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Workers Pay for Their own Impoverishment

by Frederic Lordon Thursday, Apr. 10, 2008 at 4:55 PM

A whole series of factors are combining to undermine the financial position of banks. None of this happened by chance. It is only to be expected that brokers should seize every opportunity to line their pockets. They use innovations to kid themselves they can abolish risk.

Le Monde diplomatique -- March 2008

by Frederic Lordon

*Frederic Lordon is an economist and the author of ET LA VERTU

SAUVERA LE MONDE, Raisons d'agir, Paris, 2003

The market in worse futures

Through pension funds, governments have deliberately implicated

unwitting wage earners in speculative finance, in order to ensure that

they cannot protest or fight market deregulation


You know something is seriously wrong when news thought of as being a good

sign produces an immediate opposite effect. When the US Federal Reserve

cut its interest rates several times in quick succession, no one was

happy. On 12 December, in agreement with the other central banks, it

announced an unheard-of extension of its refinancing procedures (1). The

markets concluded that things must be even worse than they thought.

On 17 January, in an unprecedented move, the Fed's chairman, Ben Bernanke,

appealed for greater budget stimuli. Evidently the Fed, having done all it

could, needed help from the US administration. Confirming the impression

that this was just the first act of a farce, President George Bush

announced a series of measures the next day echoing Bernanke's

suggestions. The markets again assumed that if the Fed and the White House

were coordinating their actions, the crisis must really be serious. That

conventional economic policy measures should go so awry is the most

spectacular and worrying indication of the confusion that has taken hold

of global finance.

The daily account of stock market fluctuations is diluted in the chaotic

stream of data from financial news agencies or remains incomprehensible.

Only when seen in a larger context does the present crisis make sense,

assuming a more characteristic form, particularly in its timeframe.

Advocates of the existing system have hastened to reassure the public that

this is a harmless glitch, dismissing it as a negligible upset and

announcing a return to normality by the summer. They will be disappointed.

There is every reason for the crisis to continue. The commentators who

suggest the current crisis could blow over are disregarding its root

cause: the mad rush to sell mortgages, the most enduring form of debt, to

insolvent households. The reset clause (2) initially worked wonders,

attracting buyers and driving property prices - and with them speculative

gains on derivative products - sky high.

Now, in a reversal of fortunes that some might see as justice, it is

forcing finance, which loves to live in the present, to come to terms with

the arrears of debt-ridden families. Unlike an exposed position, which can

be sold off, financiers cannot ditch mortgage borrowers. The impact of the

reset clause, which entails higher interest rates, forcing borrowers to

default on their repayments, will peak in March or April.

With luck, efforts to find new borrowers probably stopped at the beginning

of 2007. That means lenders will have to wait till early 2009 for the last

of the bankrupt borrowers to surface. They are of no interest to

financiers, except that their misfortune is also the main cause of the

collapse of the derivatives based on subprime mortgages. Finance, which

likes nothing so much as asset liquidity, must come to terms with the

inertia of inventory. Like it or not, the borrowers that mortgage vendors

treated as disposable are there to stay, a lasting encumbrance.


Meanwhile the effects of the disaster are spreading, reaching a category

of players no one had ever heard of before: the monolines, specialist

bodies that insure the holders of bond portfolios (mainly investment funds

and banks). They were originally designed to cover the limited risks of US

municipal bonds (3), but along with everyone else they caught the subprime

fever and were tempted into insuring much juicier items. Subprimes were

selling like hot cakes and generating stacks of income. Moreover everyone

pretended they involved as little risk as the best bonds, which of course

were subprime derivatives.

What followed was predictable. The two biggest monolines, MBIA and Ambac,

are almost bankrupt. Banks and funds, or at least the ones in a position

to do so, have been asked to recapitalise them urgently. This is a far

from minor event. Under existing rules, with monoline ratings being

downgraded, the rating of all the assets covered by their insurance must

also be downgraded. So the value of those assets, which figure in the

balance sheets of the insurers' clients, must be reduced too. Banks used

monolines to insure their colossal derivative holdings.

But the end of the crisis is even further off now that its most toxic

effects have started to spread. The balance sheets of banks are slipping

into the red, due to losses on subprime derivatives. The high level of

uncertainty is maintaining restrictions on interbank liquidity (the ease

with which banks lend each other money), amid a climate in which no one

trusts anyone else. This leads to a contraction of credit, which impacts

on industrial production, however far removed it may seem from financial


To make matters worse, high finance refused for more than six months to

face facts and accept that, with dwindling growth, we might be on the

verge of a recession. Once that uncomfortable idea takes root in people's

minds, it unleashes massive doubt, spreading further and further into

global finance. The biggest drops in share prices, early this year,

reflected this trend. Admittedly the world's stock markets had been touchy

for about eight months, but initial losses were limited to banking, in the

front line when the subprime bubble burst. From September, as the money

market started to dry up and it became impossible to raise funds, many

organisations had to sell part of their stock portfolio in a hurry to

raise cash. Now the likely prospect of a global slowdown is casting doubt

on all forms of business and their chances of showing a profit.

If the stock markets are caught in a downward spiral, they may produce

serious collateral effects, particularly for private equity (PE) funds, a

form of shareholder (as opposed to stakeholder) capitalism. This

unobtrusive but sensitive sector specialises in buying up promising

companies. PE funds remove their acquisitions from the stock market and

savagely strip them of their assets. Two or three years later the fund

sells off the company, at a comfortable profit, often by floating it on

the stock market again (4).


But with the markets in turmoil there is little prospect of refloating

acquisitions at a high enough share price to show a healthy return. It may

prove tricky to liquidate many PE investments. Either the expected gains

will fail to materialise or funds will have to delay liquidation, which

means supporting the debt for much longer than originally planned. PE

funds generally finance initial purchases through massive borrowing,

sometimes obtained under conditions as dubious as for subprimes

themselves. Banks are already beginning to worry about what will happen

when they have to write off vast swathes of their outstanding PE debts,

with all the depreciation that entails.

A whole series of factors are combining to undermine the financial

position of banks and make them reluctant to lend: the value of their

stock portfolios is plummeting; origination (5) and merger-acquisition are

grinding to a halt; PE loans are at risk (as are other humbler forms of

credit such as hire purchase and credit cards); and trading profits are

shrinking as stock markets plunge. In the wonderful world of finance, a

crisis feeds on itself.

Yet none of this happened by chance. Like many others Daniel Bouton, the

chairman of Societe Generale (SocGen), would have us believe that recent

events are just an unfortunate hiccup. This explanation is meant to be

valid at all levels, from the rogue SocGen trader, Jerome Kerviel, whom

Bouton calls a "terrorist", to the "patch of bad luck" with subprimes.

But all these mishaps are consistent with the rationale of market finance.

It is only to be expected that brokers should seize every opportunity to

line their pockets. If necessary they invent opportunities, using

innovations to kid themselves they can abolish risk. Each time stock

prices start to rise they rush in, inflating the bubble with a sudden

influx of cash. Paying little attention to individual risk, they have no

concern whatsoever for global risks. So it is hardly surprising that we

should suffer recurrent financial disasters. The whole point of financial

deregulation (6) was to remove any restrictions on investors, leaving them

free to indulge in the most addictive form of profit.

Bouton is in no position to claim that this was all "a most unfortunate

and unexpected accident" (7). The bank he heads is a perfect example of

the madness that has gripped finance over the past 25 years. A latecomer

to the world of high finance, SocGen was once a traditional, unexciting

High Street bank, with branches all over France. But it started dreaming

of global sophistication and flashing computer screens, imagining it could

become another Goldman Sachs. It taught its staff English, sent the most

promising recruits off to play in the City and started revelling in the

stock markets. All much more exciting than renewing loans for building

contractors in small-town France.


When Le Figaro wrote that "no damage has been done to the Societe Generale

model nor is it open to question" (8), we should take it to mean the exact

opposite. The model - which is not specific to SocGen - has been seriously

holed well below the waterline. The bank's obsession with market finance,

which has earned it plenty of money, is now likely to prove extremely

costly. SocGen is slightly more visible than its counterparts, as often

happens to latecomers, but it is a typical example of how the markets have

distorted banking, drawn by the fatal attraction of deregulation.

No amount of whitewashing can mask the true colours of the present crisis.

It is a full-scale demonstration of the intrinsic evil of uncontrolled

markets and those who work them. Nor is it the first event of this kind,

though it seems we never learn from past disasters. The dot-com bubble of

2000 (9) provided a lavish display of dishonesty and fraud, followed by

pious calls for transparency, regulation and the integration of all the

transactions that did not appear on corporate balance sheets.

Never again, the financiers swear at the start of each cycle, like drunks

making New Year resolutions to stay sober. As long as market prices rise,

finance makes a fortune, which it keeps to itself. But when the bubble

bursts the fallout endangers the whole economy. Governments have to pick

up the pieces, where any ordinary bankrupt would have to face the

consequences unassisted.

Anyone taking a dispassionate look at the achievements of deregulated

finance can see that the damage far exceeds any benefit. It is high time

we made some changes. Nor is there any shortage of good ideas. The Tobin

tax (on cross-border currency trading) would be a good start, though it

has already fallen into oblivion. There is also the shareholder limited

authorised margin (SLAM), which I originally proposed. Limiting the amount

shareholders can cream off in profits, reduces the incentive to drive the

workforce harder and harder.

A third option would be to set a two-tier money market, applying different

rates of interest to the funding of productive and speculative

investments. Taking a cue from the Glass Steagall Act of 1933, passed in

the US after the stock market crash (and abolished by Bill Clinton in

1998), we might consider a watertight seal between commercial and

investment banks too. This measure has a similar aim to the previous one,

except that the idea of a hermetic barrier has the additional advantage of

significantly restricting the potential of financial disasters to infect

the real economy through credit.


From a political perspective, if it turns out that the French economy has

not suffered as badly from the subprime crash as some of its neighbours,

it will be because France has not deregulated its markets to the same

extent, despite persistent pressure from "reformers" at both ends of the

political spectrum. Perhaps the most striking feature of their lobbying

over the past 25 years has been their enthusiasm for continuing change,

undeterred by the damage already done. Some might retort that not everyone

has suffered to the same extent, which is partly true.

But what seems odd, even 25 years after the fact, is that the people who

have suffered most from deregulation are those whom the Socialist Party

was supposed to defend. The rot started in 1983-86, under a Socialist

government. It took very little time to change the face of French society,

with a turning point in economic policy and a major ideological reversal

in 1983. In 1984 the prime minister, Laurent Fabius, instructed publicly

owned companies to pursue a single goal - profit - which made a nonsense

of their status as nationalised interests and opened the door for their

return to the private sector. There was a European summit at Fontainebleau

that year, a foretaste of the Single European Act and the Single Market,

synonymous with "free and undistorted competition". Then in 1986 came

financial deregulation, completing a huge change in only a short time.

Since then the French have resisted attempts to implement the promised

reforms fully. In their defence it should be said that deregulation has

caused repeated calamities, exacerbated by successive financial crises.

The current crash coincides with a gloomy economic climate, underlining

not only the all-embracing nature of the model we are being asked to

espouse, but also the considerable dangers it involves.

Competition exerts constant downward pressure on prices, affecting costs

and ultimately wages. It establishes a price-wage regime in which any

discussion of purchasing power focuses exclusively on prices. Workers make

demands but government and industry respond to them as consumers. But

lower prices impact wages. Workers made redundant when production is

relocated elsewhere have no option but to shop at the nearest discount

store, which is the most ferocious extremity of the competitive chain,

involved in the mechanisms that deprived workers of work in the first

place. Wage earners unwittingly vindicate the process that exploits them

and contribute, for lack of any better solution, to perpetuating it (10).

This vicious circle feeds constant downward pressure on purchasing power,

sapping consumption and overall demand.

The free market system claims to have a solution to the problems it

creates. The answer to the downward pressure on consumption inherent in

any price-wage regime is borrowing. If consumer purchasing power stagnates

or declines, but investors demand domestic sales, it seems logical to use

credit to lift spending above the limits set by wages. It should come as

no surprise that in the US and Britain, both of which have a significant

lead over France in this, the level of household debt as a share of

disposable income is 120% and 140% respectively.


President Sarkozy flatters himself that this is not the case in France.

But all his reforms are leading us in the same direction, even faster than

before. In 2006 household debt in France amounted to 68% of disposable

income, but it has been climbing steeply over the past 10 years, since the

start of unbridled globalisation. The British and US economies are likely

to suffer more than others because consumer credit is an essential part of

the system, and easy money is drying up fast.

The massive financial involvement of wage earners adds a nasty twist to

the free-market system, with saving as the counterpart of alienation

through debt. The downfall of financial institutions leaves us unmoved,

until we question the origin of the funds they have squandered. Part of

the money that financiers stake and lose comes from the savings of wage

earners. Here again France is an exception because most employees do not

have the means to invest in anything more sophisticated than basic savings

accounts. Only the well-off dabble in finance. Which means that stock

market crashes mainly hurt the latter, with the unexpected side effect

that they reduce inequality.

The US and British economies are pointing the way forward. They have

scrapped their contributory pension schemes the better to catch the

massive savings of wage earners and inject the cash into the markets via

pension funds. Wage earners suffer most in a market crash. Sarkozy has not

yet introduced pension funds - at least not in practice - but the concept

of stock options for everyone (or profit sharing) is similar. Offering a

substitute for proper wages, which are not going to increase in the near

future, is fraudulent. But to do so by exposing wage earners directly to

the uncertainties of finance, while attempting to make them support the

system that enslaves most of them, is even worse.

Workers are trapped in a competitive system in which prices can only be

cut by paying lower wages. They are slaves to debt, now as vital to their

survival as wages. But they are also being tyrannised at their own

expense. The savings that the stock markets exploit, the savings that

demand ever-increasing rates of return, belong to them. They will be

burned in every financial crisis because they have to carry the can for

any lost growth. There is no question of changing the financial system,

for the apparently irrefutable reason that reform might reduce their

pensions. It is a perfect double bind.

To be fair, not all those in favour of a free market are fools, repeating

the same neoliberal mantras. But its most persuasive advocates are often

the least visible. They cynically leave simpler souls to convince the

general public that markets are governed by natural forces untainted by

any political or ideological considerations, in particular supply and

demand. They are in no doubt about the political merits of

financialisation. Implicating wage earners in financial speculation is a

deliberate and effective strategy. There is no better way of preserving

the stock market than by making workers dependent on its supposed

benefits. ________________________________________________________


(1) Which it uses to keep private banks supplied with ready cash.

(2) A system by which borrowers benefit from an attractive interest rate

for the first two years, before being "reset" to the full rate for the

remaining 28 years of the loan.

(3) Used by local authorities to raise funds.

(4) See "France: the long, slow death of Moulinex", Le Monde diplomatique,

English language edition, July 2004.

(5) Issue of securities (shares, bonds, etc) on behalf of business


(6) In the 1980s more flexible rules were introduced for financial and

capital markets, with the relaxation of controls on mortgage lending, and

deregulation to enable consumers to gain easier access to credit markets.

(7) "Message a nos clients", a full-page statement by SocGen published in

Les Echos, Paris, 4 February 2008.

(8) Le Figaro, Paris, 25 January 2008.

(9) The CAC-40 index in Paris dropped from 6,922 points on 4 September

2000 to 2,403 points on 12 March 2003, a 65% fall in two and a half years.

On 6 February 2008 the index stood at about 4,800 points.

(10) See Serge Halimi, "Wal-Mart, the movie", Le Monde diplomatique,

English edition, March 2006.

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