(Yes, I know – what, you are thinking, could the collapse of Lehman’s possibly have to do with the environment? The answer is that it displays one of the most important aspects of capitalism in its current guise, namely its ability to deal with a serious crisis. Read on…)
The current Lehman collapse gives us a flavour of what is likely to befall us all when markets are squeezed by rocketing energy, food, water and resource prices. Merrill Lynch (the home of prancing bull) are in trouble too, agreeing to be bought by Bank of America for $50,000,000,000. Stock markets and the dollar have fallen and AIG, the world’s largest insurance company (who provide over a hundred billion dollars of capital to banks), are also on the skids.
It’s not as though they did not see it coming. Already the 2007 World Economic Forum in Davos – long before the bubble burst, Lehman’s boss, Richard Fuld talked openly about being “really worried” about the risks posed by property valuations, excess leverage and the rise in oil and commodity prices. “We’re taking some money off the table,” he said (Financial Times, 15/9/08). But nothing like enough it turned out, because they couldn’t resist a few more juicy acquisitions and their foresight was a good deal less advanced than their ambition. As so often in business, they (and everyone around them, investors, governments and regulators included) thought they could walk on water, only to discover too late that they were just about to walk out of the shallows and into really deep water. And of course, they became more and more detached from reality:
Mr Fuld’s role in these decisions was hard to pin down because colleagues say he
was growing more remote. Mr Fuld spent an increasing amount of time in his
mansion in Sun Valley, a ski resort in Idaho that he has used for years to
entertain clients, or travelling around the world. “When Dick came over it was
like a state visit,” says one London-based banker. Some bankers believed, too,
that Mr Gregory shielded Mr Fuld from what was going on and discouraged
executives from raising criticism or reporting bad news. “Joe was like Dick’s
bodyguard,” says one senior banker. (Financial Times, 15/9/08)
So, with ‘hundreds of billions of dollars’ now expected to be lost (say the BBC), who do you think will actually lose their money? The Lehman partners? Merrill’s directors? On the contrary, three of the latter are to join Bank of America’s board. How about their clients, who also helped dragged us all into this catastrophic mire with their insane gambles? Nope. Profit, economists tell us, is a reward for risk – we take the risk, and they get the reward.
And no, that is not just a lazy, knee-jerk anti-capitalist jibe. As Peter Morici, professor of University of Maryland’s business school and ‘a recognized expert on international economic policy, the World Trade Organization, and international commercial agreements’, has put it:
Performance-based compensation practices at Lehman and throughout Wall Street,
which pay big bonuses when bankers bet right but only imposes losses on
shareholders when they bet wrong, has propagated the kind of toxic financial
engineering that caused mortgage-backed securities meltdown, general credit
crisis, and the near-death experience of many Wall Street banks and securities
So when Alan Greenspan opines that ‘We will see other major financial firms fail but this does not need to be a problem. It depends on how it is handled and how the liquidations take place. And indeed we shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers’, I start to feel a little queasy. Just ‘winners and losers’, Alan? Such as pensioners whose pension won’t get paid now? Such as workers who lose their jobs? Ah well, win a few, lose a few, eh?
So what lesson is being learnt? To quote the man from PWC (who will earn millions from burying Lehman’s rotting corpse), ‘What it underlines to me is the importance of market confidence’. No fooling. But can we draw a slightly deeper lesson? How about ‘the ludicrous vulnerability that comes from fantasising that people whose sole motive is short-term profit are fit guardians of the world’s economic health’, even if they do wear nice suits?
Meanwhile, not too long from now, when oil and gas start going through the roof, who will be holding all our money then? Hard to name names, but it’s a cast-iron certainty that quite a few of them will be ex-Lehman and Merrill who have managed to find another comfortable birth in some other bunch of Masters of the Universe.
So what specifically do we learn about how capitalism might handle a severe environmental crisis?
- Despite being given long notice, most organisations simply won’t respond in time. We have known about the currently housing finance crisis for a decade – that there was a massive and fundamental financial weakness. That is not to say that the individuals who have been at the forefront of the current crisis have been stupid or short-sighted or greedy or wicked. The returns, while the bubble lasted, were good, and the overriding pressure business people face is to generate a return. It does not matter that the whole edifice is based on junk resources, just so long as the direction is upwards. Like all the other classic financial pyramids and bubbles, just as long as everyone else is buying, things will be OK – even though they are only buying because you are buying too.
- When the crisis comes, it comes extremely quickly and for most people cannot be escaped. It is a classic case of exponential spread leading to systematic collapse. It means that years and decades of solid growth and self-congratulation may still be terminated in months or even weeks. Ironically, thinking about the environmental equivalent to this sort of crisis, one of the seminal books on the environment, the Club of Rome’s Limits of Growth (1972) is all about the logic, consequences and limits of exponential growth.
- The economic crisis become systematic, affecting not only the sector in which the crisis was triggered but all areas of the economy. If AIG are indeed providing over a hundred billion dollars of capital, yet are undermined by their exposure to junk resources, then thousands of firms are going to find their loans called in or their interest rates pushed up when they are least able to repay them.
- The victims will be spread throughout society, to the point where the social system as a whole is threatened. Millions of individuals work for those thousands of firms, have loans from banks, rely on income (e.g., pensions) from those investments, and so on. This in turn can only feed back into the economy in the form of people tightening their belts or claiming massively more in the form of social security and unemployment benefits.
- The government will not be able to manage the problem. One company – a Bear Sterns, perhaps – is one thing, but a whole raft of major financial institutions going down is quite another. Just Merrill’s price tag – $50 billion even when it is in trouble – is equivalent of $160 each for every man, woman and child in the USA. And in any case, governments have so completely abandoned themselves to the idea that capitalist markets are the solution and so completely sold all their assets to the very people who are now in crisis that is will require a major ideological effort even to imagine that the answer is to protect society, not to salvage this fatally flawed economic system – or even recognise that these are two radically different problems.
- The whole process will disable society even at the level of basic physical resources – in this case housing, in the future energy and industry as a whole – not because they somehow don’t work any more or people suddenly don’t need homes, but because the system of property evicts the only people who can use them in the name of organisations who ‘own’ them yet are completely unable to make any use of them.
Of course, an environmental crisis would not look quite like this. Nor are all the player’s in the present investment bank crisis behaving quite as stupidly as Lehman’s. John Thain, Merrill’s CEO, was congratulated for being astute enough to call a halt before they too went over the cliff. But he was an outsider who came in in late 2007 with a cold eye towards Merrill’s pretensions and culture. Who is going to perform that role for industrial capitalism as a whole when the real crises start to hit?
Yet the lessons are striking. Cheap energy is the resource-equivalent of cheap credit with no ability to repay the debts – precisely what caused the current credit crunch. As oil, like credit, becomes much more expensive, the effect on any number of major industries will be as inexorable as a huge rise in interest rates and collapsing currencies combined. And the shock effect will be similar – rigidities in the economic system, the vulnerability of society as a whole to crises that are (literally) none of their business, and the inability of government to deal with such a vast crisis.
As for what governments are really willing to do, even about the present crisis, it’s worth noting that just a few days later, on 23 September, Philip Augar (author of The Greed Merchants: How the Investment Banks Played the Free Market Game – Penguin 2005), was writing the FT that:
The last time Wall Street was in the mire was between 2001 and 2003 when the
dotcom bubble burst. President George W. Bush pledged “to end the days of
cooking the books, shading the truth and breaking our laws”, but instead a patsy
settlement with the investment banks was reached in 2003 that imposed trivial
fines and minor rule changes but left their business model intact.
It’s hard to see that, under the far greater pressure of a global energy or other environment crisis, they would do any better.
Mind you, the current crisis could have much greater political repercussions than initially meet the eye. To quote the FT again:
Meanwhile, the Federal Reserve threw open the doors to investment in the US banking industry by private equity firms, sovereign wealth funds and corporate investors – in the hope that this would direct much-needed capital to US banks… Morgan Stanley said earlier it would sell a stake of 10-20 per cent to the Mitsubishi UFJ Financial Group (MUFG) in a deal worth up to $9bn. The news came just hours after Nomura, Japan’s largest broker, confirmed it was buying Lehman Brothers’ operations in Asia and was in exclusive talks to secure parts of its business in Europe.
Does this signal the end of one of the USA’s most cherished ideals – the option of isolation? Does it signal that the commanding heights of American capitalism are starting to go offshore? If so, we might start seeing a more global perspective starting to take shape in American politics too – which can only be (relatively) good, given the obstinacy of current American politics in the face of global environmental problems, to which the USA contributes so much and about which it has, so far, done so little.