by Michael Roberts
I’ve just returned from visiting Slovenia where I was invited to deliver a lecture on Socialising banking
for the Institute of Labour Studies in Ljubljana and also to
participate in a seminar with others, including economists from Die
Linke, the German left party and Syriza from Greece on the role of
banking and debt in the current capitalist crisis and Mick Brooks, the
joint author with me of the UK’s Fire Brigade Union pamphlet on the
banks (see s-time-to-take-over-the-BanksLR.pdf).
My paper for the lecture is here (Presentation on banking in Slovenia 140314) It
has a simple message: that banking in a modern monetary economy should
be a public service for the people, whether they work for an employer or
run a small business. This aim can only be achieved through nothing
less than full public ownership of the major banks, which must be
democratically accountable and controlled by the people and which must
act within a national (or even international) plan to meet the social
needs of the people, not the profit of a few.
As I try to to show in this paper and in previous posts on this blog (see http://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/ and http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/),
banking crashes can trigger crises in capitalism and generally they
make the depth and loss of resources during those crises larger and any
economic recovery weaker than average – as this graph from the Bank of
England shows: in ‘average’ capitalist recession, recovery to the
previous peak takes about one year. So there is only one year’s waste
of resources. When a banking crash is also involved, it takes three
years on average. But so humungous was this banking crash, global and
extensive, that only the US economy is matching that average. Europe is
still unable to return to the previous peak of economic activity after
One feature of the global banking collapse in 2008 onwards was that
governments bailed out these banks with huge dollops of taxpayers’ money
and extra borrowing. According to the IMF, straight cash injections
were equivalent to 7% of national GDP, or which less than half has been
recovered from the banks since then.
And since the banking crash and the ensuing Great Recession, public
debt has rocketed and now millions of households are being asked to pay
for this disaster in programmes of ‘austerity’ (a word used in times of
war hardship or depressions). But it’s ‘business as usual’ for the
banks: they continue to engage in scams, risky investments and outright
fraud, while top bankers pile up their grotesque bonuses yet again. Yet
nobody apart from outright ‘Wolf of Wall Street’ fraudster, Bernie
Madoff, has been charged and convicted on any crime.
My paper goes into examples of ‘business as usual’ but I bring to
your attention another recent article by Ben Strubel, a former
investment banker, who exposes in yet more detail the sheer scandal of
the banking business in the hands of just a few huge global banks, but
also copied by the smaller banks (see http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html). And
in a recent Rolling Stone article by Matt Taibi, he shows just how
appalling the Libor interest-rate rigging was – pervasive and damaging
to the tune of over £100bn (http://www.rollingstone.com/politics/news/the-vampire-squid-strikes-again-the-mega-banks-most-devious-scam-yet-20140212).
The financial sector has grown hugely as part of the modern
capitalist system in the last 30 years – the theme of ‘financialisation’
in the ‘neo-liberal era’ since the 1980s.
But it makes no contribution to creating new value. It merely
redistributes value already created, supposedly to enable investment to
take place more efficiently. Even that role has been usurped by what is
basically hedge-fund activity i.e. just betting on where the prices of
financial assets like stocks, bonds, currencies, commodities and the
derivatives of these will go – up or down? This activity is not only
value-less (as I show in my paper) but also positively damaging to the
productive sectors when these ‘financial instruments of mass
destruction’ (to use the famous phrase of billionaire investor, Warren
Buffett) blow up.
Indeed, Warren Buffett has commented just this week on hedge fund
investing, pointing out that it does not even deliver decent returns for
his fellow investors compared to just investing directly. At the 49th
annual meeting of his holding company, Berkshire Hathaway, the ‘Sage of Omaha’ said the instructions laid out in his will advised
his wife to invest 90 per cent of the money she inherits in a low-cost
S&P 500 index tracker, and the other 10 per cent in short-term
government bonds. In other words, avoid all investment funds run by
highly paid investment banks and hedge funds. Study after study has
shown that very few active fund managers outperform their benchmark over any meaningful period of time, and those that do are invariably difficult to predict in advance.
This was also the conclusion reached by Strubel in his article. His
calculations show that investing directly and not through managers would
have produced five times as much return.
So, not only is banking and financial investment worthless in
creating value, it is mostly a huge selling scam designed to rip off
rich investors. Of course, from the point of view of labour, we have no
interest in or sympathy with the rich being ripped off. However, the
failures and losses suffered by the banks and investors from this will
also have repercussions for millions through job losses, wage cuts,
higher interests and premiums, as we have seen.
In my paper, I argue that the proposed reforms of the banking system,
more regulation, higher capital adequacy ratios, breaking up the banks
into smaller bits, separating the risky investment arm from the ‘safe’
retail and commercial arms and a financial transactions tax – all these
will not be enough to make banking a public service. We need public
ownership of the main banks globally and in each country. If we stop
short of that, as nearly every set of reform proposals does, like for
example, the recent one proposed by the Keynesian-style think tank, Class, promoted the British trade unions
(2014_Banking_in_the_public_interest_-_Prem_Sikka), then it will fail to do the job.
But how to make state-owned banks democratic and accountable to the
people and not just huge bureaucratic inefficient monoliths? At the ILS
seminar in Slovenia, some excellent answers were provided by Philipp
Hershel from Die Linke in his important banking paper Socialisation of German banking and also by Dimitris Liakos from Syriza in his LIAKOS SPEECH-1. In
my paper, I argued that publicly owned banking must be democratically
accountable and controlled by its own workers, consumers and the
government. That means directly elected boards, salary caps for top
managers, and also local participation. I constructed a provisional
schema for this.
Most important, as the chart shows, banking must be integrated into a
national plan for investment and growth to plan the economy for social
need and not profit. Of course, that would not be possible without
public ownership of the ‘commanding heights’ of the productive corporate
sectors too. One goes with the other.
The people behind the Institute of Labour Studies have now formed a
political party, the Initiative for Democratic Socialism, which has
joined a coalition with two other radical and socialist parties to run
in the upcoming Euro elections as the United Left. The United Left has
adopted a programme that includes a publicly-owned and democratically
controlled banking service. The UL will be part of the pan-European
Left Bloc led by Syriza’s Alexis Tsipras in the Euro elections. See http://euobserver.com/news/123367.
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