In an era marked by leaders with increasingly populist tendencies leading a substantial part of the planet; and in the rare places where these types of leaders are not in power, there are citizens from every township in the universe who are basked in the illusion that it would be possible for them to regain control over their destiny from some of the true masters of the universe, (who are neither politicians nor, contrary to popular belief, tech giants, but rather financiers, and that has been the case for millennia) who continue to guide the planet according to their whims.
Among these financiers, there are many who work for the greater good; they place the savings entrusted to them, by those who do not know how to make the best use of it, in the hands of those who have projects that are socially and ecologically positive. In this type of scenario, finance is useful to the betterment of the world.
However, there are also others who are much less scrupulous and infinitely useless, even harmful, that use these savings for their personal gain, in speculative transactions, which are all the more dangerous because we have not been able to put in place control mechanisms for these types of transactions.
Historically, we have experienced this situation many times. And when this type of situation reaches its climax, it always ends with a crisis, of which the final victims are not the ones who provoked it, but the poor employees, who had trusted these untrustworthy intermediaries and the madly cynical financial institutions. Cynically crazy.
And now it has started again: Who would have believed that we could one day repeat the errors of 1929 and those of 2007? Nonetheless, it is what is happening.
In 2007, unscrupulous American bankers convinced poor and uninformed employees that it was not necessary to ask for a wage increase, but that it was rather sufficient to borrow a lot in order to buy a house and somehow reimburse the loan because of the increased value of the home, so they said. We know what happened next: these so-called subprime loans, were packaged and securitized as so-called collateral debt obligations (“CDOs”) and resold to the entire global financial system, which took several years to understand that the expected real estate capital gains would not come to fruition and that these transactions would only make a fortune for lenders and ruin the borrowers.
Today, everything has once again restarted, exactly in the same manner as before. However, this time, it is not only poor employees who are going into debt, (this time around, to buy a car or finance the education of their children), but also private unlisted US companies: they borrow in order to cover their losses, while hoping for crazy returns. However, these companies will be able to repay this money only if their value goes far beyond what is imaginable. Banks and other US financial institutions have issued these loans to these companies, and because these institutions know that these companies are very risky, they have subsequently gotten rid of these loans by taking it off their books, securitizing them and reselling them to the entire global financial system, this time under the so-called guise of collateralized loan obligations (“CLOs”). And as it was the case ten years ago, rating agencies have blessed these loans that they claim to be safe, but that are not.
Same causes, same effects; a new crisis awaits us: these loans will not be repaid, because the expected increase in the value of the stock markets will not happen.
Here are some figures: Half of these loans are issued with multiples greater than 5 and with variable interest rates, which makes them particularly dangerous; the total amount of these loans was already 1.3 trillion in September 2018, (the last available statistic), which is twice the amount of the subprime loans when the previous crisis happened. More than half of these loans are already securitized and resold worldwide. Furthermore, 61% of these loans are of poor quality, in 2007 that was figure was 55%. There is much less protection for lenders today than ten years ago. Finally, if the banking sector is better regulated today than ten years ago, the same cannot be said for the “shadow banking” sector, which is where everything is happening today.
The disaster can only be averted if central banks, similar to what it did previously but probably in a much more massive capacity this time, buy back all its debts, which will inflate their balance sheets, which would lay the ground for a complete collapse of confidence in the global financial system.
Madness, cynicism and speculation. The old recipes for the worst are here. It would be as illusory to believe that we could protect ourselves by closing the borders as it would be to think that we could overcome climate change by relying only on ourselves.
To solve these problems, companies, like their shareholders and their bankers, should agree not to look for outlandish profitability, and to settle for living at the same pace as other humans. Some will object and say that this profitability is justified by the scale of the innovations they implement; this is false: profit is not the engine of innovation; it is the consequence.
These are strange times, the most vulnerable citizens have rightly asked for their most pressing problems and their most local concerns to be addressed, while nothing would be more important, in their interest, than to deal with long-term issues and global risks.
Those who will figure out how to reconcile these challenges will become true statesmen. We are sorely lacking these types of statesmen today.