By Joan Pere Enciso i Rodriguez
One of the main neoliberal economic policies implemented over the past decades has been liberalizing the domestic and international financial system. One of the key planks of this policy was less regulation and less control: goverments’ allowed capital to move without any control and they lost control about where taxes must be paid – permitting taxes to be paid where it is most economically beneficial to the taxpayer.
This resulted in changes in the financial system, especially facilitating access to money in the international markets. Parallel to this, in Spain, the banks and savings banks started a process of expansion and accumulation of capital without historical precedent.
What led to this growth model?
In the late eighties, in Spain they started to encourage the public not to trust public pensions because, the people were told, the government could not afford them any more. Financial institutions, on this and the other side of the Atlantic, dedicated themselves to fund studies that demonstrated this hypothesis. The main conclusion was that if the citizen wanted to ensure a decent pension he had to have a [private] pension plan.
Our political leaders, who accepted the neoliberal dictates, encouraged their citizens to take out these pension plans, helping with a small tax relief stimulus of 15%. This allowed financial institutions to accumulate the savings of many people, with the advantage that it would not have to return them for 15, 20, 30 or 40 years. This large amount of money was available to spend on speculation without any liability. Why are they using and continue to use the tax relief as an incentive when they generate practically no returns? We, the people, have helped and continue to help the financial system accumulate at no cost, since we all pay for the tax relief as it means less revenue for the Spanish Treasury.
From the mid-nineties, financial institutions went on to stimulate consumers to borrow with the argument that the price of money was low. The message was: enjoy life, switch car, go on vacation and travel, especially if you have no home, buy one and if you already have one, change it, housing is not an expense it is an investment, the price will always go up.
People could take out mortgages for up to forty or fifty years: if you cannot pay, you sell it, you will get the money and you will probably have a small profit. This was one of the main sources of income for the financial system, and we cannot forget the costs associated with the process of granting the mortgage.
Another system of income, of wealth accumulation, was the granting of loans to entrepreneurs, especially to small and medium size businesses. They were told: ‘The market is expanding, buy new machinery, a new ship, etc., the bank will give you a loan or a policy to finance your expansion, do not worry, for good customers like you, there’s always credit.’ The ‘bubble’ was growing and without sufficient domestic savings, they went to the international market, to get cheap credit and to continue expanding credit to citizens and entrepreneurs.
But you could still grow more! Although financial institutions had a legal ceiling on the volume of credit granted, they began to think about how to overcome it. Some ‘thinkers’ had the brilliant idea of inventing preferred and subordinated debt, among other similar (toxic) products . In this way you can attract capital from small and medium savers in order to sell the product and be able to have more capital to grant more mortgages and loans. These products were really easy to sell, as the [bank] manager of each area knew his clients for a long time, in a relationship of trust and friendship in some cases (or so the client thought). The growth in the number of mortgages continued to rise. Money was available and many people who wanted to borrow: perfect! Business was ensured.
The housing bubble became so great that in 2008 it burst and turned off the credit tap. Financial institutions began to lose confidence and wouldn’t loan to each other, so they could not maintain the pace of growth in the granting of loans. To avoid a sharp fall in economic activity, the government, with its budget surplus, tried to maintain or increase demand, spending to avoid too rapid a fall. As revenues started to decrease, the government very soon went into deficit and had to borrow money from the financial system (government debt issuance). This led to job losses, decreased tax revenues and increased spending on benefits for the unemployed: the state deficit grew. As if by some slight of hand, a crisis originating in the financial system became a government public debt crisis. The financial system turned the problem on its head: from being the direct perpetrators of the crisis, the culprit became the state, because it borrowed too much, what irony!
Where are we now? Governments are under challenge, apparently to blame for the situation we are living through, when in fact they implemented measures (money) to help the financial system. Although, in reality, the main victims of this great crisis are the citizens. First, those under forty years of age who, in most cases, purchased a home to live in rather than speculate and have found that with the crisis they have lost their jobs or seen their incomes fall and therefore cannot keep up mortgage payments. With the added problem that if they wanted to sell the amount they would get would be less than the debt (there are examples of more than fifty percent less), they would be homeless and indebted for life.
Second, those over 40 years of age, and especially those over 60, who accumulated savings and, following the advice of a ‘friend’ in the bank where they deposited savings, ended up buying a product with certain characteristics that actually turned out to be something else. ‘Do not worry, the investment is safe and within 48 hours, if you need the money you can access it, think of a a longer-term account, if you need the money before maturity we will penalise you.’ But what they did not know was that longer-term meant a ‘lifetime’ and that if the bank had problems they could not recover the money.
And on top of all this, the citizens, as a result of government borrowing are suffering cuts in public spending: in health, education, welfare, scholarships, social services, etc., in some cases, affecting the weaker segments of the population, and others, the entire population; except of course, that top 10% economically better off section of the population .
Spanish society is paying the consequences of the general crisis of the financial system and in particular for the actions of the executives and boards of directors, those who when they leave will take with them a good pension, regardless of whether their clients have benefited.
The crisis was not created by all of us. It was created by the financial system, because there was no ceiling on profits and, on a second level, by the political system for not exercising any control over the financial system.[The bank executives and boards of directors] have never sought the common good, rather they have sought – and this continues – to profit for themselves personally, not the organisation they are working for, but for their own interests, because they consider that there is no ‘cap’ on what they are entitled to earn.
The victims of the crisis are 90% of the population, and especially the poorest 60%, with more or less intensity. Poverty is advancing very rapidly in our country thanks to the leaders of the National and International Financial System. We must restore real democracy. Political leaders have to listen and solve the problems of citizens and they must not formulate economic policies designed for the exclusive benefit of the financial system.
If citizens feel abandoned by their democratically-elected political leaders, they may move towards neofascist ideological positions, as is happening in Greece.
Joan Pere Enciso i Rodriguez, Department of Applied Economics, University of Lleida, Spain
Translation by Revolting Europe