Report of the Club of Rome 2018, Chapter 1.1.2: “Financing”

I propose to deal with the report of the “world government” themselves, and at the same time help you translate the original source.


An important element of the loss of orientation relates to financial markets. Historians look back at the past 30 years with concern, looking at the explosion in bank balance sheets, supported by declining levels of equity and massive borrowing. One result was a temporary boom, led by the private sector. Another was a significant increase in the global financial sector (finance, insurance, real estate - FSN), often referred to as financialization, subsequently the financial crisis of 2008–2009.

Excessive riskiness turned into a crisis that was close to stopping the entire financial system. When the bubble burst, many governments were forced to participate in broad support programs.

Governments embraced by new thinking (see Section 2.4) were deeply involved in all of this. True, there are many examples of serious abuses in the private financial sector. But if it were not for the systematic deregulation of banks by governments in order to stimulate economic growth by issuing more debt, the situation would be radically different. The causes of the crisis were numerous and varied:

• Over-lending by the banking industry
• Lack of action by regulators and central banks to stop (i) excessive lending, (ii) the spread of exotic financial instruments (synthetic assets and bonds, secured mortgage liabilities / CMOs, structured debt issues, etc.) And (iii) pure speculative transactions
• Non-transparent tax havens and the absence of a mandatory legal framework, which is adopted and implemented by the international community as a whole, as well as the main jurisdictions and financial centers;
• Securitization and distribution by investment banks and other financial entities of mortgage-related assets and investment funds transferring credit risk from the original lender to the ultimate bondholders
• The inability of some rating agencies and audit firms to properly assess and report the inherent risks associated with many financial products

A deeper analysis of the main causes of the financial crisis is presented by economist Anatom Admaty and Martin Hellwig. Western banks borrowed too little in their balance sheets to act as a buffer if everything went wrong in their business - from trading in multi-trillion dollar markets to often unscrupulous loans for real estate. For decades after World War II, banks operated from 20% to 30% of their liabilities as capital. By 2008, it had shrunk to 3%. Banks obviously believed that they invented tools that eliminated risk, allowing them to manage their banks with a tenth of the buffer they had before. This turned out to be very unrealistic. But they hoped that the state would cover their risks.

Bankers are very rich in this process. They considered themselves “too big to fail” —and too big to be in prison. However, in 2009, bankers not only escaped prosecution, but also received hundreds of billions of dollars in government payments, but some of them still paid out record bonuses. At the same time, nearly nine million households in the United States had to leave their homes when the value of their homes plummeted and they were no longer able to service adjustable rate mortgage loans - the so-called non-payment crisis.

Financialization refers to the dominance of the financial sector in the global economy and the propensity for accumulated profits (and leverage) for real estate injections and other speculative investments. Debt is an essential element of this process. For example, in the United States, both household debt and private sector debt more than doubled from GDP between 1980 and 2007. The same goes for most OECD countries. At the same time, “the value of financial assets increased from four times GDP in 1980 to ten times GDP in 2007, and the share of the financial sector in corporate profits rose from about 10% in the early 1980s to almost 40% from 2006 . Adair Turner, chairman of the UK Financial Services Authority, believed that in the years following the crisis of 2007–2008, the uncontrolled creation of private loans was seen as a key systemic flaw that led to this crisis with its devastating consequences. Therefore, it follows that the financial sector represents a significant and growing risk factor in the economy.

The degree of financing varies from country to country, but increasing the power of finance is common to all. The current financial sector has evolved in the context of deregulation, which has gained momentum since the late 1970s and since 1999 has expanded significantly by eliminating the separation between commercial and investment banking services in the United States. This barrier was introduced in 1933 by the Roosevelt administration in response to the collapse of Wall Street in 1929, when a period of rampant credit and financial speculation collapsed. Such speculation preceded the crisis of 2007–2008: the nominal value of financial products in September 2008 reached 640 trillion US dollars, 14 times the GDP of all countries on Earth.

And another, compare the speculations with the usual money transfers, paying for goods and services: “In 2010, the volume of operations with foreign currency reached $ 4 trillion a day, which does not even include derivatives. For comparison: “one day of export or import of all goods and services in the world is about 2% of these 4 trillion dollars”. Transactions that do not pay for goods and services are, by definition, speculative. Such financial products and operations, the authors continue, regularly lead to monetary crises, sovereign debt crises and systemic failures, on average, more than ten countries in conditions each year.

One of the consequences of this development is that a significant part of economic growth was distributed among the rich, as mentioned in the new Oxfam figures in the previous section.

Practice in the financial sector demonstrates the neglect of their impact on both people and the planet. Which includes short-term, the ratio of banks' reserves to their loans, the ratio of bank loans that support the real economy, to speculation in property and derivatives, the uncontrolled creation of credit - in fact, the creation of money - and the inability to take into account long-term climate and environmental risks. According to Otto Scharmer of the Massachusetts Institute of Technology, 30 “We have a system that accumulates excess money in areas that generate high financial and low environmental and social returns, but at the same time receive less money in areas that meet the needs of significant social investments.” "

Inability to take environmental risks into account means that pressure on already scarce natural resources is accelerating: trees are cut down, water resources are polluted, wetlands are drained and oil, gas and coal are accelerated under the condition of demand. It also means that huge savings, including pension funds, are embedded in investments in fossil assets. Such assets are often considered high risk assets (see Section 3.4)

To be continued...

For the translation, thanks to Jonas Stankevichus. If you are interested, I invite you to join the “flashmob” to translate a 220-page report. Write in a personal or email magisterludi2016@yandex.ru

"Analytics"

• "Come on!" - the anniversary report of the Club of Rome
• The anniversary report of the Club of Rome - embalming capitalism
• Club of Rome, jubilee report. Verdict: “The Old World is doomed. New World is inevitable! ”