Brexit, Trump’s trade wars, the crisis of our democracies, the failure to address climate change – almost every newsflash that saddens or enrages us emanates from the never-ending crisis that erupted in 2008. We felt it as a financial crash but its causes, and repercussions, ran much deeper: it was, and remains, a systemic rupture that cuts across our social fabric, our workplaces, our ecosystems.
With their banks disintegrating, in 2008 the bankers found the courage to seize the day. Enlisting central banks and governments to re-float their sunk vessels, they doubled down on a disastrous high-finance, low-real-investment model — and doubled up their net worth in the process.
Never before has so much idle cash accumulated as in the past decade. And never before has circulating capital failed so miserably to be invested in the things humanity needs, e.g. decent jobs and the green transition. It is high time we seize the day too, with a Green New Deal that matches existing resources to pressing needs at a planetary scale.
Back in 2008, commentators were quick to announce the death of financialised capitalism. Even Alan Greenspan, the libertarian Chairman of the Federal Reserve, was trotted out in front of Congress to apologise for his faith in self-regulating financial markets. As activists occupied town squares from Oakland to Madrid, and Wall Street bankers expressed an unprecedented sense of regret, many thought that change was in the air. It wasn’t!
Far from shrinking, finance generated new profit records, handed out record bonuses, and rehashed the risky practices that had produced the Great Recession. Mortgage debt — the proximate cause of the Wall Street collapse — is now at levels higher than in the pre-crisis period. The stock of BBB-rated bonds in Europe and the United States has quadrupled since 2008. Public debt has ballooned. And collateralised loan obligations, or CLOs, have surged to $3 trillion, “reminiscent of the steep rise in collateralized debt obligations that amplified the subprime crisis,” according to the Bank of International Settlements.
How did the financiers succeed in snatching such riches out of the jaws of their bankruptcy? By a combination of carrots, sticks, and tricks. The carrots went to the banks, in the form of bailouts shifting failed bets onto public balance sheets, while the weaker citizens were treated to the sticks – in the form of austerity. To justify this injustice, a subprime crisis of the financial sector was disguised as a public debt crisis, blaming the ‘overgenerous’ welfare state for the bankers’ recklessness.
And then there was the bag of tricks deployed by central banks to create a sense of recovery spanning not just finance but the rest of the economy too. Quantitative Easing, or QE, was the most impressive trick. Key to recognising how it worked is to recall that banks hate one thing more than bank robbers: Assets that they have on their books (e.g. bonds) which they cannot lend with interest! After the 2008 collapse, with investment dead in the water, the central banks had pushed interest rates to near, or sometimes below, zero – hoping to kickstart investment. But this drove bankers up the wall, since they could not charge interest to lend their assets.
To help them along, the central banks bought trillions of these assets from the banks, using freshly minted cash. One knew that things got silly when the Bank of England bought IOUs issued by McDonald’s, or when the ECB recommended to one of us to repay a debt Greece had to the ECB with private IOUs issued by Greece’s bankrupt banks, guaranteed by our bankrupt state, and rented out to the ECB for monies with which to repay the ECB!
On the surface, the tricks worked. The influx of central bank money ended the recession, shrank unemployment, even revived the United States’ gargantuan trade deficit to its pre-2008 levels. Business-as-usual regained its dominance in the commentariat’s mindset and banks were declared safe again. Meanwhile, environmental concerns, that had been confined to the backburner in 2008, returned but were not considered a good enough reason to rethink the financial system. In this climate, calls for a radical twenty-first century Green New Deal are dismissed as an overreaction.
Under the surface, however, the crisis that began in 2008 is deepening. Coupled with generalised austerity for the many, QE has had four poisonous effects: Negative interest rates eating into the middle class’ savings, pitiful investment in people and combating climate change and, unsurprisingly, skyrocketing inequality. How is QE accountable for these effects which are also the main drivers of, on the one hand, xenophobic nativism and, on the other, the youth’s rebellion?
Company CEOs looked around, saw a sea of austerity-hit consumers and, logically, predicted low demand. Flush with QE cash, instead of investing in well-paying jobs and green technologies, they opted to buy back their own shares, thus pushing up their share price, their shareholders’ dividends, their bonuses. In 2018, buybacks soared to $806 billion, an annual 55 per cent increase. According the Bank of England, the overall effect of QE was to increase the wealth of the bottom 10 per cent in the UK by roughly £3,000, and that of the top 10 per cent by £350,000.
Meanwhile, as the planet continued to warm, ecosystems collapsed, and increasing numbers of species became extinct, public investment shrank. In the United States it fell to 1.4 per cent of GDP, its lowest level in 75 years. In the Eurozone, net public investment has remained near zero for nearly a decade, with infrastructure investment in Southern European countries over 30 per cent lower than in the pre-crisis era.
Now, a decade later, the old tricks have stopped working, like antibiotics to which the bacteria have adapted. Recession is in the air at a time when interest rates are at zero and QE can only contribute further asset inflation and inequality. Central banks are “pushing on a string,” as former Fed governor Marriner Eccles once said.
Even figures with impeccable establishment credentials, like retiring ECB President Mario Draghi, are acknowledging that their tricks are no longer working. Their answer? Bring back a mild form of Keynesianism. Referring to a recent ECB board meeting Mr Draghi informed the world that “[t]here was unanimity that fiscal policy should become the main instrument.” Alas, that would be too little and it will come too late.
Small boosts in European government deficits, including the UK, will do no more than to add a little green around the edges of a brown, sad reality. In the United States, deficits are already high, following Trump’s despicable handouts to corporations already swimming in cash. Young people will treat calls for mild Keynesianism with the same contempt that they reserve for the new European Commission’s marketing ploy of creating a so-called Green New Deal portfolio lacking any transformative content, funding or vision.
The West’s lost decade is now a clear and present danger to our social and environmental fabric. Nothing short of a systemic change funded by a massive public green investment program will do. The minimum we need is to invest $5 trillion annually, or 5% of global income, in parallel with wealth transfers within the West and to the global South. To succeed we must incorporate a central idea of Roosevelt’s New Deal: Utilise public finance to press idle cash into the service of planet and humanity.
Technically, we know how to implement this Green New Deal. What is missing is the political coordination between climate strikers, scientists, workers on zero-hours contract, migrants leaving war-torn countries etc. to force governments to face up to the only real choice: Green New Deal or bust.