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Guardian economics editor Larry Elliott :
We've been warned: the system is ready to blow
Only a new way of managing the global economy can prevent more mayhem in the markets and on the streets
Larry Elliott guardian.co.uk, Sunday 14 August 2011 19.55 BST
For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.
There were glimmers of hope amid last week's despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.
Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.
To understand the mess we are in, it's important to know how we got here. Today marks the 40th anniversary of Richard Nixon's announcement that America was suspending the convertibility of the dollar into gold at $35 an ounce. Speculative attacks on the dollar had begun in the late 1960s as concerns mounted over America's rising trade deficit and the cost of the Vietnam war. Other countries were increasingly reluctant to take dollars in payment and demanded gold instead. Nixon called time on the Bretton Woods system of fixed but adjustable exchange rates, under which countries could use capital controls in order to stimulate their economies without fear of a run on their currency. It was also an era in which protectionist measures were used quite liberally: Nixon announced on 15 August 1971 that he was imposing a 10% tax on all imports into the US.
Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.
There have been big structural changes in the way the global economy has been managed since 1971, none of them especially beneficial. The fixed exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the euro floats against the dollar, the pound and the Swiss franc. The Hong Kong dollar is tied to the US dollar, while Beijing has operated a system under which the yuan is allowed to appreciate against the greenback but at a rate much slower than economic fundamentals would suggest.
The system is an utter mess, particularly since almost every country in the world is now seeking to manipulate its currency downwards in order to make exports cheaper and imports dearer. This is clearly not possible. Sir Mervyn King noted last week that the solution to the crisis involved China and Germany reflating their economies so that debtor nations like the US and Britain could export more. Progress on that front has been painfully slow, and will remain so while the global currency system remains so dysfunctional. The solution is either a fully floating system under which countries stop manipulating their currencies or an attempt to recreate a new fixed exchange rate system using a basket of world currencies as its anchor.
The break-up of the Bretton Woods system paved the way for the liberalisation of financial markets. This began in the 1970s and picked up speed in the 1980s. Exchange controls were lifted and formal restrictions on credit abandoned. Policymakers were left with only one blunt instrument to control the availability of credit: interest rates.
For a while in the late 1980s, the easy availability of money provided the illusion of wealth but there was a shift from a debt-averse world where financial crises were virtually unknown to a debt-sodden world constantly teetering on the brink of banking armageddon.
Currency markets lost their anchor in 1971 when the US suspended dollar convertibility. Over the years, financial markets have lost their moral anchor, engaging not just in reckless but fraudulent behaviour. According to the US economist James Galbraith, increased complexity was the cover for blatant and widespread wrongdoing.
Looking back at the sub-prime mortgage scandal, in which millions of Americans were mis-sold home loans, Galbraith says there has been a complete breakdown in trust that is impairing the hopes of economic recovery.
"There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars' loans, Ninja loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode, destroying the people but leaving the buildings intact), toxic waste (the residue of the securitisation process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not 100% honest. Think of the restaurant where the staff refers to the food as scum, sludge and sewage."
Finally, there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.
This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.
A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.
But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.
This is a system in deep trouble and it is waiting to blow.
- not any more! I've just written this book telling everyone that they're a bunch of corrupt so-and-sos, and that that they engage in insider trading, and they spread false rumours, and they avoid their tax and they manipulate markets in order to line their own silk pockets, and they don't care if that has a bad effect. So one example I give of dubious behaviour is when the tsunami happened in Japan. I spoke to some fund managers, ex-clients of mine, and they were talking about how they were going to make money out of this. Some of them were going to buy bonds in TEPCO, because they got hit very hard (this is the nuclear company that was responsible), and that it was going to get nationalised, and once that happened, the bond would therefore go up. Other guys were buying gold, because they knew that was a safe haven in times of troubles. Others were selling yen short, and all these things were going on, and I was like, I suddenly realised these people had no concept that this was a human tragedy, and they were just seeing it as a money-making opportunity.
Likewise, when 9/11 happened, I remember clearly the next day, when I was in the bank, people were going, okay – so, we need to sell short airlines, insurance companies; we need to go long on armaments companies, because there's going to be a war about this. We need to go long on construction companies, because there's a lot of building to be done in Manhattan. It is quite ... how can I put it? – shocking.
But why should it be shocking, Geraint? Surely the whole idea is, that is the way people should be thinking? Nobody criticises Warren Buffett to go out and buy shares when everybody is panicking – that is part of his mantra, "Be fearful when the market is greedy, and be greed when the market is fearful."
Geraint: Absolutely, and was it Rothschild who said, "Buy when there's blood on the streets", and so forth. It's not so shocking that money has no morals or ethics; it's shocking that people are completely distant from the human tragedy, and that when I'm talking to them about, oh Japan – isn't that awful? – maybe ten thousand or so people died – that is quickly brushed aside, and what is looked at is how to make money out of it.
But that's called capitalism?
It is, but you see, this is the problem with capitalism – if it's left without being in any way ...
... unchecked, if it's being uncontrolled, as it has been, as we've had greater and greater deregulation, which of course helps explain the financial crisis, there is no warmth there, there is no human heart. It is just about making money. That is, I think, something that makes us less human, if we engage in that long enough.
Just to give you one example: I believe that the fiduciary duty of most corporations is to act like a psychopath, and I've seen a documentary on this. If you think about psychopaths, they are without remorse; they have no compassion; they are very single-minded in their behaviour; they just do anything they can in order to fulfil their ambition, and that is what companies have to do. They just have to make quarterly earnings figures go up each year, and they do it without any thought about the impact their behaviour has on others. Therefore, I'm afraid this world is run by a bunch of psychopaths who are raping it of its natural resources, and ultimately, if left unchecked, will also make our grandchildren's home a very unpleasant one.
In a particularly bleak assessment, Roubini suggests that the current craziness in the markets may be the result of almost a century of trying to bargain our way out of a notion that’s been chasing us down since the Great Depression and which we’ve been barely outrunning: that markets, quite simply, might not work.
“Karl Marx had it right,” Roubini says. “At some point capitalism can self-destroy itself. We thought that markets work. They are not working. What’s individually rational… is a self-destructive process.”
Market crash 'could hit within weeks', warn bankers
A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets.
Stock Trader Clutching His Head in Front of a Screen Showing a Stock Market Crash The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008 Photo: Alamy Harry Wilson
By Harry Wilson, and Philip Aldrick
9:50PM BST 24 Aug 2011
Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago.
Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender's bonds against default is now £343,540.
The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.
"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive.
"I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.
Despite this, bank shares rebounded on Wednesday, showing the growing disconnect between equity and credit investors. RBS closed up 9pc at 21.87p, while Barclays put on 3pc to 149.6p despite credit default swaps on the bank hitting a 12-month high. This mirrored the US trend, with Bank of America shares up 10pc in late Wall Street trade after a hitting a 12-month low on Tuesday over fears that it might have to raise as much as $200bn (£121bn). As with the European banks, the rebound in the share price was not reflected in the credit markets, where its CDS reached a 12-month high of 384.42 basis points.
European stock markets joined in the rally. The FTSE closed up 1.5pc at 5,206 on hopes the chance of a global recession had diminished. European shares hit a one-week high, with Germany's DAX closing up 2.7pc and France's CAC 1.8pc higher. The Dow Jones index edged higher on strong durable goods orders data as markets began to accept that the US Federal Reserve is unlikely to signal fresh stimulus at Jackson Hole this Friday.
Even Moody's decision to downgrade Japan's sovereign credit rating by one notch to Aa3 did little to damage global sentiment, although Tokyo's Nikkei closed down just over 1pc.
As stock market nerves settled, gold - which has recorded steady gains recently as investors seek a safe haven - fell 5.3pc to $1,777 in London.
Anonymous declared "war" on the New York Stock Exchange this weekend and vowed to "erase" the NYSE from the Internet on Oct. 10 as the Occupy Wall Street protest entered its third week in New York City after a weekend that saw hundreds of protesters arrested during a planned march across the Brooklyn Bridge.
"On Oct. 10, NYSE shall be erased from the Internet. On Oct. 10, expect a day that will never, ever be forgotten," intoned a computer-generated male voice common to many Anonymous videos, in a warning posted on TheAnonMessage YouTube channel (video below).
The AnonMessage channel has been used to post several Occupy Wall Street-related video messages since the protest against lax regulation of the financial sector and growing economic inequality began on Sept. 17. Those messages include Anonymous' initial "official" video regarding Occupy Wall Street and a warning sent last week to the New York Police Department that threatened retaliation if "the brutality does not stop" against Occupy Wall Street protestors.
Anonymous, until recently known mostly for wreaking havoc on the Internet through blunt-force takedowns of websites and opportunistic hacking attacks, has lent its help to low-tech street protests of late. Prior to its participation in Occupy Wall Street, the initiation of which is credited to the Canadian activist group Adbusters, Anonymous also had a large role in a string of live protests against actions taken by the Bay Area Rapid Transit (BART) authority's police force.
The threat to "erase" the NYSE from the Internet was not explained, though in comments on the YouTube video, some speculated that Anonymous was planning a Distributed Denial-of-Service (DDoS) attack on the public-facing NYSE.com website, similar to DDoS attacks the group has used to take down websites in the past.
Others felt that would only be a minor setback for the NYSE and guessed that Anonymous was planning a larger attack, perhaps even an attempt to actually disable trading on the exchange.
Here's the transcript of the latest Occupy Wall Street video from Anonymous:
Greetings, institutions of the media.
We are Anonymous.
The events transpiring within Wall Street have caught our eye.
It seems that the government and federal agencies enjoy enforcing the law a little bit too much. They instate unjust laws as mindless automatons, blindly following orders with soulless precision.
We witness the government enforcing the laws that punish the 99 percent while allowing the 1 percent to escape justice, unharmed, for their crimes against the people.
We have observed this same government failing to enforce even the minimal legal restraints of Wall Street's abuses. This government who has willingly ignored the greed at Wall Street has even bailed out the perpetrators that have caused our crisis.
We will not stand by and watch the system take over our way of life.
We the people shall stand against the government's inaction.
We the people will not be witnesses to your corruption and ill-gotten profits.
We will not labor for your leisure.
We will not assist you in any way.
This is why we choose to declare our war against the New York Stock Exchange. We can no longer stay silent as the population is being exploited and forced to make sacrifices in the name of profit.
We will show the world that we are true to our word. On Oct. 10, NYSE shall be erased from the Internet. On Oct. 10, expect a day that will never, ever be forgotten.
Vox Populi, Vox Anon.
The Voice of The People is The Voice of Anonymous.