So the Crash of 2008 had multiple interwoven causes – but it’s important to understand how these were related. One major background cause is the nature of the monetary system and the very existence of interest. All money is created through governments borrowing from banks on interest. This means that repayments of the debt are larger than the original size of the loan. For the loan to be repaid, more money needs to be created which means more lending on interest. The result is that over the long-term, as the money supply increases, the value of the currency depreciates and thus costs of living rise. There is therefore a long-term structural tendency toward rising inflation. This contributes to the devastating nature of capitalism’s boom and bust crises - at some point the debt-bubble is patently unrepayable and has to collapse.
Yet pre-Crash inflation also had another specific cause in the 21st century, namely, rocketing fuel prices; fuel prices rose from 2001 through to 2008 primarily due to supply-demand issues (not purely due to financial speculation although this played a role), most likely as a consequence of peak oil. According to an October 2007 oil market report by the Energy Watch Group in Berlin, world oil production peaked in 2006. The excessive energy costs fed directly into the entire system, raising cost of transport, food, living and basically everything, which thus also placed structural pressure on banks to increase interest rates to cover their own costs. Experts like petroleum geologist Colin Campbell, who worked for companies like Shell, BP, Esso and Texaco, confirm we are probably now on what is known as the “undulating plateau”.
The plateau begins when peak oil induces massive price shocks contributing to economic recession. The recession in turn reduces consumption, lessening the strain on resources and precipitating a collapse in fuel prices. Lower prices create new space for renewed consumption and economic recovery. This “undulating plateau” is a period of major price fluctuation, which could last from 5 to 10 years before oil capacity limits are permanently breached and we arrive at the era of irreversibly scarce oil supplies and high prices.
The corrupt lending practices of banks interacted with the impact of rising inflation. While sheer greed partly explains this behaviour, it’s a bit more complicated than that. The structural fragility of the global financial system had been obvious since the dot com boom and bust in the late 1990s. The capitalist imperative to keep growing by continually generating profits is structural - i.e. capitalism systematizes human greed and makes it necessary for economic survival. If the financial sector didn’t find a new outlet for investment to continue growing the economy, the economy would contract. If the financial sector was to continue growing, it had to find a new previously untapped market for debt-credit creation and the associated milieu of ‘financial products’ - this new market consisted of ‘low-income’ people and even the struggling middle classes, namely, the majority of the population. The very imperative to grow - simply to avoid banks and corporations losing profits, contracting and then failing - pushed banks into even more corrupt lending practices, which combined with long-term structural energy and monetary constraints, creating a bubble of virtual growth that was bound to implode at some point.
How to Create a Quadrillion Dollars ‘Ex Nihilo’
So the housing markets were only the underbelly of a much larger beast. So-called “structured financial” products served as mechanisms to generate massive profits for elite investors by deepening levels of debt. This leads back to the structural issue of the monetary system, based on fractional reserve banking - that is, the creation of money from nothing, simply by entering numbers into a computer, as credit charged at interest. Traditionally, banks could create credit or debt-money up to 12 times what they held in reserve.
But this changed with the worldwide brokering of the New Capital Accord in 2000 by the Bank for International Settlements. The Accord effectively allowed banks to obtain unlimited leverage – the ability to create debt-money at any multiple whatsoever, with no meaningful regulation. Financial institutions exploited this new found power to subjugate the population to an enlarging and unrepayable debt that was the basis of self-multiplying profits for financial institutions.
According to the Bank for International Settlements, by late 2008 total derivatives trades exceeded one quadrillion dollars, that is, 1,000 trillion dollars. This is an insane quantity that has no relation to the real economy - the total GDP of all the countries in the world is only about 60 trillion dollars. It is a quantity generated by the creation of money out of nothing as credit – that is as debt-money requiring repayment on interest.
Worse, no one, not even in the leading financial institutions, really understood exactly how this situation had come about. As of 2004, for instance, 90 per cent of financial transactions in the US were not properly recorded. This was, in effect, a giant, globalized casino through which financiers generated stupendous profits out of thin air, all on the basis of the proliferation of massive debts that inherently could never be repaid. This ‘house of cards’ was therefore uniquely vulnerable to collapse. The housing crisis was just the trigger, threatening to unravel the entire edifice of debt-driven profiteering.
Tackling the “Triple Crunch”
Ultimately, the global financial crisis of 2008 signifies the deep-seated failure of our conventional socio-economic, ethical and political models. But the ‘credit crunch’ is only one face of global crisis. We also face two other interrelated major ‘crunches’ this century – 1) oil and energy depletion, with evidence that world oil production already peaked in 2006; and 2) dangerous global warming, with evidence that current rates of increase of fossil fuel emissions will lead to a rise of 2-4 degrees Celsius, permanently disrupting Earth’s ecosystems.
The mantra that ‘there is no alternative’ is untenable: neoliberal capitalism encourages forms of unthinking consumerism and unrestrained corporate empowerment that are together destroying the Earth’s ecosystems and depleting our energy resources beyond repair. The unprecedented convergence of global economic, ecological and energy crises threatens the viability of industrial civilization, and proves the urgency of immediate social structural reforms.
Such reforms will have to deal with the following structural features of the current global system, among many others:
1) Global inequalities in ownership of productive resources: Currently around 5 per cent of the world population owns the world’s productive resources. The rest of the population are separated from the means of production, and are forced into various forms of wage labour or servitude to survive. This requires extensive new thinking on how to increase access to, and ownership of, productive resources on the part of the majority of the world population, while respecting individual liberties and private enterprise.