In other words: the root causes of the 2008 financial crisis were never truly resolved — policymakers simply moved around some of the symptoms (and not even all of them!). Governments bailed out insolvent banks with taxpayer money, heavily indebting themselves in the process, while central banks turned on the printing presses to pump trillions of dollars into the financial system. The result, in simple terms, has been the accumulation of a vast excess of money in the financial sector and an acute shortage of it everywhere else.
What we are dealing with, then, is a classical example of what David Harvey refers to as the capital surplus absorption problem: an excess of idle money capital lies side by side with an excess of labor power — and somehow the system can’t combine the two to bring about productive outcomes. As one banker toldthe Financial Times, “what’s really driving all this activity is the availability of capital rather than the underlying fundamentals. It just comes down to people needing to deploy capital.”
Investors have dealt with this problem in the same way that they always have: by scouring the surface of the Earth in a frantic quest for the highest possible yields. As long as demand remains low and growth stagnant, yields in so-called “productive” investments will not be very attractive for the average gambler. And so investors have been turning to the same kind of speculative high-risk/high-return bets that caused the 2008 financial meltdown to begin with.
The results have been stark. Just three years after Greece concluded the largest sovereign debt restructuring in the history of capitalism, global bond markets are back on fire. In a UK survey, almost four in five fund managers for major bond-trading firms expressed a concern that bonds are currently “more overvalued than ever before and that government bonds are the most overvalued asset class of all.” John Plender of the Financial Times accuses the ECB of directly stoking this bond bubble through quantitative easing:
Government bond markets are supposed to be sedate places, devoid of the thrills and spills that characterise equities. Not any more. Since central banks started enlarging their balance sheets sovereign bonds have become exciting to the point where investors have bought more than $2tn of them on negative yields, mainly in Europe. Even in the Depression of the 1930s interest rates never fell below zero. Is this that rare thing — a bond market bubble?
It’s not just government debt that’s booming. Last year alone, US companies issued an astonishing $1.43 billion in corporate bonds; 27 percent more than they sold at the peak of the last bubble in 2007. In fact, a reasonable argument could be made that the supposed US recovery of the past years has been based entirely on an energy bubble — which has already burst due to the oil price collapse — and an even larger tech bubble. Billionaire investor Mark Cubanrecently warned that the latter is “worse than the tech bubble of 2000” and is now on the verge of bursting as well.
When this over-excited US corporate bond market collapses, it will inevitably take the stock exchange down with it. Stock valuations have been rising steadily ever since they bottomed out, in March 2009, following the last crash. The S&P 500 has shot up an astonishing 200% since then, while the Nasdaq recently breached 5,000 points for the first time since the collapse of the Dotcom bubble. The fact that this six year bull market has coincided with the deepest economic downturn since the Great Depression should suffice to give pause for thought.
Finally, with memories of the subprime mortgage crisis still fresh, investors are already expressing fears over the build-up of a new housing bubble. The Wall Street Journal points out that UK property prices are now a third above their pre-crisis peak, while property in Australia, Canada, Sweden and Norway is also massively overvalued. Cities like New York, San Francisco, Miami, London, Berlin, Paris and Amsterdam are all experiencing rising real estate prices without any real accompanying improvement in the underlying fundamentals. Even property prices in Spain and Ireland now appear to be rising again.
The conclusion is clear: plus ça change, plus c’est la même chose. All this time, policymakers have tinkered around the edges with half-hearted measures, but none of the structural problems have ever been addressed. Instead, governments bailed out the gamblers as central banks inflated a set of new bubbles to cushion their fall, cover the debris, and delay the final moment of reckoning. Still, down in the real world, blowing bubbles can only take you so far. Nearly seven years since the last financial meltdown, investors and policymakers are already well on their way to the next.
Jerome Roos is a PhD researcher in International Political Economy at the European University Institute, and founding editor of ROAR Magazine. Follow him on Twitter at @JeromeRoos. This article was written for TeleSUR English.