Twilight of the investors

     A striking symptom of the unending global financial crisis (GFC) has been the announcement by Union Bank of Switzerland (UBS) on 30 October of 10,000 staff redundancies across its world-wide operations – almost 20 per cent of its existing personnel. In London, where some 3,000 of these lay-offs have occurred, the development has been made all the more dramatic by the fact that many of those affected only learned of their fate when they arrived at the office to find that their passes had been disabled and they were given a letter informing them of their suspension on full pay (pending termination) before being escorted off the premises by security staff. According to press reports the reason for this seemingly brutal procedure was the management’s fear that, should these individuals be allowed further access to their computer terminals they might feel they now had nothing to lose from engaging in reckless trading, either in the hope of making one last killing for themselves or else, out of spite, to saddle the bank with massive extra losses. Such worries seem all too understandable in the light of the current fraud trial of an ex-UBS London trader in connection with a loss of $2.3 billion allegedly resulting from his dealing, although the defendant claims his bets well above the defined risk limits were placed with the encouragement of his superiors.

     Nothing could better symbolise the terminal decadence of the financialised capitalist economy than this sordid episode. It demonstrates graphically both the climate of dishonesty and mistrust now pervading the investment banking industry and its utter abandonment of any notion that it exists to support economically viable productive investments in favour of a purely parasitic casino culture. While some might suggest that this tendency is somehow attributable to a spontaneous outbreak of moral decay – whether in the financial sector or more generally – such a claim would be no more plausible now than when it was used to explain the Enron and numerous other financial scandals that occurred before and after the bursting of the “dotcom” bubble over 10 years ago. Indeed that event can now be seen to have marked the ending of the prolonged global stock market boom that began in the early 1980s, as equity prices have been declining or stagnating ever since and in real (inflation-adjusted) terms now stand far below their peak in 2000.

     Rather what is now becoming inescapable is the ever greater impossibility of making sufficient returns on investment – as reflected in the level of operating profits relative to capital employed – to satisfy the competitive markets other than by reckless gambling, a requirement made inevitable by the classic cyclical implosion of the corporate sector under the weight of excess accumulated capital. This perception is reflected in a recent report in the Financial Times (8 November) that a number of City institutions have pronounced that the “cult of the equity” is dead or dying, claims that echo an earlier FT article by Samuel Brittan – The End of the Cult of the Equity (2005).

     This recognition is also mirrored in the declining share of equities in the total investment holdings of UK pension funds which, at under 40 per cent, is now below that of fixed interest securities (bonds) for the first time ever. This does not mean, it should be stressed, that bonds are viewed by the market as an attractive investment, but rather that they may be preferred by pension funds desperate for the higher yield offered by speculative, but correspondingly more risky, “junk” bonds – or else simply that bonds in general may be thought less likely to experience a sudden collapse in value such as that which affected equities in the 18 months to 2009, when the benchmark S&P 500 index fell by almost 60 per cent. However, given that the market price of corporate bonds is ultimately just as dependent on the value of the underlying assets as are equities, such a belief in their relative safety is almost certainly misplaced, as noted in yet another FT article (A false sense of security – 19 November). Likewise the high prices of many government bonds – and correspondingly low interest rates – can hardly be seen as sustainable when all the Western governments issuing them are essentially insolvent and can only maintain such market valuations by virtue of money printing and other blatant forms of manipulation.

     The implications of these developments are momentous, though little understood outside a rather small circle of the more clear-eyed market observers and investors – not least because of the huge vested interest in sustaining public belief in the continued viability of long-term investment in the market. The size and power of this vested interest has been growing over the last 60 years, ever since Wall Street (followed by the City of London) began to promote the idea of the benefits of saving through investment institutions such as mutual or pension funds. Its genesis, it should be noted, coincided with the post-World War II economic boom giving rise to unprecedentedly rapid sustained growth in the 1950s and 60s. Once this came to an end with the onset of the first global post-war recession in 1974-5 it might have been suspected that the “cult of the equity” would have a limited shelf life. By that time, however, the economies of the US and much of the industrialised world were already too closely tied to the fate of the overly powerful financial sector – on which the livelihoods of many millions had in any case come to depend – for there to be any question of calling this model into question. Instead it was determined, if only by default, that policy would be directed towards maintaining the value of financial securities and the buoyancy of financial markets at all costs.

     Over the subsequent four decades the constant refrain of official propaganda has been that prosperity would be revived – and reflected in steadily rising stock market values – if only appropriate policies of market liberalisation (including globalisation) were pursued, thus supposedly permitting renewed growth of investment and output (GDP). The fact that, despite the general implementation of such policies, the sustained recovery in growth has persistently failed to happen has been constantly glossed over by mainstream commentators as well as governments – even to the point of ignoring or denying the reality of a steady long-term decline in real global GDP growth rates since the 1970s. At the same time, as in previous world financial crises – such as that precipitated by the Wall Street Crash of 1929 – an increasingly dominant part has been played by speculative investment, which essentially means the buying and selling of existing assets rather than creating new productive capacity. Such activity – defined by defenders of the status quo as “wealth creation” but more aptly characterised by Lord Turner of the Financial Services Authority as “socially useless” – has been greatly facilitated by the great liberalisation of financial markets that has occurred since the 1980s. Indeed it was precisely thanks to this liberalisation – involving the removal of restrictions which had been put in place in the 1930s to prevent the very type of dangerous risk taking that had led to the Wall Street Crash – that the global stock market boom of 1982-2000 was able to happen in spite of persistent stagnation in output.

     Ignoring these growing symptoms of economic failure and systemic dysfunction since the 1970s, propagandists for the ruling élite, particularly under the Thatcher régime in Britain, have promoted the idea of “popular capitalism” and a “property-owning democracy”, concepts that were quite easy to sell politically in the 1980s as the sustained stock market boom was taking hold and belief in more state-centred ideologies was weakened – not least by the terminal failure of the Soviet model. However, since the start of the new century, which coincided with the end of the market boom, it has become more and more obvious that investing in financial securities of any kind offers no secure route to a prosperous retirement for anyone – all the more so as the world is faced with many years of global economic stagnation before its huge debts can be unwound or written off.

     The reality of bleak investment prospects was evidently grasped – even before the onset of the GFC in 2008 – by the Pensions Commission reporting to Britain’s Labour government in 2005 on how to resolve the mounting “pensions crisis”. For it was forced to recognise that the sacred promise of the private funded pensions industry – that it could guarantee an adequate level of retirement income to contributing individuals – was soon to become a thing of the past. Yet rather than drawing the obvious inference – that the model of funded pensions was always doomed to failure and was thus an idea whose time should never have come – the Commission felt politically compelled (in the interests of the City institutions) to pretend that people should still be encouraged to save for their retirement through funded schemes, albeit ones that would offer no guarantee of any level of pension. At the same time the Commission was forced to recognise that non-funded (pay-as-you-go) pension schemes such as the vast majority of occupational schemes in the public sector were inherently more viable than funded ones, although subsequently successive governments (egged on by the City and with little resistance from the unions) have done their best to undermine them.

     As the global outlook darkens further, both market players and the authorities are becoming ever more shameless and irresponsible in their efforts to avert systemic collapse by rigging markets – through “quantitative easing” (money printing by any other name), manipulating LIBOR, stock markets and energy and other commodity markets – or turning a blind eye to other forms of fraud (mis-selling of payment protection insurance and interest rate swaps). Yet this struggle to hide the reality of a generalised collapse in the market worth of corporate assets – and indeed of the entire capitalist profits system – is now increasingly revealed to be as futile as it is criminal. Hence, as investors become an endangered species, thousands more City traders may well already be wondering, as they leave their office in the evening, whether their passes will still work when they return the next day.

21 November 2012

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