For the last several months, headlines about the global financial crisis have regularly made the front pages of international newspapers. Over this period, Europe and the US have come to realise that corporations are facing the worst economic crisis since the 1929 crash. In South Africa, however, articles on the global crisis have tended to be relegated to the back pages of the press. This is because for the last 17 months economic journalists and analysts, including the Reserve Bank Governor and the Finance Minister, have assured the South African public that our country will remain largely unaffected by the crisis. This we were told was because South African banks were not exposed to the US sub-prime loan market.1 Indeed, in the mist of the crisis, South African mainstream economic analysts have simply continued to drum on about the supposed innate virtue of unfettered free market fundamentalism. It is this unflinching faith in the ‘free’ market that has totally blinded them to the reality that South Africa won’t remain unaffected. The reality is that every single economy in the world will be affected in some way or another. This is due to the fact that economies of every single country are now interconnected — through the spread of neo-liberal globalisation. Linked to this, all economies in the world, including South Africa’s, have been restructured through a process that has become known as financialisation. It is the financialisation of the global economy that has made the current global crisis possible, and it is the financialisation of the South African economy that makes it almost impossible for our country to escape the fallout of the current global crisis.
Financialisation and the Current Crisis
The origins of the current financial crisis can be traced back to the global capitalist crisis that erupted in the late 1970s. It was during this period that the post-war boom started to come to an end and the global economy began to stagnate. With this, manufacturing and service companies began to experience declining profit rates as their markets shrank and their capacity far outstripped demand for their products. By the late 1970s, therefore, it was becoming less and less profitable for companies to re-invest in manufacturing and the service sector.2 As a result, companies started looking for new ways of making profits, and states assisted them by deregulating the financial and insurance sectors along with liberalising exchange controls. Once the financial sector had been deregulated across the globe, first in the North and then through Structural Adjustment Programmes in the South, companies could speculate on any stock market, bond or currency in the world.3 This provided them with new investment opportunities and a more profitable outlet for their capital.
As part of the deregulation process, banks, pension fund companies and mutual funds from across the world were also allowed to begin speculating on currencies, bonds and shares. With this massive expansion of the financial markets, including in South Africa, the value of a company’s stock became far more important than in the past. Companies wanted their shares to be valued higher to attract investors, like banks and pension funds. In the case of South Africa, our largest companies, such as AngloAmerican and Old Mutual, shifted their primary listings to the London Stock Exchange. They did this to raise the prices of their shares through becoming part of the Financial Times Stock Exchange (FTSE) 100, in which international tracker funds automatically invest.4
To boost share values, most of the biggest companies also borrowed massive amounts of money to buy back their own shares and thereby inflate the prices. Even companies that were traditionally manufacturers restructured their operations to become partial investment vehicles and often borrowed colossal amounts of capital to speculate on financial markets and in real estate. They would then use the money made on these investments to cover the repayments on their loans and make a profit. Thus, capitalism became increasingly dependent on the credit system to escape the worst effects of stagnation in the ‘real’ productive economy.5 The manner in which corporate executives are remunerated has also changed since the 1970s. Most executives started to receive payments in share options, meaning that they also acquired an interest in boosting share prices. By the 1990s, the value of a company’s shares became more important than the actual profit prospects of the company.6 With this, the financial sector of the economy became dominant over the productive sector, and the two sectors became disconnected. This meant that the prices of stocks and bonds were, and are, set independently through speculation and not through their real underlying value, which has made the system volatile. This whole process has become known as financialisation.7
With financialisation, manufacturing companies — including those in South Africa — also became involved in providing loans to consumers to purchase their goods. For example, most of General Motors’ profits derive from loans made to consumers at high interest rates to purchase the cars they produce. Moreover, the financialisation of the economy has created new types of consumer credit in the form of credit cards, hire purchase schemes and sub-prime loans. To continue to maintain their standard of living, the working poor, who have not received real wage increases since the 1970s, began to rely more and more on these forms of credit. This saw personal debt balloon in countries like the US and South Africa.8 With money pouring into the financial markets, these markets also responded by expanding their capacity, creating new kinds of financial instruments for investors to speculate on. These new financial instruments included futures, options, and importantly for the current financial crisis, credit derivatives.9
Financialisation Increases the Frequency of Crises
Speculators have made massive profits out of the financialisation of the economy. However, financialisation has increased the frequency of economic bubbles and crises.10 There have been over 100 economic crises in different parts of the world, including in South Africa, since financialisation began. The last major crisis, before the current one, erupted on Wall Street between 1999 and 2002 and was linked to the bursting of the technology bubble during which over $ 7 trillion was lost. To overcome that crisis, interests rates were lowered in the US so that consumers would spend, the economy would be stimulated and the crisis displaced. People and speculators used these lower interest rates to borrow large sums of money to speculate on, amongst other things, real estate. Homeowners also used the lower interest rates to borrow against the value of their homes to purchase a wide array of consumer goods. In a bid to cash in on this, banks, corporations and mortgage lenders provided loans to all and sundry — loans were even provided to individuals with appalling credit records.11
As part of the financialisation process, and the creation of new investment instruments, the corporations that were involved in making these loans began pooling them, along with corporate and credit card debts, into credit derivatives, such as Collaterised Debt Obligations (CDOs). These corporations then sold these credit derivatives onto other companies. The idea behind this was to offer some protection to the companies that were making these loans. Other banks and speculators bought these credit derivatives. These banks and speculators received cash flows and interest payments from the derivatives they bought, but they also had to accept the risk if the debt — which was bundled into credit derivatives — was not paid back.12 As long as people and companies paid their debt, the holders of these credit derivatives made massive amounts of money: in 2007, the derivatives market was estimated to be worth as much as $ 180 trillion.13 Insurance companies, like AIG, also became involved in the credit derivatives market by offering insurance against the non-payment of debt that backed up these derivatives. Again, as long as people and companies paid their debt, insurance corporations such as AIG, too, got large profits14.
In 2004, the seed was sown that would lead to the unravelling of the credit derivatives market and the system based on it. In that year, the US government started raising interest rates and continued to do so for the next two years. The low interest rates that had been used to lure people into taking out sub-prime loans were also deliberately and drastically increased by the companies involved in making these loans.15 The result was that, by 2006, millions and millions of people started to find that they could no longer pay their debts back — the debts that had given credit derivatives their ‘value’. Companies like Lehman Brothers, Citibank, Morgan Stanley, Fanny Mae, Freddie Mac, Northern Rock and Bear Stearns — which had been speculating on these derivatives — suddenly found that the value of these plummeted, and they were burdened with the bad debts that were part and parcel of these derivatives. The result so far has been that over 80 mortgage lenders,16 numerous hedge funds17 and many municipalities (that were also speculating on the derivatives market) went bankrupt, along with some of the biggest investment banks in the world. Insurance companies that, like AIG, offered insurance against the non-payment of the debt — which been bundled into derivatives — also started to experience thousands of claims from speculators that were holding these derivatives. AIG simply did not have the money to pay all of these claims, and it too went bankrupt.18 With so many companies holding credit derivatives, which contained bad debts, banks became scared of lending for fear that these new loans would not be re-paid if the companies borrowing went bankrupt. Because of this, credit began to become scarce, which created a real possibility that the global financial system could completely collapse.19 All of this has also led to massive volatility on international stock markets — in early October the Wall Street stock market plunged by 25% in one week.
Governments Have Stepped In to Save the Rich
Various governments around the world have taken drastic measures to try and address the current financial crisis and protect the interests of the rich. The US government has partially or fully nationalised most of its banks and insurance companies, including Fannie Mae, Freddie Mac and AIG, in order to save them from collapse. Other governments, such as the UK and Iceland, have also been nationalising banks to save them. The fact that governments, which for years promoted the ‘free’ market and the privatisation of services, have resorted to nationalising banks highlights the extent of the crisis. The problem with these nationalisations, however, is that they are neither progressive nor aimed at benefiting the poor. Rather, governments have used public money to take over these banks, socializing their debts. In this way, vast amounts of money have been spent to protect the rich. Since September last year, the US, the UK, Germany and Japan have been regularly pumping hundreds of billions of dollars into stock and money markets to keep private companies afloat. More recently, the US and UK governments have started buying the bad debts and credit derivatives that banks and investment companies have in order to save them. In September and October this year, the US made $700 billion available to buy these bad debts; while the UK made almost $1 trillion available to do the exact same thing. Such vast amounts of money could have been used to provide the poor with free healthcare, education, food and other necessities; but governments have rather spent this money on bailing out an elite group of speculators. What we have been witnessing is a new form of capitalism in which wealth is being directed towards the rich even more ruthlessly than under neo-liberalism. In the coming years, it will be the poor who are going to have to bear the brunt of this bailout for the rich.20 In fact, there is a very real possibility that many of the countries of the South, including South Africa, could see their entire economies collapse because of the fallout of the financial crisis in the US and Europe.21
Why South Africa’s Economy Is in Danger
The fact that the South African economy has also undergone financialisation — and has become intertwined in the global economy — means that we will not escape the fallout of the current crisis. To begin with, some South African banks like Standard Bank have been involved in speculating on the global credit derivatives market and have incurred losses. One South African company, Old Mutual, lost over $1.4 billion when it found that its shares in Bear Sterns were almost worthless because of the current crisis.22 These losses alone, nonetheless, may not be enough to destroy these banks — which has led people, such as the Finance Minister, to falsely assure South Africans that we are safe. The problem, however, is that, aside from being exposed to the derivatives market, there are many more dangers linked to the current crisis which could cripple South Africa’s economy.
The real danger that South Africa faces, due to financial deregulation, is that many of the American and European corporations that have been hit hard by the financial crisis own substantial shares in the corporations that are listed on South Africa’s Johannesburg Stock Exchange (JSE). For example, the biggest traders on the JSE are JP Morgan, Merrill Lynch, Morgan Stanley, the Deutsche Bank, Citibank and the Northern Trust Company — all of which have been severely affected by the crisis.23 In fact, these companies together with other foreign investors own half of all JSE listed shares.24 These companies, reeling from the crisis, have been withdrawing their money rapidly from the JSE to move it into safer havens, such as gold and US Treasury Bonds. This has seen the average share value of JSE-listed companies decline by almost 30 percent since the beginning of the year25. The massive outflows of money have also caused the value of the South African currency to plummet. With so much money flowing out of its borders, the country could begin to have trouble covering the cost of its trade deficit. If this happens, and it is very likely it will, the country could experience a huge problem with its balance of payments. The end result of this could be a financial meltdown in South Africa. Indeed, numerous progressive analysts,26 along with the Bank for International Settlements,27 have warned that such a dire crisis in South Africa is a very real possibility. Of course, as in the US and Europe, it is the poor in South Africa who will be forced to bear its costs: already the ANC has indicated, like its counterparts in the North, that it would give a blank cheque to bail out South African banks and corporations — and their foreign shareholders — should a crisis strike.28
1 Nasreen Seria, “South African Banks ‘Insulated’ from Global Crisis,” Bloomberg, 18 September 2008.
3 William K. Tabb, “Four Crises of the Contemporary World Capitalist System,” Monthly Review 60.5 (October 2008).
4 Padraig Carmondy, “Between Globalisation and (Post) Apartheid: the Political Economy of Restructuring in South Africa,” Journal of Southern African Studies 28.2 (June 2002): 255-269.
7 Foster, “The Financialization of Capital and the Crisis,” op. cit.
10 “Can the Financial Crisis Be Reversed? Interview of John Bellamy Foster for Página/12,” MRZine, 13October 2008.
11 Bello, op. cit.
12 Foster, “The Financialization of Capital and the Crisis,” op. cit.
14 Bello, op. cit.
15 Danny Schecter, “Subprime or Subcrime? Time To Investigate and Prosecute,” CommonDreams, 11 August 2007.
16 Benjamin Macfarlane, “United Kingdom: The Subprime Fallout-Local Difficulty Or Global Crisis? The Implications for English Litigators,” Mondaq, 11 December 2007.
21 Éric Toussaint, “Third World: Is Another Debt Crisis in the Offing?” MRZine, 18 September 2008.
26 Toussaint, op. cit.
Shawn Hattingh is a research and education officer at the International Labour Research and Information Group (ILRIG) in Cape Town.