US announces "bankers' socialism"

Submitted by martin on 24 September, 2008 - 12:53 Author: Colin Foster

For decades now we've been told that the only way to a dynamic and efficient economy is privatisation and fiercer free-market competition. Now the same capitalist governments say that the only escape from economic disaster is to nationalise and regulate.

That is how capital is. When things are going well for capital, it wants a free hand to grab what it can. But that free-fire zone for capital necessarily, sooner or later, leads to economic bubbles bursting, and the state stepping in to shore up capital.

The bigger banks and insurance companies get bailed out. The working class that produced the wealth from which huge profits were grabbed in the boom does not get bailed out. Working-class households lose their homes, their jobs, the buying-power of their wages, and for capital that is all "necessary correction".

At least, that is what happens if workers do not fight back. But fight back we must: to impose measures like automatic inflation-protection for wages, and a crash programme of publicly-funded house construction and conversion, and to mobilise towards replacing this "bankers' socialism" with workers' socialism, an economic system based on social provision for human need rather than on maximum profits for a small minority.

In the most drastic move yet, on 18 September the US government announced plans to make $700 billion available for the US government to buy up dodgy mortgage-related paper from US financial institutions and thus restore those institutions to health.

The details of this scheme are yet to be worked out. Then, when it is finalised, how will be prices be set at which the government buys up the dodgy assets? Could setting those prices push banks into bankruptcy when at present they are staving it off by pretending that dodgy assets are still worth the price they used to bring a while ago?

What if the scheme works well in its own terms? Martin Wolf in the Financial Times asked: "Is the worst now over?"; and answered his own question.

"Certainly not. Unwinding of excesses on such a scale involves four giant processes:

  • the fall of inflated asset prices [i.e. prices of the bits of paper than circulate in the financial markets, and also of houses and other property] to a sustainable level;
  • de-leveraging of the private sector [i.e. a reduction of the currently blown-out proportions of the debts which comappanies and households carry to "harder" underlying assets];
  • recognition of resulting financial sector losses;
  • and recapitalisation of the financial system [i.e. restoring its relatively "hard" core of basic assets].

"Making all this worse will be the collapse in private sector demand, as credit shrinks and wealth falls. None of these processes is even close to completion. Some have barely begun. In particular, property prices are still falling, even in the US. Similarly, the adjustment in the real economy, particularly the inevitable rises in household savings rates in the US and UK, are at an early stage..."

Nouriel Roubini, the US academic economist who first predicted and identified this financial crisis, puts it like this: "a severe US recession... recession in the eurozone, the UK, and most advanced economies". The only question now, he thinks, is between a relatively short recession (he guesses 18 months) and a long deflationary depression like the one that hit Japan in the 1990s.

These scenarios omits some of the worse possibilities - a dramatic decline of the US dollar, or an industrial slump in China - which could be triggered by further development of the crisis.

What is it all about? The theorist most quoted now is the maverick Keynesian Hyman Minsky. Martin Wolf summarises Minsky: "A long period of rapid growth, low inflation, low interest rates and macroeconomic stability [in capitalism breeds]... increased willingness to take risk. Stability [leads] to instability".

Minsky argues that capitalist enterprise always involves making payments committed to a while ago from income now, and depends on income and wealth outpacing the commitments. As Marx had put it long before Minsky: "The comparison of value in one period with... value... in a later period is no scholastic illusion... but rather forms the fundamental principle of the circulation process of capital".

The financial "posture" of a company can be "hedge, speculative, or Ponzi". Hedge means that future cash flows will be enough to cover all the future debt payments and interest repayments that the company is committed to. Speculative means that those cash flows will be enough to cover interest payments, but not the principal of the debt; the company can keep going so long as it can make fresh borrowings to the same amount.

Ponzi means that the future cash flows are not even enough to cover the interest payments; the company has to increase its borrowings in order to keep going.

A boom leads to more and more companies shifting from hedge, to speculative, to Ponzi positions - for, in a boom, the more you can borrow, the quicker you can expand, the better your chances of being first to new profit-making opportunities. "Over a run of good times the financial structure evolves from being robust to being fragile".

The fragility is unstable because, so Minsky argues, "in a capitalist economy there are two sets of markets and... prices". The first set is the market and prices for current labour-power and current goods - what most of us deal with day to day.

The second set is for "capital assets" - buildings, firms, bits of financial paper. Their prices are shaped by future income expected to flow from those assets, rather than just by static supply and demand.

Once the "Ponzi" pyramid of one company borrowing from another borrowing from another starts to totter, asset prices shrink, and what was "speculative" or even "hedge" becomes "Ponzi".

Karl Marx developed similar ideas, writing about economies in which the credit system was much less developed.

"Since the circulation process of capital is not completed in one day but extends over a fairly long period... it is quite clear that between the starting-point.. and... the end... elements of crisis must have gathered and develop" If all capitalist decisions to order or commission buildings, equipment, etc. had instantaneous effect and were "tested" against the market immediately, there would hardly be crises. But they are not.

In fact the credit system intervenes, trying to link present and future.

"The credit system appears as the main lever of over-production and over-speculation in commerce... the reproduction process, which is elastic by nature, is here forced to its extreme limits... The credit system accelerates the material development of the productive forces and the establishment of the world-market... At the same time credit accelerates the violent eruptions of this contradiction - crises - and thereby the elements of disintegration of the old mode of production".

"An easy money-market calls [risky] enterprises into being en masse, thus creating the very circumstances which later give rise to pressure on the money-market".

Or, Minsky again: capitalism generates periods when "the financial structure [is] very good at financing inept investments", inevitably followed by periods of "financing insufficient investment to create... full employment".

The way out is to use the social control, currently invoked only to bail out disaster, for the general running of the economy; and to make it democratic, working-class control, rather than social control by the bankers' friends in government, on behalf of the collective body of bankers and bosses.


Timeline

Late 2006: After a huge boom in "sub-prime" mortgages in the US, more households begin to default on payments, and house prices begin to fall.

2 April 2007: New Century Financial, a big US mortgage firm, goes bankrupt.

Summer 2007: Federal Reserve and other central banks start trying to ease the crisis by pumping more credit into economies and (the Fed, at least) cutting interest rates.

28 August: German regional bank Sachsen Landesbank is "rescued" by being bought up by a larger bank, Landesbank Baden-Wuerttemberg. Many other big banks announce probable large losses.

14 September: People queue up to get their money out of Northern Rock bank. Government stems panic by announcing that it will guarante all the deposits.

October: Bosses of Citigroup and Merrill Lynch resign (with large pay-outs) after announcing huge losses.

22 February 2008: Northern Rock nationalised.

15 March: Bear Stearns investment bank collapses, taken over by J P Morgan with a $29 billion Federal Reserve bail-out.

13 July: IndyMac collapses - the second-biggest bank in US history to fail.

7 September: US government nationalises Freddie Mac and Fannie Mae, the two big "government-sponsored" (but up then, privately-owned) firms which have been issuing 75% of all new US mortgages.

14 September: Lehman Brothers investment bank goes bankrupt.

16 September: Merrill Lynch investment bank seeks rescue by being taken over by Bank of America (a commercial bank).

16 September: US nationalises AIG, the USA's biggest insurance company. The Federal Reserve announces it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9% and effective control of the company.

17 September: British government brokers deal (including waiving law) for Lloyds TSB to rescue HBOS by taking it over.

18 September: US Treasury Secretary Hank Paulson announces plans to make $700 billion available for the US government to buy up dodgy mortgage-related paper from US financial institutions and thus restore those institutions to health.

21 September: Federal Reserve announces that the two remaining big US investment banks, Morgan Stanley and Goldman Sachs, will be helped to change their legal status to "bank holding companies" (with more government regulation, and more access to credit from the Federal Reserve).

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