The Eurozone crisis

Earlier this week, a series of remarkable statements by an American trader turned a routine segment of BBC television news into a compelling glimpse of the greed and fear that are commonly said to drive the world’s stock markets. Alessio Rastani, the trader, dispensed with the usual niceties and bluntly warned the newsreader interviewing him, that a political solution to the Greek debt crisis – and related crises in Spain and Italy – wasn’t going to work. “The markets don’t buy this plan,” said Mr. Rastani, cheerfully. When pressed as to why they didn’t he noted that “it doesn’t really matter … You see, I’m a trader, if I see an opportunity to make money, I go with that.”

Mr Rastani then noted that major hedge funds were preparing financial strategies to profit from the ruin of the euro. Unperturbed by the imminent impoverishment of millions, he observed that traders like him “go to bed dreaming of another recession“ because they know how to make money from falling markets. He memorably advised the speechless newsreader that “governments don’t run the world, Goldman Sachs runs the world” – a line bound to echo loudly through the media during the next few months (clips of the interview have already attracted nearly 2 million views on YouTube in just a few days).

Despite his plainspoken manner and apparent ignorance of the details, Mr Rastani is essentially correct about the European Union’s response to the crisis. The global financial system is relentless when investors lose confidence in a government, a currency or an economy. The dot-com bust, the Asian financial crisis and the recent crises in America have shown that no group of politicians, however powerful, can reverse a loss of confidence in the short term. Faced with Greece’s alarming levels of debt – currently 150% of its GDP – Europe’s bureaucrats have dithered, with predictable consequences.

The present situation is full of Catch-22 decisions.  If Greece withdraws from the euro and returns to a heavily devalued drachma its debts will be harder to pay – and other heavily indebted countries, a group sometimes referred to as PIIGS (Portugal, Italy, Ireland, Greece and Spain), will immediately face a dangerous loss of market confidence. If the European Central Bank stands behind the debts – which, given the size of sovereign debt in Spain and Italy alone, will have to be several times larger than the current emergency provision of €400 billion – then the ECB, in turn, will have to find a larger institution that can secure such a large undertaking. As the United States has only just narrowly avoided its own debt crisis – due mostly, it must be said, to the Obama administration’s lack of political foresight – it will take some  persuading before it is willing to assume this role, or to help find others who can.

The neoliberal doctrines which inform Mr Rastani’s view of the world have been discredited by decades of unregulated markets that lurch from one crisis to the next, and yet the ideological underpinnings of neoliberalism have remained strangely intact. It is no accident, for instance, that much of the Greek debt crisis can be traced to an unregulated financial derivative – interest rate swaps – that Goldman Sachs persuaded Greek politicians to adopt just a few years ago. These products, much like the related financial products that beguiled so many American investors, deferred debts long enough for the US banks to rack up large commissions and make a clean getaway. Not content that their exotic financial instruments have contributed to the disappearance of millions of pensions and life-savings, the US investment banks and hedge funds are now girding their loins, as Mr Rastani points out, for another round of easy profits from the ruin of those who took their bad advice. In other words, Goldman Sachs and its ilk can be said to ‘run the world’ – in a very limited and despairing sense – but only because the politicians who should be in charge have surrendered their responsibilities. Eventually, perhaps, these politicians will resume these duties, but if the current bureaucratic wrangling and pusillanimity in Europe and America are any indication of the future, probably not for quite some time.

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