Thursday, 29 September 2016

Don't Bail-out Deutsche Bank

Three years ago, I set out the extent to which the global banking system, and particularly the European banking system, is still bust. After 2008, we were told that a whole series of measures had been put in place to make the banks safe, and to prevent a repetition of the global financial crisis. It was hogwash. What happened in the aftermath of 2008, was that the share and bondholders of the banks were bailed out, and in many places, such as Ireland, Greece, Cyprus, Spain, and Portugal, that bail-out was implemented at the expense of the rest of the economy, which was cratered under crazy policies of austerity. In Europe, one stress test after another has come and gone, assuring us that the banks were now safe, only each time, for several of those supposedly safe banks to go bust! Back in 2013, I noted the reports that Germany's Deutsche Bank had exposure to around €55 trillion of derivatives, an amount equal to the entire global GDP. Now, it looks like Deutsche Bank might go bust, and the German government is discussing whether it should be bailed-out. It shouldn't.

In 2011, Deutsche Bank shares stood at over €45. Today they are hovering at just over €10, a fall of more than 75%. At the start of the year they stood at just over €20, meaning they have fallen by 50% just this year. Now, Deutsche Bank also faces a $14 billion fine from the US regulators over its activities in the US housing market leading up to the sub-prime crisis, and the financial meltdown of 2008. That fine if implemented in full is more or less equal to the current market capitalisation of the bank. Any fine over $5 billion is almost certain to require Deutsche Bank to have to issue new shares so as to raise capital, in order to keep trading. In the current conditions of the European banking system, its not likely to find willing buyers of such new shares, other than at very low issue prices.

But, if Deutsche Bank folds, that €55 trillion of exposure to financial derivatives, referred to above, would then send shock waves through the global financial system that would make the collapse of Lehman Brothers, in 2008, look like a little local difficulty. This is part of the final act of the tragedy caused by the Monetarist experiment launched by Thatcher and Reagan in the late 1980's. In 2008, we had merely the rehearsal for this finale, as I set out in my book.

At the moment, Merkel is saying that she will not bail-out Deutsche Bank. She can hardly say any other. For one thing, like bankers who traditionally stand on the steps of their institutions to assure everyone that the bank is safe, just before it collapses, she cannot give credence to the idea that Germany's largest private financial institution is on the ropes. For another thing, having told the Greeks that they had to endure all of the unnecessary agony of austerity, for the last six years, and having imposed similarly irrational policies on other EU economies, Merkel can now hardly reverse course to bail-out a German bank. But she will, in the end, try to do so.

She will do so for the same reason that after 2008, the US government and the UK government nationalised their banks, for the same reason that the Irish government took over Allied Irish Bank, and that oceans of additional liquidity has been pumped into the banking system, over the last eight years. She will do so, because the form of wealth of private capitalists today is that of fictitious capital, of shares, bonds, and property, and a collapse of Deutsche Bank will spell the collapse of all of the grossly inflated prices of that fictitious capital which has been blown up over the last thirty years, and which over the last thirty years, at least, has been kept inflated at the expense of the real economy.

These markets – shares, bonds, property – are nothing more than casinos. The capitalists who gamble on them rob each other. But, over the last thirty years, monetary policy has guaranteed that virtually no one gambling in these casinos could lose. If share prices fell sharply, as they did in 1987, 2000, and 2008, the central bank stepped in to print money and push those prices back up again; if property prices fell sharply as they did in 1990, and 2008, and 2010, central banks stepped in to again print money, to provide specific finance to mortgage lenders, to avoid repossessions, and governments intervened directly to stimulate demand via policies such as Help To Buy, aiming to keep house prices high.

The only people who thereby lost out in such speculation were those who did not participate in the speculation itself. Those who did not own any of these assets, but who only owned money, or worse still who had large debts, saw their position continually deteriorate. As share, bond and property prices rose inexorably, any given amount of money bought less and less of them, which is why pension funds developed ever larger deficits, and why more and more people found that they could not buy their first home, or move up to a bigger or better home. As with every such bubble, it thereby gave an incentive for everyone to want to get into the casino, as soon as possible so as not to lose out further.

A look at the UK property market illustrates that point. There is actually 50% more homes per head of population today than there was in the 1970's, when house prices were much lower, adjusted for inflation. The difference is that the number of single occupier homes has increased massively.

In 1971, 79% of UK households were multi-occupancy, 70% were occupied by married couples. Only 19% were occupied by single people, with a further 2% occupied by lone parents. By 2011, those figures had changed drastically. Only 59% were multi-occupancy, the number of married couples had dropped to just 40% with a further 12% cohabiting, and another 7% other multi-occupants. By contrast, the number of homes occupied by one person had almost doubled to 33%, with 8% occupied by lone parents. Source: Halifax.

As Moneyweek point out,

“The population has gone up, of course. But the housing stock has risen too. In fact, according to an interesting report from economic research group Fathom Financial Consulting, while the rate of building decreased over the last decade, the quantity of ‘housing per person’ has risen by nearly 50% since 1970, and is still increasing.!"

The difference is that, in the same way that more households have become multi-car households, and in the same way that an increased number of households means an increased number of car owners, so an increased number of single person households requires a much larger number of homes than does the same number of people living in multi-occupancy homes. An increased availability of credit was a means of encouraging an increase in the number of smaller households, each of which then becomes a cost-centre, useful for facilitating the realisation of produced surplus-value. This has been a piece of deliberate government policy to bolster house prices, so as to keep the financial bubble inflated, both to protect the banks who are insolvent, other than for these fictitious house prices, and to encourage people to borrow money against these inflated property prices as an alternative to decent wages to cover their consumption needs. 

This also explains why this huge increase in money printing has not yet led to a hyperinflation of commodity prices. Everyone who saw they were losing out by not being inside the casino, diverted their resources from the real economy, in order to engage in speculation in the share, bond and property markets. Its like gamblers in the casino, having lost money to some other gamblers, who then simply replenish their funds from outside the casino. In previous centuries that was typical of the old landed aristocracy, who ran up increasing debts, and financed it by selling off their estates. Today, the money-capitalists when they lose money, in the stock market casino, simply replenish their funds for further speculation, by demanding their representatives on company boards, increase the payment of dividends to them, which thereby diminishes the funds available for capital accumulation.

According to Andy Haldane, at the Bank of England, in the 1970's, the proportion of profits that went to dividends was around 10%, whereas today it is around 70%. That is why capital accumulation and growth of the real economy has been held back, which ultimately undermines the system as a whole, because without an increased mass of capital, the potential to increase the mass of profits is increasingly restricted, which means the potential to pay out all forms of revenues from it, such as interest, rents, taxes is undermined.

Not only do these inflated asset prices, thereby contribute nothing to economic growth, but they actually have the opposite effect. By stimulating speculation, they drain potential money-capital from the real economy into further speculation; they have massively increased the cost of pension provision, because pension contributions buy fewer and fewer of those assets, to cover future liabilities; they have massively increased the cost of shelter for workers, which, like the increase in the cost of pension provision, means that the value of labour-power is raised; and as the value of labour-power is raised, so the rate of surplus value, and consequently the rate of profit is reduced.

Workers should oppose any bail-out of Deutsche Bank, or any of the other financial institutions around the globe that will collapse along with it. The ending of the global financial bubble, a collapse in stock, bond and property markets will be a good thing for workers, and also for real industrial capital itself, as opposed to the fictitious capital whose interests have been protected at its expense over the last thirty years.

If banks and financial institutions collapse, all that is required, is that central banks ensure that there is sufficient liquidity within the system to enable commodities to continue to be exchanged. In modern economies with advanced systems of electronic money and payments, that simply requires that those payment systems are maintained and functional. The financial speculators who will have lost their shirts should finally be made to bear the consequences of their actions. The banks themselves having become worthless, should be taken over by their workers, and merged into a single co-operative financial institution, operating across Europe, and capable of providing credit to the real economy, particularly other co-operative ventures. 

As share and bond prices collapse, and yields therefore, rise, it will become easier for pension liabilities to be funded, for pension contributions to buy up the now much cheaper shares and bonds. We need proper workers ownership and control over pension funds, so that our resources can be used to exercise control over other sections of capital. As land and property prices collapse, it will again become possible for workers to buy their first homes, and for rents to become affordable without massive subsidies to landlords, and it will mean that the cost of building new homes will fall significantly, as land prices fall.

No more bail-outs for the banks and finance houses, and for the financial speculators who have inflated these unsustainable bubbles at the expense of the real economy.

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