Sham Rocked

Its just over three years ago that I wrote my blog Northern Rocked warning that it was the opening salvo of an evolving Credit Crunch.

“The crisis at Northern Rock should come as no surprise, to anyone that has been reading my blogs and comments over the last couple of years. It is part of the slow motion train wreck I have been saying was almost inevitable as a result of the huge accumulation of debt promoted, and forced upon western economies, in particular the US and UK. That policy of credit fuelled expansion, and the bail out of Northern Rock – likely to be only the first of a series of bail outs some much bigger than this one – exposes the myth of neo-liberalism that it was about free markets and non-intervention – a myth also bought even by some on the Left see Dave Broder’s comment here as part of a wider discussion, and my subsequent response. The reality is, as I said in my response there, the capitalist state has been intervening on unprecedented levels over the last 20 years, and without it, western capitalism would have undergone a severe crisis, perhaps worse than the 1930’s.”

That same Neo-Liberal State intervened once more not just in Britain, but throughout the globe, pushing more liquidity into the system. That staved off the immediate consequences, and lessened some of the underlying problems that would lead to the Credit Crunch erupting a year later at the end of 2008. That is it prevented a complete collapse of house prices, especially in the US, where the bulk of all those Mortgage Backed Securities had their ultimate resting place. The current crisis at Anglo-Irish Bank is an indication of just how deep seated those problems were and still are within the global financial system. But, as I pointed out at the time of the Credit Crunch, it is necessary to distinguish between a financial crisis and an economic crisis, even though the former can lead to the latter as it did at the end of 2008. As the Irish working-class, already suffering from huge cuts in Public Spending, wage cuts etc. - and today the EU has told Ireland it must cut further and raise more taxes! - from having to bail out the bankers in the previous round of the crisis, are told that there is no alternative but to bail out the bankers once more, and that they will have to pick up the tab, its worth looking at Northern Rock as part of deciding on how to respond.

At the time I was still allowed to post comments to the Workers Liberty site. In his Blog, Bruce Robinson wrote a post arguing for the nationalisation of Northern Rock, because if it was allowed to go bust, it would be the workers in the company, and the savers with the Bank who would be the main losers. I wrote the following response:

“I disagree, partly with the argument made by Bruce (Robinson) that if the B of E did not bail out NR then it would be the depositors, not the shareholders and Management that suffered. In fact, today after the Chancellor has said the Government will use taxpayers money to bail out the Bank, its shares, and the shares of the other banks likely to be next in line at the begging bowl - Alliance and Leicester and Bradford and Bingley - have soared. Clearly, the main beneficiaries have indeed been those shareholdres and the Management that undoubtedly also has many shares and share options. The whole basis of capitalist ideology is that owners of Capital make profits for taking risks, but if capitalists can make huge profits and Capital gains by making risky decisions such as those made by NR and the other banks, yet are guaranteed against going bust by the Government where is the risk. In fact that is the whole basis on which neo-Liberalism operates at a macro as opposed to micro economic level, and where it differs with classic Liberalism.

NR should have been allowed to go bust. Then with its true value demonstrated as worthless it should have been nationalised under the control of its workers, depositors and borrowers, and only then with the savings of those depositors guaranteed. It should then have been transferred into the ownership of the workers, savers and borrowers to be run as a financial co-operative. The lesson for all those savers in existing mutualised and co-operative financial institutions such as the Co-op Bank, Brittannia Building Society, especially these where the unions have a considerable involvement, is that they should demand an opening of their books to see what Management practices they have adopted, what their business model is. At least in these co-operative organisations you have the right to do that, you have some control.”

Who Is Irrational

As I said at the time, Northern Rock was only the first, and one of the smallest Banks to go under. If Capital was going to intervene to bail it out, then when it came to some of the other bigger banks – which a year later it did – then it was obvious that Capital would intervene to save them rather than allow a systemic crisis. When the US actually did fail to act over Lehman Brothers, the consequences were quickly apparent, and the size of its intervention of making that mistake was probably bigger than it would otherwise have had to have been. This is the background to the situation at Allied Irish, this is why the Irish Government is saying that it HAS to bail-out the Bank, and why it is being backed up in that statement by Imperialism, including offers of support from the EU and IMF if needed.

But, just because that is seen as necessary by Capital, does that mean that workers have to see that as the only, let alone best solution? Are there options besides seeing a total economic catastrophe? The answer is that, of course workers do not have to see this as the only or best option, as I wrote in that reply to Bruce Robinson back in 2007. First, let's look at the situation in Capitalist terms.

If AIB goes bust the first losers will be its shareholders, whose shares will become even more worthless. That includes the Irish Capitalist State. It also includes many Financial Institutions, including other banks around the globe. They will find that not only their shares in AIB are worthless, but any loans they have made to it, and Bonds bought in it will also become worthless. These are first round consequences. The other people immediately affected would be AIB's workers. Since 2007, States, and Ireland was the first to introduce it, have given protection for savers deposits in Banks up to varying limits – Ireland introduced full protection. Any saver with more money than that, given the experience of the last two years, is likely to have been savvy enough to have divided their savings up across various banks to make sure it was all covered. So, part of the argument I raised back in 2007 no longer applies.

Taking just the situation up to this point then, one option based on what I said back in 2007 becomes possible. Workers could argue, let it go bust. Savers would get their money back, and the bank itself would become next to worthless. If I were a worker at AIB, in the meantime I would be arguing for an occupation of the only thing that has real value, its buildings and offices, and access to all the information, and equipment contained in them. From that position of strength, the workers could argue for all of that, including its loan book to be sold to them to operate as a Workers Co-operative. If the Workers only agreed to pay the market value of these assets then they have the basis for running an important financial institution from a sound basis. From the beginning they should make contact with the Co-op Bank in Britain to organise a joint venture, and with the rest of the Co-operative Movement and Trade Union Movement throughout Europe.

However, as stated above the consequences so far described are only first round effects. Those other banks and financial institutions who lose out big time when the Bank goes bust, may find that for some of them this is the straw that broke the camel's back, which will expose what a sham the recent European Bank Stress Tests really were. Some of them may go bust too. But, in that case the very same argument, the very same response from workers should be made. The workers in those banks should occupy them too, and take them over as Co-ops. In fact, that would open the door to those banks combining with the AIB Co-op, and the Co-op Bank in Britain, and other Co-op organisations throughout Europe to form a very powerful financial Co-operative indeed. Some of the organisations that have invested in these banks may be large or medium sized enterprises who may also go bust, but again the answer is the same, the workers should occupy the only thing that has real value, the factories, shops and offices, and the equipment within them. They should continue to operate them under workers control, and demand the right to take them over and run them as Workers Co-operatives as the workers in Argentina have done over the last few years when their businesses went bust, and as the workers at UCS did in the 1970's.

In other words, workers should recognise that real wealth is not made up of all those scraps of paper, be they Euros, share certificates, Bond certificates etc. with which the Capitalist System has become transfixed by, and which has caused the current financial crisis, but is made up of the physical things produced by workers themselves be they the end commodities which are consumed, or be they the things used to produce those commodities, the building, the machines, the materials and so on, and above all the Labour-Power of the workers themselves. Once that fact is grasped the solution becomes obvious. It is to ensure that all of those things continue to be utilised to their maximum potential, and that the fetish of the bits of paper is put to an end.

On the BBC's “Question Time” last night, the idiocy of that fetishisation of the bits of paper was highlighted by a statement from the doltish David Starkey. In supporting the Liberal-Tories policy of Cuts, he pointed with glee to what he said was an historical parallel in the actions of the Canadian Government. They took their cuts to the extent, he relished, of blowing up schools and hospitals. Even a former City worker in the audience, whilst not pointing out just how ridiculous such an action shows Capitalism to be, did point out that even at a superficial level the resource based Canadian economy is in no way comparable to that of the UK. And, in fact, part of the reason the problem in Ireland is resurfacing is precisely because of the fact that the Cuts it has implemented, have sent its economy back into recession, making repayment of debt even harder. Ireland, along with the other PIIG economies has seen the prices of its Bonds fall steadily over recent months to a level now where it is paying higher rates of interest on them than it was in May! The recent downgrading of Spain's Bonds shows that they will soon be following Ireland.

In the BBC's “This Week” programme, after Question Time, former Thatcherite, Tory Minister, Michael Portillo, pointed out what I have been arguing for some time. The only way of dealing with the debt is through growth – though I would add that a big part will be played by inflation. If, the cuts slow down or reverse growth then he said, the Tories would reverse course. But, as I have pointed out before, and as Nouriel Roubini has argued, it may not be that simple. Once you have a bike up to speed it takes less effort to keep it there than if you let it slow down, and have to get the speed back. Capitalist States poured huge amounts of Surplus Value into stopping the system collapsing after 2008. They largely succeeded, but those economies hadn't speeded up enough for momentum to take over. Stopping the stimulus would be like stopping pedalling just before you could get into top gear. If those states screw up by cutting now, the system may not have sufficient resources to prevent a serious crash this time round.

There is another option open for workers in Ireland to argue. The Capitalist State says it has to bail-out the banks once again to prevent the Capitalist economy collapsing. It is asking the workers to rescue the Capitalists. In that case workers in Ireland could demand that all of the existing shares in those Banks be cancelled, and that every Man, Woman, and Child in Ireland be given free a non-Negotiable share in those banks. That would make them the direct owners of those banks with the right to have a direct say in their operation, including the salaries and bonuses paid out to Executives. It would mean that when those Banks began to turn a profit, that profit would go directly to the mass of workers, not to the capitalists or to their State. It would mean that they could utilise the resources of the Bank to invest in things that furthered the workers interests, not the bosses. Personally, I do not prefer this solution to the first, because the experience of Mutual Building Societies shows that where ownership is widely diffused to workers and others who do not have a direct interest in the day to day functioning of the business, who are not directly dependent upon it for their livelihood, they will not exercise active control, and they will be prone at some point to simply agree to sell it for a quick buck.

Finally, again as the State says it needs to bail out these banks in order to save the Capitalists, it could be asked to make all of those Capitalists pay the price. In my post How To Pay For The Deficit, I argued that it would be possible to raise a tax in kind on Capital, by requiring every limited company to issue new shares equal to 10% of its existing shares, and to simply hand them to the State, who could then sell them – or alternatively could hand them directly to every Man, Woman, and Child to do with as they chose.

There are alternatives to those advocated by Capital if workers choose to fight for them. They are alternatives which can strengthen the longer term economic and social position of workers. That is why the Bosses and their pundits will not suggest them. And is probably also why the bosses ideological representatives in the Labour Movement will not put them forward, arguing instead for yet more bargaining within the system, for strikes with no immediate goal other than to “oppose the Cuts”, and which for that very reason will be doomed to failure short of a complete overthrow of Capitalism, which is unlikely. But, workers throughout Europe, and North America will increasingly be posed with these questions over coming years. Marxists have a duty to put forward to them practical political solutions such as these that can offer them a way forward.

The Fear Is Palpable

In a blog, a couple of weeks ago, Newsnight's Paul Mason, wrote Next: QE2 - and if that doesn't work it's a currency war.

In actual fact, the talk of the US engaging in another round of Quantative Easing – rumoured to be of the order of $1 trillion – was an indication of the fact that such a currency war was already under way. The US has been applying pressure to China for some time to revalue the Yuan. It expressed considerable displeasure at Japan, last week, when it intervened in the currency markets, to push down the value of a rapidly rising Yen, against the dollar. The only area that the US has no reason to complain about is the Eurozone. But, it is only a matter of time before the growing contradictions, and problems within the Euro area, burst forth, and force more QE by the ECB.

An indication of that problem is shown by Ireland. As Alistair Darling pointed out, the other day, the Tories used to refer to Ireland, alongside Canada, when they were justifying their Cuts agenda. Big Cuts, they argued, created the condition for the private sector to step in, and for growth to take off.

They failed to mention that, in the case of Canada, this was at a time when the world economy was growing rapidly, and when Canada could get out of some of its own problems by leaning on its next door neighbour, the US. But, the Tories do not mention Ireland today, because those very same Cuts have had the effect most economists have been arguing they would for some time. Ireland has gone back into recession. That recession means that Welfare Payments rise, and Taxes Fall. Instead of the Deficit falling it widens, requiring on that logic even bigger Cuts. In such a downward spiral, such as that which occurred in the 1980's, the very basis for rebuilding the foundations of growth are undermined. A similar trajectory is inevitable for all those economies whose basis of economic recovery is weak – the PIIG economies, and the UK. And, as I have argued previously, because those economies, like Germany, which do have a more robust basis for recovery, are so tied in to the weaker economies of Europe, they will be pulled down along with them.

The recent Stress Tests carried out on European Banks were a charade, and a charade which is quickly being revealed. A number of European Banks have experienced difficulty in recent weeks, and the latest figures demonstrate that liquidity is once more drying up, as it did prior to the Credit Crunch. 

In Ireland, the Anglo Irish Bank is now in need of further support from the state, and there is a possibility that if it goes bust it will bring the Irish State down with it. That is why the ECB has had to say it is standing by to provide support. But, Ireland is not Greece. If the ECB, and the EU has to bail-out Ireland that is a far more serious business than having to bail out Greece. As I wrote two years ago, when State's were coming in to support the banks,

“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.”

Where We've Been, Where We Are, And Where We Are Going

That is the scenario that is now playing out. Imperialism, understood as that social relation that is global Capitalism, is wrestling with the problem of how to avoid such a problem becoming devouring of Capital itself. It is looking to fudge and mudge to get through the crisis, but that very social relation is built on a whole series of contradictions, of conflicting interests, between classes, fractions of classes, nation states, and economic blocs. At a certain point, it becomes impossible to resolve all of those contradictions, and, like an individual who tries to do that, it eventually arrives at a crisis, it shuts down.

The Bank Stress tests were an attempt to calm nerves, not the nerves of the professional traders, who could see through them, but of the general public. The IMF report, of the last few days, was intended to serve the same purpose, but, with the evidence of Ireland, with the latest economic data for Britain, showing sharp reductions in confidence, and a large slow down in bank lending, in mortgage approvals, in house prices and so on, no one can be fooled.

In fact, another sign of the fear was shown when, at the same time as the IMF was making this statement, Charlie Bean from the Bank of England was coming out with an impassioned plea to the Public to go back to their profligate ways, and spend whatever savings they have to stimulate the economy! This at a time when the Government is telling us that the problem is one of overspending, and not enough saving. That, of course, is what Capital needs workers to do. Consumer spending accounts for around 60% of total spending in the economy. The Tories idea, of the private sector springing to life, to increase investment, and so on, is rather hollow if, at the same time, consumers stop spending! That is especially the case at a time when the other plank of the Tories strategy – exports – looks more than a pipe dream, as other economies sink into recession due to their own austerity programmes.

The contradiction is demonstrated in the Bank of England Monetary Policy Committee by Charlie Bean and Andrew Sentance. Bean recognises the need to prop up Aggregate Demand through encouraging consumer spending and borrowing. He argues that more QE is necessary to ensure that enough money is available in the economy to facilitate that.

But, Sentance points out that inflation is rising. It is rising because of all the money printing that has already happened, that is now monetising the increased prices of imports, which is feeding through, also, into secondary price effects – though not yet wages. The 1970's showed that simply printing more money, at a time of rising inflation, does not have the effect of stimulating economic activity, but only of stimulating further price rises! It leads to stagflation. At best, if cost pressures abate, the increased money supply can simply lie stagnant in bank vaults.

That is the other problem at the moment. Nearly half a year into their period of office the Liberal-Tories have not been able to persuade the banks to increase lending. As I said before that is not because the Banks are acting irrationally. Banks make money by lending. But, not if those who they lend to don't pay them back! The banks are not lending because, especially in conditions of uncertainty caused by the Liberal-Tory Budget, they cannot guarantee that those who wish to borrow will pay them back.

In fact, under current conditions, the most likely potential lenders are those who need money to stay afloat not to expand, or else who have plans to invest in things which the Banks will have good reason to believe will fail. Those who might have the potential to expand on a firm basis, the larger companies, either have large cash balances of their own, or else have much cheaper sources of finance in the Capital Markets by Bond and Share Issues. Microsoft has just borrowed money in the Bond Markets, where yields are at historic lows and falling – which again makes a mockery of the Tories claims - despite having billions of dollars of cash, and has used the money to raise its dividend, which also has the effect of raising its share price.

In a later Blog Paul Mason quotes the Brazilian Finance Minister from the FT, saying that such a currency war had already erupted. Brazil – Now Its Currency War.

The belief is, and Paul Mason repeats the argument here, that a currency war, which will also be the consequence of each country engaging in money printing, must be self-defeating, or a zero sum game. At best, as Paul sets out, its believed that those that pull the trigger first might gain an advantage, and some economies, because of the structure of their economies may gain advantage. The US, did gain from Protectionism during the 1930's, even though it was globally devastating. But, it does not have to be the case.

The consequence of massive QE by all countries is only a zero sum game in so far as the relative values of currencies. If the aim is to try to push the crisis on to some other economy, then the consequences must be negative. But, if the purpose of that money printing is not to devalue, but to stimulate economic activity in each economy or economic bloc, then the consequence can be positive and reinforcing for the whole global economy. But, that is the kind of planning and co-ordination that Imperialism lacks, precisely because of those continuing series of contradictions that wrack it. Only a Co-operative economy, where every part of it worked in co-ordination with every other, to overcome such problems, rather than to try to shift them on to someone else, could achieve that.

Keynes pointed out that, under conditions such as those we have today, simply printing money can never be a solution. You can stuff the banks full of money, but unless someone wants to borrow that money to spend it, it will simply stay there. The banks do not want to lend to many people because, with the high probability of economic downturn, those who want to borrow will lose their customers, and not pay them back.

The banks are already sitting on large loans, made to homebuyers, over the last few years, which they have not foreclosed on because house prices had temporarily risen, and the reduction of interest rates to near zero meant that those homebuyers on tracker mortgages saw massive reductions in their payments. As those tracker mortgages come to an end, and house prices crater, the banks stand in danger of finding that many of those lenders default, whilst the houses mortgaged become worthless.Robert Peston, in a recent News report from Dublin spoke about some properties that were selling for less than half their recent prices.

That is the consequence that is likely to befall, still grossly over priced, property in Britain, as the consequences of the measures of the last 2 years unwind, and as the Liberal-Tory policies send the economy into a new recession.

Keynes argued that simply relying on increased money supply in these conditions was like pushing on a piece of string. Consumers will not borrow or spend if they think they might lose their job, their house and so on.

Businesses will see demand slowing down, and will at least cut back any expansion plans, if not begin to retrench ahead of the expected downturn. The only way of avoiding this is to increase confidence. That is what the authorities have been trying to do, a version of “Crisis, what crisis?” But, that can't change the reality. The only way of changing that reality is to do the opposite of what the Liberal-Tories are proposing. It is to use a large fiscal stimulus to create demand, to provide people with jobs, and, from there, to encourage them to be more optimistic. There are two ways to do that. You can give people big tax cuts. But, those most likely to spend them are those on the lowest pay who will get the least back in tax. And if you think you might lose your job, you might simply put the tax cut in the bank. The other way is for the State to spend the money itself.

That immediately means that other firms receive orders, and their workers jobs become secured. It means that more people are employed as teachers, nurses and so on. That is what Governments, outside Europe, have been doing, for the last two years, with considerable success.

Its no wonder that there was a leak from the Ministry of Defence about the devastating effect of the cuts being proposed. Its one of those areas that the Tory faithful have a knee-jerk reaction to.

But, if the Government caves in to the MoD, then every other Sir Humphrey will take their cue to make a similar case of why their department cannot be cut without similar dire consequences. That actually was what happened under Thatcher's Government, which meant that it was unable to achieve its goal of shrinking the State. Big Capital, then as now, needs a Big State, and the Cuts are not in its interests. It will work behind the scenes to protect its interests, along with those of its representatives at the top layers of the State bureaucracy. The Cuts and privatisation are not in workers interests either. The Cuts will devastate the economy, and, although Big Capital will suffer loss of profits from that, workers will suffer a loss of jobs, and lower living standards, as well as setting back their confidence to resist. Nor is privatisation in our interests, because it is a step backwards from the existing State Capitalism. Our alternative to the oppression, bureaucratism and inefficiency of State Capitalist provision is not privatisation, but the transfer of these services and functions to workers ownership and control, through the establishment of worker co-operatives. We should oppose the Tories Cuts and Privatisation programme, but we should at the same time recognise that our interests are not those of Big Capital, and its representatives in the State who want to protect their own interests. We have to put forward our own interests and our own solutions, based upon regaining control over those aspects of our lives that the State currently dominates.