Saturday, 12 December 2009

The Finance Sector: What is it good for?


Gerry Gold

In the run-up to the 2012 Olympics, the New Labour government is hot favourite for victory in the financial events. Its bailout of the Royal Bank of Scotland (RBS) – so far amounting to a world-record £53.5 billion since the onset of the crisis in 2007 – is the major part of the total £74 billion of taxpayers' money the government has put into the banks, including RBS, Lloyds and HBOS, since the start of the financial crisis.

The increasing size of the bailouts shows one thing – the crisis is getting worse rather than better. The latest £25.5 billion for the RBS is part of a second bank bailout which adds up to £39.2 billion. This includes a smaller handout to Lloyds, but is overall £4.2 billion more than the 2008 amount. The Government is hoping this will keep the banks afloat whilst they tear themselves apart under instruction from the European Union's competition rules.

The dismemberment of systemically important 'too-big-to-fail' banks is a hot topic for the world's financial community, but there is no agreement on a co-ordinated package of regulation and reform. Some want to return to the regime established in the wake of the 1929 crash which separated high-risk investment – gambling – from the safer, but less profitable business of balancing deposits and lending.

Others, like the International Monetary Fund, are busy trying to work out how to reduce the grossly unsustainable government deficits resulting from attempts to prevent global meltdown. All of the schemes under discussion concentrate their attention on repairs to the financial system.

Mervyn King, Governor of the Bank of England, in a speech to Scottish business organisations, noted: "The sheer scale of support to the banking sector is breathtaking. In the UK … it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform". He went on: "It is hard to see how the existence of institutions that are "too important to fail" is consistent with their being in the private sector".

In his own way, King was questioning the raison d’ĂȘtre of the capitalist financial system. It is a question we need to ask. What exactly is the financial system for? What benefits does it bring to the majority of the six billion people who inhabit the planet? Why should it be bailed out? Have the institutions that make up the financial system passed their use-by date? Has the entire basis for their existence – support for the making of profit – receded into history?

Rather than resolving the contradictions between productive and finance capital, 50 years of globalisation have intensified them to breaking point. Post-war capital expansion funded by Keynes-inspired government funding ran into crisis in the late 1960s as the rate of profit fell. The loosening of regulation needed to allow the expansion of capital needed to mitigate the crisis produced transnational corporations trading on global markets via an international financial system.

The resultant massive increase in output of cheapened commodities not only further intensified pressure on profit rates but required a massive increase in consumption far beyond the means of workers' wages. Easy credit became necessary to facilitate the age of debt-financed overconsumption. So, the unprecedented expansion of finance was necessary to facilitate the expansion of capital itself and its market, to pursue the path of growth that has driven the exploitation of the planet's resources to the limits.

Growth needed finance and finance induced growth in a mad dance of mutually assured destruction. In the hysteria accompanying the myth of growth without limits, the players in the financial system became virtually and virtuously parasitic, recycling debt throughout the 24 hour global networks like there was no tomorrow. As it turned out there wasn't. Debt exploded beyond the ability of ordinary people to meet their repayments. When they stopped paying mortgage interest the system went into a tailspin. The bubble, as they say, burst.

The intertwined crises of collapsing consumer demand, shrinking global trade, declining manufacturing and inactive credit markets spell the end of the post-war era of a spiralling growth of commodity production fuelled by cheap labour and induced by debt. The overhang of state, personal and banking debt makes a 'return to growth' impossible. No new jobs are being created or will be. Mass redundancies will accelerate the rate of house repossessions, more pensions will be destroyed.

The way the financial sector collapsed into the arms of the state shows that both it and the system of production for profit it supports are no longer viable. Bankers thumb their noses at attempts to limit their bonuses to show that the system can neither be regulated nor reformed. The short shrift given to Gordon Brown’s support for a Tobin tax on transactions shows who is in charge.

Rather than trying to patch up a broken system by bankrupting the population, a government which is serious about solving the crisis would set about:

• shutting down speculative areas like stock markets, hedge funds, the carry trade in foreign exchange
• outlawing gambling in the derivatives casino
• replacing the entire for-profit financial system with a not-for-profit network of socially-owned financial institutions providing essential services. Many examples of these already exist: mutually-owned building societies, credit unions, the Co-operative bank
• establishing democratic control over the finance system, so that decisions can be made about which debts can be cancelled and which renegotiated: mortgages, for example could be renegotiated on the basis of the greatly reduced and declining market values

With the elimination of private equity shareholding, and the abolition of speculation on the money markets, the techniques developed by global capitalism can be used to clear payments between enterprises within and between countries. Accounting systems can be used and further developed to be open to public scrutiny. The dream of a moneyless, socialist society can become a reality.

*This article is taken from the LEAP Red Papers: The Cuts, which can be discussed in full on the LRC website

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