A Unitarian-Universalist Perspective on the Economic Crisis
Address to the Melbourne Unitarian Church, January 18, 2009
What Is This Economic Crisis?
A crisis is something to be taken seriously. The word is often used haphazardly, and that denigrates its importance. So, by means of introduction, I will repeat a paragraph defining a 'crisis' from a presentation given around this time last year. "In medicine it represents a point where, regardless of individual will, the physiological system of an individual is tested to capacity in its ability to heal. In literature, it is the point of the narrative where the protagonist either successfully confronts their antagonist, be that the setting, circumstances or another character or, in the case of tragedy, their own weaknesses. In the environment, or social systems, it is also sensible to speak of crises, points in time and place where the capacity of the system is faced with a "life or death" test in its abilities to continue."
An economic crisis is, of course, a crisis in a social system. Typically they are described as a variety of financial crises; a sudden rush of withdrawals from depositers, leading to a run on the banks., a stock bubble, where the price far exceeds the present value of future income., or when a government is forced to massively devalue its currency due to speculative attack, or it fails to able to pay back its own bonds: The latter two often result in a capital flight. Such financial crises often result in an economic recession, usually defined when a country's Gross Domestic Product shrinks for two quarter year's. In the third quarter of 2008, the U.S. economy shrank by 0.5%, (although that was after a 2.8% increase in the second), the economy of the UK by 0.6% in the same period, Germany by 0.5%, and Japan also by 0.5%. Of those major economies, only Japan technically fits the description of currently being in recession, although in all probability figures from the fourth quarter of 2008 will show that they others will also reach this criteria.
Such a decline doesn't sound like much; a drop of half a percent, or even a few percent, of a country's GDP isn't what one would consider terminal case, especially from such a high base. But there are some other considerations here. Firstly, this is truly an international problem, rather than one of localised examples; even the countries which are not in recession have very slight levels of growth. Secondly, there will be other major economies which are expected to fall into recession, such as Russia and Canada, and whilst the Chinese economy is expected to grow, albeit at a slower rate, their manufacturing sector has just had three consecutive months of negative growth. Thirdly, this problem is expected to be lasting, probably at least until 2010, due to extremely low consumer confidence and falls in private consumption. Most importantly however, the reason why using the term 'crisis' is not hyperbole, is due to the systematic cause.
The start of the current economic problems first became evident as far back as the end of 2005. That is when there was a sudden halt to the rampant increases in prices in the US housing market. Throughout 2006, as prices remained flat, however the share market did not reflect this. In 2006 the Dow Jones Index actually increased approximately a quarter. In 2007 real-estate prices faced significant declines and foreclosure activity increased by 79%. Twenty-five subprime mortgage estate lenders went bankrupt, including the largest lenders such as New Century Financial, American Home Mortgage and Ameriquest. The largest U.S. mortgage lender Countrywide Financial narrowly avoided bankruptcy by borrowing $11 billion from other banks, the Internet banking pioneer NetBank (not to be confused with the Commonwealth Bank of Australia service of the same name) went broke, whereas across the big pond, there was a run on the Northern Rock bank, which was eventually put into public ownership in 2008.
Amazingly, the stock speculators seemed to remain ignorant of the old adage of a collapse in share prices following a downtown in the real estate market, even though the financial collapse in South and East Asia in 1997 should have been in recent memory. Instead, the Dow Jones Index increased even further, from 12,643 in January to 14,093 at the end of October; although for most of this time the price of natural commodities, especially oil and food prices, had been increasing significantly. The price per barrell of crude oil increased from just over $40USD at the beginning of 2007 to over $130USD in the middle of 2008 (it now below $40). Between the start of 2006 and 2008, the average world price for rice rose by 217%, wheat by 136%, maize by 125% and soybeans by 107% - all of which had a dramatic effect on the poor of development countries.
The 2008 new year started jittery with all share market gains of the previous year being wiped out. A series of arrests for fraud shook the mortgage industry in the middle of year. The Bear Stearns Companies, which had been one of the largest global investment banks, was caught in this operation and it's stock value went from a high of $133.20 to a low of $10 per share when it was purchased by JPMorgan Chase. When added to a massive reliance of the mortgage lenders to Credit Default Swaps, which insure debt holders against default, investor confidence was rather suddenly wiped out. The U.S. government was required to nationalise the Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in September. Combined, they owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. Soon afterwards, the financial services company Lehman Brothers filed for bankruptcy, despite holding assets approaching $700 billion dollars. Merrill-Lynch despite having a trillion dollars in assets, had such a poor revenue stream (negative $60 billion in 2007), that it was purchased by the Bank of America for a mere $50 billion. Goldman Sachs and Morgan Stanley survived, in a manner of speaking, by converting their status from an investment bank to bank holding company.
As the U.S. government struggled to raise support bailout, the Benelux Fortis bank required half nationalisation to the tune of €11.2 billion (US$16.3 billion). The French-Belgian bank Dexia required a government loan of €9 billion. Eventually the U.S. Congress passed its bailout plan, which included a guarentee to bank deposits to $250,000 and included $100 billion in tax breaks. Bank deposit guarantees were also put in place by the governments of most European countries, such as Germany, Ireland, and the U.K. Wachovia, which had been the fourth largest bank holding company in the U.S., was acquired by Wells Fargo. Russia was twice forced to suspend its trading exchanges in October, due to dramatic falls. The UK government made £25 billion available to major British banks as preference share capital, or permanent interest bearing securities, as form of partial nationalisation; in December it was revealed that the Royal Bank of Scotland and HBOS (Halifax and Bank of Scotland) had been "only hours away from being unable to open for business". By November 20, the Dow Jones had fallen to 7,507 - that is, approximately half of its value from October 2007. Ford, General Motors and Chrysler were provided an estimated short-term $15 billion bail-out. Although not a major economic player on a world scale, the Iceland the stock exchanged fell by more than 90% and with banks there holding 80% of their €50 billion foreign debt during 2008, all of Iceland's major banks were put under public administration; the estiamated cost to the Icelandic economy of the financial collapse has been put at 75% of the country's entire GDP for the previous year.
What Is Being Done?
The crisis, so named, is obviously on-going - on Friday the Bank of America shared price slumped 20% and Citigroup 18% - and the preceding material provides some idea of the scale of events. There have been three main strategies to deal with the problem, which I can be described as the Bush administration approach, the European approach, and a proposed Obama administration approach. The first, constituting roughly $1 trillion for a $14 trillion economy, was a set of deposit guarantees, stock purchases, tax breaks and direct aid. However when Associated Press contacted 21 major banks which received the bailout, none of them could give specific answers on how much has been spent? What it had been spent on? How much was being held in savings and what's the plan for the rest? Thomas Kelly, a spokesperson for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that [information] to the public. We're declining to."
In contrast the European and Obama approach is, in different guises, forms of Keynesian government intervention as social liberalism or social democracy. It involves re-regulation of the financial sector, the purchase of preferential shares or outright nationalisation on one hand and one the other, as expressed by President-elect Barak Obama, a massive government expenditure in public works and infrastructure, on electrical grids, on public transport, on dams and investment in alternative fuels, expected to be valued at another $1 trillion dollars, although the US Federal Reserve chair, Ben Bernanke, has warned Obama that this may not be enough. Nevertheless after several years of significant neglect in this area the intervention will undoubtedly assist those most dependent on improvements in public goods and thus provide positive externalities to the US economy as a whole. Comparison with Franklin Delano Rooselvelt's "New Deal" program have, of course, already been made.
Whilst all these actions will be beneficial, in varying degrees, in relieving the symptoms of the global economic crisis, there is good reason to suggest that they may not be sufficient to cure the cause. As mentioned right at the very beginning of this presentation, this is a crisis primarily because it is systematically induced. It has arisen first and foremost from speculative bubbles in real estate and primary resources for a reason; because natural necessities are relatively fixed in quantity and they have no substitute (except for other natural necessities), they are particularly prone to monopolists. Not a single dollar "invested" in this desire for medieval lordship over land and nature provides goods, services or employment, yet all must pay an ever-increasing rent for what nature provided freely. Is the liquidity crisis and the resultant downtown in productivity a real surprise then?
What Should Unitarian Univeralists Do?
Whilst if one wants to understand economics, they should study it, there is good mileage to be gained by reading unitarian-universalists from the past who excelled in economics and, interestingly, seemed to come to an identical solution. John Locke was the first to suggest that one is the legitimate owner of their labour, and the improvements that they make to nature. Following a stricter class analysis, David Ricardo expressed it rather bluntly. "[T]he interest of the landlord is always opposed to the interest of every other class in the community." As an editorial of The Beacon expressed last year "We Live In A Class Society"; yes that much is true. But there are productive and unproductive classes. Those who labour for wages and those who invest for interest, are indeed productive and beneficial. But the landlord class, increasingly powerful as the revolutionary aspects of capitalism are diluted into a new feudalism mediated by money rather than genetic lineage, produce nothing of value that was not already present as a gift of Providence - and yet all must pay their pound of flesh to these demonspawn!
It is worth being very attentive indeed to our religious predecessors; as Raymond Holt's excellent study, "The Unitarian Contribution to Social Progress in England" makes explicit, it was not just in the political or theological arena that they were active. To be sure, they argued that no God would create a world where truth, reason and fact contradicted freedom and responsibility. They most certainly advocated freedom of conscience, freedom of thought and expression, and freedom to worship on whatever way one pleased with neither boon nor bane from any government. They certainly argued for a more democratic parliament and were among the earliest supporters of women's suffrage, social welfare, civil rights (especially in ending child labour and slavery) and promoting public education. But a reading also reveals how closely tied they were to economic productivity. The wealthy among their number, like the Ashtons and the Wedgewoods, invested in industry. The ingenious among them, like Jedediah Strutt, Thomas Henry, and Joseph Priestly invented new machines, processes and made scientific discoveries. The merchants among their number, like Robert Hibbert and the Gaskells promoted trade between nations. All abhorred restrictions on free trade, such as the tariffs of Corn Laws, which brought misery to working people between nations, and enhanced the power of landed property.
And so it is today that the productive worker and the productive capitalist are both fettered by taxes, tariffs, and rents, onerous on their ability to provide goods, services and create wealth. And so it is, more and more aggressive wars are fought for the control of natural resources with horrendous civilian casulties. Professor Herbert Simon, the Unitarian-Universalist polymath of the twentieth century, and winner of the Nobel Memorial Prize in Economics for 1978 - as well as being a contributor to cognitive psychology, computer science, public administration, economics, management, philosophy of science and sociology - stated it quite simply when he said: "Assuming that a tax increase is necessary, it is clearly preferable to impose the additional cost on land by increasing the land tax, rather than to increase the wage tax." His comment echoes the opinion of almost every economist since Adam Smith onwards - and yet so many politicians and the so many of public both fear and misunderstand the simplicity of deriving public revenue solely from site rents.
What happens when more and more people try to get into the landlord's game, which was called 'Monopoly', for good reason?
What happens when the banks start lending money with cavalier disregard at extremely low rates and lax conditions, with with the assumption that "someone else" will engage in the productive labour and investment that will give a location a good rental price?
What happens when fewer and fewer invest in new business, industry, new goods, and new services? What happens when the expected returns from "somebody else" do not materialise?
'What happens?' indeed. The monopolists find themselves with a debt that they cannot afford to repay. What was once marked as an asset by the banks suddenly becomes written off. Confidence is lost, industry fails, economies shrink, unemployment for masses loom. And like pigs the monopolists come squealing once again before the our governments. They plead for the government, which means us, to prime the printing presses and pay for hundreds of billions of bad assets, under the assumption that "confidence" and "stability" in the credit market will be recovered - and so they can exploit both worker and investor yet again.
That is what happens.