Wednesday, December 09, 2009

Bank Bail-outs - So What's New ?

SOYMB takes the opportunity to re-print two Socialist Standard articles upon previous banking crises that demonstrates that for all the accusations of Obama's "socialism" , and the State help to support the banking industry nothing much changes from the past.

Banks and the crisis

If anything has underlined the capacity of the capitalist system for severe crisis bordering on disaster, it has been the recent report of the Bank of England admitting that in the last two years it had to launch a multi-million pound "lifeboat" fund to support financial institutions on the brink of bankruptcy. Although the Bank has refused to reveal exactly how much was spent on the operation, the Guardian (27 May) reported that "City bankers believe that more than £1 billion may have been used to bail out fewer than 10 institutions".

The Bank first realized the true extent of the banking crisis in October 1990 and soon went on red alert. It eventually came to believe that over one in six UK financial institutions were at risk from the crisis. This was primarily because the economic slump and the collapse of BCCI provoked what has been described as a "flight into quality", or towards the big five banks, at the expense of other institutions dependent on the so-called wholesale market where deposits come primarily from professional investors, many of whom were also involved in the slump-ravaged property sector.

The Bank's report claims that its actions to avert a major banking crisis followed what it calls:
substantial withdrawals of wholesale funding from smaller banking institutions arising out of a number of factors, including the pressure on banks in major overseas markets, notably America and Japan, the earlier closure of a number of other small British banks, followed by BCCI, and the reactions to those events by local authorities and other places of wholesale funds.

It is clear from the Bank's report that a full 1970s-type banking crisis was a real prospect—and the report states that the Bank of England still has £115 million in provisions representing outstanding debts at risk.

Some of those banks bailed out by the Bank of England have since ceased trading. Some have effectively worked themselves out of a precarious position while others still depend on the facilities extended to them by the Bank.

Given the anarchy of the market system it is quite easy for a major financial catastrophe to occur under capitalism and shake the system to its roots. This has been amply demonstrated by the recent activities of the Bank of England, just as it was during the secondary banking crisis of the 1970s and, of course, during the major slump of the 1930s, which was exacerbated by the major banking crisis of 1932-3.

One thing is for sure—there can be no sustained economic recovery so long as corporate, personal and national debts are compounding at a rate faster than wealth production. Before the "green shoots" of recovery really start to grow there will have to be yet more bankruptcies, cheap takeovers and massive debt liquidation to ease the pressure on finance, investment and consumption. In truth, with debts in major capitalist states like Britain and the US at such unprecedented levels and with no really convincing signs of sustained economic recovery, the pressures on capitalism's financial apparatus may be far from over.

DAP (Socialist Standard, July 1993)

Intervention USA

In these days of the enterprise culture, government involvement in industry, commerce, banking and other economic activities is not the flavour of the month. Market forces are in and intervention, or so we are told, is out.

Indeed it would appear that this is true, for all over the world, in Britain, France, Australia and elsewhere, governments have been getting rid of much of what is called "the public sector". In fact nationalisation, the main form of government involvement in a nation's economic activity and once seen as a device which would solve all of capitalism's economic and social problems, is more or less a dead duck.

So obvious is this even to politicians of "the left" that the Labour Party here doesn't intend to re-nationalise all the Tory sell-offs of the last decade, while in the so-called communist countries private enterprise is being encouraged to compete with ailing state enterprise.

From deregulation...
However, even in such times as these, governments still have to step in and intervene when they think that the interest of the national capitalist class is in danger. For example, in the United States, the very heartland of non-intervention, there has been the growing problem of the Savings and Loans banks. These S and Ls are the rough equivalent of Britain's building societies and hundreds of them have gone bust while hundreds more are insolvent. Their losses were $68 billion in 1987 and $3.8 billion in the first quarter of 1988, although depositors are covered by a government insurance agency.

How did this happen? Just as nationalisation was once seen as the great cure-all, nowadays it is "deregulation" which fills the bill. This means that enterprises in an industry no longer have to conform to laid-down government regulations but are freer to operate as they see fit. This, it is claimed, will produce a capitalism without its attendant problems, will provide greater all-round prosperity, and so on.

Thus the S and Ls were allowed by the Carter administration in 1980 to borrow, not only from small investors for re-lending as mortgages as previously, but from the money markets at ever higher rates of interest. This laid them wide open to trouble, which duly arrived when the Reagan administration further deregulated by allowing the now exposed S and Ls to move into high-risk lending for big property deals and other get-rich-quick schemes of which they had no experience. The result was the spate of bankruptcies and insolvencies already mentioned.

... to regulation
At present the insolvent S and Ls keep afloat by continuing to borrow at high interest rates and their debts are estimated to be increasing by $35 million a day. Sooner or later the government will have to foot the
ever-mounting bill. The implications of this are serious for American capitalism. How can it ever tackle its massive budget deficit of $150 billion while it throws away billions at this rate? More seriously, many American banks have collapsed in recent years (almost 200 in 1987 alone) and the additional collapse of hundreds more S and Ls could trigger a disastrous loss of public confidence in the entire American banking system. The Administration have therefore intervened to try to stop the rot.

Bush and his financial advisers have come up with a plan calling for a one hundred billion dollar issue of new bonds to bail out the S and Ls. The interest on the bonds is to be paid to the government by the S and Ls and the other banks though higher premiums for Federal insurance of all bank deposits. Critics of the plan say it breaks Bush's election promise of "no new taxes" as "the taxpayer", in the form of the banks' customers, will have the extra premium passed onto them through higher bank charges. But this will not necessarily happen because the customers may refuse to pay up, in which case the banks and S and Ls will have to bear the extra cost themselves.

This rescue package also calls for a leaner and fitter S and L industry to be taken over and run by another government agency, the Federal Deposit Insurance Corporation, and amounts to back-door nationalisation. So whatever their ideological preferences any government will make use of intervention, even despised nationalisation, when it suits "the national interest".

All of this reinforces the Socialist Party's view that whether government use less intervention or more, they are helpless in avoiding capitalism's pitfalls.

VV (Socialist Standard, April 1989)

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