When the scandal broke about a single trader running up £4.7 billion in losses for the French bank Société Général, the first response from financiers was shock because they thought Société Général was particularly well-regulated — “the gold standard”, one called it.
Now France’s finance minister says that “internal control procedures didn’t work”.
It is not a problem of Société Général. It is an endemic problem of capitalism, and especially of the highly “financialised” capitalism of the period since 1980.
For all that the apologists of capitalism will tell you that the system fosters creativity for the public good, actually it funnels the brightest, most energetic, and most imaginative - those who don’t end up designing ads for cars or toothpaste — into devising financial tricks which outsmart other financiers.
In a system that puts the race for profit before everything, every boom will spawn bubbles, scams, and frauds. Before the Great Crash of 1929 it was the Florida real-estate bubble, where prices on bits of swampland (some never to be developed) escalated so that land bought for $800,000 could within a year be resold for $4 million, and then crashed in 1926.
What post-1980 capitalism brings as new is that the bursting bubbles are more complicated and obscure.
According to the Financial Times, John Thain, the man brought in to put Merrill Lynch straight after it had to admit huge losses, told the World Economic Forum in Davos that “there is more trouble to come in the US mortgage market. The credit contraction is spreading across the world, and there are many more losses within the financial system to be revealed”.
No-one knows whether he is right. And the very fact that no-one knows tends to make the credit system freeze up even more.
That is why the US Federal Reserve bank has cut its official interest rate more sharply than at any time since the early 1980s, and to below the rate of inflation; and IMF chief Dominique Strauss-Kahn has thrown all IMF convention to the winds by calling on governments to spend more and tax less.
As Martin Wolf has pointed out in the Financial Times, if these measures succeed in softening the downturn in the US economy, it will only be by perpetuating the weird imbalances in today’s world economy — notably the gigantic US trade deficit — and making the structure, long-term, even more unstable.