The Ponzi mania: free markets, free trade, free ride?

The financial and economic crisis now upon us is by far the most menacing of the past century - even more so than the Great Depression of the 1930s. It is not just a “sub-prime” crisis; it is systemic - affecting the entire financial system. It is also global, affecting various countries in various ways but affecting them all, Australia included. In achieving a certain “globalisation”, we have been uniquely successful in globalising collapse, chaos and misery. It is a globalisation which, in our short-sighted negligence, we never envisaged.

In this crisis, Australia is no more than a subordinate, neo-colonial, financial and economic dependency. In essence, we have reverted to what we were before and during the Great Depression of the 1930s. Whitehall, Westminster and the Bank of England played the tune to which we jigged. Then, from 1945 to 1969, for the first time, we played our own tune of full employment and stable economic growth. Wild radicals like Minister Eddie Ward in the Curtin and Chifley Governments warned us to be wary of Wall Street.

The cynics might now say that Eddie was right. After 1969, we forgot his warning. Indeed, the Americans themselves forgot to guard against the chicaneries of Wall Street, where eternal vigilance should always be the watchword. They forgot what the mania of Wall Street can do to the reality of Main Street; and we shared their amnesia.

From 1969 and especially from 1971 when the United States cut the dollar link with gold, Australia surrendered any worthwhile independence in its economic and financial thinking. We swallowed American financial and economic formulae, whether we were academics or policymakers, industrial entrepreneurs, banks or providers of “financial services”.

We did not entirely switch off tunes played by Britain, the more so as Thatcher formed her slapstick band with Reagan to drum up support for “free” markets, “free” trade, privatisation, globalisation and the free flow of almost everything, including speculative capital in unqualified pursuit of private profit. Corporation and consumer greed marched in step towards global disaster.

Rational economics based on real investment, productivity and production died in favour of speculative and often Ponzi pretensions. The cowboy junk-bond merchants of the 1980s metamorphosed into respectable, mostly young, and usually idolised, financial wizards who “perfected” sophisticated, highly complex credit devices.

From the 1990s, these highly leveraged instruments took the form of derivatives, private-equity, hedge-fund and mortgage securities, abbreviated to CDOs, SIVs and the rest. Allied with “free” markets, deregulation and the uninhibited flow of all kinds of finance, those financial devices destroyed industries and the jobs that go with them. With casual indifference, they also destroyed the self-reliant working and middle classes until then typical of robust free-enterprise economies.

Theirs was not Schumpeter’s “creative destruction” but wholesale destruction of their own economies and, eventually, their own financial “system”. They destroyed personal savings and created massive indebtedness. They undermined the power and security of the United States itself as they “outsourced” real economic strength and stability to countries especially in Asia.

The Tigers, China and others grew into “powerhouses” whose creation, historically, would otherwise have taken them generations. Our eminently creditable aim of peaceful change through development of developing economies was distorted, largely through negligent inadvertence, into financial, economic and social self-destruction. Looming global collapse, with political and strategic uncertainties, are our inevitable legacy.

The speculative, Ponzi mania spread especially to Anglo-Saxon countries and to other developed countries in lesser degree. Australia took to “free” markets, “free” trade, free-floating currencies, deregulation, privatisation, globalisation, derivatives, hedge funds, private equity, wildcat mortgages and leverage-without-limit as a duck to water. Consumerism raged. Industry was gutted. Debts ballooned. The value of the currency fell at home and abroad. Despite low-cost imports, inflation flourished. In 2008, the Australian dollar can perhaps buy as much in real terms as five or ten cents did in 1969.

A situation in which real public and private investment was replaced by “ownership investment”, massive leverage and speculative finance, in which consumption grew and debts spread, could not persist; except so long as ever more money flooded in to support the insupportable. Once the flood slowed or stopped, a Ponzi-type collapse was inevitable.

But few saw it that way. Warren Buffet belatedly called derivatives weapons of mass destruction; but most saw the financial devices as belonging to a “new era”. They represented a “new paradigm”. Far from being a threat to stable growth in a stable financial system, they “spread risk” and made everyone more secure and of course more wealthy.