The financial crisis: a decade of debt
Ten years on from the global financial crisis the world continues to reap the consequences. David McWilliams connects the financial, economic, social and political dots to reveal the true impact of the worst financial crash since the Great Depression.
Produced by Punk Economics.
[MUSIC - LADY GAGA, "POKER FACE"]
[SINGING] P-- p-- p-- poker face, p-- p-- p-- poker face.
In the hot summer of 2007, Lady Gaga in New York City was scribbling the opening bars of "Poker Face." Steve Jobs had just launched a new untried gadget called the iPhone. And while Donald Trump crowned Piers Morgan the King of Celebrity Apprentice, guess who was Time Magazine's man of the year? Vladimir Putin.
All was good in the world. Unemployment was at historic lows. And the IMF were telling us the financial system was resilient and stable. Even Man United will win stuff, for God's sake. But Wall Street appeared jittery. A hedge fund deep inside Bear Stearns with the preposterous name of the High Grade Structured Credit Enhanced Leverage Fund was going bust. You see the small problem was this was a hedge fund, that didn't hedge.
But the rating agencies, they didn't seem to mind. They were paid by the bank. And they treasured the cash. And low and behold, they objectively raided shed loads of dodgy mortgages as triple A. What could possibly go wrong?
Maybe the name itself should have been the warning sign. I mean, the Lucy Kellaway call for bull shit index should've been screening red lights.
But I suppose the low grade, chaotic, debt deflated, over borrowed, dodgy mortgage fund might not have sold quite as well. So they simply made up a name to sound precisely the opposite of what the product actually was. Then just as Lady Gaga was putting the final touches to "Poker Face," the biggest gamble the financial market had ever taken blew up in their collective visages.
The fallout from the crash has been fourfold, financial economic, social, and political. So now let's connect these dots. First, think finance. Finance panicked, not knowing which bank had what crud hidden deep inside their rancid balance sheets, they simply stopped lending to each other. The world faced a massive bankrupt. And these things happen almost overnight. When asked how he went bankrupt, Ernest Hemingway responded, at first slowly and then very quickly.
The banks, the former champions of the free markets, turned into subsidy junkies demanding a state bailout.
Hey! [MAN YELLING]
It was like a classic hostage situation. The bankers, the kidnappers in this story, walked into governments all over the world and demanded a ransom, a bail out.
Everybody to the back.
And if the state didn't hand over the cash, the bankers threatened to shoot the hostage, the economy. The dirty little secret was that more and more debts were passed on to more and more people who had nothing to do with those debts in the first place.
Then it spread to the economy. Balance sheets were shattered because on the asset side the values had plummeted. But on the other side, the debts incurred to buy those assets didn't fall in tandem. Bankruptcies followed. Unemployment rose, as did government deficits. And without functioning banks, credit dried up. This is the economic equivalent of a drought on a park savanna. The economy simply suffocates.
The central banks moved to reflate the global balance sheet by slashing interest rates, pumping money into the banks and buying up everything on the banks' ruined balance sheets. It was the largest cash for trash scheme the world had ever seen.
In Europe it took a different angle. Debtor countries were pitted against creditor countries. And only a massive injection of cash by the ECB kept the euro ship afloat. Over time the economies did recover responding to zero interest rates, which drove up asset prices.
But now comes the social face. Policies that explicitly drives up asset prices have one big problem. They immediately amplify inequality. Why? Because who do you think owns assets? Rich people, of course. That's why they're rich. They own shit. So the poor guy gets left out.
But politically while the poor guy might not have a stake, he does have a vote. And although the rich guy might find it distasteful, democracy is based on the poor guy and the rich guy being equal in the ballot box. Is it any surprise that every now and then the poor guy extracts his revenge by voting for the guys who profess to have all the easy answers.
Who are you?
The fellas who are going to take back control or make America great again.
That's what politicians do.
Voting like this is a bit like telling your boss where to stuff his job. You know it's probably not the smartest thing to do. But hey, when you give them the two fingers it feels good. So who's Gaga now?