BLOWING BUBBLES

“When we hear debates about Ireland’s high-cost base and an alleged squeeze on profits, let’s remember – it has little to do with wages.”

Unite’s report into Irish wages and profits (found via Lenin’s Tomb) busts the myth that economic growth is being hampered by high wages. In fact, Irish companies make around €46,000 of profit annually out of each employee. The growth of profits has recently outstripped wage growth in the non-financial sector by more than 2:1, in the banking sector by 2.5:1, and in the business sector by nearly 3:1. The transport and communications sector has experienced "extraordinary profit growth", outstripping wage growth by nearly sevenfold.

Although British firms fare less well, they still squeeze an average of £18,000 out of each worker – that’s not far off the average annual salary in the UK.

Clearly profits are achieved by paying workers far less than the value they create. But, as Costas Lapavitsas described at Marxism on Saturday, modern capitalism exploits workers twice over. As a result of stagnating wages during the last decade, many people cannot afford to buy consumer goods from their salaried income alone (the privatisation of public services means people often cannot afford even the basics). But a neoliberal economy requires consumers to buy commodities with gusto (witness Bush’s exhortation to a traumatised public after 9/11 to “keep spending”). The gap between income and expenditure has therefore been filled by credit – lots of it.

Financial institutions have made their profits by selling individuals credit and enabling them to buy assets. The fees and interest payments associated with these transactions have provided banks and mortgage companies with their profits. But in recent years (since around 2001), banks have increasingly sold loans and mortgages on quickly to other organisations, who buy them using cheap credit. Because the banks do not hold on for the loans for long, there is less interest in assessing individuals’ credit-worthiness. This murly, barely-intelligible circulatory system has come back to bite the financial industry.

Financial institutions would use cheap credit to buy new securities. Still other financial institutions would combine several of these securities to create even more complex, “synthetic” Collateralised Debt Obligations, which give their holders the right to interest accruing on the earlier securities, and so on. In this baroque and opaque world, fuelled by cheap credit, it did not take long before just about all the major financial institutions across the world found themselves holding securities that contained bits of subprime mortgages.

What was originally a small sickness within the US economy grew enormously because of the way capitalist credit works. Since it has spread so widely—assets being created on the back of other assets that ultimately go back to the subprime market—the valuation of bank assets, and ultimately bank solvency, has also become deeply problematic.

The sub-prime crisis will hurt the financiers, but it will hurt the average or low earner more. Unless somebody somewhere can create another bubble to absorb the exploding property bubble, it is likely that the phrase “negative equity” will return to our lexicon before too long. Millions and millions of people who were persuaded to buy too much cheap credit will lose many of their assets. We should feel sorrier for these people than for the City boys and girls who will fall flat on their arses as a result of moronic decision.

But the current crisis is not the result of individual or corporate errors as such. It is the fault of the system – neoliberalism, of course, but the capitalism structure itself. Capitalism has evolved so that a small number of massive global corporations can invest using their own retained profits, or other forms of loans where necessary. Now that the banks have been left to make their profits from individuals, they have, as Lapavitsas points out, “an almost inbuilt incentive to create bubbles.” The generation of profits from the spectral world of finance, rather than from direct production and accumulation, is a dangerous game whose consequences we all may suffer.