10th Anniversary of the Bearn Stearns collapse

Ten years ago, the collapse of the investment bank Bear Stearns marked a prelude of the 2008 global financial crisis. Founded in 1923, it became one of the world’s largest investment banks and its stock market capitalization was $20 billion in 2007. Extremely active in the hedge fund business, the funds High-Grade Structured-Credit Strategies Fund and Enhanced Leverage Fund owned $20 billion in collateralized debt obligations as of 2006. These derivatives, based on mortgage-backed securities, started losing value in September 2006 since housing prices began to fall.

In January 2008, Moody’s downgraded Bear Stearns’ mortgage-backed securities and this event put pressure on the bank’s  liquidity management. In March 2008, the Federal Reserve held its first emergency weekend meeting in 30 years and finally lent up to $30 billion to Chase to purchase Bear Stearns in order to avoid that the bankruptcy of other over-leveraged investment banks, such as Merrill Lynch and Lehman Brothers (Amadeo, 2018).

After Septmeber 2008, the financial crisis acquired a manifold character involving the socio-economic structures at worldwide level. Although the crisis was triggered in the financial sector, it marked the culmination of a long-term trend of financialisation of the economic system (Herman and Madi, 2018).

Throughout the last forty years, most governments around the world supported the long-run process of neo-liberal reforms that turned out to be characterised by the financialisation of the capitalist economy. In this historical scenario, monopoly-finance capital became increasingly dependent on bubbles that, both in credit and capital markets, proved to be globally the sources of endogenous financial fragility. This process was reinforced, in a vicious circle, by a distribution of income, wealth and power. By negatively influencing labor and working conditions, it rendered increasingly difficult for effective demand to reach (or even approach) the level of full employment. In response to this situation, banking and credit policies also supported by governments and supranational institutions were inducing consumers to expand their spending.

While public spending on social and infrastructural objectives was severely restricted, it expanded for sustaining the income and the demand of powerful groups. In this situation, corporate decision making was increasingly subordinated to speculative financial commitments. A financial conception of investment gained ground in the context where financial innovations aimed to achieve short-term profits with lower capital requirements. Managers and owners of firms privileged financial gains often based on speculative shifts of shareholder values. Changes in corporate ownership, through waves of mergers and acquisitions, created new business models where companies, while highly powerful and concentrated, turned out to be simply bundles of financial assets and liabilities to be traded. Hence, current corporate governance came to have the privilege of mobility, liquidity and short-term profits based on high levels of debt.

In the new millenium, a trend of high expansion of financial assets, while economic growth remains limited and sporadic, gave way to widespread unemployment, income gaps and less welfare. The same policies that obliterated social services and kept labor cheap favoured global enterprises and financial deepening. Besides, the onset of the new millennium represents a new age of democracy where democracy allows for election to office but not to power. These questions reflect on issues of current power, politics and economics in a social context where democratic institutions are being threatened (Madi, 2015).

Indeed, in contemporary capitalist societies, the global financial architecture favoured the expansion of financial assets, capital mobility and short-term investment decisions – increasingly subordinated to rules of portfolio risk management. In this scenario, changes in productive organisation were based on competitiveness and corporate governance criteria. Therefore, job instability and fragile conditions of social protection turned out to put pressure on the redefinition of survival strategies. As a result of the new trends in capital accumulation and production, workers turned out to redefine their skills, become informal entrepreneurs or migrate, among other examples of the current worldwide challenges to citizens. Considering this background, governments faced increasing challenges to support an ethically defensible approach to working conditions. While money is an end in itself social behaviours have mainly turned out to be guided by the profit motive. Consequently, social cohesion was reduced since groups of specific interests turned out to spread their actions and expectations in ways that are desirable to the interest group. Indeed, the outstanding conflicts between solidarity and particular interests revealed growing tensions between ethical values and individual principles in capitalist societies.

This situation poses a major challenge to economic theory and policy action. In fact, after ten years from the 2008, it is evident by now that not much changed in the “mainstream way” of addressing the economic crisis. The prevalent tendency has been to conceive the crisis as caused by an excess of imprudent speculation, with little questioning of the economic and institutional “fundaments” that paved the way to that course of events. Consequently, the policies addressing the crisis rarely went beyond short-term proposals. Indeed, the policy measures have been far from still solving the structural aspects of the crisis.

In the next decade: will a new reality of disruptive innovations in business and markets create higher levels of inequality within and among nations? Will massive investments in green technology lead the world toward a cleaner future? How can we assess the model of governance and development of China?

In short, how will we look back on 2018 a decade from now?

 

References

Amadeo, K. (2018) Bearn Stearns, Its Collapse, and Bailout. How a Bank That Survived the Depression Started the Great Recession, March 14. https://www.thebalance.com/bearn-stearns-collapse-and-bailout-3305613

Arestis, P. and Sawyer, M. (eds.) (2010) 21st Century Keynesian Economics. Annual Edition of International Papers in Political Economy. Houndmills, Basingstoke: Palgrave Macmillan.

Davidson, P. (2009) The Keynes Solution: The Path to Global Economic Prosperity. Basingstoke: Palgrave Macmillan.

Foster, W.T. and Catchings, W. (1926) The Dilemma of Thrift. Pollak Foundation for Economic Research.

Galbraith, J.K. (1958) The Affluent Society. New York: Mariner Books, second edition 1998.

Hansen, Alvin H. (1939), “Economic Progress and Declining Population Growth”, American Economic Review, 29(1): 1-15.

Harcourt, G. and Kriesler, P. (eds.) (2013) The Oxford Handbook of Post Keynesian Economics. Oxford: Oxford University Press.

Hermann, A. (2014a) “The Essays in Persuasion of John Maynard Keynes and Their Relevance for the Economic Problems of Today”. In Hölscher, J. and Klaes, M. (eds.) Keynes’s Economic Consequences of the Peace: A Reappraisal. London: Pickering and Chatto.

Hermann, A. (2015) The Systemic Nature of the Economic Crisis: The Perspectives of Heterodox Economics and Psychoanalysis. London and New York: Routledge.

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4 comments
  1. lobdillj said:

    There is more to tell. The total bailout of the Wall Street perpetrators was way more than $30 billion. By 2015 the government had paid out $4.6 trillion of a $16.8 trillion commitment. This payout went to the insiders at the Wall Street investment banks, as will the remainder of the commitment. Looking at this from a normal lending risk assessment point of view, there is absolutely no way these “loans” will be repaid by the looters. They will be added to the national debt, which, in itself, is unpayable but is nevertheless used to justify additional austerity.

    • Maria Alejandra Madi said:

      Thanks for your comment and reading suggestionhttps://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#3aa477f2d83f

      More taxes and higher national debts are the result of the management of the financial crisis. Indeed, the same policies that have obliterated social services and kept labor cheap have favored global enterprises and financial deepening.
      We are living in a new age of democracy where democracy allows for election to office but not to power. Taking into account evidence from the USA, Fullbrook warns “American democracy has become a sham. It still maintains the trappings of democracy, but in reality it is a system of government controlled by the richest 1% of its citizens”

      Maria

  2. Thank you, few are currently sensitive to the bargain between governed and government. When our species’ life force penetrates the Oz curtain and realizes those pulling the controls are driving over a cliff, a new story will be agreed upon instantly; even if a path to survival cannot be found the umbilical cord to representative democracy and every other form of capitalist government is instantly and forever severed. A new reality is one blink away.

    • Maria Alejandra Madi said:

      Hello Garret, Thanks for your comment. Concerns with social inclusion extend well beyond purely economic account of justice and fairness, since the degree of economic inequality also affects social cohesion and political stability, and can also have negative implications for economic growth and democratic institutions. Considering the current social and economic challenges, In truth, the post calls for a deep examination of current power, politics and economics in a social context where democratic institutions are being threatened.

      Maria

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