Today we demonstrate how the process which brought you the financial crisis is now moving into your public services. The Real Economy is being fed to the Zombie Economy that consumes value and defecates debt. Are you going to swallow it?
If I were to take a stone and fashion it into a tool, I might be able to trade it on at a higher value than the original stone. This is because I have added value to the stone, it is now more useful within my community than before and this is confirmed by its increased market value. In short:
A Good Idea + Skill + Usefulness = Added Value
This is the simple equation that most people have in their mind when they think about Capitalism. This equation is also key in the social acceptance of the profit principle and inequality of wealth.
The problem is this has ceased to be the way business is done for at least thirty years. The way wealth is created today is not based on this simple premise of adding value by creating something useful and being rewarded for that contribution. In reality, the real economy is being consumed by a zombie economy which consumes value one end, and shoots debt out of the other.
The Securitization Food Chain
This is the way that the Zombie Economy seeks to generate profit today. It is the food chain responsible for the global financial crisis. Home buyer loans/mortgages are rolled up into investment products called Collateralised Debt Obligations. These are sold from Investment Banks to Investors (pension schemes, local governments, individual investors) as if they were actually investment products, rather than some dodgy debts. The Credit Ratings Agencies support this process by being paid by the Investment Bank to give gold plated credit ratings to the toxic products.
The Investment Bank then places an insurance policy on the same debt they just sold as a good investment, tanking. This insurance is called a Credit Default Swap. All along this chain, huge fees are awarded to the Bank, the Investment Bank, and the Credit Ratings Agencies generating paper profits. But in reality, all that has happened, is a person has taken on a debt and huge bets have been placed on that debt. The reason we had a global banking crisis was not because of the cost of the mortgage defaults of individual consumers. That would have been a domestic mortgage crisis. The reason it became a global banking crisis was because we asked the tax payer to cover the losses of all those bets. The value of American Sub Prime mortgages was $1.3trn in 2007, constituting just one fifth of the US housing market. The derivatives market (those debt games outlined above)hanging off the back of it stands at $700trn.
According to the National Audit Office, The UK National Debt rose by £1.5trn as a result of its Bank Bailout. This is twice the nation’s total annual budget. For this amount, the UK could have funded the health service (£106.7bn a year) for fourteen years , the entire education system for forty years (£42bn a year) or over three hundred years of Job Seekers Allowance (£4.9bn a year).
Where is the value in this?
In the past, the decision to provide a loan was based on a person’s likelihood of repayment. The sole interest of the mortgage lender was responsible lending. They had a stake in it. Today, the Bank has no such concern. First, the more debt it sells to consumers, the more debt it can sell to Investment Banks. Secondly, once it sells on the debt to the Investment Bank it has covered any losses in the result of the consumers defaulting. Thirdly, as evidenced in 2008, if the system fails, the tax payer will pick up the bill and business will continue as usual.
In the past an Investment Bank would have evaluated the credit worthiness of the debt on its books . If the debt turned toxic the value of the product would lose its investors (and them) money. But the ability to set up this insurance in Credit Default Swaps means a conflict of interest is created within the Investment Bank; Not only can it sell dodgy products and avoid the consequences but it can actually increase profits by betting on the failure of their own investment products.
None of the parties involved has any incentive to change either. When they failed and faced bankruptcy, their personal wealth was guaranteed by the public purse.
The resultant National Debt has been seized by neo-liberal governments to promote a reduction in state spending on public services and the real economy. They have chosen to borrow to pump money into failing banks, but not to invest in people and production. They have diverted the investment pipeline from the real economy to the Zombie Economy.
The Food Chain Extends to Public Services
The Austerity Programme across Europe is actually the Securitization Food Chain moving in to consume the public services. By arguing that the debt was caused not by the Securitization Food Chain, but by exorbitant public spending on inefficient public services, the governments invite business in to public services in the name of efficiency.
There are clear reasons why Public Services cannot be run like businesses. They are not there to create a profit but to create a social utility which likely cannot or should not be run for a real time monetary profit. I’ve explored this idea in further detail elsewhere so will not revisit here.
By opening up public services to profit making businesses, the government invites the Zombie Economy to feast on social need to create profit, just as with the need for housing. This allows our basic needs like healthcare, the education of our children, and crime and justice to be fed into the same food chain that exploded in 2008.
One example of this is the Private Finance Initiative (PFI). Our hospitals and schools have been built under private loans called Private Finance Initiatives, rather than government borrowing. These loans are at least twice the rate of interest that government loans would have been. These loans are then repaid over 25-30 years.
Today, 22 of the 103 NHS trusts to enter PFI are facing difficulty due to the exorbitant repayments required to pay back the so-called NHS Mortgage. Some hospitals are having to handover a fifth of their annual budget repayments.
Overall, for a capital investment of £54.7bn (that’s how much money we actually borrowed to build stuff), the tax payer will pay back an astounding £301bn in just twenty five years. Given the disasters of debt witnessed so far, many of the 771 PFI projects currently running will bust the budget of these schools and hospitals long before then, leaving us with the debt but not the service.
Despite this, the public private partnership continues apace. The myth that inviting businesses in to provide public services continues apace. The debt burden of the nation grows. The conversation cycle continues: not enough efficiency, not enough commercialisation, more privatisation, more debt. The prison service, the justice system, the roads, the police; all these services are being securitized.
Even our most basic need, food, has been securitized. Last year, Goldman Sachs made £250m betting that food prices would go up. In doing so, they made the market by creating a price rise. This resulted in a 66% rise in profits for Goldman Sachs, and death by starvation for real human beings who could no longer afford to eat. The Zombie Economy literally starved the Real Economy.
Value and Profit Are Not the Same Thing
The basic truth missing from discussion today, is that not everything of value makes a profit and not everything that makes a profit is of value. Governments around the world have chosen to co-opt the wealth of their tax paying masses and the utility of their public services to bolster the profits of organisations which provide no value. They continue to take money from the real economy and hand it to the Zombie Economy.
This is not only a mistake, but a dangerous, stupid and socially destructive mistake. Or it is a deliberate act of corruption. It is not, by any measure, a recipe for social or economic success, as has already been demonstrated by the global financial crisis. If we cease to tie the generation of wealth, to activities which create social value we create a system which rewards damaging activities and penalises productive activities. We ignore this issue at our peril.
An excellent animation examining the need to root economic progress in social progress.
Positive Money – learn about where money comes from, how it is created and how else we might organise the issue of currency.