How The Western Financial System Got Here

I will be writing a piece on the US-Iran MOU in a couple of days, once greater certainty of its (at least official) terms are reliably published.

Back in 2014 I gave a presentation on the financial system and the 2008 GFC and its aftermath, which is still so relevant today. It gave a good overview of how the financial system developed, how money is created in modern economies, the causes of the 2008 crash and the underlying issues of always bailing out the financial markets; never punishing the risk takers and introducing lop-sided incentives (if you win big you keep the winnings, if you lose big you get rescued by the state).

One of my thoughts in the presentation was that the authorities would just attempt to keep “muddling through” by more money printing etc. And that is exactly what they have done.

• 2010s Quantitative Easing and Zero Interest Rate Policies to keep the financial system on life support. In addition, the European Central Bank (ECB) pushed governments to socialize the losses of the private banks. Including a low debt Spain massively increasing its indebtedness to rescue the Spanish banks from their reckless property and sovereign debt lending spree; something done across Europe. Then with respect to Greece, the ECB socialized the losses itself, bailing out the largest European banks; it was a European Bank bailout not a Greece bailout, with Greeks picking up the costs. Across Europe, the general citizenry picked up the costs of the financier bailouts through government austerity. An austerity that reduced short and long term growth, as well as facilitating further state asset sell-offs.

  Mainstream economics did its usual job by providing a supporting BS theory of the relationship between government debt and growth (Bernhart & Rogoff 2010); with a 28 year-old PhD student finding that a column of figures covering twenty countries had only summated 15 of them. Of course a “mistake” that just happened to remove the inconvenient facts that would have destroyed the BS theory, along with the other “mistakes” of omitting countries that did not fit the narrative and very strange weightings between different nations’ data.

• Late 2010s attempt to undo some of the QE and zero interest rates, rapidly reversed after the 2019 Repo Crisis with a massive bailout hidden under the 2020 COVID pandemic measures. Short term US interest rates cut to 0.25% (March 2020).

• Early 2022 attempt to undo some of the (now even more massive) QE and zero interest rates, reversed in 2023 with increased government spending and a stop to interest rate rises (July 2023 at 5.5%) to stop an economic and financial crisis. Even then, there was a regional banking crisis, with all the large depositors bailed out by the state even though their deposits were not insured.

• Then rates cut to the current 3.75%, with increasing government spending and deficits, added to by the Trump administration.

• Even with inflation rising, given the now massive amounts of public and private debt there is no way that interest rates can be allowed to rise in the US. Hence the appointment of Warsh as Fed Chair and his focus on an even more unrepresentative measure of inflation (“trimmed mean” inflation that chops off the bottom 25% of price cuts and the top 69% of price spikes) to allow him to “look through” what he will call “temporary” inflation and not raise interest rates. The Fed’s previously preferred “PCE” measure of inflation, that excludes food and energy and plays statistical games to get the reported rate lower, was reporting too high a level of inflation, so the Fed needs a new one to rationalize not raising interest rates.

After a quarter century of utterly reckless and wasteful government spending (to fund wars and bail out banks) and reductions to the tax base (to reward the oligarchs and their courtier class), the US has reached a classic imperial denouement; so heavily indebted that it cannot afford major foreign wars. While locked out of solutions such as taxing the rich more, cutting utterly wasteful defence spending and huge subsidies to the fossil fuel sector, and slashing monopolistic drug prices by the an oligarchy and courtier class utterly unwilling to make any sacrifices. Actually, quite the opposite as they deepen their level of extraction from the state sector.