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Urie writes: "... the existing economic (and political) order isn't working. But, as political leaders on the right and what passes for the left these days claim, failing to sustain it would entail massive human costs in terms of unemployment, bankruptcy, poverty, divorce, suicide and the dissolution of our public institutions."

The JPMorgan Chase bank building in Lower Manhattan. (photo: AP)
The JPMorgan Chase bank building in Lower Manhattan. (photo: AP)



The True Costs of Bank Crises

By Rob Urie, CounterPunch

20 May 12

 

n March 2010 Andrew Haldane, Executive Director for Financial Stability at the Bank of England, estimated that the financial crisis that began in 2008 will ultimately cost the world economy between $60 trillion and $200 trillion in lost production (link). The methods he used to reach his conclusions require a number of assumptions, but so would any effort at assessing the broader damage. And to his point, counting the cost of bank crises in terms of costs to the banks alone substantially misrepresents the economic harm that recurrent crises cause.

When J.P. Morgan announced last week that it had lost $2 billion from derivatives transactions gone awry, later revised to $3 billion and rising, the mainstream press reiterated the framing that this is a cost to be borne by the bank and that it indicates what the rest of us might be expected to contribute if another banking crisis erupts. The implication is that future crises are possible, ignoring that we are collectively still paying for the last crisis. And again, to Mr. Haldane's point, the costs to Wall Street are nearly irrelevant when considering the total costs of banking crises.

This all proceeds from the premise that the broader economic order, of which the banks are a part, is a viable form of economic organization. Given that the current order is radically environmentally unsustainable, it is tempting to imagine that the lost production that Mr. Haldane is counting as a cost of the financial crisis has a silver lining in slowed environmental degradation. Additionally, any careful look at the business of banking finds degrees of predation inversely related to social power - even when they aren't blowing themselves up, most of the world would be better off without predator banks.

This establishes a paradox - the existing economic (and political) order isn't working. But, as political leaders on the right and what passes for the left these days claim, failing to sustain it would entail massive human costs in terms of unemployment, bankruptcy, poverty, divorce, suicide and the dissolution of our public institutions. Ironically, add increasing environmental destruction to this list and it well describes current conditions under the existing order. Apparently the best that defenders can offer is that things could be a lot worse.

To point to the obvious, even Mr. Haldane's lower cost estimate of $60 trillion isn't being borne by the banks. The banks couldn't pay this if they were forced to - it is more money than they will collectively earn in profits over coming decades. And it isn't being borne by the large corporations that are earning the highest rate of profits in history. It is in fact a negative, an unmet promise made to the rest of us by the proponents of capitalism over recent decades. Through the prism of social struggle it appears as an absence, not as a more straightforwardly actionable misappropriation. But then, what is the ultimate difference?

Jamie Dimon, J.P. Morgan's CEO, offered that the bank's loss reflected a failure of risk models. But the bank's risk models are necessarily narrowly delineated - what model could propose that transactions that could cost the broader economy $60 trillion if they go wrong balance out in favor of the transactions? Such risk models carry the implicit premise of heads, the banks win; tails, the rest of us lose. Practically speaking, these trades, when they work, are simply a method of converting a rigged game into cash. The assets being traded, reportedly a basket of credit default swaps, are un-funded insurance policies; accounting fictions that when aggregated guarantee bailouts - every bank requires that every other bank meet its obligations or the whole system collapses.

For all of the money that the banks have been allowed to create and pay out to the purported rocket scientists who build their risk models, the particular model under discussion in J.P. Morgan's case (VAR, value-at-risk) is a work of rare idiocy. The question that it attempts to answer is: how badly can things go for one day, week, month etc. assuming (1) no other banks run into similar problems and (2) everything goes back to normal in the next period. What makes use of this model so questionable is that both of these assumptions are behind every spectacular financial collapse in modern history that didn't involve outright theft (e.g. Ponzi schemes).

Ultimately the particulars of J.P. Morgan's losses are so much noise. What they point to is an economic system designed to self-destruct. Add increasing environmental degradation in the face of global warming to structural financial fragility and what capitalism appears to have created is a full-blown suicide machine. And to invert Mr. Haldane's premise - the $60 trillion in lost production (minimum) was never going to go to us anyway. The trajectory since the 1970s had it going to corporate executives, bankers and machines (automation).

The challenge for reformers and re-regulators is that the system is the problem. Companies pollute because they individually prosper while we collectively pay the costs. Banks take risks that are internally rational while they are systemically catastrophic. Environmental and financial crises cannot be solved with capitalism intact. In fact, when global warming and bank crises are considered, there is little evidence that capitalism ever produced any profits net of externalized costs. And the consolidation of wealth that capitalism produces undermines all attempts at remediation. Capitalism itself is a suicide machine.

What made J.P. Morgan's loss news is the recognition that the financial crisis hasn't been resolved. And again, this crisis isn't from without. It is endemic to the system we are being told we must save. As Mr. Haldane has it, even if the crisis had been resolved, we would still collectively be out more than $60 trillion anyway. And the only way toward those trillions is through increasing environmental catastrophe. By appearances, the current order is in the process of imploding of its own weight. And while dislocations create fear, they also create openings for other possible futures.

 

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+6 # bluebluesdancer 2012-05-20 08:13
Get rid of The Fed and all the 'debt-based' financial systems in the world. Let each country make it's own money and use the interest from loans to pay to run the countries in question instead of paying the CEO's of the banks.
 
 
+8 # John Locke 2012-05-20 10:15
bluebluesdancer : You are correct anyone who disagrees with you is an idiot and has NO idea what is going on and probable believes we should continue bailing out our enemy...The Banks are our enemy, and the sooner we realize this the sooner we can reclaim our democracy...mea nwhile a tax revolt is the answer for now as there will definitely be more bailouts and that means more taxes! And less entitlements…Th ink about that and try to think clearly!
 
 
+7 # grindermonkey 2012-05-20 16:07
Fight the war on banks - join a credit union.
 
 
+7 # gaga1996 2012-05-20 13:51
I so agree. I wish we as a society were not so frightened of the temporary chaos that will ensue; but instead, turn our attention to beyond the breakdown to the rebuilding of a sane and humane society.
 
 
+4 # okie_mule 2012-05-20 16:18
I admit to knowing little about the finance industry, but this I do know: we have been screwed and soon we will be asked to grab our ankles again. What really scares me is that so many are willing to submit instead of taking a stand and saying, "You will have to kill me first."
 
 
+2 # Charles3000 2012-05-20 17:48
I made a simple block diagram with a central bank (The Fed), a government and an economy with banks. I made a few assumptions: the central bank only replaces worn money; no money is added to the economy, the government runs a balanced budget; what it takes out in taxes it spends back into the economy and the banks do their thing circulating the money, loaning it at interest and getting the principal paid back to them. The long term result becomes obvious; in the end the banks have all the money and the economy stalls. Sound familiar?
 
 
0 # B. Traven 2012-05-21 06:35
Does your model, your "simple block diagram", accurately reflect reality? If not is it still useful? And if you add the mind-numbing complexity of modern finance does the economy still bottom out?
 
 
0 # B. Traven 2012-05-20 18:21
This article is a cheap shot. It uses numbers--$60 to $200 trillion--that the author of the referenced article, Haldane, warns against accepting too literally with statements like: "In the real world, there is considerable uncertainty about both costs and benefits" and "a significant over-statement" as well as "no more than illustrative". It is almost as if Urie didn't read the whole article, he just cherry-picked the parts he liked.

Then Urie starts ranting about pollution and capitalism in general, the "suicide machine" as he puts it. He fails to acknowledge the unprecedented prosperity, "net of externalized costs", enjoyed by millions of Americans from '45 to '70 or so. Perhaps he should ask his parents or maybe his grandparents if the system was working for them in 1949 or '52 or '57 or '62. Maybe ask his great-great-gra ndmother if she wants to go back to washing clothes in a tub and hauling water and wood every day.

The post-civil war era from about 1880 to 1920 is another period worth examining. In both eras legislation, first TR's Progressive trust-busting then FDR's New Deal righted systemic wrongs and led to long periods of progress and prosperity.

Granted things are a mess right now but instead of raving about the all the stuff that's wrong--and there's plenty to go around--we all might be better off figuring out what we have done right in the past and how we can do it again.
 
 
+3 # Chuck H. 2012-05-20 22:34
As I have stated before: Big business can't be trusted and must be regulated.
 
 
+3 # 666 2012-05-21 03:33
The problem is not so much "capitalism" - there really isn't any such beast because the big concerns don't have any legal or financial responsibility as in true free-market capitalism. The problem is "inverted socialism" (which is a more accurate name: the people contribute to the benefit of the few).
You don't have to invert this completely to fix many of the problems (although I'd prefer real socialism). You can neutralize the "big sucking sound" from above. Nationalize the banks and all businesses that are too big to fail. Invest in things that are for the common good (jobs, green energy etc) not in the BS in which the world's bank now invest (it really is BS). Get business and big money out of politics.
-- oops, there I go fantasizing again...
 

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