Severe Financial Warning

A Crisis of Biblical proportions

This has to be a short post, because I did my back in a few days ago, and its painful sitting typing. However, events last night on the markets, lead me to believe that a very serious situation might have arisen. If I am right, and it plays out, then we are talking a complete financial meltdown, a catastrophe of Biblical proportions, "rivers of blood, cats and dogs living together etc.". What causes me to think that is two things.

Yesterday, bank stocks got trounced again. Britain's second largest bank - Royal Bank of Scotland - whose share price had already fallen, from over £6 last year down below the £2 price of its £12 billion rights issue, of just a couple of months ago - a rights issue which effectively diluted the share capital by 40% - got trounced again. Its share price fell to just £1.60. Some financial commentators have said that, if its price falls to £1.50, then it is likely to see possible takeover interest, or at least interest from wealthy speculators and investors. We'll see. Royal Bank of Scotland itself, along with other big British banks, had only last week bought shares in Bradford and Bingley, when its shares collapsed, after it botched a proposed takeover by a US Private Equity company. In the meantime, Santander, which does not seem to have the same problems, caused by exposure to the credit crunch, that other European banks have, has taken the opportunity to buy up Alliance and Leicester on the cheap, to be merged with Abbey.

In the US, the same assault on banks' capital base continued. Not only did the huge Government sponsored mortgage providers, Fanny Mae and Freddie Mac, continue to see their shares collapse, but another large bank, based in California, Indymac, collapsed, causing the state to have to intervene, to protect savers' deposits. As I said last week, it was becoming obvious that the state would have to intervene, to prop up Fanny and Freddie. Outright nationalisation was discussed, then, on Friday, a rumour spread that the Federal Reserve would allow them to have access to the discount window - an emergency measure that it was argued might have saved Bear Stearns. It effectively means the Fed takes mortgage paper in return for cash - but then that rumour was denied by the Fed.  Reminiscent of both Northern Rock and Bear Stearns, official spokesman appeared to proclaim that both Freddie and Fannie were sound and so on. Its said that whenever a spokesman has to appear to give such pronouncements it means the bank is already dead. Sure enough the shares of Freddie and Fannie, along with other banks, continued to fall precipitously, yesterday.

Oil and Liquidity

Then, in the middle of Ben Bernanke's Humphrey Hawkins presentation to Congress, something surprising happened. The August Oil Futures' price fell by $9 a barrel - a fall of more than 5%, which is big, even for today's volatile oil market. There was no basis, in the fundamentals, for such a fall. It appeared that the cause was liquidation of positions by the distressed banks. In other words, banks, which have held positions in oil, for example, the growing number of Exchange Traded Funds, took the profits that these holdings have been showing, due to the rapid rise in the price of oil. But why??? The fundamentals for the oil price remain strong. Supply is not matching demand, and is not likely to. Even if new supply could be brought on stream, it is likely not to be for another 7 years, and, by that time, will not be anywhere near enough even to cover the increase in demand that would have arisen by that time. The increasing likelihood of an attack, by the US on Iran, means that dislocation in the oil market is likely to see the oil price spike, providing a perfect opportunity for holders of oil futures to sell, and make a huge profit. The only reason banks could have been selling oil, on such a scale, and under such conditions, is because they have to.

When the financial crisis hit Japan, in the 1990's, part of the cause was the extent to which Japanese banks had interlocking share ownerships. One bank held shares in other banks. If the share prices rose, then, on the balance sheets of other banks, this meant a stronger asset position, and meant that the bank could lend more money. But, when that all began to unravel, the opposite occurred. All of those bank shares collapsed, reducing the capital value of other banks, and causing them to have to liquidate assets, in order to bolster their balance sheets, to conform to legal requirements on reserve assets. That could be the tsunami about to hit US and British Banks.

It has long been suspected that capitalist states, the US Fed in particular, have intervened in capital markets. In the period after the Crash of 2001, one favoured method was thought to be for the Fed, or the Treasury Department, to buy equity futures, towards the last hour of trade, in the cash market, on days where prices had fallen sharply. By buying futures, particularly in large cap companies, that can move the market indices, at a time when the market is less liquid, prices can be moved more than during other times of the day. Moreover, seeing a sudden move in the futures prices, of important stocks, traders in the cash market, are forced to scramble to buy stock, for fear of being left short of stock, in these companies, the next day, if some important news comes out, which has been the cause of the move in the futures price.

In the long term, such manipulation of the market has to be unwound, it cannot be a means of preventing an ultimate fall in share prices - though in Hong Kong and elsewhere, where such intervention occurs openly and legally, the state has held large share positions, for considerable periods, in order to stabilise share prices - but it can, on days where large falls have been experienced, act as a firebreak, reversing the selling, and stopping a chaotic collapse. Such action, to manipulate the market, is probably illegal, but as recent years have shown, capitalists have little concern for legality in such matters.  The casino is rigged for the big players. Legal or not, it certainly gives the lie to the idea that capitalism operates through a "free" market. Its also thought that, because some large private financial institutions had gone short of gold, in a big way, some years ago - largely because they believed gold served no useful purpose; its price had collapsed, over 20 years, from a high of $800 an ounce, in 1980, to just $250 an ounce, in 1999; the dollar acted as world currency, and there were other assets that could be held, that produced a return - some of them were in danger of going bust, as the sharp rise in the gold price meant they had to cover these shorts, many of which were also highly leveraged. It is a certain fact that, at a time when the gold price was rising, central banks, in Britain and the US, began selling gold from their reserves. Such a decision, by Gordon Brown, a few years ago, cost Britain several billion pounds in lost reserves.

If the large banks are being forced into distressed sales of assets, it must mean that their balance sheets have been badly hit, and they need to rebuild their cash position, in order to conform with reserve requirements. At a time of credit crunch, that is all the more serious. The sharp fall in oil futures caused share prices to rise, including the share prices of the banks. That is partly due to the fact that the high and rising oil price has caused share prices to fall due to concerns about its effect on consumer spending. General Motors, which has effectively been bankrupt for several years, and which has only stayed afloat due to the profits earned by its financial and credit arm - GMAC, whose iffy mortgages Bradford and Bingley was contracted to take on - saw its share price fall sharply as demand for its gas guzzlers collapsed - demand for Toyota's Prius, and other small cars has continued to rise, however. But, such a respite is likely to be short lived. The basic fundamentals for oil remain the same, its price will continue to rise after this blip.

Byzantine

What the above demonstrates is the Byzantine web of interrelationships between capitalist firms and financial institutions, which as Paul Mason, on Newsnight, last week, said, requires a series of fictions to be maintained in order to keep going. Increasingly, those fictions are being exposed. None of this changes the basic economic fundamentals, of the current situation, or the argument I have outlined over the last few weeks, or indeed, the basic economic analysis I have outlined for the last 6 or 7 years. The world economy, IS in the Spring Phase of a new Kondratiev Long Wave, which has, and will, see phenomenal economic growth. The indication of that is that DESPITE the phenomenal pressures that have existed for the last year, the worst FINANCIAL crisis since the 1930's, the huge increase in oil prices etc., the world economy continues to grow. Indeed, Ben Bernanke said, yesterday, that US Second Quarter growth had been stronger than anticipated. Despite all the headline grabbing doom-mongering, in the bourgeois press, aimed, at least in part, to persuade workers from demanding wage increases, to compensate for high inflation, even in the old and sclerotic economies of the US and UK, weighed down with huge amounts of public and private debt, encouraged and accumulated in the last 30 years, as a means of countering the effects of the Long Wave downturn, we continue to see economic growth NOT recession.

But, clearly recessions CAN occur, even during the Long Wave boom. As Trotsky pointed out, in his critique of Kondratiev, there can be exogenous shocks. If, the world's most powerful financial institutions all collapsed - and financial services like other service industries now account for the most important aspects of economic activity - that would be one hell of an exogenous shock, which would be bound to have an effect on the rest of the economy. A lot depends on what happens in terms of the US financial institutions, and in particular Fannie and Freddie. At the moment the intervention of the US authorities is inadequate. But, its a careful balancing act for them. If they don't nationalise them then the possibility exists of a rapid collapse, before such action could be taken. If they do, then this would send a signal to the market that there was a really serious situation, and might cause a run on other banks, which would mean that Fannie and Freddie might be saved, at the cost of collapsing hundreds of other financial institutions. In fact, its thought that, even if they dodge this bullet, hundreds of US banks will either go bust or get bought up, because compared to Europe, the US has far too many small banks.

In fact, although some have said that the state nationalising Fannie and Freddie would double the size of the US deficit, this is not true. Although the assets of Fannie and Freddie run into trillions of dollars, the amount the state would have to inject is much, much smaller. Its only that amount, which would be exposed, because its unlikely all of those mortgages would go bad. In fact, as Jim Cramer said last week, buying up Fannie and Freddie could be seen, in a few years, as a good investment, for the US taxpayer, as those mortgages got repaid.

Either way, it is a serious situation for financial capitalism. Any crisis, that results from it, would be likely to be sharp and severe, but for that reason, might be short lived. Indeed, it might only strengthen China, and other new capitalist powers. China, in particular, with its state controlled economy, could be better placed than most to weather such a storm, especially given its huge reserves, and its potential to develop an enormous home market for its commodities. Given the fact, uncovered recently, that China has been developing a huge navy, including a large submarine fleet, in deep water, as a means of exercising control, in the area, such a development could strengthen China's position considerably.

The New Society Forces Itself on The Old

What is becoming clear, once again, is that the basic contradictions, within capitalism, mean that it cannot proceed on the basis of the myth of neo-liberalism - which really was a myth, because the capitalist state has been intervening in the economy, on an unprecedented scale, over the last 30 years, just using Monetarist rather than Keynesian fiscal measures - let alone old style Liberal methods. Increasingly, capitalism is forced to borrow from the forms and methods of the new society, of socialism. At the level of the enterprise, it is forced to replace competition with monopoly, and oligopolistic competition (which in fact has largely turned into oligopolistic co-operation, for example, the sharing of engines, the joint partnerships of the biggest car manufacturers etc.), to replace the price mechanism with long term planning, and to integrate this within the context of a macro-economic environment of stability, engineered by the state through monetary and fiscal intervention, and through a dominant role, for the state, in economic activity itself - even in neo-liberal America, the state accounts for around 40% of economic activity, and in Europe its closer to 50%. Now, even that most old style of state intervention is returning - state ownership.

But, capitalism can never utilise these forms and methods in the way socialism can and would. Capitalism remains interested only in the production of profit. It uses these methods for that end alone. And, for that reason, it can never utilise them efficiently or effectively. Only if workers own those monopolistic and oligopolistic enterprises can they begin to properly integrate their activities, gear them to meeting workers needs and so on. Only if workers, owning those factories, do the actual planning, of what to produce, can that integration begin to ensure that what is produced meets workers needs, and not the needs of the capitalists.

The economic stability, that workers need, is not one manipulated and engineered by capitalist state institutions, which is built on a series of fictions, which can collapse, but one that flows directly from the fact that workers own their own means of production, and plan production to meet their needs. Endless examples, such as the role of the state now in trying to suppress public sector workers wages, to the vicious class war unleashed by that state, against the miners, in 1984, to the unleashing of MRSA and other features of poor provision, for workers, by that state, show that workers have no real reason to argue for nationalisation, or to support existing state capitalist forms of provision.

As a minimum, workers should demand workers control over these enterprises, from the NHS, to the provision of pensions and other benefits. But, workers control will never be conceded, by the bosses and their state for long, and Marxists should not delude workers into believing they will, any more than they should delude workers, by arguing for state intervention in the first place. The real solution lies in the answer given by Marx. Workers should begin to establish their own co-operative enterprises now, especially in those most important aspects of life such as housing and healthcare, and education. But, that will mean that workers will need to also look to taking over all those ancillary industries that currently leach off these enterprises - look at the prices that the NHS pays for drugs, for example, compared to the prices for those same drugs, in Europe, where patients have to pay for them. That is the solution Marxists, and other socialists, should now be proposing, along with the development of existing co-operative financial institutions, and their closer integration - the Co-op Bank and CIS, with Unity Trust, with all the various credit unions set up by tenants and residents, and even with the various mutual institutions that remain, such as building societies, like Britannia, that have links with the trade unions.

But, such a transformation would also require a huge democratic transformation. Such a process can only be developed from the grass roots upwards. The problem is that the majority of socialists, and even of the Marxists, remain transfixed in a statist frame of mind that militates against such solutions, and indeed, which ultimately leaves them confined to offering solutions which are either ultimatist - Socialism Now, meaning a 1917 style revolution which will not happen - or else solutions which rely on the bourgeois state, and which miseducate workers into such a reliance.

Only a rebirth of true Marxism can provide the answer.