The Chinese have a saying and curse – may you live in
interesting times. The financial crisis and credit crunch are certainly
interesting times. But how do these complex shenanigans impact on the real
economy? Here’s an example.
We are experiencing a crisis in what is called the monoline
business in the USA. You’ve probably never heard of monoline, but if these
financial players go down, which may well happen, then US banks are set to
write down more than $200 billion of their assets. Kissing goodbye to all that
money brings a banking collapse so much closer. $2.4 trillion in loan
guarantees have been called into question.
Monoline is part of the insurance business specialising in
insuring bonds issued for local infrastructure projects. That’s all they do. They’re
only in one line of business. That’s why it’s called monoline.
Even the most financially unsophisticated reader will work
out that this is a very boring bit of high finance where it’s very hard to lose
money, even if you’re not raking in pots. Local infrastructure projects are
safe. Nothing much can go wrong. So the monoline or bond insurers in the States
have a top AAA rating. Obviously the insurers have been frustrated by seeing
their buccaneering fellows in more ritzy lines of high finance trousering
shedloads of cash. So they’ve decided to diversify. In other words they’ve gone
out betting other people’s money on stuff they know nothing about. And they’ve
lost.
This matters because they’re big. A ‘minor’ player ACA has
lost $1 billion and gone bust. Giant insuring firms Ambac and MBIA are
tottering on the brink of bankruptcy. Their credit ratings agencies have blown
the whistle. Ambac has lost $500 billion for more than 100,000 state and local
projects.
Here’s how this is giving a helping hand to the looming
world recession. There’s a Private Finance Initiative to build a hospital for
the Maidstone and Tunbridge Wells area in Kent. PFI is a scam where a
capitalist consortium puts money up-front to build a hospital, school or other
public asset. They then own the hospital and charge the public sector for the
use of ‘their’ hospital. As Socialist
Appeal has pointed out, if the government borrowed the money to build the
hospital, it would be cheaper. When did you last hear of a government going
broke? Since the risk of lending is non-existent, interest rates are much lower
than for a capitalist firm. New Labour
argues that it’s worth paying more since risk is transferred to the private
sector. Actually, as we know from the Metronet fiasco on the London underground,
if the PFI firm goes belly-up the government picks up the bill. No risk is
transferred. Instead the PFI privateers just get to pocket our money.
The consortium building the Tunbridge Wells hospital was
going to borrow the money (£225 million) guaranteed (‘wrapped,’ as it is
called) from the monoline bond insurers in the USA. That makes it the cheapest
source of private finance. Now they can’t. They’re going to have to go cap in
hand to the banks. That will cost more. The PFI people don’t care. They will
just present us with a bigger bill. A PFI project to provide the RAF with a
fleet of refuelling tankers for £1 billion has been called into question
because the PFI consortium can’t go to the cheap monoline insurers for their
money. They’ll have to pay more, which means we’ll have to pay more. Interest
rates are going up all over the place anyway. We’ve seen the end of the era of
cheap money
Real
projects employing real building workers and providing work for real nurses are
getting the chop because of the crisis in high finance. And this is just the
start.
