ATTAC GERMANY ON THE SUBPRIME CRISIS

AFTER THE CRISIS IS BEFORE THE CRISIS

The instability of finance market capitalism grows

By attac’s finance market study group

[This February 2008 pamphlet on the subprime crisis is translated from the German on the World Wide Web, www.attac.de.]

Many thought these pictures were long past: long lines of small savers fearing for their money formed before the branch offices of the English mortgage bank Northern Rock. The bank could only be saved by an emergency credit of 1 billion euro. German banks also speculated. Savings accounts and regional banks helped the Saxony regional bank with a credit assurance of 17 billion euro. An emergency merger with the Baden-Wurttemberg regional bank rescued the Saxony regional bank (IKB). The IKB could only be saved by other banks leaping into the breach. UBS, Credit Suisse, Citigroup, Deutsche Bank, Merrill Lynch, Bank of America and Commerzbank have already announced massive losses. Hardly anyone knows the amount of rotten credits on the books of the financial industry. Forced sales or compulsory auctions threaten two million heavily indebted US households.

THE SUBPRIME CRISIS

What caused this crisis? Many homeowners accepted mortgage credits from banks (or financial providers) even though they could not really afford them. Money was cheap since the American Federal Reserve set a low key interest rate to cushion the effects of the previous stock market crash. Banks baited customers with enticing offers of credits at low interest rates and later seemingly favorable variable interest rates. Securities were hardly required. The share of credits with low creditworthiness (called “subprime”) rose from 2% in 2000 to around 14% in 2007. The construction industry boomed and contributed to the higher gross domestic product at 0.5% to 1% annually.

The business worked as long as real estate prices climbed. When debtors could not pay any more, the creditors recovered the real estate that increased in value. Banks could afford the extravagant credit awards because they simply passed on the risks to others. The debts or charges were bundled and resold to other investors and hedge funds. Homeowners could obtain ever=greater credits on their increasingly valuable property. This stimulated the economy through higher consumption. Financial providers earned fees for the bundling and investors through the resale of securities and payments of borrowers.

The party was quickly over when the real estate prices stopped soaring. After the key interests were raised, the variable interest credits also rose. More and more debtors could not pay for their credits any longer. Their property was threatened with compulsory auctions. But there were hardly any buyers since many homes were sold at the same time. Home prices fell again and again. In June 2007 big banks like Citibank, Goldman Sachs and Deutsche Bank withdrew gigantic sums from the US mortgage market. Two hedge-funds of Bear Stearns went bankrupt because they speculated with mortgage securities and lost around $1.5 billion.

Many investors became nervous and began withdrawing their money. Banks hardly lent money to each other out of fear that other banks would go bankrupt from non-payments. To avert worse developments, central banks gave short-term credits; the European Central Bank infused over 200 billion euro in a few days. Since then, real estate financiers have declared bankruptcy almost daily. Many banks were saved just before bankruptcy or posted enormous losses.

The crisis is not over. Insolvency threatens two million homeowners in the US. Many employees in the construction-, real estate- and banking sectors worry about their jobs or have already lost their jobs. Economic research institutes correct their growth forecasts downward. Hardly anyone can estimate the exact extent of the crisis. Through the mostly non-transparent reselling of credits to hedge-funds in tax havens, the risks and further turbulences on the financial markets are unclear.

The crisis threatens to spread powerfully to Europe. Through the falling value of the dollar in the course of the crisis, European exports become more expensive and US products cheaper. In export-heavy economies like the German economy, a significant decline of economic growth could occur. There are also real estate crises in some European countries. The number of compulsory auctions in Great Britain and Ireland has increased; 15% of housing real estate in Spain is vacant.

CRISES ARE PART OF THE NEOLIBERAL FINANCIAL- AND ECONOMIC SYSTEM

The real estate crisis involves a systemic failure of the neoliberal financial- and economic system, not especially bad or misguided speculation. Capital assets increased enormously in the course of the liberalization of the financial markets and global redistribution. In the time period from 1980 to 2005, the German gross domestic product rose four-fold while the financial assets grew almost twelve-fold. Investors try to invest their capital where it brings the greatest profit, for example in currencies, stocks of businesses of the New Economy, the real estate sector or novel investment forms like hedge-funds or Private Equity Funds. In all these areas, the boom was followed by crises, the Asian crisis, the collapse of the New Economy and now the subprime crisis.

Investors are often guided by herd behavior, investing their capital where others invest without considering fundamental economic data. Bubbles arise that end in crises as soon as the expectant attitudes suddenly change and/or the first payment problems arise. Then the consequences are frequently not only borne by owners of capital. Crises expand from financial markets to the real economy. Employees lose their jobs; more and more businesses go bankrupt. On account of lower tax revenues, the state must economize with social transfers and public necessities and aid distressed credit institutions.

As a rule, the advance of the finance markets solves problems. Transactions on the finance markets become more short-term. “Money” should “work” and be invested quickly where it brings the highest return and can be quickly withdrawn again. Several consequences of this economic mode can be summarized under the key word “shareholder value”: showing high short-term profits to avoid being taken over and satisfying the profit expectations of shareholders. This often happens at the expense of personnel through dismissals and wage cuts, canceling future investments and reducing research spending.

The power of owners of capital and the pressure on politicians grow with the growing capital. Financial lobbies work at creating further investment possibilities by privatizing public assets and transforming them into financial products. The (partial-) privatizations of the pension systems in Europe and privatization of the railroads are examples.

IS EVERYTHING FATE?

This development was not inevitable. The unequal distribution of assets that led to the amassing of huge wealth is also the result of misguided policy. Income from capital assets rose far more intensely than wage income. Unjust tax systems increasingly contributed to this malformation. Capital assets and profits of transnational corporations always look better than wage incomes. Missing revenues are compensated through increased consumer taxes. Lower corporate taxes and higher sales taxes are examples. In many cases, harmful financial transactions are even promoted by tax law. Offshore centers evade national laws so a large part of the money streams cannot be apprehended by financial oversight or by the internal revenue office. The multitude of invented financial products makes the financial system and its risks incalculable.

WE DEMAND:

• The greater transparency of the finance markets urged again and again is necessary but not sufficient. Further measures regulating the finance markets must be taken. These include introduction of a currency-transaction tax and upgrading and expanding banking oversight.

• The finance markets and the economy must become more democratic and controlled to ensure active political capacity.

• Sustainable economy must have a priority over short-term profits. One important step would be taxing secondary trade with financial products to limit short-term speculation (for example, the stock transfer tax).

• Tax havens, the non-transparent zones with their special favors for the wealthy, must be abolished.

• Redistribution from bottom to the top must be stopped through a just tax- and wage policy.

• Financial investments (like Private Equity or REITs) should not be promoted by the tax law. Tax privileges for managers of these businesses are unjustified.

• Sensitive public goods like education, pensions, health care, public transportation, water supply, housing etc. must be protected from takeovers by financial investors.

• A more just world trade system including balances of trade must be introduced.

• System alternatives deserve consideration.



The attac finance market study group is occupied with the themes finance markets, public indebtedness and taxes. Its reports focus on the core elements of neoliberal globalization that influence politics and affect more and more areas of society – whether heavy debts, accumulation of riches, shareholder value practices or inadequate controls. The study group offers suggestions on organizing the finance markets and tax systems benefiting the general public.