A Financial Boom Despite the Crisis
For the banks, deficit state budgets become important clients. They compensate the private demand for credit. The financial boom is completely based on the support measures of state organs. An economic upswing is not in sight. The deregulation of the Clinton years should be canceled and investment banks strictly separated from credit banks.
A FINANCIAL BOOM DESPITE THE CRISIS
The State Monopoly Capitalism Play as a Farce
By Lucas Zeise
[This article published in: Marxistische Blatter 2/2010 is translated from the German on the Internet, http://www.linksnet.de/de/artikel/25736.]
The contrast could not be more crass. On one hand, the economic crisis continues. Things worsen in some regards. Wages fall, unemployment rises, bankruptcies increase and the deficits of public budgets expand dramatically despite social cuts. On the other hand, the finance boom is already fully underway. Stock prices climb. Hedge funds and grasshoppers are gathered by the wealthy of this world and vast money for the motley capital collection. They buy businesses, cut them up as in the past, and speculate on raw materials and the "emerging markets" as before the crisis. They think more highly of China and India. Many banks post terrific profits. In 2009 Mr. Ackermann, the head of Deutsche Bank, received a pay of just under 10 billion euro for his efforts. Since the British government levies a special tax on special payments called "bonuses," Ackermann doubled the pay of his investment bankers working in London so they would not come off worse.
One could track how it happened that financial management seems glorious again while the real economy only recovers slowly. On television and in the newspapers, we have seen how the governments of all capitalist countries bailed out "their" native banks from ruin with enormous money. Never in our lifetime was the "play" "How state monopoly capitalism (Stamocap) functions" performed so true to life on the open stage. In Germany the bank bailout fund financed by the German Federal Government amounted to 480 billion euro in the fall of 2008. That is half of the whole 2010 Federal German budget. Of this sum only half has been used today in the form of capital resources subsidies, credits, silent deposits and guarantees. The fact that the state in case of emergency guarantees banks and bails them out is crucial. Before running cameras on a Sunday in October 2008, the central plot of the play was performed by Chancellor Angela Merkel and former German finance minister Peter Steinbruck to the public. Serious and resolved they told citizens their deposits were safe with German banks. The state guarantees everything, they said.
Without such an explanation, a "run" on the banks would have occurred. The citizens would demand their money. Since this beautiful money "worked" in meaningful and meaningless capitalist projects, the banks would be insolvent or bankrupt. Businesses and citizens would have become insolvent without their money. The capitalist economy would have collapsed. Thus the bailout action of capitalist states for the banks was necessary. Without that action, the whole nice-looking economy would have gone up in smoke, not only the banks.
This bailout action was the most spectacular element of the financial sector's support by the state power. The action of the central banks is and was just as important for its support. Right at the start of the crisis, the central banks completely reimbursed the deficient liquidity of commercial banks on the money market. These central banks understand themselves as creditors of last resort. Their subsidies for the banks were necessary for the system.
Through several special effects, the banking system became a profiteer of the financial crisis which it caused itself. First, the central banks lowered their prime interest rates to an extremely low level, practically zero in the US and Japan and 1 percent in the euro-zone. Second, the weak economy forced capitalist states to expand their borrowing. Credit volumes decline in economic crisis. Businesses and private households try to reduce their indebtedness. With weak aggregate demand, investments decline along with demand for credits. For the banks, the deficit state budgets become important clients. They compensate the private demand for credit. As a rule, states are reliable debtors. Third, the central banks appear as buyers of debt securities and thereby support the prices. The European Central Bank buys debenture bonds. The US Fed also buys debts. The volume of debt securities with mortgages is considerable. The Fed has already acquired $1.2 trillion in such "mortgage backed securities."
Given such varied and generous state support, it is no wonder that the financial market is in such good form. The standard business of a normal commercial bank in Germany is to borrow money from the central bank at one percent and lend it again at three percent to a city, a German state or a cooperative enterprise, a safe state address. .. The banks and funds have a problem. It is like the time before the crisis to a T. In view of the lack of money to invest, the investment possibilities are trifling. Highly profitable businesses are very rare. Traders on the stock market speak of the investment emergency prompting fund managers to invest in the stock market despite the miserable situation of many businesses.
UNSTABLE INTERIM STAGE
The situation is a little different than before the outbreak of the crisis. Even the dumbest of financial actors know or at least suspect that the situation is unstable. As described above, the financial boom is completely based on the support measures of state organs. An economic upswing is not in sight. That the revived speculation and rising prices for stocks and raw materials are giving real economic impulses cannot be seen anywhere on the horizon. No recovery is in sight even in the segment where the crisis erupted, the real estate market in the US... The paradoxical market reaction arises again and again. The stock market jumps up with poor economic data; it pancakes with good data. According to the trivial calculation of investors, the central banks will extend the luxuriant money infusion if the situation remains miserable. If it improves, they will stop.
The unstable situation tempts many observers of the scene to warn of new bursting of these re-inflated bubbles. Be not anxious, one could shout to them, this crisis is the old crisis. Burst bubbles have not accomplished what crises in capitalism should do, namely correct the situation. If the crisis had taken its course, a considerable part of money capital would have been destroyed. The write-offs at the banks and the losses of hedge funds were steps in this direction. In a simplified way, the financial sector of every economy and of the world economy altogether consists of credits. These credits represent claims to economic goods and services. They are more or less capital in money form. The credit volume can be scaled back in two ways. Firstly, the credit can be erased or paid back. Then it disappears. Or the debtor becomes insolvent or refuses to pay. The creditor must then write off this credit and the credit disappears.
In the initial phase of the financial crisis, this process was carried out on a broad front in both versions. The credit write-offs for the banks may have amounted to $3 trillion. The Lehman bankruptcy and the following stock guarantees of governments for the financial sector have checked and possibly even halted its shriveling process. In the US, a series of smaller banks were released into bankruptcy. The large- and medium-size banks were either supported or taken over by rivals. In Germany, the little IKG regional bank was regulated. For the survival of the medium-size bank Hypo Real Estate (HRE), German taxpayers under direction of private banks and their associations spent more than 100 billion euro...
THE CRISIS DOES NOT CORRECT
The annoying result of the state bailout actions is that the financial sector in the globalized world economy is nearly as large as before the crisis after almost three years of the open financial crisis. This is unfortunately not a harmless state. Rather this also means that the claims for payment represented by the financial sector are also enormously high compared to the total economy. A high share of profit is diverted from trading- and industrial capital to money capital. One could think it could be all the same to wage-earners how the total profit is distributed within the capitalist class. That is not entirely true. The pressure to lead large parts of the profit to bank capital drives businesses to reduce costs and minimize investments. Grasshoppers working with a high share of foreign capital and managing businesses bought by them are a good illustration of the effect of credit-capital dampening growth.
Not to allow masses of banks to die out was on principle the right decision of capitalist governments. They were wrong not to take control at that moment. What kinds of banking transactions should remain and what banks should survive must be examined and decided. The rest must be handled orderly. Ultimately money and credit are only an economic infrastructure for capitalist economies thanks to state guarantees. Simply abandoning the privately operated banks leads to disaster as we see. The old leftist demand to nationalize the bank system is an antidote. This has nothing to do with socialism.
Assuming control, examining and deciding sounds like a politically na´ve conception of the world formulated in the unrealistic ideas of the past. The notion that governments in Washington, Paris, London or Berlin could take control of the financial sector is completely na´ve and unreal. The lifelike performance in the Stamocap-play should have had an enlightening or purging effect. Much has been said and written about Wall Street's methods of exercising power and in particular the Goldman Sachs investment bank in Washington. That the Deutsche Bank is in charge is clear even to the politically blind. The alliance should not be forgotten. The most important economic gift of the state budget went to Munich insurance in the form of a dowry for the Dresden bank. It has been a worldwide market leader in its branch after the collapse of the US AIG.
WHAT IS LEFT OF REGULATION
The actors and authors of the "regulation" of the financial sector were devoted to their own prosperity. Here the drama of Stamocap becomes satire. Here the top politicians prove masters of great empty words. Monitoring, control and regulation of speculators were presented as keywords. The governments of nation states and of the EU announced reforms and instituted commissions so "this crisis will not be repeated," as Ms. Merkel said again and again. The recently elected US president Barack Obama announced the "most far-reaching reform" of financial monitoring that amounts to a regrouping of bank oversight and competence in favor of the Fed.
A year later after nothing happened and voters in traditionally democratic Massachusetts chose a republican in a by-election, the self-confident president was under new pressure. The de-regulation of the Clinton years should be cancelled and the investment banks strictly separated from the credit banks. Less will probably come from this project than from health care reform.
The worldwide economic crisis continues. Supported by the state, the financial sector is as large, dominant and unregulated as before. This is an exquisite mixture. It guarantees economies will only recover slowly if at all. Japan's history after the great 1989/90 crash on its real estate and stock markets shows what could happen. The massive state relief was largely soaked up by the financial sector and like capital exports flowed to the financial markets of the rest of the globe. Domestic demand and the real economy stagnated. Japan drifted into deflation, which still afflicts the country today.
The prospects for the world economy are gloomy. The relatively high growth of many threshold countries will also not continue for along if the metropolises of capitalism stagnate. The strange provisional state in which the financial sector exists, a kind of speculation wave supported by nothing but the indebtedness and money supply of the state cannot last for long. Presumably an even greater bankruptcy will end the strange euphoria.
EUROLAND AS A SPECIAL PROBLEM
A state bankruptcy is offered as a crisis trigger. A farce has been played out for three months in the case of Greece. Greece is a small country. But it is a member of the monetary union of the euro. This makes the matter interesting. The real problem of the euro-zone is the economies drifting apart. They are even reinforced by the special construction of the currency union in which only the central bank makes policy, different economic policy is regarded as taboo and rules only refer to the indebtedness of state budgets.
The advantage of a large currency union is that the participating economies can largely evade the irrational movements of the financial markets, in particular of the currency market. Industry and commerce can sell their goods within the currency union without having to fear not being able to sell anymore in another country on account of the sharp drop in prices. The European monetary union was created so the sales of industry and commerce could avoid the irrational fluctuations of currency markets, not as the old chancellor Helmut Kohl wanted to persuade his citizens with sentimental eye-patches to secure the peace in Europe or to do France a favor. How could German auto-manufacturers open up the market in Italy, Spain and France when they were confronted again and again with drastic devaluations of the Lira, Peseto and French Franc? That was impossible without a monetary union. A common currency for countries that pursue completely different economic policies cannot succeed. That was even clear to actors at that time like Kohl and his finance minister Theo Waigel.
So they invented the trick of putting countries participating in the euro in chains. States were told to keep away from the economy and withdraw from it. Upper limits of debt contraction were prescribed to them with the "Stability and Growth Pact." Location competition was the principle and unfortunately also functioned. Location competition actually ensured lowering taxes on profits and lowering the wage level less in some countries and more in others like Germany. An adjustment or rather a general reduction of economic policy also occurred. Real economic conditions in the euro-lands drifted apart. The actual goal of the euro to create a currency zone and commodity market undisturbed by the turmoil of the financial market was thwarted.
The case of Greece was a test because many states in the euro-zone are in a similar situation to Greece. On the financial markets, people want to know who ultimately pays when a state nears bankruptcy. Governments of somewhat better situated countries want to hold to the fiction that every debtor country is on its own, even in the currency union. They demand a coarse austerity program from the Greek government. Since the summer of 2009, this government has forgotten its election campaign promises. In hasty obedience, the government promises drastic cuts financed by reducing state employees.
Up to now only one thing is clear: Before they become completely cramped or tight-fisted, the great Euro-countries, above all Germany will give the Greek government either an emergency credit or a guarantee. The German export industry will not tolerate the collapse of the euro-zone. The bailout should not cost anything. Therefore relief for Greece or the next candidate judged a risk by the financial market will be delayed as long as possible. In this case, the crisis burdens should be borne b y the weakest.
"Life after the Peak: Everything will Change" by Elmar Altvater
Video: Immanuel Wallerstein and Grace Lee Boggs in Conversation at the 2010 US Social Forum in Detroit
68 minutes www.commondreams.org
Video: Michael Hudson and Richard Wolff - Europe Under the Crunch
www.grittv.org July 31, 2010
We've heard plenty about the recession in the U.S., but what about the rest of the world? Countries across Europe have faced budget crunches and conservative governments are using the crisis as an excuse to roll back the social safety net that most have enjoyed for decades.
Many of the problems--and the solutions--sound sadly familiar. Lowered taxes on the rich and corporations, falling wages, and deregulation led to the crisis, which is being shifted onto the backs of the working class--as Michael Hudson notes, putting the class war back in business. Hudson joins us in studio, along with Richard Wolff, to discuss the economic crisis in Europe, what we can learn about the response to it and apply back at home. Here's a hint: it involves organized labor.
To watch the interview broadcast on GritTV July 31, 2010, click on
link to www.grittv.org
"Banking Regulation? Malfunction" by Lucas Zeise, February 2010
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