Lehman's Plus Five - Part 7

In 2008, in the aftermath of the financial meltdown, we were told that part of the problem was that the banks were too big too fail. Yet, after a flurry of proposals for breaking up the banks etc., what we have seen is that the banks have become even bigger. Why would anyone be surprised at that? 150 years ago, Marx explained the process, by which capital naturally becomes more concentrated, and more centralised. The smaller capitals go bust, whenever there is a crisis, and the bigger capitals swallow them up. In fact, far from breaking up the banks, as the financial meltdown unfolded, states encouraged that process of consolidation.

But, in that process what we have seen is that the remaining banks simply increased their own insolvency, because they took over the insolvent position of the banks that had gone bust, which simply aggravated their own underlying insolvency. The clearest examples of that have been in Ireland, Spain, Portugal and Greece, but the same situation applies to banks across Europe and North America. Many of the banks in China are probably also insolvent, not only because of their exposure to western financial assets and property, but also because of their loans to large numbers of Chinese businesses that are insolvent. But, the Chinese banks are owned by the state, and behind the state stands huge financial resources.

In Spain, the state reorganised the banks from above. A range of regional banks, cajas, that had made reckless property loans, were taken over by other banks, and some were grouped together in Bankia, as a state backed bad bank. But, even since it was established, the shares in Bankia have dropped by a staggering 90%! Shares in other Spanish banks have dropped significantly, but despite a 50% drop in Spanish property prices, the value of property on these banks books continues at inflated levels. Without that, the remaining banks would be seen to be insolvent. The latest estimates even out of Spain, suggest that Spanish property prices need to fall by a further 30%, others put the figure at 50%.

In Britain, the same situation can be seen with what has happened with the Co-op and with Nationwide. The Co-op Bank has effectively been bust, because of its merger with Britannia, which had made reckless property loans, along with all the other banks and building societies. Nationwide seems to be in a similar position. But, that situation can be repeated certainly across Europe and North America. The global financial system is floating on a sea of liquidity that simply hides the fact that it is insolvent.

Back in 2008, I wrote,

“The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks. We have already seen that to some extent. It was seen over the actions of the Dutch, Belgian and Luxembourg governments over Fortis. It was seen in the scramble for advantage when Ireland stepped in to guarantee all Bank deposits, threatening a stampede out of deposits in other EU countries. Most classically, it has been seen in the conflict between Britain and Iceland over deposits in Icelandic banks, and which was reminiscent of the 1970’s Cod War. It is certainly the case that some of these banks such as UBS of Switzerland have Balance Sheets bigger than the GDP of their host nations.” 

Where We've Been, Where We Are, and Where We're Going

In many instances, states have come in to stand behind banks. Banks in the US and UK were essentially nationalised, and recapitalised. That happened in Ireland too, which then undermined the finances of the state itself. The state has also nationalised banks in Europe, like Dexia, and the problem identified of banks with bigger balance sheets than the GDP of the host country played out in Cyprus. But, as I've set out elsewhere, that particular problem is far greater in relation to Luxembourg, and it applies to many other smaller economies throughout the EU.

Back To Part 6