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The Crash of 2008
In the summer of 2008, the Bank for International Settlements (BIS) warned of the danger of another Great Depression rivaling the economic crash of the 1930s. The problem supposedly began with the US sub-prime mortgage crisis, whereby American banks increasingly granted mortgages on less stringent conditions to consumers who could not prove their ability to make repayments. This wasn’t an idle mistake due to insufficient regulation. Governments knew what was happening, and had ample opportunity to stop it. But financial institutions lobbied successfully for the power to lend at whatever multiples they wanted, without restriction. According to former Governor of New York Elliot Spitzer, when states realized the vast extent of corrupt lending practices by banks and tried to intervene to regulate them around 2003, the US Treasury Department unilaterally blocked their efforts.
On the basis of the proliferation of sub-prime mortgages, banks innovated new ‘financial products’ such as derivatives, valued against projected mortgage repayments. These are essentially contracts that gamble on the future prices of assets, thus deriving their value from primary assets, such as currency, commodities, stocks, and bonds. As more people with lower incomes obtained subprime mortgages, increasing volumes of bad debt were repackaged and re-sold globally, on the basis of which even larger amounts of credit and thus new loans were flooded into worldwide markets.
“Risk?... What Risk?”
Veteran derivatives trader Nassim Nicholas Taleb, Distinguished Professor of Risk-Engineering at New York University’s Polytechnic Institute, confirms that banks routinely certified such transactions as solid and risk-free using quantitative models which, in reality, simply concealed the actual scope for risk and its potential consequences. This allowed them to create extremely risky financial instruments, slap a certification of safety over them, and sell them on for stupendous profits. In turn, these products were fraudulently insured by other financial companies, which used the opportunity to charge exorbitant fees. But these ‘insurance’ firms simply did not have the assets to cover losses in the event of a real default.
Consumers increased their spending on the basis of the security of their houses, while financial institutions accelerated their lending on the basis of rapidly proliferating mortgages, together contributing to rising prices and a mounting inflationary property and consumer bubble. This frenzy of spending and lending created a veritable bonanza of debt-based ‘virtual growth’. It had nothing to do with a real surplus derived from increases in productivity, but rather from a monetary system based on the ability to continually borrow (and effectively create out of nothing) cash that in real terms did not yet exist, except as the expectation of repayments on loans.
Worldwide sales worth trillions of dollars of these dodgy financial instruments distributed risks across multiple financial markets. Moreover, the hierarchical structure of the global financial system, dominated by New York and London, meant that debt-based profiteering at the core of the system radiated outwards and downwards to more peripheral countries tied into the system through their receipt of loans from the core and/or purchases of derivatives.
Indeed, thanks to the monumental profits and concomitant phenomenal growth accrued through this process, US and British financial institutions jubilantly accelerated lending to Europe, Asia, and countries in the South, creating an entrenched global web of debt, credit and financial profits. Thus, when the defaults started in the US, the crisis radiated outwards and downwards, and is still doing so.
US economy for sale?
Was ‘Structured Finance’ Structurally Sound?
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.
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