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# PostCapitalism-_Paul-Mason_-_z-library.sk_-1lib.sk_-z-lib.sk_

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Basel II was an open invitation to game the system – and that’s what the bankers and their lawyers did. The ratings agencies misvalued the assets; the law firms designed complex vehicles to get around the transparency rules. As for the market risk, even as America veered into recession in late 2007, the Federal Reserve’s Open Market Committee – the room in which they’re supposed to know everything – stank of complacency. Tim Geithner, then boss of the New York Fed, predicted: ‘Consumer spending slows a bit, and businesses react by scaling back growth in hiring and investment, and this produces several quarters of growth modestly below trend.’<sup>20</sup>

This total failure to measure market risk correctly was not blind optimism; it was supported by experience. When faced with a downturn, the Fed would always slash interest rates, enabling banks to lend even more money against fewer assets. This formed the second basic reflex of neoliberalism: the assumption that all crises were solvable.

From 1987 until 2000, under Greenspan’s leadership, the Fed met every downturn with a rate cut. The effect was not only to make investing a oneway bet – since the Fed would always counteract a stock market crash. It was to reduce, over time, the risk of holding equities.<sup>21</sup> The price of shares, which in theory represents a guess as to the future profitability of a firm, came increasingly to represent a guess as to the future policy of the Federal Reserve. The ratio of share prices to earnings (annual profits) for the top 500 companies in the USA, which had meandered between 10x and 25x since the year 1870, now spiked to 35x and 45x earnings.<sup>22</sup>

If money is a ‘link to the future’, then by 2000 it was signalling a future rosier than at any time in history. The trigger for the dotcom crash of 2001 was Greenspan’s decision to raise interest rates in order to choke off what he called ‘irrational exuberance’. But following 9/11 and the Enron bankruptcy in 2001, and with the onset of a brief recession, rates were slashed again. And now it was overtly political: irrational exuberance was OK once your country was simultaneously at war with Iraq and

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Afghanistan, and once confidence in the corporate system had been rocked by scandal after scandal.

This time, the Fed’s move was backed with an explicit promise: the government would print money rather than allow prolonged recession and deflation. ‘The U. S. government has a technology, called a printing press,’ said Fed board member Ben Bernanke in 2002. ‘Under a paper-money system, a determined government can always generate higher spending and hence positive inflation.’<sup>23</sup>

When financial conditions are positive and predictable, the profits of banks themselves are always going to be high. Banking became an everchanging tactical game focused on skimming money off your competitors, your customers and your business clients. This created the third basic reflex of neoliberalism: the widespread illusion that you can generate money out of money alone.

Though they had reduced the percentage of capital banks were required to keep on hand, the US authorities had maintained the strict partition between Main Street lending banks and investment banks imposed in the 1930s by the Glass-Steagall Act. But by the late 1990s, in a rush of mergers and acquisitions, the investment bank sector was going global, making a mockery of the rules. It was Treasury Secretary Larry Summers who, in 1999, through the repeal of Glass-Steagall, opened the banking system to the attentions of those adept at exotic, opaque and offshore forms of finance.

Fiat money, then, contributed to the crisis by creating wave after wave of false signals from the future: the Fed will always save us, shares are not risky and banks can make high profits out of low-risk business.

Nothing demonstrates the continuity between pre- and post-crisis policy better than quantitative easing (QE). In 2009, having wavered before the enormity of the task, Bernanke – together with his UK counterpart Mervyn King, governor of the Bank of England – started the presses rolling. In November 2008 China had already begun printing money in the more direct form of ‘soft’ bank loans from the state-owned banks to businesses (i.e. loans that nobody expected to be repaid). Now the Fed would print \$4

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trillion over the next four years – buying up the stressed debts of statebacked mortgage lenders, then government bonds, then mortgage debt, to the tune of \$80 billion a month. The combined impact was to flush money into the economy, via rising share prices and revived house prices, which meant that it was first flushed into the pockets of those who were already rich.

Japan had pioneered the money-printing solution after its own housing bubble collapsed in 1990. As its economy floundered, premier Shinzo Abe was forced to restart the printing presses in 2012. Europe – forbidden to print money by rules designed to stop the Euro being debased – waited until 2015, as deflation and stagnation took hold, before pledging to print €1.6 trillion.

I calculate the combined amount of money printed globally, including that pledged by the ECB, at around \$12 trillion – one sixth of global GDP.<sup>24</sup>

It worked, in that it prevented a depression. But it was the disease being used as a cure for the disease: cheap money being used to fix a crisis caused by cheap money.

What happens next depends on what you think money actually is. The opponents of fiat money predict disaster. In fact, books denouncing paper money have become as common as those denouncing banks. With a limited amount of real economic goods but an unlimited amount of money, goes the argument, all paper money systems eventually go the way of nineteenthcentury Texas. The 2008 crisis was just the tremor in advance of the earthquake.

As to solutions, they come mainly in millenarian form. There will be, writes former JP Morgan manager Detlev Shlichter, a ‘transfer in wealth of historic proportions’ from those holding paper assets – whether in bank accounts or pension funds – to those holding real ones, above all gold. Out of the ruins, he predicts, will come a system where all loans have to be backed by cash in the bank, known as ‘100 per cent reserve banking’, together with a new Gold Standard. This will require a massive one-off hike in the price of gold, as the value of all the gold in the world has to rise to make it equal to the world’s wealth. (A similar rationale stands behind the

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Bitcoin movement, which is an attempt to create a digital currency, not backed by any state and with a limited number of digital coins.)

This proposed new world of ‘real’ money would come at a massive economic cost. If bank reserves have to match loans made, there can be no expansion of the economy through credit, and there can be little space for derivatives markets, where complexity – in normal times – aids resilience to problems such as drought, crop failure, the recall of faulty motor cars etc. In a world where banks hold reserves equivalent to 100 per cent of their deposits, there would have to be repeated stop-go business cycles and high unemployment. And simple maths shows us that we would go into a deflation spiral: ‘in an economy with an unchanged money supply but rising productivity … prices will on trend decline’, says Schlichter.<sup>25</sup>

That’s the preferred option of the right-wing money fundamentalists. Their big fear is that, in order to keep fiat money alive, the state will nationalize the banks, write off the debts, seize control of the finance system and kill for ever the spirit of free enterprise.

As we’ll see, it may come to that. But their reasoning contains a fundamental flaw: they don’t understand what money actually is.

In the popular version of economics, money is just a convenient means of exchange, invented because in early societies swapping a handful of potatoes for a raccoon skin was too random. In fact, as the anthropologist David Graeber has shown, there is no evidence that early human societies used barter, or that money emerged from it.<sup>26</sup> They used something much more powerful. They used trust.

Money is created by states and always has been; it is not something that exists independently of governments. Money is always the ‘promise to pay’ by a government. Its value is not reliant on the intrinsic worth of a metal; it is a measure of people’s trust in the permanence of the state.

Fiat money in Texas would have worked if people thought the state would exist for ever. But nobody, not even the Alamo-era settlers, did. As soon as they realized Texas was going to join the USA, the value of the Texan buck revived.

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Once you get your head around this, the true nature of neoliberalism’s problem becomes clear. The problem is not ‘Damn, we printed too much money against the real stuff in the economy!’ It is, though few will admit it, ‘Damn, nobody believes in our state any more.’ The entire system is dependent on the credibility of the state that issues the notes. And in the modern global economy that credibility rests not just on single states but on a multilayered system of debts, payment mechanisms, informal currency pegs, formal currency unions like the Euro, and huge reserves of foreign exchange accumulated by states as insurance in case the system collapses.

The real problem with fiat money comes if, or when, this multilateral system falls apart. But that lies in the future. For now, what we know is that fiat money – when combined with free-market economics – is a machine for producing boom-and-bust cycles. Left to run unsupervised, it could – before we’ve even considered the other destabilizing factors – push the world economy towards long-term stagnation.

FINANCIALIZATION

Go to any of the British towns devastated by industrial decline and you’ll see the same streetscape: payday loan stores, pawnbrokers and shops selling household goods on credit at hyper-inflated interest rates. Next to the pawnbrokers you’ll probably find that other gold mine of the povertystricken town: the employment agency. Look in the window and you’ll see ads for jobs at the minimum wage – but which require more than minimum skill. Press operatives, carers on night shift, distribution centre workers: jobs that used to pay decent wages now pay as little as legally possible. Somewhere else, out of the limelight, you will come across people picking up the pieces: food banks run by churches and charities; Citizens’ Advice Bureaux whose main business has become advising those swamped by debt.

Just one generation earlier these streets were home to thriving real businesses. I remember the main street of my home town, Leigh, in northwest England, in the 1970s, thronged on Saturday mornings with prosperous working-class families. There was full employment, high wages and high productivity. There were numerous street-corner banks. It was a world of work, saving and great social solidarity.

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Smashing that solidarity, forcing wages down, destroying the social fabric of these towns was done – originally – to clear the ground for the free-market system. For the first decade, the result was simply crime, unemployment, urban decay and a massive deterioration in public health.

But then came financialization.

The urban landscape of today – outlets providing expensive money, cheap labour and free food – is the visual symbol of what neoliberalism has achieved. Stagnant wages were replaced by borrowing: our lives were financialized.

‘Financialization’ is a long word; if I could use one with fewer syllables I would, because it is at the heart of the neoliberal project and it needs to be better understood. Economists use the term to describe four specific changes that began in the 1980s:

1. Companies turned away from banks and went to the open financial markets to fund expansion.

2. Banks turned to consumers as a new source of profit, and to a set of high-risk, complex activities that we call investment banking.

3. Consumers became direct participants in the financial markets: credit cards, overdrafts, mortgages, student loans and motor car loans became part of everyday life. A growing proportion of profit in the economy is now being made not by employing workers, or providing goods and services that they buy with their wages, but by lending to them.

4. All simple forms of finance now generate a market in complex finance higher up the chain: every house buyer or car driver is generating a knowable financial return somewhere in the system. Your mobile phone contract, gym membership, household energy – all your regular payments – are packaged into financial instruments, generating steady interest for an investor, long before you decide to buy them. And then somebody you have never met places a bet on whether you will make the payments.

The system may not be specifically designed to keep wages low and productive investment weak – neoliberal politicians constantly claim to be promoting high-value work and productivity – but judged by the results, financialization and low wages are like precarious work and food banks: they go together.

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The real wages of production workers in the USA have, according to the government, stagnated since 1973. Over the same period, the amount of debt in the US economy has doubled, to 300 per cent of GDP. Meanwhile, the share of US GDP produced by finance, insurance and real-estate industries has risen from 15 to 24 per cent – making it bigger than manufacturing and close to the size of the service sector.<sup>27</sup>

Financialization also changed the relationship between companies and banks. From the 1980s onwards, the short-term quarterly profit figure became the stick finance used to beat to death the old corporate business models: companies making too little profit were forced to move jobs offshore, to merge, to attempt monopolistic do-or-die strategies, to fragment their operations into various outsourced departments – and to relentlessly slash wages.

The fiction at the heart of neoliberalism is that everybody can enjoy the consumer lifestyle without wages rising. You can borrow, but you can never go bust: if you borrow to buy a home, its value will always rise. And there will always be inflation – so if you borrow to buy a car, the value of the remaining debt is eroded by the time you need a new vehicle, leaving you plenty of scope to borrow more.

Widespread access to the finance system suited everybody: liberal politicians in the USA could point to the growing number of poor, black and Hispanic families with mortgages; bankers and finance companies got rich from selling loans to people who could not afford them. Plus it created the vast service industry that’s grown up around the wealthy – the florists, yoga teachers, yacht builders and so on, who provide a kind of fake-tanned Downton Abbey for the rich of the twenty-first century. And it suited the ordinary Joe, too: after all, who is going to turn down cheap money?

But financialization created inherent problems; problems that triggered the crisis, but were not resolved by it.

While paper money is unlimited, wages are real. You can go on creating money for ever but if a declining share of it flows to workers, and yet a growing part of profits is generated out of their mortgages and credit cards, you are eventually going to hit a wall. At some point, the expansion of

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financial profit through providing loans to stressed consumers will break, and snap back. That is exactly what happened when the US subprime mortgage bubble collapsed.

From 2001 to 2006, US mortgage lending grew from \$2.2 trillion a year to just below \$3 trillion: significant but not outrageous. But subprime lending – i.e. lending to poor people at high real interest rates – grew from \$160 billion to \$600 billion. And ‘adjustable mortgages’ – which start cheap and become more expensive as time goes on – came from nowhere to make up 48 per cent of all loans issued in the last three years of the boom. This market for risky, complex, doomed-to-fail borrowing did not exist until investment banks created it.<sup>28</sup>

That illustrates another inherent problem with financialization: it breaks the link between lending and saving.<sup>29</sup> Banks on Main Street always hold less money than they lend. We’ve seen how deregulation encouraged them to hold less in reserve and to play the system. But this new process – whereby every stream of interest gets wrapped up into a more complex product, distributed between investors – means ordinary banks are forced into the short-term money market just to run their normal operations.

This drove a fatal shift in the psychology of banking. The long-term nature of their lending (on twenty-five-year mortgages or never-cleared credit cards) got pulled further and further away from the short-term nature of their borrowing. Thus, over and above all the scams and mispricing, financialization creates within banking a structural tendency towards the kind of instant crisis of liquidity – i.e. ready cash – that destroyed Lehman Brothers.

In financialized societies, a banking crisis does not usually see the masses rush to take their money out – for the simple reason that they do not have much money in there to start with. It is banks that have money in the bank – i.e. in other banks – and, as we found in 2008, much of it is in the form of worthless paper.

The problems described here can be solved only if we stop financialization. Allow it to continue and over time more and more of the money in the finance system becomes fictional, and more of its institutions become reliant on short-term borrowing.

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But no politician or regulator was prepared to dismantle the system. Instead they have put it back together, primed it with \$12 trillion of money created out of thin air, and set it going again. This ensures the same conditions that caused the boom-bust cycle will – should any significant growth occur – create another one.

The historian Ferdinand Braudel suggested that the decline of all economic superpowers begins with a spectacular turn to finance. Surveying the fall of the Netherlands as a trading empire in the seventeenth century, he wrote: ‘Every capitalist development of this order seems, by reaching the stage of financial capitalism, to have in some sense announced its maturity: it [is] a sign of autumn.’<sup>30</sup>

Proponents of the ‘financial autumn’ theory point to the same pattern in the Genoese Republic – the main financial centre of the late Middle Ages – then the Netherlands, and then London towards the end of the British Empire. But in each of these examples, the pattern was for the dominant power to become lender to the world. Under neoliberalism, this has been reversed. The USA – and the West in general – have become the borrowers, not the lenders. This is a break in the long-term pattern.

So, too, is wage stagnation. The big financial empires of the past 500 years were making profits from unequal trade, slavery and usury, which were then used to finance decent lifestyles at home. The USA, under neoliberalism, boosted profits by impoverishing its own citizens.

The truth is, as finance has seeped into our daily lives, we are no longer slaves only to the machine, to the 9-to-5 routine, we’ve become slaves to interest payments. We no longer just generate profits for our bosses through our work, but also profits for financial middlemen through our borrowing. A single mum on benefits, forced into the world of payday loans and buying household goods on credit, can be generating a much higher profit rate for capital than an auto industry worker with a steady job.

Once every human being can generate a financial profit just by consuming – and the poorest can generate the most – a profound change begins in capitalism’s attitude to work. We’ll explore this later, in Part II. For now, to summarize: financialization is a permanent feature of neoliberalism. Like fiat money, it leads to breakdown – but the system can’t do without it.

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THE IMBALANCED WORLD

The inevitable result of neoliberalism was the rise of so-called ‘global imbalances’ – in trade, saving and investment. For countries that smashed organized labour, offshored large parts of their productive industries and fuelled consumption with rising credit, the outcome was always going to be trade deficits, high government debts and instability in the financial sector. The gurus of neoliberalism urged everybody to follow the Anglo-Saxon model, but in reality the system relied on some key countries choosing not to.

Asia’s trade surplus with the rest of the world, Germany’s surplus with Europe, the oil exporters’ relentless accumulation of other people’s debts – none of these were anomalies. They are what allowed the USA, Britain and southern Europe to borrow beyond their means.

In other words, we must understand from the outset that neoliberalism can exist only because certain key countries do not practise it. Germany, China and Japan pursue what their critics call ‘neo-mercantilism’:

manipulating their trade, investment and currency positions to accumulate a large pile of other countries’ cash. These surplus countries used to be seen as economic laggards, but in the post-crisis world they are among the few economies left standing. Germany’s ability to dictate the terms of humiliation to Greece, in the living memory of people who’d seen the swastika fly from the Acropolis, shows the power of being a producer, exporter and lender once neoliberalism breaks down.

The main measure of global imbalance is the current account – the difference between imports and exports of goods, services and investments. The world’s current account imbalance grew steadily through the 1990s then took off rapidly after 2000, rising from 1 per cent of world GDP to 3 per cent in 2006. The main deficit countries were America and most of

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