After the Wall
Street Crash in 1929, the US Congress passed a new law called
the Glass-Steagall Act so that history could not repeat itself.
Fifty years later, Congress repealed or scrapped this law and
consequently, history did repeat itself.
There are two principal
causes to the current global crisis. The first is overproduction
and the second is the deregulation of the financial
markets, which is, in fact, a direct result
of the first cause, overproduction.
Since the Second World War, humans, in
particular production engineers and economists, have become
brilliant at manufacturing high quality goods that people want
to buy on a large scale. Engineers and economists have used both
robotics and the outsourcing of production to parts of the world
where the cost of labour is low. Fantastic products are made
very cheaply, sent all over the world in containers and sold at
bargain prices. All this has happened in a highly competitive
This intense activity caused two important
things to happen. The governments of manufacturing countries
like China became very rich and formed the now famous sovereign
wealth funds with the objective of investing all this lovely
capital. Investing in industry was unattractive as profit
margins were very slim. Investors wanted bigger profits. Strict
banking regulations also made life very difficult for investors.
Secondly, all this liquidity caused a continued increase in the
price of real estate, just like in the 1920s.
When the US Congress repealed the
Glass-Steagall Act, investment banks and retail banks were able
to work together again for the first time in 50 years. Next, not
to be left behind, the European financial sector lobbied the
European Union, mostly in secret, to liberate the European
market. This deregulation put an end to transparency in the
banking world. Hedge funds, whose investments are carried out
under the cover of darkness, mushroomed.
Simplicity was replaced by complexity and
uncertain risk. Credit default swaps gave investors large
payouts for loans gone bad and futures, which are more like bets
than investments, offered juicy returns.
Hungry investors then began speculating on
the price of food commodities, especially rice and wheat and
this was when we saw the first signs of trouble. The price of
wheat flour increased more than 25% due to speculation and the
Sphagetti Riots broke out in Italy. Petrol prices increased
further and further still. Farmers complained that they could
not afford to refuel their tractors and truck drivers went on
strike in Spain.
The world now had a stagnant real economy and
a very busy financial sector. In the USA, the financial sector
accounted for 40% of the nation’s total profits but less than 5%
of the GNP.
On January 24 2008, the French investment
bank Société Générale announced that it had lost an astounding
7.2 billion dollars of its clients’ money from futures which
went the wrong way.
Next, in the space of just 6 weeks, the price
of a barrel of crude oil fell from $150 a barrel in July to less
than fifty by October.
Then we found out about sub-prime loans.
Investment banks and retail banks, working together, had lent
vast quantities of their clients’ money to high risk borrowers.
This means borrowers who are likely to default on their home
loans or mortgages because of low incomes and job instability.
And guess what? They defaulted, handed back the keys to the
house and the banks are now left with properties that nobody
wants and whose value continues to fall. What a disaster!
After that, it was the turn of the hedge
funds. Many banks, such as Grupo Santander, passed on investors’
money to hedge funds who then passed the money on to... Bernard
Governments have now spent billions of
taxpayers’ money because of the mistakes made by greedy and
irresponsible bankers and The White House has said that the US
deficit will rise to $1.6 trillion in 2009. The Bank of England
puts the cost of the global crisis at $2.8 trillion but nobody
really knows and nobody really knows what all this means for the