Some thoughts on the bursting of the speculative bubble

It is true that the bursting of the housing bubble started the financial crisis that is rocking the world right now. But the bursting of the housing bubble in itself and by itself is not big enough to trigger the kind of financial crash that the world is witnessing right now. Something else is going on which is much bigger and which, increasingly, looks like it could lead to a serious economic recession and, possibly, even to something similar to the Great Depression which, in 1929, started with the collapse of the stock market. The bursting of the housing bubble is related to the real economy -- which has to do with the supply and demand of goods and services that are actually needed by the people, housing is indeed a bona fide or basic need. Demand is bound to go down since people who are kicked out of their homes and are beginning to lose their jobs – last month 150,000 jobs were lost and it is only the beginning – do not consume very much. And people are scared, so there is panic, and it is vicious circle which is making things much worse.

What is Really Going On?

So what is this something much bigger which could lead to a serious economic recession and, possibly, even to something similar to the Great Depression? It is the bursting of the speculative bubble which has to do with the collapse of all these fake financial instruments, such as CDOs (Collateral Debt Obligations), the true purpose of which was to make money for the speculators. These fake financial instruments were created by fake financial institutions like the hedge funds and the private equity funds, and their accomplices in the banks and other supposedly legitimate financial institutions. Serving these fake financial institutions were the so-called golden boys, i.e., traders sitting before screens in the back rooms of these supposedly legitimate financial institutions buying and selling puts and calls, options, and so on. These traders worked in shifts and their work never stopped. They were active round the clock because the stock markets around the world never stopped. They were the sorcerers’ apprentices whose masters sat in the boardrooms of supposedly legitimate financial institutions which collapsed like a château de cartes his by the tsunami of reality.

What Can Be Done About It ?

Milton Friedman must be turning in his grave.1 The sudden betrayal of the guru of the sacrosanct-ness of the market by those who professed to worship him is nothing short than stunning. John Maynard Keynes, on the other hand, must be smiling broadly wherever he is, in Purgatory, or perhaps even in Paradise. The equally sudden embrace of the champion of the intervention of the State in the economy by those same ones who only weeks ago professed to despise him is no less stunning.

So what happened to explain this brutal reversal?

Partly, it is that those who professed to worship Friedman did so conditionally, that is, as long as he served their interests. In other words, they supported Friedman, as long as his theories were good for them, allowed them to make money. This can be seen an opportunistic and hypocritical attitude or position, but it is human – only too human, as would say that profound critic of democracy and capitalism, Friedrich Nietzsche. So, when push comes to shove, when reality overwhelms illusions, pragmatism takes over. This explains that the powers that be of government and Big Business embrace so fully today what they rejected so forcefully yesterday.

Partly, it is also because, as Naomi Klein underlines in a recent lecture, economics, despite all those beautiful mathematical and econometric models, is not a hard science. 2 It is at best – like sociology, political science, psychology, etc. -- a soft science. It can even be argued that it is, possibly, like music, for example, an art, in which intuition and instinct play a big role. It is, after all, psychology which explains best why people panic and behave irrationally, and what is a financial crisis rapidly turns into a severe economic recession and, possibly, into a depression. There is such as thing as spiralling down in a vicious circle, while its opposite is spiralling up in a virtuous circle.

The Iceberg Metaphor as an Explanatory Device

A very good metaphor to illustrate what is happening presently is an iceberg of which only one-tenth is visible on the surface of the water, while nine-tenths are hidden underneath it. Certainly, the one-tenth that emerges is important, but, obviously, not as important as the nine-tenths that are submerged. What made the Titanic sink into the icy waters of the Atlantic was, after all, not the emerging one-tenth of the iceberg, but the nine-tenths that were submerged and invisible. So, it is of paramount importance to understand that the submerged nine-tenths of the iceberg can be fatal.

The emerging one-tenth of the iceberg is the financial crisis. The sub-prime crisis, people unable to pay their mortgages, financial institutions losing hundreds of billions of dollars, the lack of liquidity that is strangling corporations which cannot pay their employees and utility and other bills. The 700 billion dollars bail-out plan and the hundreds of billions of euros and pounds poured into the banks, buying them partly, and lending them huge sums can deal with that.

But the 700 billion dollars bail-out plan and the hundreds of billions of euros and pounds poured into the banks cannot deal with the submerged nine-tenths of the iceberg which have to do with a structural deficiency or flaw of the capitalist system. As Walden Bello has correctly identified it, that deficiency or flaw is a permanent crisis of over-production. 3 It can be summarized thus: Capitalism is about generating ever-growing profits, which needs ever-expanding possibilities of profitable investment. But the extraordinary growth of capital and the tremendous rise of productivity have, paradoxically but understandably, limited the possibilities of ever-growing profits in the real economy. Remain wasteful consumerism, luxury ‘industries’ geared to the very rich and speculation. The latter explains the tremendous increase of speculation.

Conclusion and the Inevitable Solution

Speculation has taken a bad hit. It will probably be regulated and prospects, in the predictable future at least, will not be good in it. Global warming oblige, wasteful consumerism too will come under heavy criticism and will be curbed. The very rich also will be targeted and they will have to reduce their absurdly luxurious lifestyles. But all this will not be enough to deal with the structural deficiency or flaw of the capitalist system.

What we really need to do is changing the whole system under which we live. Because that system is not sustainable. It is destroying the world owing to global warming and the possibility of a devastating war owing for the growing competition for scarce natural and energetic resources among the great powers.

We need a revolution that changes our values, that makes us see our lives and our priorities differently. This involves:

1. Changing the system of unlimited and quantitative economic growth into limited and qualitative economic growth. We need to teach our children that the real pleasures of life are either free or cost little. Love is free. Friendship is free. A good walk in the countryside, watching a beautiful sunset, listening to birdsong are all free. Reading a good book, eating a healthy meal, seeing a good movie cost little. Gandhi said there is in this world enough for everybody’s need, but not for everybody’s greed.

2. Eradicating extreme poverty. 1,200 million people living with less than $ 1.25 a day is a serious crime against humanity, it is, as I wrote it repeatedly a genocide by omission.

3. We need to replace the culture of war by a culture of peace. More than $ 1,000 billion are spent every year for weaponry, more than half of it by the United States alone. It is criminal and stupid.

4. It is likely that international terrorism will become a marginal phenomenon if social justice, respect of other cultures, including Islam, and a culture of peace are realities.

We can do it, it is a matter of survival, after all.

NOTES

1. They want to create a Milton Friedman Center worth $ 200 million at the University of Chicago. Those faculty members opposed to the idea invited Naomi Klein to give a lecture. It is: Wall Street Crisis should Be for Neo-liberalism what Fall of Berlin was for Communism, posted in www.stwr.com on 6 October 2008. Naomi Klein has won the Right Livelihood Award which is considered as the alternative Nobel.

2. Naomi Klein makes the argument in her lecture mentioned above.

3. Walden Bello is one of the foremost exponents of this thesis. See his: Wall Street Meltdown Primer, in Foreign Policy Focus, posted in www.stwr.com on 26 september 2008

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