austerity was a policy choice and not an economic or political necessity. The Keynesian type stimulus by Obama in the US and Gordon Brown in the UK in 2009 led to the beginnings of a recovery. This was choked off in the US by the Republican Congress in 2010, by the Conservative-Liberal Democrat Coalition government in the UK in the same year, and by policies promoted by Germany in the Eurozone. 

The argument for austerity claimed that the recession induced by the crisis caused government revenues to fall, government expenditure to rise, and government borrowing to cover the difference to increase dramatically. The levels of debt involved would be unsustainable and so there was no alternative but to cut benefits and services, which would reduce expenditure and bring debt back to acceptable levels. Alongside this a variety of spending cuts and tax rises were also announced. It was believed that these actions collectively would increase business confidence and encourage expansion. They did not. Instead output shrank, business held back on investment and the debt did not reduce. It took more than five years for economic output to return to pre-crisis levels. During this period and after wages fell or stagnated. In 2008 the average wage in the UK was £465; now in 2018 (after taking account of inflation) it is £461. This marks the longest period of declining real incomes in recent recorded history. More than one fifth of the population now live on incomes below the poverty line even though most of these households are in work. Most striking of all, life expectancy among some sections of the population have reversed, not only in the UK but also among the white working class in the US.

Austerity and the policies behind it have fed growing inequality. One of the most important of these has been quantitative easing (QE); creating new money to boost spending and investment. The US committed $3.7 trillion, the UK £1 trillion and the ECB €2.5 trillion to QE.

Creating new money is not the same as spending it. While the intent behind the various QE programmes was to keep liquidity high and interest rates low, allowing the banks to offer cheap loans to business and households, the reality has been rather different. Instead banks and multinational companies have used QE to boost their reserves and stimulate another round of mergers and acquisitions among giant corporations. This has fed the existing trends in capitalism toward monopoly, and has also encouraged asset price inflation among those already holding shares and property.

According to investment stockbrokers Hargreaves Lansdown, an investment of £10,000 in the FTSE all-share index in the UK in August 2008 would now be worth £14,893 without including dividends and £21,352 with dividends reinvested. In the US the gains were even higher. A £10,000 investment in the S&P 500 index in September 2008 would now be worth nearly £40,000 with dividends reinvested. Contrast this with those holding modest amounts of savings. Government policy since 2008 has been to keep interest rates low and many accounts pay no interest at all. The sums in such accounts have increased from £48 billion to £164 billion in the last ten years. A sum of £10,000 held on deposit in 2008 is now worth only £8,790 when inflation is taken into account.

There is now a six-fold difference in income between the top 20% of households compared to the bottom 20%, with 44% of the UK’s wealth owned by 10% of the population. Increasing inequality between the top 1% in the UK and the other 99% has grown. No wonder money held by the rich in off-shore accounts where it avoids detection and taxation has grown to reach $8.7 trillion and, by some estimates, much more. In short the ‘many’ have paid heavily to rescue the ‘few’. There has been growing political recognition of this fact and a developing push-back against it. Although some of this is informed by conscious class politics much more has been informed by a strident populism particularly in Europe and now the US (1).

More worrying still such populism has gained further ground in the last two years with populist movements now setting the agenda, constituting the opposition and even entering government in some countries. Populism is ‘catch-all anti-politics’ that masks class discontent and diverts political energy. The ruling class benefits from this; the working class does not. It has to be vigorously exposed and opposed.

THE CRISIS NOW AND STILL TO COME

To date, no bankers have been punished for their reckless actions in precipitating the crisis and no banks have been broken up as ‘too big to fail’. Instead they have grown larger, and the bankers have again begun to reward themselves with huge bonuses. Last year these amounted to £15 billion the same as in 2007. Nor has there been any change in economic thinking. The dominant ideology governing economic policy remains neo-liberalism, which still favours a regime of light regulation of the financial sector, meaning the behaviour of the banks and other financial institutions has not fundamentally changed. Real risks remain, and the consensus among those who study and comment on finance is not if there will be another financial crisis, but when and in what form.

The immediate outlook is not good. QE is coming to an end with unknown consequences, including possibly precipitating recession in economies such as the UK where growth has been weak. There are signs of inflation returning in the US, which will likely increase the value of the US dollar relative to other currencies and so increase the costs of repaying debts denominated in US dollars in emerging market economies, which have borrowed heavily in US dollars and are particularly exposed. Household, corporate and sovereign (government) debt has risen by 74% since 2008 and, given what has happened in the past, a significant proportion of this will be ‘bad’ debt which is unrepayable, cutting profits and margins and putting banks once again at risk.

Compounding this is the ‘shadow banking’ sector (investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds and pay-day lenders) which contributed to the crisis of 2008 and is not subject to close oversight. Its size is disputed ranging from $90 trillion to $160 trillion (the latter figure is twice the GDP of everyone on earth) with estimates that at least $30 trillion is ‘at risk’. Taken together and adding political uncertainties, in part created by the Trump presidency, these developments have led the International Monetary Fund in its most recent Global Financial Stability Report (October 2018) to conclude that a global economy dominated by mobile private capital is inherently unstable.

The Report warns of “dangerous undercurrents” threatening the global economy. Among those it lists are waning support for multilateralism, growing trade tensions, rising inequality, attempts to roll back banking regulations put in place after 2008, over confidence in buoyant stock markets, the end of QE and “easy money” and financial technology spawning new risks. “Near term risks to global financial stability have increased somewhat over the past six months” it claims while “medium-term term risks to global financial stability and growth remain elevated” with emerging market economies particularly vulnerable. Towards them there is a “risk of contagion” if investors panic and pull out capital, tightening financial conditions and precipitating a global crisis. The conclusion to be drawn, despite the IMF’s assertion that the global financial system is more resilient now than in 2008, is that the economic future is even more unpredictable and the risks of a financial crisis greater.

At the centre of such a financial crisis will be the City of London. Much is routinely claimed for its importance to the UK economy for the thousands of highly paid jobs it provides, the £31 billion in direct tax revenues it pays, and the surplus in trade in financial services it delivers. However, recent research published by the University of Sheffield’s Political Economy Research Centre (Baker, Epstein and Montecino: The UK’s Finance Curse? Costs and Processes, October 2018) reveals that the City of London is a burden to the country. It claims that the City of London is much too big for the British economy, resulting in lost growth potential for the UK of £4.5 trillion between 1995 and 2015. This amounts to roughly 2.5 years of average GDP across the period, or £170,000 per household. The figure is made up of £1.8 trillion in lost output caused by the financial crisis of 2008 and £2.7 trillion in ‘misallocation costs’. These are costs incurred when finance is diverted into the City of

London and away from more useful investments in other parts of the economy, such as industry, infrastructure etc. They also show that compared to a similar study conducted for the US losses were two to three times higher for the UK underlining a conclusion that hosting the City of London costs much more than hosting Wall Street (where costs were just above one year’s GDP).

The report’s conclusion is that: “the UK economy may have performed much better in overall growth terms if: (a) its financial sector was smaller; (b) if finance was more focused on supporting other areas of the economy, rather than trying to act as a source of wealth generation (extraction) in its own right”. These are important findings that need to be shared widely across the labour movement. They provide more ammunition for an incoming Labour government seeking ways to ‘roll back’ the City and harness it to the task of re-balancing the economy toward more productive activities, such as the regeneration of industry and the promotion of technology, and not simply in richly rewarding itself at our expense.

The period since the 2008 crisis has seen a lower rate of investment in the UK than in other developed countries and a collapse of productivity. This will not be easy to reverse but at a minimum it demands that, difficult as it may be, the financial genie must be put back in the bottle from which it was released by the policies of the Thatcher governments in the 1980s. The ‘many’ deserve nothing less.

(1) See: Populism: its European Context by Paul Sutton – The Socialist Correspondent Issue 25

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