Market Madness
Cara Chellew
History seems to repeat itself.
The explosion of the sub-prime mortgage crisis on the American financial scene in February 2007 is another glaring example that free-market economic policy championed by the Chicago school of economics is fatally flawed. Unfortunately, this is not the first market crash of its kind. Popular rhetoric spewing from North American governments and mainstream media outlets claim that no one saw this unprecedented crisis coming. It may be true that we have never seen a financial crisis spiral to the scale it has today. This is because globalization and advances in communications technologies has made the world incredibly interconnected and interdependent. What is not being talked about is the fact that we have had similar market crashes periodically over the last 40 years because neo-liberal economic theory is based on false premises. These spectacular market crashes include the 1989 savings and loans debacle, the 1997 financial crisis in East Asia, and the 2001 collapse of Enron and Worldcom.(1)
Free-market ideology is a cornerstone of neo-liberal economic theory. It is based on a controversial view of human nature. It relies on the ‘truth’ that human beings ALWAYS act to maximize their rational self-interest. All other tenets are centered around this basic axiom. Of course, it takes only a moment of self-reflection to recognize that humans only act rationally sometimes. Other times we act according to habit, whim, and emotion. The economists do not feel this is important when they calculate their mathematical calculations. Thus, what we buy is not necessarily a process of rational deliberation. Often, the psychologically invasive tactics of marketing creates desire for products like reality TV and bacon wrapped sausages, which are not the demands of rationally self-interested public.
Deregulation of the markets is championed because neo-liberal economists claim that individuals know how to spend their money most efficiently and governments have no business interfering with national economies. Under the neo-liberal framework, efficient economies are seen moral devices, rather than amoral mechanisms that can be used for moral or immoral ends. So what is economic efficiency? It is using resources in such a way as to maximize the production of goods and services. As wikipedia explains, “A system is considered to be economically efficient if no one can be made better off without making someone worse off, more output cannot be obtained without increasing the amount of inputs, and production proceeds at the lowest possible per-unit cost.”
Thus, in the name of goodness and efficiency governmental regulation of financial markets was rolled back beginning in Reagan/Thatcher era of the 1980’s and continued throughout the 1990’s as corporations gained greater power and profits. The economic boom of the 1990’s was made possible due to deregulation and increasing levels of individual, corporate, and governmental debt. Lenders routinely lent out more than the total their physical assets. The invention of the Credit Default Swap (CDS) market allowed banks to buy a sort of insurance against the default of loans. In return for paying small premiums, depending on the perceived risk of the loan, banks were free to think of themselves as not exposed to risk and did not have to ensure that money was set aside to cover defaulted or ‘bad debts.’ This in turn allowed them to lend out even more money. These Credit Default Swaps were dispersed internationally by bundling these bad debts into financial packages that were traded and speculated upon. The amount of debt in the CDS market is estimated to be more than $50 trillion.(2)
With the help of a low floating interest rate and irresponsible lenders, Americans who wanted to live the ‘American Dream’ were sold mortgages they could not afford, especially when interest rates rose to more realistic values. Foreclosure and bankruptcy rates rose as people started to default on their loans. Financial confidence began to erode when the sub-prime default risk was reassessed and it was realized that if people started to default in large numbers, banks would not have enough in assets to pay up. Banks became suspicious in lending to each other and to businesses because any one of them could foreseeably go under any day. Thus, the motion of the free-market came to halt with the seizing of credit. The crisis spread from the institutions directly responsible for the toxic loans to the rest of the world as investor confidence in the global financial system diminished. The bailout plans first pursued by British and US governments were followed by many other national governments. Injecting capital into troubled institutions was thought to spark investor confidence. Months later, we have seen this money go down the drain as the crisis persists and troubled institutions ask for more money.
Contrary to the what we’ve heard in the corporate media, individual greed, corruption, and irresponsible borrowing did not cause a meltdown of this magnitude. National governments have become slaves to global trade and corporate interests. We, the people, have allowed governments to organize millions of human lives around the international money markets. Most of our basic needs are given a monetary value and traded globally. About 1.5 trillion dollars moves around the markets daily. This is ten times greater than total world income and 25 times greater than total world trade. Speculators make money off of this movement of money, which in turn causes the price of commodities like wheat and rice to be unpredictable, unstable, and overly expensive. What we have is a system of socialization of cost and risk and privatization of profit.
So what can be done? We can divorce ourselves from the markets. We can demand that profit cannot be made from goods that are essential for human survival. This includes food, water, land, air, energy, education, and culture. We can allocate a new role for the markets. They can be used to trade items of luxury like gold and spices. Finally, we must disassociate the notion that money equals happiness. This is a pervasive lie that is told over and over again to keep the masses content with their 9-5 lives, modeled after the protestant work ethic.
Whatever we do, it must be done consciously and deliberately. We must act with recognition of our dependence and interconnectedness with others in the global community. We must understand that economics is a human constructed theory and not a science. Those who do not learn from the mistakes of the past are destined to repeat them.
(1) Joseph Stiglitz. “Reversal of Fortune.” Vanity Fair.
(2) ”Debts the Way to Do It” SchNEWS
In Praise of Idleness
Bertrand Russell
“Modern methods of production have given us the possibility of ease and security for all; we have chosen, instead, to have overwork for some and starvation for others. Hitherto we have continued to be as energetic as we were before there were machines; in this we have been foolish, but there is no reason to go on being foolish forever.”
