Faculty of law blogs / UNIVERSITY OF OXFORD

Democratic Illusion and Capitalist Cynicism


Jacques Attali
First head of the European Bank for Reconstruction and Development, Professor of Economics at the University Paris-Dauphine and Ecole Polytechnique


Time to read

3 Minutes

At a time when increasingly populist leaders rule over a substantial part of the planet, in the rare places where they do not, some citizens are under the illusion that they may regain control over their destiny from some of the true masters of the universe. Those are neither politicians nor, contrary to popular belief, tech giants, but rather, as has been the case for millennia, financiers who continue to run the planet according to their whims.

Among these financiers, many 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 running socially and ecologically positive projects. In this scenario, finance serves the betterment of the world.

However, much less scrupulous and harmful financiers use these savings for their personal gain by engaging in speculative transactions, all the more dangerous since we have not been able to put in place adequate control mechanisms to monitor them.

Historically, such situations have occurred many times. And when they reach their peak, they always lead to a crisis, whose burden is not ultimately supported by those who provoked it, but mainly by low-income workers, who trusted these untrustworthy intermediaries and cynical financial institutions. 

And now it has started all over again: who would have believed that we could one day repeat the mistakes of 1929 and those of 2007? That is, nonetheless, currently happening before our eyes.

In 2007, unscrupulous American bankers convinced poor and uninformed employees that it was not necessary to ask for a wage increase; rather, it was sufficient to borrow a lot in order to buy a house, and somehow reimburse the loan thanks to the increased value of real estate. We know what happened next: these so-called subprime loans were packaged, transformed in collateral debt obligations (‘CDOs’) through securitisation and then disseminated in the entire global financial system, which took several years to understand that the expected capital gains would not come to fruition and that these transactions would only make the lenders richer and ruin the borrowers.

Today, everything has started over again. However, this time, it is not only low-income workers 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, borrowing  to cover their losses, while hoping for high returns. However, these companies will only be able to repay these loans if their value goes far beyond what is reasonable to expect. 

Banks and other US financial institutions have lent money to these risky companies, and subsequently taken these loans off their books, securitizing them and reselling them through the global financial system, this time under the so-called guise of collateralized loan obligations (‘CLOs’). While both CDOs and CLOs are asset-backed securities, CLOs are more specifically made of these leveraged loans; and as was the case ten years ago, rating agencies have blessed these products with high ratings, claiming they are safe, while in reality they are not.

The same causes produce the same effects; a new crisis looms around: these loans will not be repaid, because the expected increase in the value of the stock markets will not take place.

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 of 1.3 trillion in September 2018, 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 were of poor quality, while in 2007 this 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 of the ‘shadow banking’ sector, whose importance since 2007 has only increased. 

The disaster can only be averted if central banks, similar to what they previously did, but this time probably at a much larger scale, buy back all the debts, which will inflate their balance sheets, subsequently laying the ground for a complete loss 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 from financial turmoil by closing our borders as to think that we could overcome climate change by relying only on ourselves.

To solve these problems, companies, as well as their shareholders and their bankers, should agree not to look for outstanding profitability, and settle for living at the same pace as other humans. Some will object this profitability is justified by the scale of the innovations that companies implement. This is wrong: profit is not the engine of innovation; it is the consequence.

In these strange times, the most vulnerable citizens are rightly asking for their most pressing problems and their most local concerns to be addressed first, while nothing would be more important, in their own interest, than dealing with long-term issues and global risks.

Those who will figure out how to reconcile both challenges will become true statesmen. We are sorely lacking such leaders today. 

Jacques Attali was the first head of the European Bank for Reconstruction and Development. A Professor of Economics at the University Paris-Dauphine and the Ecole Polytechnique, he is the author of more than 80 books, translated in 21 languages. He served as a counsellor to French President François Mitterrand, and led the Committee on the growth of French Economy under President Nicolas Sarkozy. 

A version of this post first appeared on the blog l’Express, in January 2019. 


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