When the financial wizardry lost its magic

Steve Appleton reviews: Whoops! Why everyone owes everyone and no one can pay, by John Lanchester, published by Allen Lane, 2010. Ł20

CAPITALIST POLITICIANS want us to forget the origins of the latest economic crisis. They talk instead of the 'unavoidable' necessity of tax rises and swingeing public spending cuts. However, for socialists, an understanding of the origins of the crisis is vital. This book is not a socialist analysis but it explains in accessible terms what happened and why. Readers can clearly see Lanchester's anger at the crisis and its effects on people who had nothing to do with precipitating it.

The author groups events around four themes - climate, problem, mistake and failure. The "climate" means the new world political order, "neoliberalism", boosted by the collapse of the Soviet Union.

The Stalinist states of the USSR and its satellites were totalitarian regimes run by privileged bureaucracies but, in their planned economies, they held up an alternative to capitalism.

Lanchester says: "The population of the West benefited from [the soviet states'] existence... For decades there was... an ideological beauty contest between the capitalist west and communist east, both vying to look as if they offered their citizens a better, fairer way of life".

But after Stalinism's collapse, capitalist governments had no need to compete for hearts and minds and capitalism no longer had to 'behave itself'.

The "problem" for Lanchester was banking and finance's increasing domination of much of the "Anglo-Saxon" economies.

For 100 years, until the 1970s, the value of Britain's banking sector's assets, for example, hovered around 50% of its GDP.

By 2006, this had shot up to 550%! Banking and finance was, in capitalist terms, 'worth' more than five times the rest of the economy.

New forms of financial "wizardry" were developed, new ways for the major institutions and "high net worth individuals" to speculate and 'play the market'.

The value of this trade in these financial "derivatives", says Lanchester, "exceeds the total of value of all the world's economic output by ... perhaps tenfold"!

The "mistake" theme concerned "risk" and bankers' reliance on mathematical modelling systems for calculating it.

Complex risks were generated by such financial 'instruments' as the collateralised debt obligations (CDOs) comprising many thousands of "sub-prime" mortgages.

However, no capitalist forecast the possibility that house prices may fall! But fall they did. This helped precipitate the crash and the array of banking failures. In reality, the maths was a fig leaf hiding major investors' greed and relentless profit-taking. Andrew Haldane, 'director of financial stability' (!) at the Bank of England calculates that $25 trillion of global wealth was lost at the peak of the crisis (mainly the fall in the value of assets), about 45% of global GDP (the value of everything the world produces).

The "failure" theme meant political and governmental control. Lanchester pitches this as mainly the failure of government regulation, rather than any wider systemic failure of capitalism - although what he says points at this conclusion.

Sub-prime system

Since the days of Thatcher and Reagan, any formal regulation that had existed, had been radically stripped down.

Regulatory bodies were staffed with senior managers whose previous employment had been the industries they were supposed to supervise.

Net result? "Light touch", ie zero-effective governmental control. The book shows how the crisis still impacts millions of ordinary people's lives, in particular US house buyers and how mortgage lenders persuaded poorer families to take out loans they knew would be hard to repay.

Lenders selling these mortgages were not concerned whether the loans would be repaid, because they were immediately bundled together (into CDOs) and sold on.

This book is a humorous explanation of the crisis. There are limitations. The chapter on what might be done claims that "the Anglo-Saxon model of capitalism has failed." But this suggests that a return to an alternative form of 'social-democratic' capitalism is needed.

However this is the model that, Lanchester admits, collapsed alongside the Soviet Union and the rise of big money triumphalism!

The bulk of working and middle-class people face a future of austerity and uncertainty as governments worldwide seek to offload the cost of the capitalist bailout onto them.

For major shareholders of banks and financial institutions, however, things return to comfortable normality.

Goldman Sachs went from near disaster to record profits in July 2009. The bank, "which had to borrow $10 billion from the taxpayer, was, less than a year later, setting aside $16.8 billion in pay, bonuses and benefits...

That is obscene... The big club of potential nationalisation needs to be taken out and warningly brandished."

As socialists we do not merely "brandish" the threat of nationalisation. We aim to build a mass party committed to the democratic nationalisation of the economy's commanding heights and to start building a society where public need replaces the 'needs' of the capitalist market and of the rich.

This book and many other writings of interest to socialists are available from Socialist Books, PO Box 24697, London E11 1YD or tel: 020 8988 8789 to pay by card.

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