Britain’s crisis fuels warnings about the stability of the global financial system

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Media commentators and analysts increasingly feel that the financial crisis in the UK signifies the emergence of an inflection point in the operations of the global financial system.

In other words, to use the oft-used metaphor, it is the canary in the coal mine of the eruption of a crisis, suppressed for more than a decade and a half by the injection of trillions of dollars by central banks to financial markets.

The Bank of England has launched a temporary bond-buying program as it takes emergency action to prevent a “significant risk” to the UK’s financial stability. Franck Augstein [AP Photo/Frank Augstein]

Events in the UK, involving a £65billion emergency intervention by the Bank of England last week, doled out in daily injections of £5billion until October 14 to halt a collapse of the bond market, are an example.

The crisis has focused on pension funds. In the past, these funds were able to meet their liabilities by investing in long-term government bonds of 10 and 30 year terms, known as gilts, in the belief that they could to get an adequate rate of return. But the launch of quantitative easing after 2008, combined with central bank interest rate cuts, caused bond yields to fall to historic lows.

To meet their obligations under conditions where their traditional sources of income were drying up, pension funds had to invest in riskier assets such as corporate credit, stocks and real estate in order to meet their liabilities. .

They have sought to hedge their risks associated with these investments through financial market transactions using derivatives. They borrowed funds for this purpose using their holdings of government bonds, considered the safest assets, as collateral.

However, bond prices have plunged following the Conservative government’s mini budget on September 23, which cut taxes for businesses and the super-rich by £45billion, funded by an increase in public debt of £72 billion. The value of the collateral therefore fell and pension funds faced margin calls from their lenders.

This led to further bond selling as funds sought to meet these demands, deepening the fall in bond prices and driving demands for more collateral. If this situation had continued, some 90% of pension funds, which hold £1.5 trillion in assets, could have been rendered insolvent.

Like all crises, this one had its own national forms. But there are concerns that ultimately it is the result of global processes.

The ultra-low interest rate regime of the past 15 years that has boosted stock markets is being reversed as central banks around the world, led by the US Fed, tighten monetary policy as they seek to suppress workers’ wage demands in the face of the highest inflation in four decades.

In a recent commentary on the British crisis, the wall street journal columnist James Mackintosh wrote that it sent shockwaves through world markets. It “provides a warning to governments around the world of the dangers of the new economic era we are entering”, expressed in Britain through a toxic mix of politics, inflation and higher interest rates.

He noted that while superlatives were often used in market reports, “the ructions” in the UK were “truly extraordinary”.

The Conservative government’s actions have had such a “significant effect given the broader context of soaring interest rates, high debt, dire communications and the erosion of the country’s institutional credibility”, most of these conditions applying “to a greater or lesser degree in developed countries”. world.”

“The most apocalyptic risk is that Britain will be just the first big victim of a rise [interest] rate,” he wrote, noting that, as had often happened in the past, it was problems in an area considered safe, in this case pension funds, that caused difficulties.

The Fed bases its program on the belief that higher interest rates can bring inflation to a halt, as happened in the class war launched under Fed Chairman Paul Volcker in the 1980s.

But like FinancialTimes columnist John Plender commented, “changes in financial structure since Volcker’s time point to impending financial instability.”

According to Plender, “the main role of the financial system is no longer to accept deposits and make loans but to refinance the debt that supports global growth and consumption” and “this complex system is increasingly dependent on weak guarantees”.

Another FT columnist, Robin Wigglesworth, noted that the pension fund measures were not a flashy hedge fund strategy, but “the financial market equivalent of doing your family taxes”.

He noted that “true cataclysmic financial meltdowns tend to involve investment strategies and financial stocks that everyone thought were boring”, raising the question of “what else could be lurking like this. in an “unlikely corner of the global financial system”.

In a recent comment on his Chartbook blog, discussing the “September 2022 bond market massacre,” economic historian Adam Tooze, author of a major study of the 2008 global financial crisis, began by noting that this is not It wasn’t just the UK that was under pressure.

“On the other side of the Atlantic, too, tremors are crossing the US Treasury markets, the foundation of the dollar system,” he wrote.

Tooze cited a recent Bloomberg report, based on data from JP Morgan, that “liquidity in the Treasury market is extremely low” as conditions resemble “those seen during the pandemic and post-crisis period. of Lehman”.

He said he wasn’t sure who had benefited from the Bank of England bailout, suggesting we were dealing with a system “torn by conflicts of interest”.

“Does it really make sense to perpetuate a system in which disastrous risks are built into the for-profit provision of basic financial products like pensions and mortgages?” He continued.

He concluded by observing that the crisis is not the result of “some metaphysical uncertainty”, but rather of a “contradictory, incoherent and dangerous profit-oriented system, which the status quo guarantees”.

But as a social democrat – he describes himself as a “left liberal” – Tooze essentially defends this status quo – the capitalist profit system. He regards it as the only viable form of economic organization, and therefore stops to draw the necessary consequences flowing from his own indictment of its operations.

This is because it would increase the need for his overthrow and the establishment of socialism – a prospect he abhors above all else. And so, it offers the vain prospect of some sort of reform.

The working class, however, must reject these bromides and, based on their own living situation, come up with their own independent solution to the crisis. In the face of the ongoing decay and disintegration of the capitalist economy – bringing a future of social and economic devastation, combined with the ever-increasing danger of war, the continued mass death inflicted by COVID and the disastrous effects of climate change – it must undertake the struggle for political power in order to pave the way for the reconstruction of the economy on socialist bases.

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Don F. Davis