Losing Control

Unless you've been on Mars these last weeks, the unfolding international financial crisis centred on Wall Street can't have escaped your notice. Some of Wall Street's biggest names have disappeared, either having collapsed (such as Lehman Brothers) or having been pushed into commercial shotgun marriages (Bear Stearns bought by JPMorgan Chase, Merrill Lynch by Bank of America). The American taxpayer now owns the mortgage finance giants Fannie Mae and Freddie Mac, and early last week the U.S. Treasury stepped in to bail out and effectively nationalise American Insurance Group (AIG).

In the last day or so, after enjoying decades of being Wall Street darlings, Goldman Sachs and Morgan Stanley, the last of the Wall Street independent investment banks, have sought to become bank holding companies. Analysts have noted that this subjects the two institutions to far greater regulation and closer government supervision, but the banks' motive is to gain access to the full array of the U.S. Federal Reserve's lending facilities. Times are that tough.

The New York Times opined in a headline that "Goldman and Morgan Shift Marks End of Era in Finance". More bluntly, to paraphrase a a commentator I heard on CNBC today, it marks the impact point in a period in which Wall Street has enjoyed the profits and socialized its losses. The group picking up the tab for the U.S. Treasury's rescue package, which some estimates put at US$700 billion, is of course American taxpayers. (Central banks and Treasuries in other countries are mounting their own efforts, like those underway in Great Britain: these costs are not included and ultimately their taxpayers will foot the bill for their endeavours.)

To put this 700 billion dollar Wall Street rescue package into perspective, according to the International Institute for Strategic Studies' 2008 Military Balance, the U.S. National Defense Budget Authority request for this year was estimated to be 695 billion dollars, plus loose change of a few tens of millions. This included supplemental funding requests of almost 190 billion dollars for the so-called Global War on Terror (GWOT). (Incidentally, according to IISS, with the supplemental enacted as of May 2007, Congress had approved a total of around 610 billion dollars since 11 September 2001 - more than two-thirds of it spent in Iraq.) Although the figures are not neat, it's clear that we're not talking loose change here - either for a Wall Street bail out or the GWOT.

No doubt these expensive financial rescues are necessary under the circumstances, although it's by no means certain whether they'll actually serve to prevent the global financial meltdown, the prospect of which frightens governments and investors alike. Political and financial leaders, with the spectre of the Great Depression of the 1930s over their shoulders, are doing their best to soothe fragile investor confidence. And, of course, the public is worried too: in a globalized world anyone with a bank account, a job, a car loan or even a warranty on a toaster is stuck in this together.

Meanwhile, economists talk about the externalities of economic decisions. This sounds more abstract than it is. To quote that paragon of accuracy (it serves well here), Wikipedia:

"Standard economic theory implies that any voluntary exchange is mutually beneficial to both parties involved in the trade. This is because if either the buyer and the seller would not benefit from the trade, they would refuse it. An exchange, however, can result in additional effects on third parties. From the perspective of those affected, these effects may be negative (pollution from a factory), or positive (honey bees that pollinate the garden)."

Rising interest rates are an externality of recent aggregated economic decisions: positive if you have money in the bank (although inflation is rising too), but negative if you have a mortgage or other debts. Many people are finding this out the hard way, and an approaching backlash is palpable. I was in the UK last week, and the newspapers all contain increasing numbers of stories about fat-cat city boys, especially if they're getting their comeuppance in a falling property market or a courtroom. Some stories verged on the nasty, but underline the resentment growing about the allegedly greedy and amoral activities of those involved in high finance.

The fact is that such blatant moral hazard - in which an elite reap the majority of benefits from some activity, but others largely pay the price (or seem to) - is hardly limited to international finance. We have only to look to the international arms trade and its effects. The reality is that, in much of the world, many communities are suffering the effects - the externalities - of transactions of arms they weren't involved in. The effects on civilians of weapons like anti-personnel mines and unexploded cluster submunitions are cases in point. Another is the illicit trafficking in small arms and light weapons such as assault rifles. Many were supplied by the superpowers during the Cold War to their proxies in brushfire conflicts, but now these weapons slosh from insecure environment to insecure environment arming paramilitaries, violent insurgents and criminal gangs. The people who suffer from the presence and use of these weapons aren't just the ones who wield them, but ordinary people whose lives and livelihoods they threaten.

So spare a thought for those who endure such externalities and lend your support to ways to reduce their insecurity. Following the Wall Street crisis, governments and voters are going to be more wary (at least for a while) of unconstrained market activity as an end in itself. We should be similarly wary of the international arms trade in its current form: even when legal the longer term effects of the arms trade can be hard to predict, and can come back to haunt us. All the more reason for an Arms Trade Treaty, and continued implementation of the Programme of Action on curbing the illicit trade in small arms.

John Borrie


Reference

International Institute for Strategic Studies, The Military Balance 2008 (London: Routledge/IISS: February 2008).

Paul Rogers' book Losing Control: Global Security in the Twenty-first Century (2nd edn), (London: Pluto Press: 2002) explores and analyzes big themes such as the proliferation of weapons of mass destruction, the impact of human activity on the environment, paramilitaries and the growth of hypercapitalism and attendant inequality, poverty and insecurity. Paul's Open Democracy column is also well worth following.

Picture credit: 'Free Fall in the City' by cactusbones (8 January 2008) downloaded from Flickr.