Reckless financial speculation almost broke the world economy in 2008, but it has returned in new forms, showing capitalism’s inherent tendency to create crisis, argues John Clarke

It is well-known that shaky sub-prime mortgages, bundled up into highly toxic bond packages, played a decisive role in triggering the devastating financial crisis of 2008. The shock that the financial system and the global economy experienced in this situation was of historic proportions and only a truly massive infusion of public resources was able to restore a level of stability to the workings of global capitalism.

A recent article in the Guardian explains that, following this grim experience, regulators ‘introduced new rules that could help ensure that asset-backed securities – once allegedly referred to as “crack cocaine of the financial services industry” by the billionaire Guy Hands – would never again spark such a massive meltdown.’

Reckless and dangerous

However, it becomes clear that reckless and dangerous forms of investment are not so easy to prevent and that regulatory dictates can be worked around. New ‘risks are emerging’ and ‘they are linked to highly indebted companies backed by private equity firms, which are part of the growing but opaque portion of the financial system known as the shadow banking sector.’ This sphere of activity involves ‘financial firms that face little to no regulation compared with traditional lenders.’

This return to methods of ‘securitisation’ has now reached vast proportions. ‘Today, the global securitisation market covers about £4.7tn of assets, according to estimates by analysts at RBC Capital.’ About £300bn of these investments are taking place in the UK, with some £120bn occurring within the shadow banking system, which involves ‘an under-appreciated risk, given the lack of regulation in that space and the complexities of the instruments that are being held there.’

The article makes clear, however, that the supposedly safer and more respectable ‘public securities market warrants close review.’ Such scrutiny would have to include ‘risks related to collateralised loan obligations (CLOs). These are types of securities that are backed by a pool of debt, including loans to companies with low credit ratings, or struggling businesses that have been snapped up by private equity firms with the help of big loans, in what are known as leveraged buyouts.’

The private-equity firms that engage in this activity ‘invest in companies that are almost failing, and in order to make these companies survive, they load them up with debt. These loans end up being repackaged as well, a little bit like the junk mortgages before the 2008 crisis.’ It is clear from this that the near death experience of 2008 didn’t eliminate the kind of high-risk behaviour that preceded it.

It is also apparent that speculative zeal is not such an easy quality to contain. The article quotes Natacha Postel-Vinay, an assistant professor at the London School of Economics and expert in regulation and financial history, who observes that: ‘It’s a game of whack-a-mole. You regulate stuff, but then the financial system finds ways around the regulation very quickly.’

For its part, the Bank of England is presently ‘in the midst of compiling the results of its first stress test involving the shadow banking sector’ and it has already raised general concerns on high-risk forms of investment. Its financial policy committee has noted that vulnerabilities ‘from high leverage, opacity around valuations, variable risk management practices and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors.’

As shocking and serious as this proliferation of asset-backed securities is, the failure to prevent or contain it is hardly surprising. Writing after the failure of Silicon Valley Bank in 2023, which took regulators by surprise and led to a serious international banking crisis, Michael Roberts took stock of ‘the total failure of bank regulation to avoid crises.’ He quoted a ‘bank legal expert’ who had concluded that the ‘enormous legal edifice to govern financial institutions’ that had been created after 2008 was actually of little worth. ‘What good does it do to have a massive set of regulations … if they aren’t enforced?”

With productive investment generally sluggish since the financial crisis and the Great Recession that followed it, a major turn to parasitic forms of speculation has been in evidence. As Roberts explained in an earlier article: ‘Low profitability explains above all else why corporate investment has been so weak since 2009. What profits have been made have been switched into financial speculations: mergers and acquisitions, share buybacks and dividend payouts.’

Housing speculation

In a wide range of countries, a great deal of this speculative activity has been devoted to investment in housing. In Toronto, where I live, the ‘housing market continues to rank among the top global real estate bubbles.’ This assessment is largely based on the fact ‘that home prices are heavily disconnected from local incomes and rents … In other words, most residents cannot afford to buy homes based on their earnings, a hallmark of a housing bubble.’

The upscale redevelopment that has driven up rents and caused so much hardship in Toronto communities has largely been focused on the condominium market. The luxury condo tower has become an emblem of the gentrifying process and rampant social inequality. To an astounding degree, this has been driven by investors rather than actual housing needs. ‘According to StatsCan, investors owned 65% of Toronto’s smaller condo units (under 600 sq. ft) when data was last collected in 2022. In comparison, investors only owned 44% of units that were over 800 sq. ft.’

Storey’s Real Estate News explains that ‘investors enable the construction of condominium projects as the main purchasers of presale units, in turn, allowing the developer to secure financing for the project. And they don’t buy the units with the intent of living in them, they buy them to rent out or to sell for a profit down the line. In fact, in 2022, nearly 40% of all Toronto condo units were investment properties.’

This pattern has created a situation where ‘condos are shrinking. In the 90s, for example, the median living area of a Toronto condo was 947 sq. ft, compared with 640 square feet for those built after 2016.’ However, ‘people don’t actually want to live in a 600 sq. ft box, and where families are involved, they couldn’t live in one even if they wanted to.’

Marx explained long ago that, while commodities are most certainly sold in order to realise profits, they must also have a ‘use-value’ that makes someone want to buy them. In the case of the Toronto housing market, the building process has actually come to be so focused on the appetites of investors that it has become seriously detached from real and actual housing needs. Inevitably, with increased interest rates making things far worse, investors are no longer investing, developers are losing money and a recently lucrative but entirely unsustainable market is tanking.

Speculative investment has, of course, always been a feature of capitalism, but the neoliberal period from the 1970s on saw a process of deregulation and ‘financialisation’ that has greatly increased such reckless and parasitic forms of investment. The turn towards neoliberal approaches was driven by an effort to restore declining rates of profit and the lure of financial speculation represented a means of enrichment that appeared to compensate for diminished returns on productive investment. By the time of the 2008 crisis, this speculative sector had spun out of control, with devastating results.

We might note that the return of Donald Trump to the White House offers a green light to the most reckless and dangerous tendencies within the capitalist class. Wall Street Pit notes that ‘following Donald Trump’s election, Wall Street’s speculative edges are witnessing an unprecedented surge in risk-taking behaviors.’ It adds that the ‘landscape is rife with high stakes where leverage can just as easily turn gains into losses overnight. Yet, for now, the appetite for risk on Wall Street’s fringes shows no signs of waning.’

The swollen global securitisation market, with its £4.7tn in high-risk assets, is part of an even bigger speculative pattern that leaves no doubt that the experiences of sixteen years ago changed remarkably little. The most parasitic, dangerous and destructive forms of speculation remain pervasive and global capitalism continues to generate the ever-present threat of shattering crises.