Economic crisis - "Regulating" this crisis-prone capitalist system is no answer

Apr/May 2009

As we go to press, the G20 summit is about to be held in London. In the run-up to this summit, a huge media campaign promoted Brown's plan to, quite simply, lead the planet's 20 richest countries into adopting a "worldwide response to the crisis" capable of dealing with the problems of all countries, rich and poor!

However, such an attempt to use Britain's ceremonial presidency of the G20 in order to pose as a "world leader" who is out to save the planet's population from the devastation of the crisis, was merely ridiculous posturing - especially given the relatively limited political weight and economic resources of the British state, compared to those of its US and Japanese counterparts, or even to the euro-zone block.

But then, of course, this pathetic posturing was primarily aimed at British public opinion, in an attempt to try to make up for the discontent caused by months of flooding capitalist finance with the government's largesse, while doing nothing against the rising tide of job and wage cuts, factory closures and repossessions. Probably much the same could be said of the posturing of every single head of state participating in the summit, except maybe Obama, who is probably the only one who does not need a popularity boost for the sake of his domestic public opinion, for the time being at least.

The G20 - A "den of thieves"

All this posturing is linked to the fact that, of course, the idea of a coordinated international response aimed at countering the impact of a crisis, which has been international in scale right from the beginning, may appear to many people as making a lot of sense.

It is not for nothing that British union leaders have chosen the occasion of the G20 meeting for their first ever national demonstration against the cuts in jobs, wages and conditions, which have been happening ever since the beginning of the crisis. This is partly because, this a "safe" option for the union leaders: by setting the G20 summit as the target of their only national protest, rather than the British government and bosses, they point to the G20 as being the problem - that is, a body which will disappear into thin air within days, beyond the reach of workers - thus removing the need for a follow-up to this protest once the summit is over. But union leaders also chose this target because it may appear relatively credible to workers, given the international nature of the crisis, and therefore a reasonable choice for a national protest - which allows the union machineries to appear to be doing something against the crisis, when, in fact, they intend this protest to be a dead end for those workers who are looking for ways to resist the attacks of the capitalist class.

Much the same can be said of Brown's posturing. As he has done so many times in the past, in particular at previous summits dealing with the dramatic situation of the poor countries, Brown can pose, for the duration of the summit, as championing a comprehensive bailout of the populations affected by the crisis across the world, and then return to his policy of bailing out capital on the backs of the working class, once the summit is over.

In theory - that is, if today's society was run in the interests of the majority, instead of being ruled by the greed for profits of a tiny capitalist minority - bodies like the G20, together with their various satellite agencies, like the IMF and World Bank, could potentially mobilise most of the world's resources and coordinate their use. They could do this despite the obstacles represented by obsolete national boundaries, so as to minimize the impact of the crisis on populations, if only by keeping afloat the useful activities which are affected by the crisis and protecting the jobs of those under threat. And maybe they could use the opportunity to put some rationality into an economic organisation so totally disrupted by profiteering.

But unfortunately, we live under capitalism and under the rule of private profit. For the G20 to go down such a road would require the political will on the part of all the governments, which none of them shows - not in the policies they implement in their respective countries, let alone when it comes to dealing collectively with the crisis on a world scale!

Because, in fact, the G20 is merely an assembly of robber barons. Its participants are trustees of rival capitalist classes and their only concern is to defend the interests of their respective capitalist masters against their competitors from other countries - and this, regardless of the consequences for the world population, or for the population of their respective countries, for that matter. This is why the many G8, EU and other international summits held since the beginning of the crisis, have produced only a long series of statements of intent, while proving incapable of agreeing on any practical measures. The fact that, even before the London summit, the main G20 leaders had already fallen out between themselves over the nature of the short-term measures that need to be taken, only illustrates the chronic paralysis of the G20 as a whole.

And even if bodies like the G20 did manage to agree, eventually, on practical measures against the crisis, workers would still have nothing positive to expect from such measures. Because the G20 just brings together 20 replicas of Brown. And just as Brown's policy in the crisis has been entirely aimed at helping British business to cover its losses out of public funds and make the working population foot the cost of the resulting bill, in the same way the only measures the G20 would take against the crisis, would be designed to bail out the capitalist system, but certainly not the working masses.

"Irrational market" and regulation

Meanwhile, in Britain, more and more commentators have been revisiting the causes of the crisis and what should have been done to prevent it.

So, for instance, one could read recently the following statement reported by the press: "Markets have shown not to be rational, excesses have not been corrected by market discipline". These could have been the words of a disgruntled trader joining London's G20 protests, after losing his job in a City financial firm. But, in fact, these were the words of Hector Sants - a former high-flying bank director turned Chief Executive of the Financial Services Authority (FSA), the body set up by Labour to "regulate" the financial sector. They were part of a speech delivered in mid-March this year, which was peppered with many other similar sweeping statements, such as, for instance: "the recognition that financial markets are not rational, but rather that they are a behavioural system built around personal aspirations, is critical to us". And who would disagree with this, even if it would have been more accurate to talk about greed than "aspirations".

Only 12 months ago, such language would have caused a storm of protest in the City and attracted a severe admonition from Downing Street. Wasn't the FSA just meant to be an "arms length" body, whose task was merely to oversee a market which, according to the official line, was supposed to correct its own hiccups automatically? Wasn't the brief of the regulators based on a general consensus that the market was so "rational and perfect" that it could digest even the most mind-boggling "financial innovations" and that its operators' frantic drive to maximise profits could not possibly cloud their judgment to the point of putting the financial system at risk, let alone the whole economy?

But then, 12 months ago, ministers were still claiming that Britain's economic "fundamentals" were healthy (as opposed to those of the US) and the Bank of England was still arguing that the worst danger that the British economy was facing was that companies' behaviour might become "too pessimistic". So much water has flowed under the bridge since then, that the landscape has changed beyond recognition! If only because, in view of the brutal rise of job cuts, no-one can pretend any more to ignore the madness of the factors which led to the present crisis, nor its extent.

These days, indeed, Hector Sants' statement hardly comes as a surprise, even from the lips of such an official pillar of the City establishment. Now that the crisis has exposed the bankruptcy of the capitalist financial merry-go-round, there is no shortage of economic experts, including among yesterday's most outspoken champions of the free-market dogma, who come out with similar bold condemnations of the capitalist market's irrationality.

So, for instance, Adair Turner, another former high-flying banker and ex-director general of the bosses' organisation CBI, who was appointed chairman of the FSA last year, formulates a similar view in his recent 122-page review of the workings of the banking system. He argues, for instance, that: "The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value and market discipline of individual bank strategies has proved ineffective." In other words, Turner reckons that the past official approach, based on voluntary codes of practice, that banks and other financial institutions were supposed to implement willingly without the need to put any pressure on them, nor even to really monitor what they did about the problems raised, has been a complete failure. And he comes, very respectfully and politely, to the conclusion that market mechanisms cannot be relied upon to cushion the hectic operation of financial trading and that banks simply cannot be trusted to act responsibly.

Of course, all this may seem fairly obvious to anyone who has no stake in the capitalist system and, as a result, looks with a certain amount of suspicion at the mindlessness of the capitalist sharks' profiteering - a mindlessness which is primarily a feature of the system itself. But for managers of the profit system like Sants and Turner, it has taken the catastrophic and uncontrollable devastation caused by a full-blown crisis such as the present one to acknowledge the obvious. Their having now "discovered" the flaws of the system, does not mean, however, that these representatives of big business have much to offer in the way of effective measures to offset its damage, let alone to make it workable. But then, nor is there much that can be done to turn a bankrupt system into a viable one!

What both Sants and Turner were doing in the speech and review quoted above, was outlining the kind of reforms that they considered necessary in the way financial markets are regulated by the FSA. Indeed, the new fad in town, these days, among economic commentators and politicians alike, is known as "financial regulation". Hasn't Brown himself hailed the "new, healthier" market economy of the future, that will be guaranteed by the "better regulation" he intends to promote and enforce?

Well, probably the best illustration at hand of what Brown really means by this "better regulation", is provided by his current bailout of the banking system.

State-owned - but, please, don't tell anyone!

Since Brown's third "targeted" rescue of large British banks, at the beginning of March, following the sharp fall in share prices on the stock market caused by the huge losses announced by RBS and Lloyds-HBOS, his government runs the largest state-owned banking sector in Europe. With the 77% share of Lloyds-HBOS and 90% of RBS it acquired on this occasion, the "arms-length" agency UK Financial Investments, set up by Brown to manage the government's shareholding in bailed out banks, now effectively owns over a third of the assets of the banking industry.

To date, out of Britain's largest banks, only HSBC and Barclays have managed to avoid having to relinquish some degree of control to the state in return for a share of its bailout money. Although, this does not mean that these two banks have not benefited from the various government bailout schemes. In particular, they have used, like any other bank, the Bank of England's programmes allowing them to exchange some of their more or less unrecoverable loans (their so-called "toxic" assets) against fresh cash, either permanently or for a few months or years. Only, unlike the now state-controlled banks, Barclays and HSBC have managed to raise fresh funds from private shareholders, rather than having to resort to public funding, and to retain large enough resources allowing them to do without the government's guarantee for the rest of their loan portfolio.

It is rather ironical to note, in passing, that, precisely at the same time as the government is thus carrying out the largest "nationalisation" seen since WWII, it is going out of its way to re-energise its privatisation programme in other areas (such as Royal Mail or the Atomic Energy Authority, for instance), despite the fact that it has been dormant for quite some time and that there is not much left to be sold, anyway.

But then, who said that Brown and Darling were willing promoters of state-ownership? One should remember their convoluted euphemisms and rather indecisive attitude, before they finally took over 100% of Northern Rock, back in the early days of the crisis. And then how, after the government took over the debt and toxic assets of the collapsed Bradford & Bingley, they set up this strange "beast" called "UK Financial Investments Ltd" - as a private business, whose sole shareholder is the Treasury and whose board of directors is made of 5 former directors from private banking (including its chairman), one former private banker recently head-hunted by the Treasury and one single genuine Treasury employee!

Isn't it ironical that the majority of the board of the state-owned body in charge of managing these state-controlled banks, which have all been bailed out of bankruptcy by public funds, should be made of former high-flying private bankers, who have been in charge, at one stage or another, of the very same greedy profiteering which led the banking system as a whole into the present meltdown? Or, rather than ironical, shouldn't one say that there is something mad about this?

But then, of course, there is some rationality in this madness, if what the government is trying to do, as it constantly does in virtually every aspect of its policies and activities, is to demonstrate its respect and loyalty towards the interests of the capitalist class and, in particular, to highlight the fact that it has no intention of keeping these failed banks in public ownership one minute longer than is absolutely necessary from the point of view of the interests of the capitalist system as a whole.

The RBS/Lloyds-HBOS bailout farce

The fact that this government is terrified of being suspected of wanting to interfere with the profiteering of the capitalist class was illustrated once again by the convoluted process which led to its takeover of RBS and Lloyds-HBOS.

Both banks were heading straight to the wall when the government stepped in. RBS, for instance, had seen its market value (the total value of its shares) fall to £9bn - compared to annual losses worth £24bn and total liabilities far larger than Britain's annual GDP! Had they been allowed to collapse, the whole British banking industry would be littered with unpaid debt left by RBS. It would have been shattered, and probably also, the banking industries of several European countries, like the Netherlands. In addition, there would have been serious knock-on effects in the US as well, due to RBS' big presence there. Not only that, but the many non-banking companies whose operations depended on their regular line of credit with RBS, would have been immediately threatened with bankruptcy. RBS was just too big to be allowed to collapse. The same applied to Lloyds-HBOS, although for reasons which were somewhat different. Since HBOS was still Britain's largest mortgage lender, its collapse would have had unpredictable, but certainly catastrophic consequences on an already very sick housing market.

So, bailing out these two banks was vital. But the sums required were enormous. Both banks were far too sick, not only to raise the funds they needed immediately, but even to be able to carry on trading as banks for any length of time - which required that they should be able to borrow money from the money market in order to finance their regular lending, not to mention the additional lending to businesses that the government was demanding from them, as a condition for bailing them out. Bankrupt as they were, no-one would carry on lending any money to these banks, except on a very short-term basis and at a very high cost - that they could not afford.

So, in addition to the fresh funds already injected into these banks, the Treasury injected another big wad of cash (£35bn between the two), which brought its share-ownership to 43% in each bank. At this stage Brown and Darling let it be known that, whatever happened, they were determined to ensure that the state's share of the two banks would remain at 43% - so as to safeguard their all-important status as private businesses. For them, anything (except bankruptcy) was obviously preferable to full nationalisation!

However, this was only enough to mend the existing leaks, but not enough to allow the banks to carry on trading. Both banks were overloaded with hundreds of billions of "toxic" loans, which made their credit-worthiness next to nil. In normal times, the solution would have been to insure these loans by buying a guarantee from a specialist insurance company (like the now defunct US giant AIG, which collapsed precisely due to having insured too many "toxic" assets). But firstly, this would have required a lot of cash to pay for the insurance, and secondly, it would have been hard to find a specialist insurer willing to guarantee such an enormous amount of such risky assets. This led to yet another dead end.

At this point, the Treasury turned itself into a specialist insurance company, by offering its own guarantee scheme. Overnight, the Treasury's magic wand turned over £600bn worth of "toxic" assets into perfectly respectable ones, by committing the public purse to compensate whatever losses would result from a default on these loans. This instantly restored the credit-worthiness of the two banks. But there was another problem: how were the banks going to pay for this insurance? They had no cash for that and yet, they could not easily be allowed to get away with paying nothing, since many of the "toxic" assets guaranteed by the Treasury were certain to default at some point, with the public purse having to pick up the bill. Providing the insurance for free would have been politically unjustifiable for Brown.

So, after much horse-trading, a compromise was found: the banks would pay for the guarantee using their own (virtually valueless) shares. However, this raised a new problem: handing over more shares to the government would break the 43% state share-ownership ceiling that Brown had committed himself to respect. But there was no way around that one. So Brown had to move the goal posts by moving the ceiling and inventing... a new linguistic device: the government's "economic stake" and its "voting stake". In the end, while the state now owned 77% of Lloyds-HBOS shares, it was agreed that UKFI would have only 64% of the votes among the shareholders. At RBS, which was in much worse shape, the level was even higher: 90% shares for 75% voting rights.

Ultimately, the only purpose of this charade was to ensure that the City would not castigate the government for having "swallowed" the two banks, as had been the case after the emergency take over of Northern Rock!

Regulation is not an answer for the working class

The charade of RBS/Lloyds-HBOS would not be complete if was not mentioned that, actually, the huge share of these banks which is controlled by the government (and the tens of billions of public funds which have been injected into them) has changed very little to the way they operate. The scandal surrounding the grand pay-off offered to former RBS boss Fred Goodwin, only highlighted two things: that the government had been represented on the board which took the decision of making the pay-off and that, when consulted, Paul Myners, the minister in charge of the City, had okeyed the deal. It was only because the pay-off was revealed by the press, which chose to make a big story of it, that Brown felt obliged to challenge it.

But the fact is, that in accordance with Darling's much reiterated undertaking that the state-controlled banks would continue to be run "commercially", the government is hardly represented in the leading spheres of these banks. And when it is represented, its representatives are ex-merchant bankers, like Paul Myners, who see no problem in the greed which dictates the "normal" operation of these banks.

To that extent, these banks are only state-controlled on paper, but not in the real world. The state pays the bills and the bankers spend the money. Non-interference by the government in the banks' profit business is the rule.

And this highlights what "regulation" really means for people like Brown. It only means clearing the mess that the capitalists leave around their profiteering in order to help them to boost their profits - but certainly not dictating to them how they should operate their banks in the interest of all. The interest rates and the fees charged by the state-controlled banks are not lower than those charged by the others. Nor do they cut fewer jobs or repossess fewer homes - in fact, they can repossess even more, as the case of Northern Rock shows.

Today, the FSA may well apologise for its past leniency towards the bankers. But this changes nothing with regard to the role of regulators as they see it. If the consensus today is that banks need to have a higher level of capitalisation - which it is - the FSA will enforce it, because the capitalists are willing. But what will happen tomorrow, if and when there is an upturn and the fear of excessive risk-taking fades away in the City? Then it will fade away at the FSA and other agencies too, because their primary role is to act as auxiliaries of the capitalists' profiteering, including in its most short-sighted and, therefore, irresponsible aspects.

Ultimately, any form of regulation is bound to be determined by the fact that those who enforce it are themselves part of the same universe as those they are meant to regulate, with the same language, the same preoccupations and the same interests. It is a question of social organisation. And as long as the capitalist class rules, whatever regulation there is will merely be designed to protect its system and its affluence as a class, not to protect the interests of the majority in society.

But for now, in this period of crisis, if anything is illustrated by the role of the banks in today's mess and the state bailout of the banking system, it is that banking is too dangerous to be left in the hands of bankers. Profits are too big and too easy (or can be made so) and the role of the banking system in oiling the cogs of the economy, is too vital for it to be allowed to fail. And it is precisely because of this vital role that banks would be much more useful to society as a whole, if they were concentrated into one single entity, without any interference from profit-making, to provide the funding where it is needed, when it is needed and for what is needed, from the point of view of the interests of society as a whole. And this is what real nationalisation would be - the formation of a single bank, to serve the needs of all, rather than the greed of a few.

Of course, what it would require as well, is that this nationalised banks comes under the scrutiny of people whose primary concern is the interests of the population, rather than people like Brown and Darling who see their role as keeping the capitalists happy. And the best guarantee is that the bank be subjected to the control of its own employees - not the traders, but the backroom and counter workers, those who never gain anything out of the profiteering of the bankers.

In a way, the very necessity that the government has had to face from one hiccup of the system to the next, to take over an increasingly large section of the banking system, is a recognition of the need for the whole banking system to be merged into one single nationalised bank, under the control of the population. This would be far more efficient and far less risky than the frantic piecemeal pseudo-nationalisation carried out by the government, which certainly helps to line the pockets of a number of parasites, but only papers over the problems, instead of resolving them once and for all.