Financial recovery?

How can banks announce record profits and pay out massive bonuses again – so soon after the storm of October 2008 to March 2009? I put this question to Oliver Roethig, Head of the Finance Sector at UNI Global Union.

“It’s simple”, said Oliver “all these fiscal stimulus packages are financed by government debt, and banks organize the bond issues. Meanwhile monetary stimulus with interest rates near zero means money is cheap. Banks make money when the real economy goes up, and they make it when it goes down – they win both ways”, he concluded.

Oliver’s comments help to explain the paradox of financial recovery while the real economy struggles. It also checks out with a series of articles in recent days questioning the strength of the recovery in financial markets.

Writing in the New York Times, Wolfgang Münchau cites two key indicators showing that the US stock-market was over-valued last month by 35 to 40 per cent (IHT, 19/10/09, quoting Andrew Smithers: “Wall Street Revalued: Imperfect Markets and Inept Central Bankers”, Wiley 2009”.

In other words, there is a new speculative bubble, just as there was in the lead-up to 2007-08. This new bubble could burst much more quickly than the last one, plunging financial markets back into chaos before the real economy gets a chance to recover.

The history of earlier depressions (1837, 1873 and the great depression of the 1930’s), tends to confirm this risk. Joe Nocera, writing on the same day, pointed out that some markets moved abruptly upwards in the ‘30s. “We tend to forget”, Nocera writes, “between 1935 and 1937 business began to boom again”. But in September 1937 the market crashed and the depression took hold again (Nocera: “In the ‘30s the experts were blind”, IHT, 19/10/09).

So we all need to be wary of talk of recovery until it is based on substance – which means recovery of the real economy.

Here is the real question. Writing on the same day in the Financial Times, under the heading “The Free Market is not up to the job of creating work”, Mort Zuckerman, editor in chief of US News and World Report states: “Today there is no evidence of job creation, quite the opposite”, before adding “labour markets have not faced such problems in more than 70 years”.

As global unions put it to G20 leaders in Pittsburgh sustainable recovery will come not from financial speculation but from consumer demand, based on full employment, decent work and a just transition to a green economy.

Education and training are critical to such a sustainable recovery of the real economy. Everybody - employers, labour leaders and governments - seems to agree with that proposition. But is that broad consensus being translated into policies and programmes, backed by adequate investments?