Thursday, October 29, 2015

Will Hutton: Back to the Future, part 2/3

Hutton’s view is that lax regulation around the cash reserves that banks are required by law to hold (the fractional reserve) and the abandonment of other controls on capital flows between countries (previously part of the responsibilities of central banks) are responsible for an excess of credit being ‘created’ in the global economy.  Hutton argues that the ‘emergence of a global banking system’ means that ‘central banks are much less able to monitor and control what is going on’.  Because ‘few countries now limit capital flows’ the result, says Hutton, is that ‘cash generated out of nothing can be lent in countries where the economic prospects look superficially good.’  This leads to a ‘false boom’:
‘Property prices rise. Companies and households grow overconfident about their prospects and borrow freely… all seems well until something – a collapse in property or commodity prices – unravels the whole process.  The money floods out as quickly as it flooded in, leaving bust banks and governments desperately picking up the pieces.’ 
Hutton argues that the current problems in China follow on from the financially induced crisis in 2008 and that crises in other ‘emerging market economies’ are a knock on of the same process of ‘sky-high commodity prices… fuelled by wild lending’ that create ‘super-high but illusory growth rates.’

But the crash of 2008 was not a ‘false boom’ caused by finance but a particularly far-reaching crisis in the history of the business cycle that is inherent in capitalist production.   This cycle has played out numerous times in the past couple of centuries in capitalist economies, a process of capitalist production that Marx described as moving ‘through periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation.’  In an expanding economy banks see a plethora of opportunities to lend at relatively low risk.  This lending greases the wheels of the productive economy which continues to expand at an even faster rate.  At some point in the process of expansion a sector of the economy overproduces relative to the demand.  Production slows in this sector, questions are asked and glances are exchanged.  Production slowing in one sector knocks on to another and then another, doubts begin to grow and confidence is dented.  Before long what seemed like a never-ending process of expansion turns into economic contraction as panic sets in and investment slows or stops.  This is what happened in 2008 as house building in the US outstripped demand leading to a collapse in prices.  This knocked on to the global financial system because the risks of default for US mortgages were bundled up in financial institutions around the world, a contagion that caused panic to ripple around financial markets and confidence to collapse.  Lending contracted, investment stalled.  It wasn’t caused by banks and credit but the global nature of banking did allow the results of overproduction to spread widely and rapidly (just as global banking facilitates investment and economic expansion widely and rapidly). 

The cause of the crisis then is not banks or even overproduction as such but production as it is carried on in capitalism.  Goods are produced not for direct use but for exchange, for sale on the market, rather than being consciously planned in the light of social need.  Inevitably, at some point, more goods will be produced than can be sold at a profitable price causing a dislocation in the expansion of production, the consequences of which (depending on its magnitude and inter-connections) may remain only local or may ripple out to affect regional, national or even the global economy. Frederick Engels referred to this process of production in capitalism as the ‘anarchy of social production’.   The situation is not caused by banks ‘creating credit’ but rather the opposite, an increase in investment in the productive economy causes a rise in lending, which facilitates and accelerates this growth by lending to apparently relatively risk-free borrowers.  Conversely the restriction of credit does not cause an economic downturn but is a reflection of it as borrowing for investment declines and lending is relatively more risky.  Credit accentuates the business cycle by inflating bubbles in times of growth and deepening downturns by restricting credit but it does not cause it. 

So too, the Chinese financial downturn is a tale many times told of rapid growth followed by a crisis and a recession (establishing the conditions for renewed growth).  In an attempt to reverse a slow-down in the productive economy the Chinese government cut interest rates in an effort to stimulate the economy.  Borrowing increased and the Chinese stock-market boomed for a while.  All that happened was that the gap between the reality of a slowing productive economy and stock-market prices grew larger.  At some point the two had to come together again and so they have. Banks did not cause the crisis by creating credit they only delayed and accentuated it.  More regulation of banks will not solve the problem of the cycle of boom and bust inherent in capitalist production.  Banking regulations of the sort that Hutton want aim to reinstate, it is argued, prevented crises in the past and will iron out the instability caused by the psychological flaws of bankers who ‘create money’.  It did not work before and it attributes to banking a power of the economy that it does not have.  Like many on the left Hutton wants to return to a time before Keynesian interventionism was ousted by free market ideologues.  Socialists argue that capitalism, not the form that it takes, that is the problem.  The future lies not in going back in time to a world of more regulated banking but forward to a world where the anarchy of production (indirect social production where goods and services are for sale and realised only when exchanged for money) is replaced by consciously planned production for meeting human needs (directly social production where goods and services are consumed without exchange) and where the conditions of production that give rise to banks will have been abolished.