Discourse – Financial Crisis of 2007–2008: A Brief Discussion (1 of 2)

This discourse offers a brief discussion on the financial crisis of 2007-2008. This discourse argues that the financial crisis was the consequence of the latest incarnation of capitalism that is prevalent under the neoliberal ideology and institution: Finance Capitalism. The transition towards finance capitalism has made what has inherently been an unstable economic system – capitalism – into an even more catastrophically unstable system due to inequality and its following consequences. In this regards, the crisis would then be argued as something that is inherently inevitable within the framework of the system due to its contradictory nature.

The Financial Crisis of 2007-2008 was nothing short of a catastrophic shock. The crisis has made one of the greatest [if not the greatest] global economic slump ever since the 1930s Great Depression (Smith, 2010). While more than some positions tend to compare the crisis to that of Japan’s in the 1990s, they tend to overlook the fact that while the crisis affected 17 percent of Japan’s Gross Domestic Production [GDP], the 2007-2008 Financial Crisis affected 70% of the United States’ GDP (Marazzi, 2011). The greatest representation of the utter disarray probably could be found in the statement of then Republican presidential candidate John McCain in which he asserted that the fundamental of the United States’ economy is strong. An assertion that was made in the midst of a calamity somewhat depicted the then strongly held notion: that the music would never stop. This was also clearly depicted in the responses following the catastrophe. Cries to “save the system” were pervasive as shown in the October 11 2008 edition of The Economist (Smith, 2010). The argument offered by this side of the spectrum revolves around the idea that we do not have any other system that could replace capitalism thus everybody must do what they can to “save” and “revive” the system.

When the dust settled, the damage was displayed onto the world. By the beginning of the 2009, stock markets in North America lost 30 up to 50 percent of its value due to tightening of credit, declining profit as well as the broken of investors’ confidence (Smith, 2010). Business fixed investment plummeted at the annual rate of 39.2 percent; fastest rate ever since the Second World War (Kotz, 2009). This would then obviously lead to a series of “how” and “why” questions. But the most disturbing of all the questions that was born out of the fray has something to do with the element of “when”: when will the same thing happen again? The capitalist system is no stranger to “hiccups” and crises (Kotz, 2009). Small scale crises were mostly blamed upon the usual business cycle; however the big ones are matters of great interest. It was argued by Kotz (2009) that severe structural crises risen due to the institutional type [of capitalism] that was prevalent within the said historical period. In this regards, if we were to look at the financial crisis as a severe structural crisis, then consequently we need to see the prevalence of finance capitalism due to neoliberal ideology and institution as the inherent cause of the crisis due to its own working. Simply put, this discourse’s main proposition is that the inherent contradiction within the finance capitalism that was created out of the neoliberal ideology and institution was the main cause of the crisis, which in a sense allowed the crisis to have a long way coming. In other words, it was not an accident. The discussion of the crisis in this discourse would then be framed within the concept of neoliberal institution and finance capitalism. The first section of this discourse would start with a brief chronological exposition of the 2007-2008 Financial Crisis. The second section would then proceed with the discussion of the crisis in the frame of finance capitalism and neoliberal institutions. Section number three would end with concluding remarks on the discussion.

1. The Chronology

The Crisis had its sign as far back as a 2006. Cues for trouble appeared as banks such as Commerzbank stopped building up its subprime position (Lewis, 2011). AIG also lost its confidence and ceased selling credit protection against the CDOs (Richard, 2010). However, the real trouble hit only after 2007 came. The first quarter of 2007 in the frame of the crisis, was characterized by the plunge in home sales (Amadeo, 2018).  It was mostly argued that the plunge was the steepest ever since 1989. United States’ 15^th largest subprime lender was $3.3 billion deep in debt and ended up filing for chapter 11 on February 5^th(Cox, 2008). The comments made by the then Federal Reserve chairman, Alan Greenspan about the coming of a recession set off a market tremor (CNN Money, 2006). It caused a major sell off in the stock market on the following day, February 27^th. However, other positions argued that the economy could still experience growth in 2007 as they believed that the stock market could not lose its value beyond what it was in 2007 (Amadeo, 2018).

February and March saw the collapse of the subprime industry. Several subprime lenders within the industry filed for chapter 11 one after another (Cox, 2008). The slump within the housing industry crept into the financial market due to the investment into the Mortgage Backed Security that was made by hedge funds. The lack of regulation by the government on hedge funds allowed no information on the magnitude of the loss that the mortgage default caused (Amadeo, 2018). The use of derivatives by these hedge funds also made the loss worse. By essence, derivatives allowed hedge funds to borrow money for the means of investment. This would cause the loss to be amplified were the market to go bad. By August, the Federal Reserves lowered the rate to 4.75 percent to support the shaky financial economy (Amadeo, 2018). Banks were hesitant to borrow from each other as they feared the spillover from the whole subprime fiasco. By September 2007, the LIBOR rate was a full point above the fed funds rate. This divergence between the LIBOR rate and the Federal Reserve’s rate spelled a sign of the incoming financial meltdown (Amadeo, 2018).

December showed no improvement in what was already a chaos. The Financial Service Authority warned that the credit crunch would only get worse; Fannie Mae faced capital issues as the housing market continued to deteriorate; and UBS announced $10 billion more in their write down due to their subprime holdings (Cox, 2008). As another attempt to restore a healthy level of liquidity within the financial market, the Fed created the Term Auction Facility [TAF]. This was designed to allow banks to get Fed funds by pledging all sorts of collateral (Cox, 2008). What were put on auction were fundamentally debts; so theoretically speaking, the bill would not have to be footed by the taxpayers. At the same time, Bear Sterns reported its first quarterly loss in 84 years at $854 million. The foreclosure rate also doubled in comparison to the previous year of 2006. However, lenders at the same time did not have the ability to refinance due to the plummeting house prices which led to the spiraling down of the chaos.

In March of 2008, the Feds began its bailouts (Cox, 2008). On March 11^th, the Fed announced that it would lend $200 billion in treasury notes for the means of bailing out bonds dealer. March 17^th was the day that the Fed held its first emergency meeting in thirty years. Guaranteeing the bad loans of Bear Stearns, it wanted JP Morgan to purchase Bear Stearns to prevent bankruptcy (Amadeo, 2018). The reasoning for this is that Bear Sterns had about $10 trillion in security within its books. Were they to go under, the global economy would be severely affected. Bear Stearns was acquired by JP Morgan at $2 per share, when 48 hours ago they cost $48 (Marazzi, 2011). In July, IndyMac Bank failed followed by the tragedy that happened in September of 2008: The fall of Lehman Brothers (Amadeo, 2018). The collapse sent shock towards the globe. This allowed the United States’ treasury bonds yield to fall even further. The Fixed Mortgage Rate however, remained high as the fear of bad mortgage loomed. Due to the collapse of Lehman Brothers, investors fled money market mutual funds (Amadeo, 2018). One Money Market Funds managed by Reserve Management Corporation actually finished a day at $97, signaling an economic distress(Cox, 2008). Some even argued that had the panic lasted several more weeks, the economy would have faced a total collapse.

As if those were not enough, the rejection by the United States’ House of Representative of the bailout bill sent the global economy to further downward spiral (Amadeo, 2018). The Dow Jones Industrial Average was down by 770 points, the most in any single day in history and the MSCI World Index fell by 6 percent in a day, the most since its creation. Global stock markets were in total fiasco despite interventions all the way up to October. However, those interventions prevented it from becoming a total depression due to some extent of restored liquidity (Amadeo, 2018).

[to be continued]