Monday, November 19, 2012

Marx, banking, firewalls and firefighters

by Michael Roberts

“If Karl Marx had been alive in 2007, he would have been working for a bank. Banks had reached a state of communist perfection. The workers took home everything; the capital holders were left with nothing. Shareholders of banks were raped by the staff, who paid themselves extravagant sums out of illusory profits.  Labour had found a far more effective device than trade unions for destroying capitalists, by duping the shareholders that higher pay was essential to retain Talent.  They were assisted by the accountants, who allowed them to declare profits before they received any cash. Marx would have been laughing all the way from the bank.”
  So said Karl Sternberg of Oxford Investment Partners in the Financial Times last week (

So, according to Sternberg, the global banking crash was caused by ‘communism’ in banks i.e. greedy workers “getting too large a share of the income generated“.  Really? Apart from the distortion of the idea of communism into something that has to do with labour’s share being maximised under capitalism, it’s just not true that wages or ‘employee compensation’, as the Americans like to call it, have increased as a share of national income in the major capitalist economies over the last 30 years.  On the contrary, as we have shown many times on this blog, labour’s share has fallen back and inequality of income and wealth has increased sharply, at least in the major financial ‘rentier’ economies of the US and the UK.
Of course, what Sternberg means (when he is not being too silly) is that the executives of the big banks and financial institutions racked up investments in ‘financial weapons of mass destruction’ and then took huge bonuses out as ‘compensation’.  This drove up the ratio of employee compensation relative to revenue to record levels.  Why Sternberg thinks this brought the banks down is not clear. But anyway, the increase in the share of compensation in the banks went mainly to the very top levels of executives and the investment bank traders, not to the average bank worker in the high street or loan centre.   And contrary to Sternberg’s argument, the poor old bank shareholders did fine out of the arrangement as the credit boom boomed.

Indeed, as Andy Haldane, the Bank of England official responsible for financial stability, pointed out in a recent speech (to the Occupy group!): “There are 400,000 people employed in banking in the UK. The vast majority of those, perhaps even 99%, were not driven by individual greed and were not professionally negligent. Nor, even in the go-go years, were they trousering skyscraper salaries. It is unfair, as well as inaccurate, to heap the blame on them. For me, the crisis was instead the story of a system with in-built incentives for self-harm: in its structure, its leverage, its governance, the level and form of its remuneration, its (lack of) competition. Avoiding those self-destructive tendencies means changing the incentives and culture of finance, root and branch. This requires a systematic approach, a structural approach, a financial reformation.”

And since the banking crash, it is the bank staff in back offices, on the counters and in the call centres that have been losing their jobs, not the top executives (apart from a  few headline names).  The number of City-style jobs in the UK peaked at 354,134 in 2007; they are now down to just 249,512, according to the Centre for Economics and Business Research (CEBR), and will fall to 237,036 in 2013 and 236,494 in 2014, the lowest since 1993. One out of three posts will have been axed since the height of the bubble. So much for a “communist” banking sector.

Sternberg goes onto argue that what is needed to avoid a renewal of ‘communism’ in banking is regulation.  This “must involve splitting the banks into their trading functions and their deposit-taking and lending functions.”   In other words, we must divide traditional and ‘safe’ forms of banking from the risky speculative areas.  This is also the view of the Vickers Commission in the UK, set up to come up with recommendations for safer banking in the future.  There should be firewalls between risky banking and safe banking. It’s the same argument presented in America by ex-Fed chief Paul Volcker. Sternberg idiotically calls this “more capitalism and less communism.”  Whatever you call it, will such regulation work in curing capitalism of future banking crises?

So far global banking regulators have proposed Basel-III (the third such attempt to regulate banking over the last 20 years).  These regulators said they wanted to satisfy the need for ‘more regulation’ without ‘strangling the banks’ so they could not function profitably.  Indeed, a very tricky objective!   Under Basel-3, banks are supposed to keep at least 4.5% in cash and equity with another buffer of up to 2.5% for safety’s sake.  And when things were going well and they started to make good profits, they were going to have to keep another 2.5% of assets in reserve for a rainy day.   However, the banks said this would ruin profits and so these new ratios do not have to be met until 2015 at the earliest and in the case of some ratios, not until 2018 or even 2023!

Meanwhile the recommendations of Vickers and Volcker on putting firewalls into the banks have been watered down or downright rejected.  The Vickers Report on the UK banking sector ( also proposed to increase the amount of capital funds that banks must hold relative to the loans they make and financial assets they purchase.  They also want to reduce the holdings of ‘risky’ assets that banks can hold.  And they have gone halfway to proposing (through ‘firewalls’) separating the activity of banks between their ‘traditional’ role of lending to business and households and their ‘investment’ role of gambling in bond and stock markets.

And then there is the idea of breaking up banks that are so large that if they fail they would bring down the whole sector (like say Lehmans in 2008).  This has been totally shelved.  On the contrary, the big banks that survived the crisis are getting bigger.  That’s because breaking up the banks would mean fewer profits and in those countries like Britain or the US, where financial sector profits are so important, there is little enthusiasm to pursue the Volcker rule.  So it’s really business as usual.  Bonuses are down not because of regulation but because bank revenues are down as the global economy stagnates.

And anyway, as former UK Labour Chancellor Alastair Darling commented, what makes Vickers or Volcker think that a banking crisis can only happen in the ‘speculative’ part of banking?  In Britain, the banking crisis first erupted in the ‘ordinary’ banks like Bradford & Bingley, Northern Rock and HBoS.  Only later did the ‘universal’ banks that speculated in US mortgage-backed assets and credit derivatives like RBS get into trouble when the whole banking world began to implode.  As Marx would have argued, loan-bearing capital is inherently vulnerable to the possibility of crisis, because loans may not be paid back and deposits may be withdrawn and transactions can break down.  So it’s very unlikely that he would want to have worked for a bank in 2007.

The answer to avoiding another financial collapse is not just more regulation.  Bankers will find new ways of losing our money by gambling with it to make profits for their capitalist owners.   In the financial crisis of 2008-9, it was the purchase of ‘subprime mortgages’ wrapped up into weird financial packages called mortgage backed securities and collateralised debt obligations, hidden off the balance sheets of the banks, which nobody, including the banks, understood.   Next time it will be something else.  In the desperate search for profit and greed, there are no Promethean bounds on financial trickery.

But why should banks be commercial (let alone speculative) operations?  What is to stop us turning them into a public service just like health, education, transport etc?  Nothing is the short answer.  If banks were a public service, they could hold the deposits of households and companies and then lend them out for investment in industry and services or even to the government.  It would be like a national credit club.  If banks had been under public ownership and engaged only in a plan to provide funds for industrial investment, government infrastructure development and housing,the financial crunch would have been avoided (even if the Great Recession was not).

The evidence shows that where there has been publicly-owned banking, it has been highly successful.  In the right-wing US state of North Dakota, the main bank is publicly-owned and has been for years.  It provides solid and reasonably priced loans to farmers, students and the public; it was not broken by the global banking crisis ans continued to provide profits for North Dakota state.
Indeed, during the Great Recession, those countries that suffered least were precisely those countries that were bolstered by state-owned investment banks that supported infrastructure projects to keep jobs and create investment.  Brazil’s INDES investment bank was very successful in that, despite the cries of foul by the privately-owned and foreign banks operating in Brazil.  It is no accident, for example, that Brazil had a very mild recession because the government there plunged huge resources through its state-owned development bank for infrastructure spending.  China’s banks were ordered to do the same.  Speculation in financial instruments was avoided.

I’ve argued in this blog many times that banking plays an important role in a modern capitalist economy and credit mechanisms will do so for many generations even if capitalism were to go as the dominant economic system.  But banks need to be run as a public service to small businesses and households providing credit for projects that create jobs and incomes, with loans at reasonable rates.  This ‘traditional’ role has all but disappeared in the binge of financial speculation.  The assets of British banks, for example total £6trn, or over four times the UK’s annual GDP.  But loans to business are just £200bn, or 3% of that total!  Indeed, most UK bank assets are abroad.  Only 20% of that £6trn is invested domestically.  British capitalism is an imperialist rentier economy.

The most important domestic function for banks is to channel savers’ money to businesses for investment. Only productive investment generates growth.   But banks in both the US, Europe and the UK are failing in this vital task.  Just look at the very latest data from the Bank of England on bank lending growth.

Sure, the lack of loan growth is mainly due to the lack of demand for loans.  Britain’s biggest corporations are international and cash-rich.  They are hoarding their cash and not investing.  So they have no need to borrow.  On the other hand, Britain’s small and medium size businesses are unable to borrow because they have too much debt and are not making profits.  They are increasingly becoming ‘zombie’ companies.  According to new research, one in ten British businesses are able only to pay interest on their debts and not reduce the debt.  “Zombie companies cannot invest or innovate, they just sit there slowly losing employees and customers and dragging on the economy “ (KKR asset management).

And Britain’s banks are not helping.  Even though two of the big five UK banks now have a sizeable public shareholding (RBS 82%, Lloyds 43%), they are not helping small businesses, despite various incentive schemes and targets being set by the government for them to do so.  While the Bank of England base interest rate is near zero and the BoE is buying up the government bonds held by the banks to give them huge amounts of cheap cash, they are still charging increased rates of interest to businesses in the real economy, because they have to make a profit to their shareholders.
And they will have to go on doing this until the banks are profitable enough to drive up their share prices.  The House of Commons Select Committee recently concluded that the British taxpayer’s original equity investment in RBS and Lloyds of £66bn is still below the water line and probably will never be recovered.  If the government sold their shares today (as they would like to), the taxpayer would lose £34bn on the investment.

But why should the government sell anyway?  On the contrary, the best way forward for taxpayers and a better economy is to take the big five banks over completely.  At current share prices, this would cost taxpayers (assuming the government paid full compensation) just £55bn, or 3% of GDP.  This could be funded by government bonds (currently at all-time low rates of interest).  In return, the British people would then have full control of the banks to help industry within an integrated plan for investment and growth.  The government could sack overpaid top executives (reducing ‘communism a la Sternberg’) and taxpayers could reap the full benefits of future profits without the need for special ‘windfall’ taxes etc.

“We also provide a dividend back to the state. Probably this year we’ll make somewhere north of $60m and we will turn over about half of our profits back to the state general fund. And so over the last 10, 12 years, we’ve turned back a third of a billion dollars just to the general fund to offset taxes or to aid in funding public sector types of needs. Not bad for a state with a population of 600,000. Our capital was in a fine position to go ahead and do that. So in some cases we’ve acted as a rainy day fund.  We in fact are dealing with the largest surplus we’ve ever had. So our concern is how do we spend it wisely and make sure we save it for the future.” 
  Interview with Eric Hardmeyer, head of the Bank of North Dakota (

It is this idea that Britain’s Fire Brigades Union (FBU) has recently taken up (  The FBU realises that protecting their members’ wages, conditions and pensions cannot just depend on their negotiating skills or campaigns.  It requires political action because what is happening in the wider economy will affect the conditions of all workers whether in the private or public sector.  Indeed, public sector workers are under direct attack by the UK government that is trying to make them pay for the bailout of the banks and the ensuing Great Recession.  And private sector workers are facing reduced real incomes as British capitalism stagnates.

So the FBU launched a campaign earlier this year to bring the big five UK banks into full public ownership and democratic control.  The FBU managed to get a motion along these lines through the annual conference of the Trades Union Congress in September.  And now they have produced a pamphlet, It’s time to take over the banks, as part of the campaign to win public support for this policy (s-time-to-take-over-the-BanksLR.pdf.)  Mick Brooks (see my post on his recent book, and I helped write this pamphlet and outlined its contents at a recent FBU education school (at the FBU school picture below).

It’s just the start of the campaign.  The British public is convinced that its railways should be returned to public ownership, bringing to an end the disastrous privatisation adopted under the previous Tory government in the late 1990s and promoted by the New Labour Blair government.  A recent poll said that 70% of Britons asked wanted a publicly-owned national rail service.  The public is also convinced that the utilities (water, gas and electricity) should be returned to the state to stop the ludicrous profits being handed over the private shareholders (and ‘communist’ top executives) as energy and water prices rocket.  But they are less sure that banking can be a proper public service that could help the economy.  The FBU hopes to change that view.

Paul Sternberg is apparently the co-founder of Oxford Investment Partners.  This is an investment manager that looks after the investment of five very rich Oxford University colleges, among other investors.  What these speculative investment managers know about communism, banking or the interests of the British public is hard to see.  I think Britain’s firefighters have a better idea.

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