Crisis, What Crisis?

By afraser, submitted on Sun, 26/10/2008 - 23:02

A Praxis guide to those perplexed by the 2008 Financial Crisis

1) Opportunity Amidst The Rubble

The die is cast: who knows now where the numbers will fall?

This is a golden opportunity, once in a generation, to get the financial sector nationalised and socialised. And to keep it that way.

Since the decline and collapse of the USSR, nationalising everything in the economy was an argument that was never going to be won (thankfully - state socialism was genuinely awful).

Markets work well for consumer goods. But financial markets do not work well, can not work well, for investment decisions. We have seen that over and over again - the dot com bubble, repeated real estate bubbles, repeated stock price bubbles.

And investment decisions should in any case be made by society as a whole.

Were that in place you would have a socialism that would work. You would have ordinary firms functioning as now in a market economy for consumer goods. They might be worker co-operatives in some way rather than shareholder owned, but otherwise they would function as now as if in a private enterprise free market economy. But the financial sector - savings banks, investment banks, bonds, stocks - would be run by governments or social enterprises under the control of governments. Not capitalists. It would work, and it would be good.

That's a message we can take to the people and win with.

The message in a nutshell?

Take the banks over properly, to let them be run for the good of the people.

2) FAQ on the Crisis

What happened?

Main cause - Property bubble in coastal US and in UK.
Exacerbating exposure to this - Increasing deregulation of US and UK banks and building societies since mid 1980s, allowing for more risky loans and foreign investment.

Below – The house price property bubble. Note that it still has some considerable way to fall.
Buy-to-letters, why didn't you look at graphs like this back in the day?:

Why did that happen?

Greedy capitalists
And greedy ordinary people too. Many jumped on the buy-to-let property speculation bandwagon, even when they knew price rises could not last and were not real.
(I don't mean to be too harsh – these people were often just trying to ensure a decent retirement nest egg for their old age. They face loosing everything now.)
Failure of leadership – Gordon Brown, Tony Blair, G.W. Bush, Alan Greenspan, all could have halted the bubble at an earlier stage, reigned in the banks.
Behind it all – a lack of fear of socialism following the decline and collapse of the USSR in the 1980s.

Umm, are these fat bozos really taking a chainsaw to US Federal financial regulations?

Yep. In a 2003 photo-op organised by the Federal Government itself no less. Crowing about how good it was doing in cutting red tape for the financial industry, chopping away regulations, abolishing restrictions. They did a good job of that, all right.

Every time you can't work out how the modern capitalist economy could get so fucked up all of a sudden, just take a look at these clowns, in this picture.

Then you'll know.

It'd be worth a thousand words easy – if we weren't all rendered speechless just looking at it.

Remember, the ones in the picture are the the guys meant to be doin' the regulatin' of the banking system. They're G. W. (Arbusto) Bush's hand picked regulators. The ones in charge of the whole mess right up until now.

The guy holding the chainsaw? He's James Gilleran, Republican schmoozy and head of the Office of Thrift Supervision(!). From the Federal Government:

December 7, 2001
James E. Gilleran was sworn in today as Director of the Department of the Treasury's Office of Thrift Supervision (OTS) by Treasury Secretary Paul H. O'Neill. He was confirmed by the U.S. Senate on November 28, 2001.
As Director of the OTS, Mr. Gilleran oversees an organization that regulates and supervises 1,037 U.S. thrifts with $974 billion in assets, as well as thrift holding companies. The OTS has approximately 1,180 staff members.

Aren't you glad this guy was regulating and supervising $974 billion in assets all those years of the bubble? The Senate (Democratic controlled) really did its job in confirming him, way to go guys.

And the other guys in the picture? They are similarly the heads of the various other regulatory agencies.

In case there was ever any doubt, we can now take it as pretty much proved, that, if you take a combination of coke, hookers, sleazy campaign contributions – and then go throw live chainsaws into the mix – well, you're not going to get the best possible system of financial regulation coming out.

Because Wall Street executives were calling all the shots here. They ran the K Street lobbyists who in turn ran the US Treasury Department and owned a huge pile of Congressmen with a combination of money and sleaze. A few of them are facing jail now. It was – and it still is – more like an organised crime racket taking over city hall politicians and judges, than a rational economic system of controlling national investment. You can read through some of the sordid details starting from http://en.wikipedia.org/wiki/K_Street_Project

What are the fundamental causes?

Having a market in land. That in turn is a feature of having alienable land ownership, rather than, say, regulated community land trusts. Markets such as that cannot function correctly. Why? Because land is fixed, cannot be spewed out of factories like consumer goods can. So land is especially prone to speculative buying and bubbles. Always has been. The Florida real estate boom in the 1920's fed into the 1929 crash and subsequent Great Depression. The 1980's property boom fed the 1987 crash and subsequent Bush I / Major depression. And so on, back in time.
Having financial markets determine investment. They just can't do it right. That's because of the cost of information. It's – at best – ruinously expensive for an outsider to gather detailed information on the underlying fundamentals of investment decisions. The corporations themselves maybe know something about what they're spending on – although that's being generous. But outside banks and stock investors can have only the fuzziest idea, unless they spend prodigious sums investigating for themselves (which would not be sensible).
And that's the best case. More often, it is literally physically impossible for anyone, or any market, to know what is the best investment option, because many futures are inherently unknowable and un-guessable.
So the reality is that financial markets are a big useless scam. They make some rich investors, who are on the inside, or in the know, very happy, but provide no useful economic information or service.
Joe Stiglitz and others wrote at length on this ages ago. They even got given the Nobel Prize in Economics for doing so. But so far, no one has wanted to face up to this reality, because of its fatal implications for capital markets, and hence capitalism.

Below – The economics of information: Keynes' Animal Spirits in action.

How should it be fixed?

Nationalisation of banks.

How will it be fixed?

Temporary part-nationalisation of banks.

Will that still work?

Yes that will still work, but it won't be pleasant to watch. Expect to see:

Capitalists and politicians desperately pretending nationalisation isn't actually nationalisation. Watch them twist and turn to avoid the N– word and the S– word. Prepare for every kind of euphemism: placing-in-trust, bailout, equity deal, partnership, and so on – instead of (the accurate) 'nationalisation' and 'socialism'.
The shares bought by the government (taxpayer) at far too high a price.
Very little control of the part-nationalised banks by politicians or civil servants, instead largely left run by the old crew of crooks and greedy incompetents.
Pitifully miserly investment by these part-nationalised banks in industry, housing, and so on. That's horrible, because the whole point of nationalising the financial system is precisely so you can pump far more investment funds, than capitalism would, at the projects and jobs that people really need. And there's going to be hard times coming out of this crisis, with massive job losses in many sectors, especially construction, so serious investment spending will be desperately needed. But the old bankers and capitalists still clinging inside the wreckage and whispering into the ears of politicians won't care about that. They'll want to see the banks balance sheets made good as soon as possible, so they can move on to the re-privatisation phase below. And that means – miserly lending policies.
As soon as the crisis is over, in a few years, the shares all sold off in a privatisation deal by the government (taxpayer) at far too low a price.

So that will work, after a fashion, and fix the crisis after a few years of misery for the poor. But it'll be a much juicier deal for the rich and powerful, and gives them everything back at the end of the day to go ruin all over again.

Why the resistance to nationalisation?

It's the obvious fix, and the only fix. So why so much dragging of heels over going ahead and doing it? Such as, when the British Government tried to sweet-talk Lloyds TSB into taking over HBOS instead of simply nationalising HBOS (fortunately its looking like the takeover is dead now and the nationalisation will belatedly go ahead as it originally should have)

Nationalisation will fix the problem quickly and easily. It will, if done aggressively enough, go further, and actually create an economy better and more dynamic than the pre-crunch one.

But nationalisation is a scary word for rich people to hear. Especially when applied to the banking and finance sector, which rules the economy as a whole. Many of them are scared that the people might grow to like the idea of nationalisation, making it permanent and growing it in scope. And that's not what the rich and powerful want to see, not one little bit. They want to have the banks nationalised only for as long as the credit crunch lasts, and then given right back into the hands of the original owners the second the economy is fixed again. A case of 'heads I win, tails you (the taxpayer) looses'. Some of them are afraid it might not be so easy to sell that idea to the general population. Make no mistake, the rich would rather see the economy destroyed than risk their privileges over us.

Hence US Treasury Secretary Paulsons otherwise senseless $700bn bailout plan. And him letting Lehman Brothers go bankrupt rather than nationalise it. The rich were too afraid of nationalisation last week

For the rich and powerful, maintaining their status is more important than maintaining or improving the economic situation for the general good.

Most of them would rather be big fish in a little clogged up pool, than little fish in a huge ocean.

And the rich and powerful are, by definition rich and powerful, which means they wield disproportionate influence over the economic decisions of government.

But, like in Argentina, we were not ready. The crisis hits, but without organisation in place, the opportunity is lost and everything goes back to normal when the crisis ends.

How Bad is it going to get?

Bad.

Soon – I mean by the end of this (2008-09) winter – the banks will kill most all their lending: mortgages, credit cards, overdrafts to small firms. Consumer spending will drop and firms will lay off workers. That'll trigger a death spiral: more lay-offs causing more spending drop, causing more lay-offs. It's the end of the world as we know it.

If you can hunker down into a steady job, do so soon.

Construction will be the hardest hit – it'll pretty much die on its feet – but we'll all feel the pain. If you're in construction, or manufacturing, or on a temporary contract, or agency job, or are still a student – then start brushing up on your welfare rights. You'll likely need it soon.

Only government spending on a massive scale – especially direct government investment in industry through the nationalised banks – will save us now. Yet governments/capitalists will be so terrified of the N– and S– words (that's nationalisation, socialism) that they'll be scared to take more than baby steps in those directions.

But we'll get that if we push enough. And if we push some more, we'll get a socialised economy for keeps.

Is it as bad as the 1930's? Worse? Not so much?

It's as bad as the 1930's. Except this time, people know what they are doing, know what went wrong last time. So the effects won't be as bad as the last Great Depression. This time, governments seem more prepared to actions – like nationalisation – to help fix it. Last time around they were pretty tardy, except for Hitler and Stalin. Herbert Hoover and the British Government too would hardly do anything last time.

$0.7 trillion, £500 billion – does this money actually exist? I thought money had to be backed by gold?

Money hasn't been backed by gold for donkeys years. Not really since before 1914, and not at all since Nixon was in the White House.

Nowadays, money is created (printed) out of nothing by Government – the U.S. Federal Reserve, the Bank of England, and similar central banks. It's free money for the government to spend wisely or to give away in corrupt bailouts as it wants to.

Creating and then spending money in good times could cause some inflation. But in what is happening now, the bailout money won't actually be spent likely for years. It's already been spent in the past during the bubble with all the cheap easy credit. Now the reckonings due, but the inflationary impact, if any, has already been felt. It's history.

A lot of the bailout money will in the long run be recouped. The big question is, by whom? Who in the end looses from the bailout, who gains from the recoup? If you think, taxpayer looses, and private investor gains later on, you'd be being cynical. But fair. Unless we change it all first.

Socialism? How can bank nationalisations equate to socialism when the bourgeoisie the world over are currently in the midst of a bank nationalisation spree?

The rich have often been in favour of socialism – for the rich. That's when us taxpayers get to bail them out of their own greedy mistakes. But in this case, because it's banks which are involved, the rich and powerful are divided. Some are too scared that we, the people, will try to keep hold of the banks permanently when the crisis is over.

So Lehman Brothers was allowed to fall because of aversion to nationalisation.

And the Group of 7 crisis meeting on October 10th failed to agree anything. Britain aggressively pushed the Brown plan of nationalisation (ironic to see Brown and Darling being the proponents of nationalisation - they stubbornly resisted it for about a month too long in their own country). France and Germany agreed, but Italy and the others are still too scared of socialism and so opposed it. The US can't even agree with itself: "Paulson says he’ll move ahead on recapitalization, but also seek private capital. So the communiqué represents the United States arguing with itself, as well as with others." [Krugman].

What's going on there? The free market fanatics in the Republican Party just can't bring themselves to support nationalisation. They'd rather see the whole economic system collapse in a Götterdämmerung than see any even partial big government socialist remedies brought in. Like Hitler in his bunker in the final days.

So the so called capitalist class / bourgeoisie are deeply split amongst themselves.

Remember, the architect of much of the disaster, Alan Greenspan, is a fellow traveller of the off-the-planet crazy ghetto weirdos of anarcho-capitalism - Murray Rothbard, Ayn Rand, the starve-the-beast people. A lot of his push to abolish financial regulation – and to hell with the consequences – came from that ideological influence. He's retired now, but those ideas remain influential. Extreme capitalist ideology trumps even short term self interest for some cases.

But I predict that as the crisis worsens, the pro-nationalisation people will win out, and the market fanatics will be left grumbling on the sidelines.

Why do we want nationalised banks? Shouldn't we just advocate the abolition of banks, savings banks, investment banks, bonds, stocks and all?

It is important to get investment decisions right. A huge amount of human labour and scarce natural resources are poured into major investment projects. We need to be sure that we spend what we need to spend on what we want. Credit will always be rationed - more firms will want funds for investment than society has available to spend.

Some institution has to make those decisions. The name for that type of institution, is a "bank".

The important thing is to place those institutions under democratic control. To have the investment priorities decided directly by citizen bodies. And with review and supervision of those institutions undertaken by elected officials. With private investors and unaccountable CEOs removed from the financial picture altogether.

Which is socialism, but one that would work. It is not moneyless communism though. If you want that, well then yes, no banks. But good luck to making your economy work.

Having just one big giant state owed bank sounds scary. Is that what we want?

No, we want many socialised banks of a mixture of sizes.

One single state bank in each nation-state would be a threat to civil liberty. People would be afraid to offend them lest they cut off funds.

One big giant bank would also loose the competitive effect of having multiple distinct investors independently carrying out monitoring of debtor firms. Having many banks gives us an easy way to measure performance of individual banks.

So it would be better to have multiple distinct banks all under different varieties of social ownership. That should be done through competing jurisdictions – where every level of government owns it's own bank. So Wall Street would have an office of the Federal bank, the New York State bank, and the New York City bank. All would extend loans to the same groups of firms. Big firms would, as now, take loans from a variety of different banks, with one bank chosen as the lead monitoring bank and with that position periodically rotating.

Small scale banks, neighbourhood savings and loans, credit unions, and micro-credit lenders, could dominate the small business and home loan sector. They are best of all because they can all be placed under genuinely democratic neighbourhood level direct government control.

Industry federations and syndicates could also establish their own banks, again under democratic control. The Mondragon co-operative does just that with its own bank throughout Spain. And the big Japanese and Korean industrial combines each have their own bank attached.

We know all of this will work, and work well. Taiwan until recently had all its banks owned by the government. Korea and Japan both had their banking industry tightly controlled and directed by government. China has all its banks – among the biggest in the world – partially or wholly owned by government. And their economies have all boomed, and the economies with the greatest degree of government control or ownership of the banks – well, they're the ones that did best of all.

3) We've been here before

Through all the dark days to come, remember that the 1929 crash and 1930's Great Depression was a bad time for socialist politics. Herbert Hoover was near useless in his clinging to capitalist ideology. Ramsay MacDonald turned Judas, crossing the floor of the Commons, and leading Britain into the abyss of capitalist economic orthodoxy. The Tories, with Ramsay MacDonald, won their biggest election victory in all history. There was the rise of Hitler and Stalin. There was the loss of Spain. Orwell wrote about giving up hope. Berkman killed himself.

But in the end, although it took a time, the people pulled through. They knew what needed to be done. The 1945 Labour election landslide, with a radical manifesto imposed by a grassroots trade unionist revolt, was the child of the Great Depression. Social Democracy and the new deal and the great society came from fighting and winning from the lessons we all learned, the knowledge we all gained, from those dark years.

It was 16 years in the coming, but it gave our fathers generation everything they, and then we, had.

This time we'll go further.

Our grandchildren will study these days in history class to learn how the fights in these times won them the society of the future.

4) Want to know more?

Above all others, Paul Krugman: