California: land of the future

The sovereign debt crisis that threatens to sink the Greek economy and perhaps in time, the world economy should a default occur, is being regularly compared to the collapse of Lehman Brothers.  That incident brought about the crash and 'credit crunch' of 2008 when banks worldwide had to write-down (devalue) their assets and billions of pounds essentially disappeared from the world financial system, resulting in a lack of credit (the proverbial 'credit crunch').  Its effects are still being felt today as the UK economy bounces along the bottom, a full-blown recovery perpetually just around the corner.

But Lehman Brothers by itself did not cause the crash of 2008; it was merely the denouement of a property speculation bubble that would inevitably burst.  Its causes are complicated, but broadly speaking the search for (profit) growth  and the availability of cheap credit led to banks lending to all and sundry (whether they could afford repayments, such as the NINJAs) and packaging up the risks into financial instruments to be sold on to others, a bit like spreading disease via a contaminated bank note that gradually travelled around the world.

The source of cheap credit can be traced to the economic slowdown of 2001; the Dot Com bubble burst and 9/11 threatened to plunge the US economy into recession so interest rates were slashed, reducing the cost of borrowing.  The US Dollar is the primary currency of global trading and as a result the knock-on effects were felt worldwide, cheap credit flooded the global markets.  The availability of cheap commodities from China was also a large element, consumers had something on which to spend their goods and Dollars flooded into China (which is why it is technically the USAs biggest creditor).

The result was an overheated global economy in which Greece and its population had access to cheap credit that allowed them to grow through the boom.  When the house of cards fell, they were left badly exposed.  It then emerged that the Greeks had misled the European Central Bank in order to gain access to the Euro.  However these issues are not what have affected Spain, Portugal and Ireland, indicating a more systemic problem.

But despite the near collapse of the world economy nothing much has changed.  The wealthy get ever wealthier; the poor are faced with huge cuts to public services.  In Greece, taxpayers’ money has been poured in to the country but has simply disappeared back out again into the hands of private investors who have pulled their capital out of the country as it flirts with default.  Our economy is built on the same foundations as it was pre-crash and there is no attempt to alter this; indeed property speculators have returned to the drawing board to revise their plans ready for when the economy takes off once more.

But three years on we’re staring down the barrel of a gun once more; or if you belief the pessimists, staring down a cannon.  The collapse of the Greek economy could bring about the 1930s style depression we’ve all been pretending or hoping could never happen.  

The victims of that outcome are those that had little in the first place, such as the unemployed in Greece.  Arguments that they are the deserving poor because they didn’t pay enough tax are spurious; they were sold the capitalist dream and ran with it.  Further, tax avoidance is hardly the exclusive practice of the Greeks; many wealthy individuals and organisations in the UK continue to follow similar practices yet enjoy the trappings of affluence.  Before moralising on the Greek people, we should take a look in the mirror.  We should also asks who benefits from the 'us vs them' narrative.

In the UK those with the least are also the hardest hit; via cuts in benefits or lack a of jobs for those without formal qualifications.  To place blame on individuals is misleading; they are but one element of a society which we have all created.  If people are falling off the bottom we are all collectively responsible as we sustain the system that creates these disparities.  The same applies worldwide; the UK is a key element in a financial system that is helping to impoverish the Greek people.  On the other hand, some currency speculators and hedge funds are set to make a fortune should the worst happen.

The central problem is that since Lehman Brothers we – or our policy makers – have attempted to patch up the existing system in the hope that it would return to business as usual.  Bank bailouts that transferred the risk from the private to the public sector are a major symptom of this.  This approach has led to where we are today; the potential collapse of the Greek economy and huge drops in the standard of living across developed nations as the fundamental flaws in our system have returned to haunt us and dictate what action we can now take to remedy the situation.  This is before the parlous state of the US economy is taken into account; at some point the enormous national debt and deficit will have to be addressed with huge repercussions for the world economy.

There have been no concerted efforts to change the economy or society, to address huge disparities in wealth, opportunity or standards of living.  The wealthy are now more affluent than before the recession, the rest are growing poorer as inflation and commodity prices shrink real incomes.  By most estimates we have passed the point of peak oil and therefore its price will continue to raise regardless of short term factors such as the Libyan crisis.  There is little appetite for change outside of those nations worst affected; presumably we are all hoping it won’t affect us.

California offers a terrifying glimpse of the future.  By itself the state of California is the eight largest economy in the world, yet its government is essentially broke, unemployment is soaring, the prison population is the highest in the world and 15% of its inhabitants live below the poverty line.  As oil prices soar a city built for the car is impoverishing its commuters who spend their disposable incomes getting to and from work.  But it’s still home to Hollywood and Silicone Valley and a fantastic number of millionaires and profit making corporations, so the situation in which it finds itself is all the more disconcerting. 

California's problems don't arise exclusively from the credit crunch, they're part of a much wider issue.  Peak Oil came arrived in 2005 and would always harm a city so betrothed to the car.  The housing speculation bubble that has impoverished thousands was an inevitable consequence of the capitalist system; the Dot Com bubble burst as speculators piled in to make a quick profit and to stave off collapse the housing bubble was born. 

But the huge disparities in wealth - a major problem in itself - have amplified these issues.  Those at the bottom have even less than before thanks to job losses, the cost of fuel and mortgage defaults.  The prison population soars as the wealthy become ever fearful of those with nothing.

It is essentially, a society of extremes of wealth and opportunity and the UK is on a similar path.  The crash of 2008 did not amplify these problems in the UK to such an extreme as the underlying problems are less acute, but government cuts will soon see to that.  The fallout of the last crisis is not only that worst-off feeling the greatest pain and the old way of doing business continuing unchallenged, but the tax payer propping up a clearly flawed system.  The result is another crisis in which the same is likely to occur again; Greece is experiencing more austerity than any other developed nation ever has done and more is being demanded.

The UK and California are very different places, but we should ask if the situation in which the it finds itself is one we would like to draw anywhere near to.  If not then new answers to the same old questions need to be found; preferably before the next collapse occurs.