What’s the left’s response to the financial crisis?

12:16 am - September 17th 2008

by Dave Osler    

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The value of the derivatives market in 2006 was estimated at half a quadrillion dollars. That’s a five with 14 zeros on the end of it, or more than ten times the value of the output of every real economy in the world combined.

The usual explanation for its existence is that derivatives are primarily instruments for legitimate hedging. But there is no reason for anybody to hedge more than once. In short, the derivates market is at least 90% explicable by wanton speculation without any semblance of rational economic justification.

Now perhaps hundreds of billions of dollars worth of derivatives have, in the jargon, ‘gone toxic’; nobody knows what – if indeed anything – is the worth of the underlying assets on which they are based. That, at bottom, is what did for Lehman Brothers and Merrill Lynch and may yet fell AIG.

If those institutions had simply been forced to take the hit, that would have been bad enough, but they might have survived. However, these pieces of paper – not least those backed by subprime mortgages – were often put up as collateral for further borrowing. And so we are where we are now, staring world recession in the face.

From any rational political standpoint, rightwing as much as leftwing, the questions that need to be asked at this juncture are fairly obvious. Most urgently, the task is to come up with immediate policies to mitigate the damage. When eventually there is time for reflection, we will need to consider how this situation has been allowed to develop, and how it can be prevented from happening again.

But it is already apparent that Black Monday is an indictment of the free market orthodoxy that has dominated economic thinking for the last three decades.

A handful of economists – most notably the late Andrew Glyn from within the Marxist tradition and the Keynesians Joseph Stiglitz and Larry Elliott – can be credited for seeing in advance where all this was heading.

Interestingly, the neoclassical right simply didn’t see it coming. That, in retrospect, is hardly suprising; the irrational exuberance boys didn’t foresee the October 1987 crash, or the Asian crisis of 1997, or the Russian debt default and the Long Term Capital Management bail out of 1998, either.

Worryingly, there is currently no dissent from the neoliberal consensus at any point on the spectrum of mainstream British politics. New Labour are as much in hock to this pernicious ideology as the Lib Dems and the Tories. That should provide an opportunity to the socialist left.

In the 1970s and 1980s, the left did have ideas to put forward. Whatever criticisms can be leveled at the Alternative Economic Strategy put forward by the Bennites and the Communist Party in this period, at least it was an internally coherent radical platform.

A quarter of a century on, it is not good enough to cut and paste these proposals and advance them as joined up policy thinking, not least because of the many ways in which world capitalism has changed since then. Platitudes and rehashed transitional demands are not good enough, either.

It would be criminal to allow the right to dominate the debate in the years ahead. But unless we come up with some convincing arguments, that is what will happen.

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About the author
Dave Osler is a regular contributor. He is a British journalist and author, ex-punk and ex-Trot. Also at: Dave's Part
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Story Filed Under: Blog ,Economy ,Foreign affairs ,United States

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Reader comments

The writing has been on the wall and ten banks so far
this yr, will WAMU or Wachovia be next?

McCain believes in enforce existing financial market regulations and not enacting new ones. The there is McCain’s record and involvement in the Keating five – the last big collapse of US financial institutions, that cost taxpayers over $200 billion (in today’s dollars.)

And what is the evidence that it is self correcting? And that is my point, if I don’t like your rating, I can pay someone whose rating I like. THE MBSs were never solid securities, im certain u can agree on that C+ if that.

“Keating used Senator McCain to lobby the Reagan administration successfully to appoint not only Lee Henkel (who then served as Keating’s “mole” on the FHLBB until I blew the whistle on him), but also another individual chosen by Keating. The FHLBB was run by three presidential appointees, so this would have given Keating majority control over the agency regulating S&Ls. The Reagan administration was set to make these recess appointments over the objections of the White House director of personnel, who opposed the appointments because when he called Arizona Republicans to vet the proposed appointments he learned that Keating “had a reputation for buying politicians.”

The only Fallacy of Composition I have observed is malignant McCain saying the fundamentals of our economy are strong yesterday in FL.

McCain promised to “replace the outdated, patchwork quilt of regulatory oversight.” During his 26-year career in Congress, McCain has supported proposals to cut, not increase, federal financial regulations.

In 1999, McCain voted in favor of the Gramm-Leach-Bliley banking deregulation act that let commercial banks and investment firms merge for the first time since the Great Depression. And, while he supported the Bush administration’s takeover of Fannie Mae and Freddie Mac, McCain says he wants to sell the mortgage finance companies to private buyers.

And it is true, where did JP Morgan get the loot – US tax payers. Y do I say this? Because JPMorgan Chase and the federal governmentt teamed up on the bailout of Bear Stearns, a last-ditch move to save the investment bank. It calmed the market for a few – but such intervention aint SELF CORRECTING JONES.

The FEDS lent (is that a word) JPMorgan $29 billion as an enticement to buy the troubled Bear and its liabilities. As collateral, JPMorgan put u[p $30 billion worth of WORTHLESS mortgage-backed securities and other complex investments, which are basically the most problematic assets on Bear’s books. JPMorgan has to repay the Fed loan with interest at the “discount rate,” which is currently 2.5 percent.

The risk to the Fed—and to taxpayers—is IF these MBS turn out to b completely worthless, then the Fed would be out the whole $29 billion. Under the terms of the deal, JPMorgan would pony up the first $1 billion in losses.

And about Mr. Chairman Bernanke: He defended this shit, and in April this year folk said “Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” that is what he told the Senate Banking Committee.

I would go on and wont even touch Cox because he was being considered. Tell me if I am wrong jones?

Progress seems to involve lurching from one crisis to another.

Re the comment that ‘there is no reason for anybody to hedge more than once. In short, the derivates market is at least 90% explicable by wanton speculation without any semblance of rational economic justification’, I don’t think this is fair. Say a farmer hedges his risk with a counterparty, whatever the form of the counterparty surely there is a massive economic waste if they are not allowed to sell on the contract to someone who wants it more than they do. We’ll never know what percentage of true hedging by corporates and how much is speculative money, but I can’t see how the former can exist without the latter, and the latter requires liquidity, the ability to trade in and out of positions.

Is there a clear, meaningful distinction between hedging and speculating? Or just a fuzzy grey area?

BTW – if government regulators did not see this coming, how much faith should we have in government regulators and their regulations?

I would suggest that it would be a mistake for the left to actually draft up an economic strategy of any kind in response to this situation. What we have learned in the past is that socialists, advocating socialism have not succeeded in bringing it about. On the other hand, socialists advocating a high standard of democracy have achieved some remarkable objectives – ones that are insulated from short-term repeal by incoming right-wing governments (i.e. EU working standards, discrimination and social justice rules).

Many of these advances were made with right-wing governments in power in this country as well. And the lesson from the current situation is that democratically elected goverments are better than the ‘masters of the universe’ at running things (indeed, they have fixed their mess for them).

The left needs to only advocate a consistant and high standard of representative democracy. That’s all. Nothing else.

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