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Reflections on the GFC.

US sub-prime crisis - will we ever learn?
Monday, June 02, 2008

By Joffré Balce

The term ‘democracy’ holds no meaning in the light of the US Sub Prime Mortgage Crisis and its precedents: the Bubble burst in the 1990s and the Savings & Loan Crisis in the 1980s. The irrelevance of ‘democracy’ is likewise evident in the recent Food Crisis in the developing nations, and the continuing Third World Debt Debacle.

Where does this anti-democratic financial cycle begin? It begins with an earnings bonanza from a policy change oftentimes motivated by good intentions. As early as the 1970s, there was the oil revenue extravaganza that saw billions deposited in banks the world over. The cash was used to spur developments in the Third World.  In the 1980s, there was the Reaganomic supply-side dividend, which freed up taxes in the hope that it would be ploughed back as investments to spur further growth. The 1990s rode on the heyday of the information highway and the peace dividend at the end of the Cold War opening up vast opportunities in new markets and former military products with mass consumer applications. Before the Sub-Prime Crisis, it was the revival of what Former President Dwight Eisenhower called “the military industrial complex” in its war against terror, the resurgence of oil and energy profits and the increased demand for green energy to combat global warming.

The plot has been simple. Along with all that extra cash flow and the corresponding feeling of affluence comes the cupidity to earn even more. Investment brokers (an appropriate term on hindsight of the crisis) would formulate ideas for the best ways to make one’s money grow passively (not bad in itself especially if one considers the basic tenets of investing in what one knows, what one is good at and what is needed).

Clichés pushed by the market and its spinmeisters fuel the wealth creation frenzy: “You can’t lose with property“, in the case of real estate. In the case for new technologies in information and energy, “There’s an obvious rising market demand.” They say: “Trust us. We’re experts.”

After greed comes hubris. Lifestyles become more ostentatious; earnings fly through the ceiling; bonuses reach unprecedented levels.  After all, they deserve it and to the victors go the spoils.

Then there is envy. Soon, not just the big players but everyone wants to make as much money as their officemate and next door neighbour. Forgetting to read the fine print of contracts that says what happens when fortunes reverse, people go even to the extent of hocking their hard-earned properties and pensions under the illusion that they can’t lose.

The story takes an awful twist when the marketplaces of investors have stretched their resources and the brokers have nothing left to squeeze. It then comes time for the large players to exit after having made their returns. They are the first the market honours as sponsors with whom they want to do repeat business. Some brokers and spinmeisters will apply accounting procedures (not principles) to cover the growing money hole, or worse, continue the illusion and the accompanying profligacy until the system can no longer hold. Finally there comes the confession: your money is gone but our contracts protect us.

Like the whiplash of a tsunami, ordinary investors – the common citizen – watch helplessly. Not only are their hopes and dreams washed away, but so are the very economic foundations on which their lives were built.

It is time to challenge this system, however huge, ancient and immovable it may be. And the first step is awareness. 

Joffre is an economist who has worked as a top-level government consultant and as a grassroots campaigner in his home country, the Philippines. Currently Joffre is completing a PhD at UNSW specialising in the restructuring of sovereign debt of highly indebted poor countries to better address economic development concerns.

Joffre is a valuable member of Jubilee Australia's Policy Advisory Group.

Joffre Balce

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