Lehman's Plus Five - Part 8

In fact, rather than carry through the original policy of nationalising and recapitalising the banks, states have avoided that task and instead used repeated doses of liquidity. How does that work? Banks need to be recapitalised, because over 40 years they have lent money recklessly, a large proportion of which they may not get back. The additional capital is required to cover the potential losses from those defaults. But, the amount of capital required for that is in reality huge, because the real figure requires that the collateral – property, bonds, shares – that stand behind the banks loans be properly valued. In the US, property prices fell by up to 60%, the same is true in Ireland. In Spain property prices have also fallen by around 50%. If the property on banks balance sheets was valued to reflect the likelihood that it is only worth these kinds of figure, and probably even less, then the banks would be seen to be massively insolvent. The fact, that Deutsche Bank with massive exposure to European property debt, has covered its debt via complex derivatives estimated to be equal to the entire global GDP, gives some idea of the extent to which such recapitalisation would be required.

That is probably never going to happen. But, if it were, if there were a demand for additional capital to make good the hole in the Financial system, imagine the rate of interest that would be required to encourage the phenomenal supply of money-capital to meet this demand! It is for that reason that central banks have instead simply continued to print money for the last five years. In fact, the money printing by the US Federal Reserve is greater today than it was at the height of the crisis in 2008! It is why, as over past weeks, global bond rates have continued to rise, and stock markets have panicked at the prospect of even a slow down in US money printing, and Ben Bernanke baulked at even the most modest tapering of QE – Why Ben Bernanke Baulked.

But, Bernanke has only delayed the inevitable, and possibly made it even worse. The markets had been prepared for the beginning of tapering. In the day before the Fed decision, US 10 Year Yields had even pulled back slightly from 3% to 2.8%. Now, they will have to go through all of that preparation again. The dollar fell, and gold soared, as fears of inflation were raised. Stock markets soared, but then today US markets have fallen back. Moreover, just as has happened with his UK counterpart, Mark Carney, and as happened in Japan a few months ago, the announcement designed to push yields down, hasn't worked anyway. UK rates had pulled back slightly, but are rising again to the 3% level, German Bunds are also about to go back above 2%, and the US 10 year which had fallen as low as 2.65% is back up near 2.8%, where it started yesterday.

Whatever, central bankers do, interest rates and inflation are moving higher. That will cause a crash in the bond market, followed by a crash in the property market, quickly followed by a collapse of the banks and stock markets. That will be the real resolution of the contradictions created in the financial markets over the last 40 years. It is, however, from the perspective of capital in general the necessary resolution of 40 years of contradictions that money printing has built up within the system. The actions of central banks is now and for the last 30 years has been based upon meeting the needs of money-capital, as opposed to the interests of industrial-capital. That is not surprising central bankers are themselves bankers after all! That policy has been made possible because it was in tune with the ideology of right-wing, populist governments whose membership and electoral base is within the nationally based, small capitalists, who themselves rely on that early 19th century mentality of extraction of absolute surplus value, via the creation of a low wage/high debt economy. That model has now definitively hit the buffers. Wages and conditions in developed economies cannot be screwed down to Chinese, Indian and Vietnamese levels, and when you arrive at the stage where large numbers of workers rely on Pay Day loans at 4000% rates, and when even sections of the middle class are resorting to borrowing from pawn brokers, you know that the limits of loading families with debt has gone as far as its going to go.

The debt can only be repaid out of income, and that requires the production of real wealth. The extortions of money-capital from industrial-capital are an impediment to that. As Marx put it,

"As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

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