Over the past couple of weeks, Britain,
many other European countries and the US have announced plans to nationalise
large chunks of the financial sector, thereby taking a good proportion of the
commanding heights of the economy into public ownership. The British government
has been forced to effectively part-nationalise three of the country’s biggest
banks, RBS, Lloyds TSB and HBOS. The plan, which includes putting treasury-appointees
on the boards of all three banks, will cost the taxpayer in the region of £37
billion. Many of the major European powers are unveiling similar plans, and
even the US, the ideological bastion of free-market capitalism, has been forced
to invest $250 billion into buying stakes in nine of its banks (though these
‘non-voting preference shares’ mean the US government will have no direct control
over the running of these banks).
Reasons for the bail-out
Did I suddenly awake to find myself in the
midst of a world convulsed by socialist revolution? What exactly is going on?
An editorial in the Financial Times
moves to quickly dispel any notions that the world’s major capitalist powers
have had a sudden attack of socialism:
“Gordon Brown came to save capitalism, not
to bury it. Paying £37bn to part-nationalise some of the commanding heights of
the economy may not be many people’s idea of what free marketeering governments
do, but the prime minister has taken bold steps to save the financial system
and – with it – the real economy. The model he has set out for rescuing banks
is a good one, and is now being imitated across Europe and in the US.”
The moguls of finance capitalism recognise
the moves as designed to serve their interests. The article continues:
“By insisting on high capital ratios, the UK scheme
creates fortress banks, able to withstand further shocks and win wider
confidence. Nervous of each other’s soundness, banks are not currently lending
to one another. But spurred by guarantees on interbank lending, the first signs
that the plan is working should be visible in the money markets as banks start
lending to one another once again… So, does this rescue mean the end of private
financial capitalism? Of course not.” (FT,
Nationalise to save the free market, October 13 2008).
In plain English, banks aren’t lending to
each other. Because banks and financial institutions always spend more than
they actually have in assets, they rely on borrowing from other banks to
continue functioning. This is fine when the price of whatever they are trading
is increasing – they can sell it on for more than they bought it for, and make
a profit. However, when prices begin to fall, these institutions get their
fingers burned.
As ever more institutions lack the funds to
pay back what they borrowed, investor ‘confidence’ drops and inter-bank lending
dries up, which is what is happening now. Gordon Brown’s plan gives the
government the power to force the
(part-nationalised) banks to lend to each other, in the hope that this will
improve investor ‘confidence’ and get the markets moving in the upward
direction again. In other words, these governments want to re-start the process
that lead to this mess in the first place.
It must also be remembered that the UK is more
heavily dependent on financial services than most advanced capitalist countries.
Much of Britain’s
‘wealth’ comes from foreign industries investing their capital in British
financial institutions, and from these institutions gambling this in the casino
of the financial markets. To a greater extent even than the US, the UK is a parasitic rentier economy,
so the option of protectionism (falling back on the internal market for
manufactured goods) simply isn’t open to it. A world depression will hit Britain hardest
of all.
Will this be a permanent solution?
In a remarkably candid tone, the editorial
continues:
“Although the size of the crisis requires
an exceptional response, this is but the latest in a long line of banking
crises and state rescues. Nationally owned banks seem likely to be a reality in
many countries for a decade. In the next great financial crisis – rest assured, there will be others –
bank rescues with equity purchases may be a first step rather than a last
resort. But stakes in banks will, eventually, be sold back to private
investors. Governments – rightly – will regulate to avoid further crises. They will fail, and then be forced to act
to pick up the pieces. There is no alternative.” (ibid, my emphasis – WL).
In other words, booms and slumps – bubbles
and crashes – are an essential part of capitalism. So long as capitalism
endures, we will be forced to endure these convulsions, along with insecurity,
home repossessions and unemployment they bring. The journalist is completely
honest in pointing out that these banks are only being taken over so long as
they are making losses. Once their ‘fictitious capital’ (Marx’s term for the
capital raised purely by trading financial instruments, without any material
basis) has been ‘flushed out’ and the share prices of these institutions have
bottomed, they will be sold back to private investors at rock bottom prices and
free-market profiteering will resume.
The editorial continues:
“Modern capitalism needs well-functioning
banks. Businesses and individuals need liquidity and an effective means of
turning their savings into productive investments. But banks perform this function by making bets on the future. This is
the purpose for which they exist – but it makes them inherently unstable. They tend to over-extend themselves in the
good times and are over-cautious in the bad, exacerbating booms and busts.” (ibid, my emphasis – WL).
Indeed, the betting analogy is spot on –
the market is essentially a gigantic casino, where financial institutions
gamble vast sums of other people’s money. Trouble is, when they get on a losing
streak, no-one will lend them anything more to gamble with, and their creditors
come knocking, demanding they pay back what they owe. Instability is
part-and-parcel of this system. Any government which claims it has tamed the
beast (remember “no more boom and bust”, Gordon?) is either delusional or dishonest.
What effect is this intervention having?
The chaotic and unplanned nature of the
market makes it near-impossible to predict the long-term consequences of any
actions taken by governments or regulators. Another article in the FT gives a few
examples of such unforeseen consequences:
“[W]hen President Lyndon Johnson decided it
would be a good idea to sell the government mortgage agency Fannie Mae, to
balance the books in the Vietnam war era, the outcome took four decades to
become clear.
“The presence of giant mortgage lenders
with an implicit government guarantee, taking risks on the assumption that
there would be a government backstop if things went wrong, forced private
sector lenders to give up on trying to compete with them. Instead they headed
for an area where Fannie (and Freddie Mac, which came a little later) could not
go: subprime lending. We now know the consequences.” (FT, Long view: Consequences game plays out to bitter end, John Authers,
October 3 2008).
The full consequences of this privatisation
could not be foreseen or controlled by Johnson when he made this decision.
Similarly:
“Another string of consequences still
unfolding came from the decision by the US Treasury to stop borrowing over
30-year terms (in other words, stop issuing the 30-year “long bond”). Many
companies and fund managers had planned around the long bond. Its absence
prompted them to look for substitutes, such as mortgage-backed securities. That
boosted demand for them, with consequences we now know.” (ibid)
Even the ban on short-selling, intended to
rein in the worst practices, had unforeseen consequences:
“Many hedge funds had relied on shorting
financials to make money of late. Where could they go?
“They knew that fellow hedge fund managers
needed to raise cash to cover losses, and that they would do this by taking
profits in their most successful investments. They also knew what those
investments were. Lists were circulating in Wall Street. High-tech, energy,
transport and resources stocks, all bets on a global growth story that ever
fewer investors truly believed, were chief among them. So the ban on shorting
financials helped to prompt investors to short sell these stocks – and pushed
their price down.” (ibid)
In other words, killing the main source of
revenue for hedge-fund managers caused them to employ the same practice of
short-selling on stocks in the ‘real economy’, which had not been outlawed. No
matter how much the capitalists attempt to tinker with this broken system, they
cannot fix it, for each fix they implement will have a thousand unintended
consequences.
So what will the unintended consequences of
this part-nationalisation be? As the above article demonstrates, giving a
precise answer is difficult. However, the evidence of the past few weeks, as
well as that of history, suggests that the governments will be forced to pump
more money into the system than they even now estimate. This would force them
to make cuts elsewhere, likely throwing many public-sector workers onto the
dole. As well as causing terrible hardships for these workers and their
families, rising unemployment would slow down consumer spending even more than
has already happened, further depressing the economy and thus producing the
opposite effect to the desired one.
What do we stand for?
This crisis has forced governments to take ever
further steps to nationalise the financial sector. We say: nationalise the lot.
And not simply to jump-start the failing capitalist system – the banks should
be used as part of a planned economy, where the needs of everybody are taken
care of without the chaos of the market. These banks should be under the
democratic control of the communities they serve and the workers who make them
function. Forward to socialism!
