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Socialist Party of Great Britain - Capitalism In Crisis - The Banking Crisis.

The headlines have recently been made by the banking crisis. There is nothing new in this; every trade depression is accompanied by bank failures or banks losing much of their assets. Walter Leaf in BANKING (1926 edition, page 59) said that the crisis of 1837: “it is believed that every bank in the United States, without exception, suspended payment”.

And the same happened again in 1875. Writing of the American depression in the 1930’s, H. G. Nicholas said that “two-thirds of the banks of the country had closed their doors” (THE AMERICAN UNION, page 252).

H. M. Hyndman, in his COMMERCIAL CRISES OF THE NINETEENTH CENTURY (page 95) wrote of the collapse of the great banking house Overend & Gurney, described as standing next to the Bank of England, and “their name and influence extended to all parts of the civilised globe”. When they stopped payment on 10 May 1866; “The panic occasioned throughout Great Britain was to the full as furious and unreasoning for the time…as the panic of 1857”.

Hyndman said that the Foreign Secretary:

Was impelled to send a circular to all our Ambassadors abroad, in order to assure foreigners that the bottom had not fallen out of our island”.

Banks make the most of their profit by borrowing money from depositors at a low rate of interest and lending or investing at a higher return. In recent years the banks extended this tradition. Commercial banks - Britain's high street and America's Main Street banks that take deposits from the public and process cheques - have purchased large quantities of so-called structured finance products from investment banks. (The latter differ from commercial banks in two main respects, that they trade and underwrite securities, and that their executives receive vast incomes and bonuses)

According to the economist, Tim Congon,

In principle the typical structured finance product bought by a commercial bank has been very safe and, when issued, was given a triple-A rating by the credit rating agencies. These triple-A securities ought to repay 100 cents in the dollar, 100 pence in the pound, 100 cents in the euro and so on. The great majority of them probably will repay in this way, despite the recent financial crisis”.

But he went on to say:

Unfortunately last year (2007) the wholesale money markets closed up for a wide variety of reasons, of which the most important was the fall in American house prices and the implications of that fall for the value of the structured finance securities. Triple-A securities dropped in value, often by 10 to 20 per cent. If such securities were, say, 10 per cent of high street bank assets then they had lost 1 or 2 per cent of the value of all their assets” (TIMES 02.10.08)

A drop in the value of assets of 2 per cent wipes out 40 per cent of the capital of an organisation such as a bank. According to rules developed by international financiers in Basle, Switzerland, over the past 20 years, a bank that has lost a large portion of its capital must reduce its assets to restore the capital-to-assets ratio to its original level.

The banks can shrink their assets by selling off securities or force their customers to either repay loans or renegotiate the interest rate on overdrafts upwards which have the consequence of driving some businesses into bankruptcy and the inability of others to get credit for their commercial needs.

Credit-Crunch

The so-called “credit-crunch” occurred when banks hugely reduced their lending to each other because they were uncertain about how much money capital they had against bad debts. Many banks did not have the confidence of being re-paid loans with the result that some of the biggest banks in the UK were deprived of the finances they needed for their day-to-day activities.

According to the BBC NEWS (07. 12. 08) part of the problem was the high rate of loans through the London Interbank Offer rate (Libor). . Libor is fixed once a day and sets the rate of $360 trillion (£210 trillion) worth of financial products worldwide, ranging from mortgage rates to car loans. The last time Libor was as high as it is now was in the aftermath of the collapse of US hedge fund Long Term Capital Management in the late 1990’s which had been founded by two Nobel Prize winning economists, when banks worldwide feared a financial crisis.

In 1998 LTCM lost $4.6 billion in less than four months following the Russian financial crisis and became a prominent example of the risk potential in the hedge fund industry. The fund folded in early 2000. The Nobel Prize had been given in recognition of sets of mathematical equations being produced by the two economists, Scholes and Merton, allegedly demonstrating “a crisis free” economic model for investment and risk management. They were wrong. Capitalism is anarchic and unpredictable. The US government through the Federal Reserve had to bale out the US financial system.

Out of their profits banks have to meet the cost of its employees (900,000 workers were employed in the banking sector as of December 2008 according to the Office of National Statistics). The cost of the maintenance of the financial infrastructure like building maintenance runs into millions of pounds each year.

Banks can get into difficulties, either by their depositors wanting to withdraw all their deposits, or lending money to individuals, companies or governments which go bankrupt or default on a loan. If depositors lose confidence in the bank and try to get their money out the bank is in trouble because they have only very small amounts of cash in their tills or on deposit at the Bank of England.

One way to reduce costs is to merge, close down surplus outlets and make thousands of bank staff redundant. And this is precisely what the Banks are doing whether private part or fully nationalized. Lloyd Banking Group, the part nationalized bank, has just announced it is getting rid of another 2100 jobs taking the total jobs lost since Lloyds merged with HBOS and received £17 billion of government loans to just over 7000 workers (EVENING STANDARD 30.06.09).

The Credit Crunch also had a devastating effect on Northern Rock. In 2006 the bank had moved into sub-prime lending via a deal with Lehman Brothers who, themselves, were to go bankrupt in 2008. Although the mortgages were sold under Northern Rock's brand through intermediaries, the risk was being underwritten by Lehman Brothers. On 14 September 2007, the Bank sought and received a liquidity support facility from the Bank of England, following problems in the credit markets.

This led to many customers queuing outside branches to withdraw their savings (a run on the bank). The Labour government was forced to nationalize the bank even though they subscribed to the current dogma of economic liberalism where the weak should be allowed to fail “moral hazard” as the Governor of the Bank of England called it.

The Banking system in the US is suffered a similar painful adjustment. The worsening U.S. economy prompted the Federal Deposit Insurance Corp to double its projected U.S. bank failure costs to more than $80 billion over a five-year period ending in 2013. The 25 U.S. bank failures in 2008 cost the agency $18 billion, the FDIC said. Another $65 billion in bank failure costs is expected from 2009 to 2013, it said. In February of this year, the FDIC announced that the number of problem U.S. banks jumped by nearly 50% to 252 in the fourth quarter of 2008(CNN NEWS 27. 02. 09)

Nationalisation is not Socialism

THE FINANCIAL TIMES accepted the nationalisation of Northern Rock as the "least bad of limited options" (Editorial, 17 February 2008). For THE ECONOMIST it was similarly "the least worst of several poor options". And they went on to say “"Critics who accuse the government of having reverted to its old socialist leanings of the 1970s are plainly wrong?"(18 February 2008).

However, nationalisation of industries carried out by past Labour governments during the 1970’s was not ‘socialist’. The State took over failed industries in order to manage them better in the interests of the wider capitalist economy. Northern Rock is expected to be loss making until 2010. It has repaid £15.4bn of the government loan, leaving a further £11.5bn to be repaid.

There was talk of nationalising all the banks as occurred in Sweden in the 1980’s. An argument was put forward for complete nationalisation by the Economic Editor of THE EVENING STANDARD, Anthony Hilton (The political tide is turning against our greedy bankers, 09.02.2009).

He said:

…if everything is brought under state ownership it would become much easier to hive off the toxic assets into a “bad bank” where they could be left like a nuclear waste site, gradually to become safe and re-usable, while the clean part of the bank could quickly return to its traditional business of deposits and lending. In this case nationalisation works not because the state has deep pockets, but because it removes the private sector conflict between who pays the costs and who gets the profits. The taxpayer does both

Not once did Mr Hilton state this was a “socialist” policy. In his view nationalisation was in the interest of the capitalist class as a whole.

At the end of February 2009, Citigroup and the US Treasury reached a deal that saw the government substantially increase its stake in the ailing bank from 8% to 40%. Again this had nothing to do with Socialism but the capitalist State forced to intervene to prop-up a bank in economic trouble which could not be allowed o fail in the interests of the capitalist class as a whole.

In the US there are free market fundamentalists claiming that the Bush- Obama bale out of the banks, housing and car industry is “socialist”. Some even claim that Bush and Obama are “socialists”. These crazed fundamentalists believe that any interference in the economy is “socialist”. In the 1930’s some Republicans attacked Roosevelt’s policies as “Communist” and F. A. Hayek’s book “THE ROAD TO SERFDOM” was intended as an attack on the “socialism” of the New Deal.

Even Keynes was denounced as a “socialist” rather than as a “saviour” of capitalism. According to the INDEPENDENT, following President Obama’s bail-out of Citi-Corp he was described in the Republican press as “a communist” (28.02.09). Market fundamentalists do not understand what capitalism is, how it operates and the role of the capitalist state as the “executive of the bourgeoisie”. In reality there is no such thing as free markets and capitalism without the Sate.

As for Lehman Brothers not all was doom and gloom. Senior executives made their escape with millions of dollars in bonuses to waiting chauffeur-driven cars, smart Florida villas and the obligatory private boat. And they knew how the system worked. The disgraced former chief of Lehman Brothers 'sold' his $13.3 million Florida mansion to his wife for just $100 - two months after the investment bank went bust with debts of $613 billion. Richard Fuld transferred ownership of the 3.3 acre seaside property to his wife for $100 for the transaction, the minimum amount allowed to transfer property.

Many workers at Lehman, many on six-figure salaries - were not so street wise. They had invested their bonuses in the company’s share portfolio and lost everything including their jobs.

HARD TIMES IN WORLD CAPITALISM

One aspect of the financial turmoil has been its impact on capitalist countries like Iceland. One of the world's richest countries only a year ago, Iceland and its 300,000-plus population are now facing a deep economic crisis. Interest rates have risen to record levels of 18 percent. Unemployment rates that were nearly nonexistent only eighteen months ago rose to 5.4% in December 2008. The Government collapsed as hundreds of workers were laid off each week with families having to turn back to horse meat, a traditional staple that's half the cost of beef.

By the 1990s Iceland had grown increasingly prosperous, due mainly to financial deregulation and a stock market boom. The Organization for Economic Development declared Iceland, per capita, the fifth richest nation on earth. New parents received nine months of paid maternity leave; workers got an average of five weeks of holiday a year. However, in October 2008 it became the first national casualty of the financial crisis due to a banking sector with massive overseas debt totaling billions of dollars. Ultimately Iceland's three major banks collapsed and all had to be nationalized.

Reykjavik suffered the largest loss of any stock market in 2008 when the Icelandic bourse lost 94 percent of its value. In November, the government negotiated emergency loans from the International Monetary Fund and adjoining Nordic countries. The working class in Iceland learnt nothing and in January 2008 voted another capitalist party into power.

THE EVENING STANDARD (20.02.09) reported that there are fears of a full-scale financial crisis in Eastern Europe which will have financial repercussions for Western banks, many of whom are highly exposed. The Western banks are all in trouble through having lent vast sums of money to companies and governments which, because of the depression, are unable to keep their repayment agreements or, in some cases, even to pay the interest. Western banks have lent $1.74 trillion (£1.22 trillion) to the former Soviet bloc, including $1 trillion of foreign loans and $700 billion in home currency debt through local banking subsidiaries.

The European Bank for reconstruction and Development (EBRD) predict that Eastern Europe requires as much as £385 billion to re-finance loans and assist its banking system. The EBRD will provide up to 6bn Euros for the financial sector, the European Investment Bank will put up 11bn Euros of lending facilities, while the World Bank will provide about 7.5bn Euros (BBC NEWS 27.02.09).

13 million workers in the EC are unemployed as at the end of February according to Eurostat (INDEPENDENT 28.02.09). Overall, 26 million workers are unemployed in Europe as a whole.

Already Belarus, Ukraine, Hungary and Latvia have had to be helped by the IMF. However, IMF loans are granted only on the condition that the borrowing government agrees to restrict its expenditure and take whatever other punitive measures the IMF will impose. One action has been cuts in government expenditure; increase taxes reduce public sector pay.

For Russia the problem has been the fall in oil prices. Russia has been unable to pay for necessary imports and meet commitments on their huge debts. Russia's foreign exchange reserves have fallen by $210bn, from their peak at end of July 2008 to $386.5bn as of 23 January 2009.

Russian officials have already warned that growth in 2009 will be close to zero after a decade of economic boom. The Russian economy has been hit by the fall in the price of oil, which ended 2008 below $50 a barrel, having hit record highs of $147 a barrel in July. Manufacturing slumped 24.1% in January from a year earlier, while extraction of raw materials declined 3.6%. Car output dropped 79.7% in January as consumers cut back on spending. And according to the Russian business magazine, FINANS the number of Russian billionaires fell to 49 from 101 in 2008 largely by the consequences of the global downturn (BBC NEWS 16.02.09).

While the depression, like all earlier ones, has seen thousands of companies go bankrupt in America, Britain and other countries, it appears that the governments will, this time, try to prevent widespread failures of the big banks. Former Republican President, George Bush was forced to assist the US banking system with his Troubled Asset Relief Programme (TARP) towards the end of his presidency a reform measure continued by his successor, Barack Obama. Similarly the Labour Government gave a £35 billion life line to Lloyds Banking Group, the Royal Bank of Scotland and other banks although the “Toxic Assets rescue” may reach £400 bn (SUNDAY TELEGRAPH 8.02.09).

And a small step has been taken in Britain to protect depositors against losses through bank failures. The banks, with Bank of England approval, have arranged to set up funds to ensure that depositors up to £50,000 will receive all their deposits in the event of banks or building societies closing down.

It should of course be remembered that whatever governments may, or may not do, the banks cannot escape running up huge bad debts in a depression, at the expense of bank shareholders. If banks fail, depositors lose. Any government financial aid must come out of taxation a burden which falls on the capitalist class as a whole –a choice of evils as far as the banks are concerned.

What of the Future?

What of the future? In this depression as in all the others, voices are heard prophesying the coming end of capitalism, a “final collapse”. More so in the 1930’s when it was Communist Party orthodoxy. Some Trotskyists groups on the capitalist Left in Britain and elsewhere hold this position today.

This was also the view of Michael Moore on CNN NEWS in December 2008. He saw in the problems of Ford and General Motors a point of no return and “the end of capitalism as we know it”. This overlooks the fact that all the parties of capitalism, including the Labour Government and President Obama, are busy devising policies in the belief that it will keep the system going.

In February 2009 Obama passed his “Keynesian initiative”; a £1 trillion plan to revive the banking industry and a separate £573 billion “economic stimulus plan” intended to create up to four million jobs. There is little guarantee that this policy will be a success but even if the US car industry or housing was to collapse it does not mean that generally commodity production and exchange for profit has ceased elsewhere.

Michael Moore forgets that the nature of capitalism is for capitalists, owning the means of production, to exploit workers by paying them less than the wealth they create in the productive process. That reality does not change even if Ford and GM motors disappeared from the car market.

In fact GM is now out of Chapter II bankruptcy with the US government owning some 61 per cent of the company, the Canadian government the union’s health care trust and the bondholders owning the rest (INDEPENDENT ON SUNDAY 12.07.09). Of course there is social pain. GM plans to close around a third of its plants and lose about a quarter of its workforce but it is not a charity but a business who has to make a profit. The reality of class exploitation is only abolished with the establishment of Socialism.

Capitalism in the US is no where near collapse. There are more workers in the US employed than the 6 million who are not. Capitalists are still prepared to invest, buy and exploit labour power to make a profit. Contrary to Moore’s pessimism, while there is a working class to exploit capitalism will continue to exist. As Marx stated there is “no permanent crises”.

Through a combination of low interest rates, lower wages, the destruction of competitors, devalued commodities bought cheaply and so on capitalists will begin to invest again and capitalism will continues to the next economic crisis and trade depression. Only the world working class can abolish capitalism. Until workers take conscious and political action the present depression will end only to be followed by another crisis and depression, and another and another.

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