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RUSSIA:THE POLAR GRAB PAGE 8
BANQUE D’ IM AGES,PARIS
HERVÉÉ DI ROSA – Guns and ammunition (1992) A
SUBPRIMES, NINJA LOANS, DERIVATIVES AND OTHER FINANCIAL FANTASIES High finance – a game of risk
Could the sales of houses and apartments in the US to people who never really had the money to afford them severely damage the whole world’s economy? It’s feasible.The world’s vulnerability to localised greed is a major by-product of globalisation
Up in arms
United States armaments are pouring into the Middle East. Secretary of State Condoleezza Rice announced on 2 August that deliveries over the next 10 years will reach $62bn. They will go to Bush’s allies in the region: Saudi Arabia, Egypt, Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates. In case Israel is worried about Saudi Arabia receiving consignments of sensitive material, on 15 August the US increased military aid to Tel Aviv by almost 25%, to $30bn over a decade (1). All to swell the profits of the big three – Boeing, Lockheed Martin and Raytheon – and probably their contributions to the next election campaign. On 7 December 2006 a UN General Assembly resolution adopted by 153 states authorised preparatory work on a treaty to control transfers of conventional weapons not previously subject to international rules. Twenty-four countries including China, Russia, India, Iran, Israel and Pakistan abstained. Only one, the US, voted against. The EU Council openly supported the resolution. About the same time, France signed substantial deals with Libya: a $228m contract for the purchase of Milan anti-tank missiles (with which 41 countries’ forces are already equipped) from MBDA (2), and a $173m contract for a Tetra radio communications system from EADS. President Nicolas Sarkozy protested his innocence: “Am I to be blamed for winning contracts? Creating work for French firms?” (3). Not necessarily. But he is certainly to blame for the secrecy with which these lethal deals were completed in circumstances over which the elected representatives of France had no control, and for maintaining the dangerous dynamics of war. According to a statement issued by the French defence procurement agency (Dééléégation géénéérale pour l’armement) on 18 September 2006, France will export $8bn worth of arms in 2007, compared with $4.6bn in 2004. Members of the EU are required in principle to
comply with a code of conduct that prohibits them from fuelling existing conflicts. But productivity increases mean that few modern weapons are now produced in one place. So European undertakings, like EADS, and US companies supply parts and technology for the development of the new Chinese Z-10 attack helicopter without knowing anything about the export policy of China, which has already supplied Sudan with military equipment (4). Provoked by US dealings in the Middle East, Syria and Iran may turn to China or Russia, which are both now a force in the market. Niger is worried about France’s “gifts” to Libya – which has recently claimed about 30,000 square km of oil- and uranium-rich Niger territory. The White House favourite, Israel, is no longer content to import and is now the number one supplier of arms to Colombia. And Colombia’s firepower, combined with US hostility, is a source of concern to Venezuela, which is turning to Russia for help in modernising its armaments. Other suppliers are emerging: India, South Korea, South Africa. The sector has never seen so much activity. By the end of 2006, expenditure on military equipment had reached an unprecedented $1,058.9bn (5). And the moral? There is no moral. Yet the Pentagon has lost track of 110,000 AK-47 rifles and 80,000 pistols (plus 115,000 helmets and 135,000 items of body armour) supplied to the Iraqi government in 2004 and 2005 (6). These weapons may have ended up in the hands of insurgents and some are probably being used against US forces. MAURICE LEMOINE TRANSLATED BY BARBARA WILSON
(1) AFP, 16 August 2007. (2) Joint venture by EADS (37.5%), Italian arms firm Finmeccanica (25%) and Britain’s BAE Systems (37.5%). (3) AFP, 5 August 2007. (4) Control Arms campaign, jointly run by Amnesty International, Oxfam and the International Action Network on Small Arms. http://controlarms.org/ (5) Ibid. (6) The Washington Post , 6 August 2007.
INSIDE THIS ISSUE
How the myth of Bin Laden’s riches came into being page 3
Turkey comes to terms with its first post-Islamist president page 4
Will the West be the ultimate victim of globalisation? page 5
Critics of Israel’s policies are branded as anti-semitic in the US page 6
The cost to the Arab world of the creation of Israel page 7
How American universities are closing the door on the poor page 10
Caught between two cultures: France’s Moroccans page 12
Sarkozy’s dismaying and outdated vision of Africa page 16
BY FRÉÉDÉÉRIC LORDON
Two centuries after Hegel deplored the chronic failure of states to learn the lessons of history, financial capital seems to be caught in a similar loop, condemned to repeat the same errors, trapped in a recurring crisis. The instruments involved may be new but the current crisis on the credit markets has enormous potential for disaster, and offers another reason to re-examine the “benefits” of capital market liberalisation. There is something of a religious cult about finance. It sees itself as reality and insists that businesses justify themselves according to the standards of financial reporting, by their quarterly results and longer-term performances. Yet it remains stupidly ignorant of what its own recent history teaches. Financial liberalisation has a mixed record. Since it began, there has rarely been more than three years without a serious incident, usually of historic significance. After the 1987 stock markets crash (Black Monday) came the junk bonds scandal and the Savings and Loans crisis, both in 1990, and the 1994 US bonds crash. A financial crisis started in the Far East in 1997 (Thailand, Korea, Hong Kong), before spreading in 1998 to Russia and Brazil. After 2001 the internet bubble burst. Globalisation, according to a devotee, PierreAntoine Delhommais, is “a blessing, but an erratic one” (1). He is astonished by its ability to bounce back, stronger than ever, from potentially fatal disasters. Of course he overlooks the fact that every time the financial markets go wild, ordinary workers have to pick up the tab. The collapse of the markets hits the banks, then has a knock-on effect on credit, investment, growth and employment. Maybe he would like to see his own newspaper taken over by a hard-nosed investment fund. First-hand experience of downsizing might make him more sensitive to the consequences of the financial world’s practices. Maybe the knocks he suffered from globalisation’s erratic progress might outweigh its blessings. The current crisis in the US credit market is an ideal opportunity to examine the fatal consequences of unregulated speculation. We can observe distinct stages leading from unfettered speculation to catastrophic collapse and central bank intervention.
Ponzi market tendencies
The best account of the blindness to disaster that characterises the interlinked finance markets was given by Hyman Minsky (2). He examined the activities of Charles Ponzi, a speculator during the
Fréédééric Lordon is an economist and author of Et la vertu sauvera le monde...Aprèès la debacle financièère,le salut par l’ééthique? (Raisons d’agir,Paris,2003)
1920s, who separated suckers from their savings by promising incredible returns. Ponzi had no assets and rewarded his initial investors not with the dividends that were never there, but with the capital paid in by subsequent victims. The sustainability of the edifice depended on sustaining the flow of new participants. Apart from this fraudulent element, all bubbles that depend upon a constant inflow of liquidity to sustain a rising market and the illusion that everybody is a winner, use a similar mechanism. The trick is to keep recruiting new investors; and once the initiates have signed up, more ordinary, and less astute, punters are enlisted in greater and greater numbers. For the US property market to keep growing (ideally for ever), more households have to be pressganged into mortgages. The appeal of the US property dream made it easy to enlist them, particularly since households damaged by the bursting of the internet bubble were looking for fresh investments. But the reservoir of healthy borrowers was quickly exhausted and brokers began to look further afield for recruits to sustain the market. Problematic borrowers were pronounced fit. House prices exploded. Borrowers and brokers agreed that in the event of default the property could be sold, yielding a profit for borrowers and commission for brokers. They had faith in the indefinite expansion of the market: everyone was fit to borrow. The floodgates of credit burst open, feeding a speculative rise that seemed to justify the process. The result was subprime mortgages: loans to aspiring owners with no credit record or creditworthiness, typified by “ninja” loans (no income, no job or asset).
Inadequate risk evaluation
Everyone assumes that the financial industry has the reserves and expertise to handle risks. It certainly isn’t short of ingenuity. It has a secret weapon: derivatives. The problem with any credit, particularly a risky one, is that it stays on the lender’s books until it ends well or badly. But in the early 1990s banks realised that they could merge different credits into a line of negotiable bonds. The major advantage of this process, known as securitisation, lay in the fact that these securities could be sold in bundles to enthusiastic (institutional) investors, and risky loans could be wiped off the balance sheets of the issuing banks. But why were investors so keen to buy something that banks were desperate to get rid of? Partly because they acquired them in smaller quantities; but mainly because the bonds were negotiable and could be sold on. The line of securities derived from the original
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