AFTER THE FALL

Writing in the London Review of Books earlier this month (Volume 40, number 13), John Lanchester reminds us how much the world has changed – and in some respects how little is different – ten years after the credit crunch and the beginning of the Great Recession.

Lanchester is one of our smarter contemporary thinkers. He’s the author of one of the best books on the credit crunch – Whoops! Why everyone owes everyone and no one can pay and the only novel i can recall about the resulting London property boom, Capital – you may have seen the television drama made from it even if you have not yet read the book. Although there is very little explicit Marxism in either book, Lanchester is one of the few contemporary writers who knows his Marx . This was apparent when he gave a talk to promote his book Capital to the London Review of Books – much of his talk was about the more famous book of this name.

Lanchester describes in the article the climate of intellectual over-confidence that preceded the crisis in 2007. He points out that most of the time, in conventional economic thinking, debt and credit don’t present a problem. Every credit is a debit, every debit is a credit. The problems arise when no one is sure who owns what. As he points out, on a global scale there are billions of pounds more credits than debits. Why? The rich have hidden their assets in off-shore tax havens to avoid paying tax.

Lanchester reminds us that, following the bail out of banks, no one has addressed the too big to fail problem. Furthermore, the risk of failing remains high. We have previously commented on how John Vickers fluffed the opportunity to ring fence banks’ more risky business from their socially useful activity of providing credit to businesses and consumers. Another problem Lanchester highlights is the failure to rein in shadow banking – all the things banks do but which are done by institutions that don’t have a formal banking licence.

Is another banking crisis on the way? Probably, but one thing is clear. Each new crisis in capitalism shows a different face, a different mix of problems. Into the mix sooner or later global warming is going to feature. This is why the Communist University in South London, CUiSL, is working on a discussion paper looking at how classical Marxist theories of crises and social revolution relate to this new threat. If you wish to see how this is progressing, and, even better, to join in, follow https://communistuniversity.wordpress.com/.

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Saving capitalism

While the Tories would like to see the NHS destroyed and replaced by a US-style insurance-based system (all those lovely profits just waiting to be extracted) and, aided by the Lib Dems, they have done everything they can to facilitate this (GP commissioning, sub-contracting and partial privatisations), the current crisis in the NHS has a single cause: the 2006 financial crisis. In order to save capitalism, the government had to save the banks, or, more precisely, the speculative capital invested in banks, and to do this they:

  • froze the level of funding for the NHS (ignoring increasing demand);
  • froze the pay of NHS staff and worsened the terms of employment of junior doctors (ignoring the need to recruit and retain staff); and
  • slashed funding for local government social services for frail and elderly patients (ignoring the need for such services if patients are to be discharged from hospital).

The current crisis in the NHS is the consequence. But it is not the only one. The bank bailout and the way it was financed depressed economic growth for at least a decade, increased inequality by underwriting the earnings of the financial elite and destroyed social services beyond those supporting patients discharged from hospital. Furthermore, it yielded no return on the government’s investment in the banks – like Lloyds Bank, they are returning to 100% private ownership and yielding not even a notional profit to the government.

Despite the cost of this bailout, the government has failed to ensure that the banks won’t ask to be bailed out again. Yet the risk of losing our money transmission services and that individual depositors could call on the government guarantee could again allow banks to blackmail governments into bailing them out when their speculative activities collapse. The report by John Vickers in 2013 looked at the “too big to fail” argument but failed to call for a complete separation of simple banking activities – money transmission services and lending against deposits – and the banks’ speculative activity. Vickers, a neo-classical economist with, as his track record as a former Director General of the Office of Fair Trading demonstrated, a misplaced faith in more competition as the remedy for every economic problem, accepted that (his words) “some risk of failure” had to be tolerated and opted for ring fencing and a capital reserves regime. Notwithstanding monitoring by the Financial Conduct Authority, this “risk of failure” is real and will materialise when the banks’ speculative activity next comes off the rails, as it surely will.

But at least we will know what to do next time. Saving capitalism won’t be the priority. We will insist that the government truly nationalises the banks without compensation, not give them what were, in effect, interest free loans until their share prices recover. They must then remain in the public sector to be run in the interests of working people on whose labour their existence depends. These interests will include not pauperising the NHS; they don’t include saving capitalism.

WHEN IT PAYS TO SETTLE

Earlier this month, Bernie Ecclestone was able to terminate the prosecution for bribery against him in a German court by agreeing to pay £60 million. His lawyers insisted, of course, that this payment was not an admission of guilt.

 

£60 million is a lot of money to pay when you are innocent. It is, however, considerably less than another out-of-court settlement this month:  that by Bank of America following a charge by the US Justice Department of “misconduct in the production of mortgage-backed securities”. This was for $16.65 billion. Like the settlement of the German court case, it is intended to ‘wipe the slate clean’ and forestall any further prosecutions or claims for damages. As in the Ecclestone settlement, there was no admission of guilt.

 

We will probably never know whether Bernie Ecclestone’s payment of £60 million represented value for money for him. As he risked a jail term if the prosecution was successful, perhaps, it did. After all, he is not a young man and he might have been required to serve his sentence in one of our grubby, under-funded and over-crowded prisons rather than in a more humane German lockup. We do know, however, that Bank of America’s settlement of $16.65 billion represented a real bargain for them. According to the US Government Accountability Office, the 2008 Financial Crisis triggered by the mortgage backed securities scam cost the US economy alone $22 trillion. The cost to the world economy must be a multiple of this huge sum.

 

Crises are endemic in capitalism. While Marxists have a good understanding of this phenomenon, capitalists and their advisers tend to ignore it until it happens. Even if they are interested in anything beyond mere personal and family accumulation, the economists to whom they listen fail to see beneath the surface of the economy and mistakenly conclude that the system can be managed and boom and bust avoided. The snake oil remedy they invariably peddle is ‘more competition’ as, for example, did John Vickers in his report on UK banking. It would be more honest to admit that capitalism is a casino for the rich who must get out of the market before the bubble bursts.

 

If the Bank of America had not decided to peddle worthless mortgage-backed securities, another trigger would eventually have kicked off the recession. Thus the real remedy is for ordinary working people to own the banks and all the other major undertakings in the economy, not the other way round. Until that day dawns, however, let’s kick up a fuss about the inadequacy of the fines and penalties, such as they are, on those banks whose reckless behaviour triggered the financial crisis.