Meltdown, Phase 2
The nearest historical parallel to the 2008 crash is 1929 on Wall St, and it’s worth remembering that the economic consequences of that disaster didn’t really start to bite until about 1933. So just because the world’s major economies are back in growth, doesn’t mean that the worst is over, and now we are beginning to see signs that the Meltdown, Phase 2 is about to begin.
Greece has been in the headlines for a while, with most commentators agreeing that they should never have been allowed into the Eurozone at all, and that Goldman Sachs conspired with them to fiddle the figures so that they were eligible. But the shockwaves are spreading, and now S&P have downgraded the debt of Portugal and Spain too. It doesn’t look too far-fetched to think that the Eurozone may have to spit out these struggling economies. But why we should trust S&P I don’t know; they didn’t exactly cover themselves in glory with their ratings of mortgage-backed securities and the banks that issued them.
The underlying problem with Greece etc is exactly the same as the sub-prime mortgage problem – it’s lending money to people or countries who can’t afford to pay it back. Bad banking, however you look at it. But it disguises a deeper problem, which is endemic across the whole of capitalism. The global industrial system depends on customers, and when customers don’t have enough money to buy your products, the thing fails. What’s been happening is that credit has been allowed to grow, helped by the perverse incentives in the banking system. That credit has driven global growth, and it’s credit, again, that is driving the “recovery” – allowing customers to start buying stuff again. But the recovery won’t really be sustainable unless customers start buying stuff with money they’ve earned rather than money they’ve borrowed.
Meanwhile, the bankers are behaving like the Russian aristocracy after 1905. “Crisis? what crisis?” and it’s business as usual. But in Greece, the people who will suffer aren’t the corrupt developers who’ve siphoned off so much money, or those in the parts of the Greek economy where tax is optional, but salaried workers mostly in the public sector. They’ll be made redundant and driven to survive in the untaxed economy, making deficit reduction for the nation even harder. And with subprimes, it wasn’t the bankers but the pensioners who lost out. Each time there’s a crisis like this caused, essentially, by bad banking, it leaves a trail of human suffering by people other than the bankers. This adds to the political pressure, and makes a revolution more and more likely.