In the early hours of this morning
(08.10.08), the government and the financial authorities have finally agreed an
ambitious plan to save the banks. They present the £50bn bail-out as decisive
action to stop the rot. In fact their hands were forced, and there’s no sign that
it will stem the panic on UK stock markets in any case.
Last Tuesday shares in two of our biggest
banks, HBOS and RBS, plummeted by 40%. Let Nils Pratley (Guardian 08.10.08)
chronicle the damage. “At the close of trading, Royal Bank of Scotland, a bank
that raised £12bn of fresh capital from its shareholders in June, was worth
only £18bn.” (That is what the sum total of its shares came to.) “Shares in HBOS were priced 50% below the value
of a bid from Lloyds TSB to buy it.” The banking system faced catastrophe.
Markets had not been impressed by
Chancellor Darling’s dithering and evasions in the House of Commons the
previous day. He declared that he would do, “Whatever is necessary to maintain
stability,” but it would be, “Irresponsible to speculate on specifics.”
Throughout this crisis the government has been behind the curve. Two days later,
Darling was forced to implement what has been called the ‘semi-nationalisation’
of the banks.
Though details of the plan have not yet
been published, the outlines are clear. The core idea is to recapitalise the
banks by pumping our money onto their asset sheets. The reaction of the
authorities indicates that the problems are worse than they have been telling
us. Up to now they have assured us that the banks have a liquidity crisis. This
means that they are strapped for cash, but with no more fundamental problems in
sight.
The most visible sign of this liquidity
crisis is the drying up of inter-bank lending. Though we punters never see this
money, it is an essential lubricant of the entire financial system. So just a
couple of weeks ago all the major central banks started pumping money into the
banking system. The US Fed put $180bn more in and the European Central Bank
responded with $110bn extra. It’s not at all clear where all this money went.
One thing is for sure. It didn’t work.
So the banks are not just faced with a
little temporary financial embarrassment. They have a solvency as well as a liquidity
crisis. This is altogether more serious. In plain English they are in queer
street. The assets in their vaults that are meant to back up their loans have
melted away. Many of these pieces of exotic paper generated in the years of
boom and speculation have proved to be valueless. That is why the banks have to
be ‘recapitalised’ – with taxpayers’ money.
The banks also faced the danger of a run on
deposits of the kind that brought down Northern Rock. The reason for this was
the refusal of Brown and Darling to match the deposit guarantees given by
Ireland, Greece, Germany and other countries. This inevitably drove savers to
abandon UK banks, draw out their cash and put it in a country where it would be
safe.
Darling intends to recapitalise the banks.
How? By lending them the money! He also plans to buy preference shares in the
troubled banks. Preference shares are the first to attract a dividend, so he
would argue that he is safeguarding taxpayers’ interests. But preference shares
don’t have voting rights. So we are to prop up the banks with no say-so as to
how our money is used. This, presumably, is to reassure private capitalists
that New Labour is always there to throw our money at them when they are in
schtuck. But New Labour will never challenge their divine right to take all the
decisions, despite the fact that they have made a total dog’s breakfast of the
financial system, and landed us with the bill.
In fact the government had its arm twisted into
some sort of action by the collapse of bank shares. As Robert Peston reported,
“A gang of three of Barclays, RBS and Lloyds TSB told Darling to pull his
finger out and finalise whatever it is he’s eventually prepared to offer on
taxpayers’ behalf.” What an insight into our ‘democracy’ – the bankers bully the
government into doing what they want!
One of the reasons bank share prices
collapsed was because the banks needed the lifeline, but shareholders feared
the consequences of government interference. So they sold. Bank profits have
collapsed, so no shareholder is likely to be getting a dividend any time soon.
Government owned preference shares will be the first up for a pay-out. Do the
banks really dare to pay out dividends to private shareholders whose necks have
only been saved by public largesse? Bank share prices went down partly because
there was no bail-out in sight and partly because there was. There’s no
pleasing some people.
Though minor concessions may be made on fat
cat pay, effectively the rescue plan is a blank cheque for the bankers. John
McDonnell comments, “At a minimum the government must place conditions on any
bail-out including full parliamentary and public scrutiny of the banks’
accounts, representation on the boards, no repossession of homes, a pay cap for
bank directors and the end of bonus binges, and a reduction of consumer
interest rates.” These are indeed minimum requirements to make sure our money
is not just wasted. The government has made it abundantly clear that it will
impose no such conditions.
In that respect, it’s just like the Paulson
plan in the USA reluctantly accepted by Congress. It was accepted because the
alternative didn’t bear thinking about. That doesn’t mean it will solve
capitalism’s problems. Paulson sets up a ‘bad bank’, a gigantic septic tank,
and gives the banks money in exchange for toxic assets which it dumps in it.
Brown and Darling just pony up our money direct in exchange for a stake in
banks that are leaching losses. It’s the same principle.
As Joseph Stiglitz says of the Paulson plan
it’s, “like providing massive blood transfusions to an ailing patient while
vast internal haemorrhaging is occurring. Unless we deal with the underlying
source of the problem, the bleeding of our financial system will continue.” He
sums up, “The president vetoed a bill to provide health insurance to poor
children – costing a few billion a year – saying that we could not afford it.
Without needed medical care, some of these children may be scarred for life,
and others not live to adulthood.” New Labour shows exactly the same priorities
as George W. Bush.
The plan, if it works, is a medium-term
project to recapitalise the banks. As long as we have capitalism, we will have
banks and they must have adequate capital ratios. But that is not a solution
for the present crisis. For a start extreme market turbulence is a global
phenomenon. The government can’t turn it around at Dover. In Britain house
prices continue to fall. House buying has dried up. House building has almost
come to a full stop. Manufacturing output has fallen for the past six months.
Unemployment is rising. A full-blown recession is in process – no doubt about
it. And that means the financial crisis will go on – and get worse.
Collapsing stock markets are a separate but
related aspect of the crisis. Here’s what they do to us. The state pension is a
passport to poverty. Decent occupational pensions are becoming a thing of the
past. If we can afford it, most of us have to put money aside for private
pension provision. Our money is punted at the stock exchange by the pension
fund managers. Because of the fall in the share prices, and through no fault of
our own, pensions are now worth almost 20% less than they were a year ago. The
government has no plans to compensate us. And share prices continue to head
south.
£50bn or £500bn?
The Tory press is having
to bite the bullet. Though the word ‘semi-nationalisation’ comes through
gritted teeth they cannot oppose the measures, which their readers’ hope will
save their bacon. The Mail and the Telegraph both calculate the total cost to
bail out the banks at £500bn (not ‘just’ £50bn). This is more than a third of
Britain’s GDP! Here’s their reckoning:
- Top banks given £50bn for recapitalisation
- Liquidity boost of £200bn in short-term loans
- £250bn debt guarantee for inter-bank lending.
Where is this to come from? If their calculations are
correct, the government is laying out £16,000 for every taxpayer in the country.
If all the money were taken up, that would double public spending. It would put
the entire economy into an iron maiden, with incalculable consequences on the
currency and the national debt – just to take two obvious stress points. The
government has committed all this without so much as a ‘by your leave’ to their
working class supporters. All of a sudden they have money to burn.
Over the past few days the government’s bumbling
and fumbling was almost fatal. But their hesitancy is not an accidental
psychological flaw. It is inherent in the outlook of New Labour, the bastard
child of Thatcherism. In 1997 the present system of regulation was set up. The
power to set interest rates was given away by the government and put in the
hands of an independent institution – the Monetary Policy Committee of the Bank
of England. This action was based on the monetarist belief that monetary policy
was solely a matter of worrying about inflation. As Simon Jenkins comments
(Guardian 08.10.08), the MPC, “Remains inert, mesmerised by its…fixation with
inflation. Worrying about inflation at present is like weeding the lawn when
the house is on fire.” The real capitalist economy was held to be stable and
automatically reached equilibrium at full employment! So we have to twist the
arms of the unelected swivel-eyed ideologues who dominate the MPC to get a cut
in interest rates to protect our real economic welfare.
In 1997 the Financial Services Authority
was set up to regulate the banks. It seems to have been asleep at the wheel for
the past few years of swindling and financial insanity. As a protection against
financial hurricanes, the system installed in 1997 functioned perfectly while
the financial sea was smooth as a millpond. We see it failing at the first
serious test, as things fall apart. The half-wit who devised the 1997 system
was Gordon Brown.
Today (08.10.08) shares continue to fall. The
markets, credited by New Labour with almost divine wisdom, show all the signs
of hysteria. Capitalism is inherently unstable and the crisis won’t blow over.
But New Labour still crawls before
capitalism. As John McDonnell explains, “The bail-out is nothing but a subsidy
by the taxpayer to the very people who have brought our economy to the brink of
collapse.” Reject the plan. We want nationalisation of the banks, but under
workers’ control and management, as part of a socialist plan of production.
8th October 2008
