Getting rich quickly, poor even quicker

This week Britain saw long queues of anxious people standing in line outside the branches of Northern Rock, a bank threatened with disaster in the wake of the US crisis over “sub-prime” loans.

The inventiveness of the language that describes such transactions is as creative as the accounting which led to the present situation. “Sub-prime”, translated into English, means loans offered to people who simply do not have the means to repay them. There has been a systematic attempt by the unscrupulous (and whose scruples ever made much profit?) to make such loans to the poorest. In the US, this means African-Americans. The debts they have now incurred will involve yet another vast transfer of wealth from poor to rich in one of the most unequal societies on earth.

This is the meaning of the “credit-crunch”. And it is no aberration. Every day for many years, the mail has brought me offers of loans; every time I open my e-mails, someone who magnanimously declares himself indifferent to my credit status, is nonetheless willing to offer me fabulous sums of money so that I can take the dream holiday, invest in a new kitchen, upgrade my home or take part in all the other pleasant activities which seem to have become the principal reason for living in these rich societies.

Britain’s total indebtedness is more than twice the GDP of India. Recently, India’s success as a one-trillion dollar economy was greeted with something little short of ecstasy. What an enviable prospect, to “catch up” with us, adrift on debt, the answer to which is not prudence or cutting one’s coat according to one’s cloth, but the contracting of more debt. A mortgaged future, tomorrows eaten up in advance, the lavish spending of income not yet earned: welcome to the “developed” world.

Northern Rock was the eighth-largest bank in the United Kingdom. Until earlier this year, the financial pages had been full of praise for its “business model”, which had seen it become a major lender in the UK for house-purchase.

The “sub-prime” collapse in the United States will lead to the “repossession” of two million houses in the next couple of years. Compulsory sale of their property will lead to a fall in house prices. In both Britain and the US, following the fall in the stock markets after the dot.com collapse at the turn of the millennium, investors moved into real estate, paying unreal prices in an unrealistic expectation that these would go on rising for ever. “Safe as houses” seemed a good bet: something tangible, bricks and mortar - what more palpable pledge could there be of sound investment?

It later emerged that certain banks, among them Northern Rock, had been relying for the loans they provided, not on money deposited by savers, but on borrowing on a short-term basis from “the wholesale financial markets.” Loans were then “sold on” by banks in $700 billion dollars’ worth of “asset-backed commercial paper” (a sort of promissory note used by banks and companies for short-term financing) and other “securitised instruments.” If all this is opaque and incomprehensible, this is no doubt as it should be: to call such transactions by their real name would offend the tender sensibilities of bankers.

It would not do to admit too much light into a world where banks have been “packaging mortgages” for resale to other banks and financial institutions. “Bundles of assets”, it seems, also contain an unnumbered quantity of bad debts, so that their true value is unclear, despite elaborate computer models designed to evaluate them. We are “informed” that “these securities were parcelled up in a host of instruments, with differing levels of risk, bought by hedge funds, which borrowed heavily against them or used them to bet against future default rates.”

The outcome of these mysterious developments was, however, crystal clear: banks abruptly stopped lending to one another, with the spectacular “run on the bank” that we saw last week in Britain - people whose life-savings had been placed in an institution which threatened to go bust, and whose share-price dropped by three-quarters in just a few days. Such scenes were reminiscent of the darkest days of capitalism - the bursting of investment bubbles in the 19th century, or the great depression, when the sky rained ruined bankers throwing themselves out of skyscraper windows.

The British government, which prides itself that almost one-third of GDP now comes from the “banking and financial sector”, and which has permitted London to become one of the the most relaxed on-shore tax havens on earth, stepped in to announce that it had agreed with the Bank of England and the Financial Services Authority (the nominal “regulator” of financial dealings) to lend enough money to the bank to ensure that it would not collapse. At present, only a percentage of savings is guaranteed to savers caught up in a bank failure; so this did not dissolve the crowds pressing to draw out their savings from the stricken bank.

So the government went further, and the Chancellor of the Exchequer announced that all savings with Northern Rock would be guaranteed. In complete contradiction to its professed admiration for free markets, the government demonstrated that it will not allow bad practice (yesterday’s admired business model) to permit a bank to go under. The grounds on which this had been, in theory, ruled out was that it created “moral hazard”, that is, it might encourage irresponsible lending, because the lender could be sure that the government would rescue them in the event of failure. It is significant that use of the word “moral” is restricted to this extremely narrow context: there is, it seems, no moral hazard in growing inequality, in fortunes self-administered by city bosses and CEOs or in the perishing poverty which is the inseparable companion of great wealth.

So now we know. It seems that the streams of money which have passed through our hands have the power to cleanse memory, so that we swiftly forget the bitter lessons of two hundred years of capitalist society: that fortunes can be made and lost overnight, that insecurity is part and parcel of its life, that the system is all-powerful and autonomous, and humanity exists to dance attendance upon it. Its survival depends upon the permanent renewal of optimism that this time, or at least next time, it is all going to be different. If its success rests on the superstition that we can all get rich quick, reality often shows that many people can also get poor even quicker.

Great fear once existed among the people of Britain of “falling into the moneylenders’ hands.” It now seems that such hands are all we have to protect us against destitution. How ironic, this convergence between the fate of the most humble Indian peasant and the most “developed” metropolitan.

Are there any lessons for India here? If so, they are unlikely to be welcomed by a country plunging into the never-never world of perpetual credit, mountainous debt and unpayable dues. Only when the debts are called in, the goods consumed, the resources used up and the poverty of riches stands revealed, will the people of the world gather in turbulent crowds outside the banks, that have closed their metal grilles, reinforced shutters and security apparatus against their anger. Only by then, the wealth will have fled, spirited away in “vehicles” and “instruments” that pass our understanding.