The Agony of Global Capitalism
Causes and consequences of the turbulent western economic system
At least two populations suffered a severe economic crises this year – Greece and Puerto Rico – crises that submitted them to the demands and will of international creditors and resulted in dramatic cuts in social spending, as well as untold suffering in the form of increased unemployment and poverty.
These two places, Greece and Puerto Rico, although separated by more than 8,000 miles, and despite their completely different socio-political, socio-economic, and historical contexts, have in common a subjugation to the global economic system generally and, more specifically, to a major economic power: to the United States and to Germany, respectively.
Are the crises of Greece and Puerto Rico isolated events?
Can they be understood without taking into account the global economic system?
In order to make sense of these most recent crises, we need to go back, at least, to 2008, when the global financial crisis hit. This crisis began in the United States, when, in September 2008, stock markets collapsed and the U.S. entered its worst recession since the Great Depression of 1929. The event had ripple-effects that impacted the entire global economy.
The immediate cause of this financial crisis and "great recession" was the collapse of a real estate “bubble” that began in 2003, when deregulated banks and investment houses poured untold sums of money into the housing market, where they tried to take advantage of “sub-prime” high-risk mortgages. However, when the market reached unprecedented heights, these high-risk mortgages, which investment houses had disguised as being safe investments, collapsed and caused dozens of banks to fail.
Thirteen banks failed in the first nine months of 2008, which rippled throughout the economy and led to the collapse of the U.S.'s third largest investment bank, Lehman Brothers, which had US$43 billion in mortgage investments on its books. The Lehman collapse led to the bankruptcy of another 12 major banks in the following months.
The U.S. Federal Deposit Insurance Corporation (FDIC) reported in its December 2008 annual report that 171 banks had suffered financial problems that year and that the volume of insured assets that was at risk of being lost reached US$115.6 billion.
The origins of the crisis
Following the crisis of the Great Depression of 1929-1939, the U.S. government introduced a number of measures to regulate finance capital, so as to prevent a re-occurrence of this type of crisis.
Among the most important measures was the passage of the Glass-Steagal Act, in 1933, which required a strict separation between consumer banking and investment banking. The idea was that since investment banks are engaged in more risky investment activities than consumer banks, an investment bank collapse would not have an effect on the savings of ordinary citizens, who deposit their money in consumer banks.
BRETTON WOODS AND THE BEGINNING OF THE CRISIS
Another important measure to regulate the global economy immediately after World War II was the conference of Bretton Woods, which established a series of measures that would enable countries to pursue Keyenesian economic policies by, for example, fixing the exchange rates between countries. Also, Bretton Woods established the International Monetary Fund (IMF), which would help countries overcome financial crises and the World Bank, which would provide development loans.
However, 25 years after Bretton Woods, in the early 1970's, powerful interests began lobbying to reverse the financial regulations of the post-war economic order. Richard Nixon made the first move in this direction when he abandoned the gold standard, which had fixed the value of the U.S. dollar and which was the key to the unravelling the fixed exchange rate system of the global economy.
The next step in the direction of neoliberalism took place in Chile, following the 1973 coup against socialist president Salvador Allende, and the implementaiton of dictator Augusto Pinochet's economic policies, which the economist Milton Friedman and his so-called "Chicago Boys" guided. However, the Chilean experiment was a small one in a relatively small country.
The election of Margaret Thatcher in 1979 and of Ronald Reagan in 1980, who were both devotees of neoliberal economics, represented a truly major push to completely deregulate the economies of their respective countries, as well as of the global economy. Although Reagan did not get rid of Glass-Steagall officially, he did deregulate the banking industry, allowing banks to undermine Glass-Steagall. This then contributed to the Savings and Loan crisis that began in 1986, bankrupting over 1,000 such banks out of a total of about 3,000.
Bill Clinton, who was elected as a “centrist” Democrat in 1992, further contributed to the deregulation of finance capital in the U.S., particularly when Clinton lobbied for and signed the repeal of the act towards the end of his presidency in 1999. Clinton famously said at the time, "the Glass–Steagall law is no longer appropriate."
Also, President Clinton allowed the merger of many major banking institutions, such as the fusion of the fincial insurance giant Traveler's, the investment bank Salomon Smith Barney, and the consumer bank Citibank, which then also merged with the financial services company Primerica. The repeal of Glass-Steagall made this possible.
The Ripple-Effect of Financial Crisis
The "Great Recession" of 2008 was a direct result of financial deregulation because deregulation allowed financial institutions to make high-risk mortgage loans and re-sell them to other financial institutions as if they were safe investments. These institutions thus made a handsome profit and let unsuspecting pension funds and others hold what came to be known as “toxic assets.”
When the U.S. housing market bubble started to decline, the entire structure began to crumble, like a house of cards, taking down with it not only the stock market and millions of people's retirement investments, but also over 140 banks that the U.S. government bailed out to the tune of nearly two trillion dollars.
The ripple-effect of the U.S. crisis ended up affecting economies around the entire world. How governments reacted to this, though, was quite different from country to country and region to region. While the U.S. bailed out the banks, in northern Europe many banks were nationalized.
BANK NATIONALIZATIONS AND RESCUE PACKAGES IN EUROPE AND THE U.S.
The U.S. financial crisis meant that at least half a dozen European governments resorted to "rescuing" their principal banks, either by using the taxpayers' money to bail out the bank or to nationalize the bank. Below are some examples of bank nationalizations that occurred in the aftermath of the financial crisis.
United Kingdom, February 17, 2008 – The British government nationalized Northern Rock, the first company to be nationalized in Britain since the 1970's. In September of 2008, Lloyds TSB rescued the Bank of Scotland for 15.37 billion Euros and the bank Bradord & Bingley (B&B) was nationalized.
Denmark, July 11, 2008 – The national bank of Denmark rescued Roskilde Bank, a medium-sized banking consortium, so as to ensure its liquiditywith the support of a little over 100 million Euros.
Belgium, Holland, and Luxemburg, September 29, 2008 – agreed to nationalize the banking entity Fortis with an injection of 1.2 billion Euros, in exchange for 49 percent of the bank's capital in each of the three countries.
Germany, September 29, 2008 - "saved" the mortgage bank Hypo Real from bankruptcy with a credit guarantee of 35 billion Euros, supported by the German government and various financial entities.
Belgium, France, and Luxemburg, September 30, 2008 – injected 6.4 billion Euros into the Franco-Belgian financial group Dexia.
U.S.A., October 3, 2008 – President George W. Bush signed into law the Troubled Assets relief Program (TARP), which would provide up to US$700 billion to purchase "troubled" assets from struggling financial institutions in order to allow them to clean up their balance sheets.
Holland, October 19, 2008 – The Central Bank of Holland and the banking group ING reached an agreement to augment ING's capital reserves, which had suffered 500 million Euros in losses in the third quarter of 2008.
Belgium, October 27, 2008 – The Belgian government rescues the bank KBC with 3.5 billion Euros.
These measures, by and large, allowed Europe and the U.S. to overcome the Great Recession. However, the greater social costs of the crisis ended up being borne by poorer countries.
The "other" Europe
NOT ALL EUROPEAN COUNTRIES HAD THE SAME LUCK
Iceland, Portugal, Greece, Spain, and Italy all felt the full brunt of the global financial crisis, particularly because their economies are to a large extent connected and subordinated to the "core" countries of Germany, France, and the U.K.
The economies of Europe clearly demonstrate a division between the north and the south, where the southern European countries ended up suffering for a long time after the financial crisis first hit in 2008. while southern Europe was still struggling with recession in 2011, Germany reached a record level of exports, at one trillion Euros, and its trade surplus reached 155 billion Euros in 2010.
A slightly special case might be Iceland, which is not in the south and which, prior to the crisis, was one of the richest countries in the world when measured by per capita GDP, which was 50 percent higher than that of the U.S.
However, in late 2008 the Icelandic economy imploded shortly after Lehman Brothers collapsed in the U.S. Aside from being a victim of its own financial deregulation, which led to an external indebtedness of over three times its GDP, Iceland could not roll over its loans as it had previously when the global financial crisis froze international credit markets.
Iceland's three largest banks, Landesbanki, Kaupthing, and Glitnir had to be liquidated and put into receivership, while the country's stock market collapsed by 76 percent and the currency by 70 percent. The IMF then stepped in with emergency loans, which were, as usual, connected by various strings, such as tax increases, salary and wage cuts, and social spending cuts.
The people of Iceland, though, reacted strongly to these measures and protested against them, so that in 2010 a referendum was held in which 93 percent of the voters decided not to pay the debt that the previous governments had irresponsibly acquired. A new leftist government also initiated a criminal investigation into the causes of the crash and many bankers ended up receiving prison sentences.
The Icelandic case was particularly extreme, both in terms of the collapse and its raletively rapid recovery. The situation was quite different, though, for other countries, such as Germany in the North, which never experienced much of a critis in the first place and the countries of Europe's south, which are still struggling today.
The following graphic shows how different the long-term impact has been, comparing GDP figures between 2008 and 2014:
Debt as a percentage of GDP:
Income and expenditures between 2008 and 2014:
Argentina and Brazil
While the economies and peoples of the U.S. and of Europe suffered, the main raw material exporters of Latin America, such as Brazil and Argentina, experienced an unprecedented level of economic growth during this time. Part of the reason for this had to do with their export orientation, their levels of foreign investment, and their relationship with China, without bowing to neoliberal economics.
In 2003 Argentina's president Nestor Kirchner put an end to neoliberalism in Argentina and put his country back on a track of economic growth after its massive economic crisis of 2001. Kirchner's successor, Cristina Fernandez, made this point recently when she highlighted on August 26 that despite the global economic crisis that the world has been going through since 2008, her country continues to maintain a budget surplus.
Similarly, Latin America's largest economy and the fifth largest in the world, that of Brazil, has also been doing quite well since 2008, thanks to the economic policies that President Lula da Silva began when he took office in early 2003.
Since then Brazil has tried to consolidate its economic position be becoming part of the BRICS group of countries (Brazil, Russia, India, China, South Africa). Currently the BRICS countries represent one fifth of the global economy and 40 percent if the global population. In 2015 they launched a new monetary fund and a new development bank (similar in conception to the IMF and the World Bank), with an initial capital of US$50 billion and an emergency fund of US$100 billion.
The Other side of the Coin: Greece and Puerto Rico
In 2002, after adopting the Euro, the Greek government was able to increase public debt because of the stability of the European currency. The 2004 Olympic Games in Athens also generated excessive public spending and debt that worsened with the global financial crisis of 2008.
At the time, the Greek government hid its economic reality from the European Union for years. That changed, however, in 2009 when Georgios Papandreou became president, who revealed that public debt was at 113 percent of GDP.
The EU loaned more money to Athens – with conditions – so that it could keep paying the European banks for the next two years. As a consequence, the Greek economy was even worse off as its debt was even higher.
This is the situation that Syriza and prime minister Alexis Tsipras inherited once coming to power.
Even though Greece followed all of the austerity measures that its creditors demanded, Greece's debt burden, as a percentage of GDP, is now, in 2015, 78 percent higher than it was when the crisis began. However, as a result of the austerity, unemployment more than tripled from 7 to 25 percent, its GDP dropped by 26 percent, and poverty skyrocketed to 44 percent.
While Greece has been turned into a colony of the EU and, by extension of Germany, Puerto Rico has been a de-facto colony of the United States all along. This has tremensoud consequences for its economy, which suffered through draconian policies that the U.S. government imposed on the island, particularly the requirement that all commercial ships that dock in Puerto Rico fly the U.S. flag. This increased the cost of products on the poor island because generally all ships destined for Puerto Rico had to first go to the U.S. Also, since 1976, all transnational companies doing business in Puerto Rico are exempt from paying taxes to the island.
In other words, Puerto Rico was caught between an imposition of low taxes on corporations and higher costs for imports, which eventually resulted in an every increasing debt, which reached US$70 billion this year, forcing the government to default on a portion of its debt payments last August 3rd. This crisis has affected the general population in the form of an unemployment rate that is 13%, more than double that of the continental U.S., and a poverty rate that reaches 45 percent, a higher poverty rate than any state of the U.S.