Kill the poor

by Derek Wall

I HAVE a friend who works in the city. Like me he is not a fan of capitalism but we all need to eat. He told me that many of the more thoughtful
senior bankers he has talked to believe there’s a strong possibility the entire European Union banking system will be nationalised.

The implications are massive but do not currently register with those on the left, right or in the media.

Would bank nationalization be some kind of socialism? The state will control what has been the dominant sector of the economy in countries like the UK, the financial sector. Will this enable real radical social transformation with finance being used to bring a more equal, stable and ecologically sustainable society?
Or will it mean that companies which made obscene amounts of money in the
private sector can simply “socialize” their losses and wait for the time
after being bailed out by citizens to make even more money?

Remember Northern Rock.  Because of its exposure to toxic US loans, British savers took fright and queued up outside local branches to remove their money.  This created a classic run on the bank and the government had to step in and take control.  Now it’s been sold to Richard Branson’s Virgin group at a huge loss to taxpayers.  If and when it makes Branson a profit the taxpayers will not receive a bonus. It would have been better to hold onto Northern Rock and use it to fund small businesses or make it into a cooperative bank which could lend cash to green and worker-owned enterprises at low rates.

Banking is innately crisis ridden.  The simple fact is that banks take our cash and instead of looking after it give to other people. It’s a bizarre system of well-ordered theft.  Imagine giving your car or bike to a friend to look after.  Instead of looking after it, your friend promptly lends it out to someone else and pockets the cash.  This is the banking system!

‘Liquidity’ i.e. ready cash, must be kept in reserve. So as long as only a
fraction of depositors ask for their money back on a particular day, banks
remain afloat.  ‘A run on the bank’ occurs when depositors fear for their
cash and demand it back - as there is never enough to cover this the bank
collapses.

Government regulation was introduced to make sure that a suitable
proportion of liquid assets were kept.  In turn in an inter-banking
system, with multiple banks, collapse was thought to be unlikely because
short term absence of liquidity is overcome by banks supporting each
other.  Finally central banks like the Bank of England act as lenders of
last resort, helping in potential crises.  It’s a conjuring trick but it
basically worked, for a time.

In the ‘80s Thatcher and Reagan introduced deregulation. Banks
were allowed to reduce their liquidity rations and expand into new areas.
Steroid-like growth resulted but with alarming side effects.  Banks
increasingly moved into esoteric financial instruments.  Essentially
highly complex mathematical formulas were used to indulge in sophisticated
forms of gambling. Risk was multiplied and internationalised.

The neo-liberalism of Thatcher and Reagan massively reduced the strength
of trade unions and pushed down workers pay and conditions.  From
manufacturing shifting to China to the decimation of company pensions to
the replacement of full time posts with part time and temporary positions,
workers became more economically insecure.  Average wages in the USA
remained virtually static in real terms (once inflation has been stripped
out) between the 1970s and 2000s.  Capitalism catches a cold when
consumption slows so to keep working class families shopping cheap credit - whether in the form of remortgaging, credit cards, personal or car loans - was rolled out.  Personal debt mushroomed.

A long-term imbalance between China and US and Western Europe can be seen as the root cause of the 2008 crisis.  It’s worth noting that poor citizens in Florida could not keep up with their high interest ‘sub prime’ mortgages and increasingly defaulted.  Sub prime mortgages had been sold on to other banks including Northern Rock.  Banks stopped trusting each other and the LIBOR rate (the interest rate for banks borrowing and lending to each other) shot up.  The pack of cards started to collapse and only massive intervention, fuelling government debt, prevented total disaster.

Banking debt has been turned into ‘sovereign’ i.e government debt and is being passed on to the poorest citizens in Europe and the US, with added austerity measures.

An excellent account of the problem is surprisingly provided by
Mervyn King, Governor of the Bank of England
“http://www.bankofengland.co.uk/publications/news/2010/082.htm.
Incidentally he and the Bank were stripped of their regulatory powers over
banks.  Neo-liberal banking has created a form of unfeasible zombie
finance.

King argues that the present system is structurally flawed.  Banks are so
big, for example in Britain, that their assets are approximately four times
larger than UK GDP. They simply cannot fail.  If one of the four major UK banks were to collapse it would effectively destroy the economy. Therefore bankers are perversely incentivised to take risk.  ‘Investment’ in complex financial instruments – gambling to you and me - can potentially create huge profits. But if it goes wrong the government have to step in.

Even without such ‘gambling, King insists banking is innately risk, a fact that the deregulators forgot:

The real failure was a lapse into hubris – we came to believe that crises
created by massive maturity transformation were problems that no longer applied to modern banking, that they belonged to an era in which people wore whiskers and top hats.  There was an inability to see through the veil of modern finance to the fact that the balance sheets of too many banks were an accident waiting to happen, with levels of leverage on a scale that could not resist even the slightest tremor to confidence about the uncertain value of bank assets.

The European Union has introduced extra dimensions of insanity and risk
into this narrative.  The EU heavily deregulated the banking system and strongly encouraged trans-European bank expansion and mergers.  The idea
was that bigger and internationalised banks would be able to exploit economies of scale, increase efficiency and therefore lending more cheaply, fuelling growth.  The reality is that this has internationalized risk.  An Italian bank which collapses in an EU system threatens not just Italy but the bill has to be picked up by the whole EU.  The UK, despite relative isolation compared to say Germany or France would be severely damaged by the collapse of any non-
UK banks in the EU.

The sovereign debt crisis is another factor.  Before the introduction of
the Euro-zone, countries like Greece could have helped their economic
problems by allowing their currency to fall in value.  This is impossible
with a single currency so crisis tends to deepen.  EU country after
country has suffered from unsustainable government debt.  Governments
borrow via bonds, the financial sector buys the bonds (i.e lend money).  If
the risk of default increase the markets will only buy the bonds if they
are given higher rates of interest.  As interest rates rise the government
debt becomes more difficult to service (pay off the interest on the capital borrowed).  More and more intervention has been necessary to keep Ireland, Spain, Portugal, Greece and Italy afloat and the crisis is in danger of spreading to Germany and France.

As George Irvin at Social Europe
“http://www.social-europe.eu/2011/10/why-we-need-nationalised-banks/ notes:

EZ sovereign bonds are as toxic today as CDOs (sliced and diced mortgages
et al) were yesterday. Why? Basically, because if Greece defaults
tomorrow, no-one quite knows how quickly and widely the dominoes will
tumble. A carefully negotiated default backed by a huge and fast-acting
EFSF might save the day—just as jointly backed Eurobonds might have six
months ago—but given the absence of a firewall, the fallout from Greece
might set Europe ablaze as other sovereigns come under attack. Equally,
current financial austerity means that a financial meltdown will spread to
the real economy more quickly—with devastating effects.

The EU approach to banking and sovereign debt crisis has been essentially
two fold, a mixture of austerity plus regulation.  The Euro zone stability
pact is to be strengthened with the recent proposed treaty, it will outlaw
increased borrowing by member nations.  To calm bond markets in the short
term, Europeans will have huge spending cuts and tax increases inflicted
which will plunge the EU into almost certain recession.  The poorest are
being made to reduce their calories so the obese can maintain their
weight.  Permanent austerity looks to be on the agenda.

Regulation means that banks, to simplify, will have to maintain a greater
ration of liquid assets to reduce risk.  Banks are being forced to issue
new equity (to vulgarise, they issue new shares) so they have greater
liquidity.  However the value of European Bank shares are falling sharply.
Banks are finding it far easier to build up liquidity ratios by lending
less.

Irvin quotes Keynes biographer Lord Skidelsky “As things stand, the banks are the permanent government of the country, whichever party is in power.” (Lord Skidelsky, House of Lords, Hansard Citation, 31 March 2011) http://www.social-europe.eu/2011/10/why-we-need-nationalised-banks/

Irvin argues for a nationalised banking sector to support small business
and to green infrastructure but with the bankers in charge even nationalisation might sustain a failed system rather than creating real change.  Buying banks could still mean selling OAP homes and accelerating public sector cuts. This has been the experience so far in Britain and Ireland.

The multiple and increasingly complex crisis is increasingly likely
to leave the European Union with a wave of nationalisation.  There is a
strong possiblity that the entire financial sector will brought under
state control.  Neo-liberal policies, austerity and a system that protects
the banks rather than citizens must not be the result.  The record of
countries such as Argentina and Iceland shows that an implosion of the
financial sector can provide an opportunity to transform the economy and
society in a more socially just direction.  However unless we pay keen attention to the workings of the financial system and throw our weight behind popular movements like Occupy to raise some real noise, nationalisation will just be a kind of deranged business as usual, funding the banks at the expense of the rest of us.

USEFUL LINKS

1. The Corner House http://www.thecornerhouse.org.uk/
2. David Harvey on the financial crisis http://www.youtube.com/watch?v=qOP2V_np2c0
3. On the EU crisis and the dynamics of resistance: http://www.europe-solidaire.org/spip.php?article23310
4. Sovereign Debt is a capitalist issue:  http://21stcenturysocialism.com/article/sovereign_debt_is_a_capitalist_issue_02079.html

Derek Wall is a member of Green Party of England and Wales and blogs at http://another-green-world.blogspot.com/