Will Brown looks at the state of the world economy and anticipates Thursday’s upcoming leaders’ debate.
Bourgeois democracy often acts as a fig-leaf, legitimising capitalist rule while holding out the hope, or mirage, of popular control and progressive change. Meanwhile, the state plays a key role in preventing one section of capital rising to dominance at the expense of capital in general.
The startling proposals for bank reform by the IMF demonstrate how the booming growth of the banks over the last 20 years is seen as the primary cause of the global crash. Finance capital dominated, destabilising the world economy and risking the interests of capital in general. State action is now required to control the monster, but this must be implemented at a global level.
On April 21st, leading Financial Times commentator Martin Wolf wrote on the need for major bank reform. He noted:
‘A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole.’
Concentration has meant a large number of small banks have merged into to a small number of giants. These have globalised, using competition among nations to force down regulation and tax. To grow larger and increase profits, the banks have used leverage – investing with borrowed money – to amplify returns. Britain has been at the forefront of these developments. Between 1880 and 1970, British banks had assets (interest bearing loans) around 50% UK GDP – over the last 30 years these assets have swollen to 550% UK GDP.
12 months ago, the G20 charged the IMF with drafting reforms of the banking system. Published last week, the IMF proposals surprised commentators with their scope. Two new international taxes are mooted: one on bank turnovers to generate a fund that will be used in future crises. A second on bank profits and bonuses is hoped to act as a deterrent to excessive risk taking. Many commentators have watched state guarantees protecting depositors’ savings while ‘too big to fail’ banks were bailed out. Bankers have been able to rake in massive salaries by taking high risks which were implicitly underwritten by tax payers. The quaint expression for this protection of millionaire bankers is ‘moral hazard’.
A rejuvenated Obama has joined the attack. Last week he addressed Wall Street bankers on the need for Democrat bank reforms to be passed. Among Obama’s audience was the leadership of Goldman Sachs, the most powerful Wall Street investment bank. The US Govt has aggressively charged Goldman with fraud committed during the crash. Goldman stands accused of deliberately creating bundles of failing sub-prime home loans. They then sold these designed to fail instruments to other banks. The US state has also set about the finance sector with some determination. A Congressional committee spotlight has turned on the rating agencies: Moody’s, Standard and Poors, and Fitch. These played a key role in the crash. Supposedly, they offered independent assessment of the credit worthiness of borrowers. The hearings reveal that the agencies tailored their credit ratings to suit the firms that were paying for them: the banks. Not surprising then that the assessors of risk proved unable to predict the collapse of the banking system.
But attempts by the IMF to reform the banking system threaten ideas of national sovereignty. Japan and Canada, whose banks avoided much of the turmoil of the crash, are opposing the IMF proposals. Japan’s banks have expanded as Wall Street and the City faltered. Naoto Kan, Japan’s finance minister recently said ‘The EU’s debate on the issue doesn’t mean that Japan should follow suit. The EU and the United States have their own ideas, and Japan has its own’.
The IMF has two major roles in the current drama. In addition to proposing reforms of the banking system, it is involved in the bail-out of Greece. The Fund was set up after WW2 to supervise stable relations between nation states. The founding members, 45 in all, subscribed funds. Voting rights are proportional to your subscription. As the wealthiest contributor, the USA has always had the loudest voice. The Fund had a general role of promoting trade, employment and growth. But it had a specific function of ‘assisting’ countries when they encountered ‘balance of payments’ difficulties. A state that develops a budget deficit, where state spending exceeded taxes collected, to the extent that ‘the markets’ (aka international capital) was no longer willing to lend that state money (buy its bonds) can turn to the IMF. The IMF would then offer to lend the government money, but only if the government took action to tackle the offending deficit. The IMF required recipients of its largesse to follow policies bitterly labelled ‘the Washington consensus’. A raft of neo-liberal policies – privatisation, repeal of labour protection law, slashing welfare spending, ending subsidies on basic commodities – was the required medicine if an impoverished country wanted IMF money.
So the IMF fights on two fronts: trying to force controls on the obese banks while helping the EU bail out the Greek economy in the face of bitter opposition by the Greek working class seeing their living standards cut by supra-national agents. And while the project of EU monetary integration hangs in the balance, commentators argue over the strength of the ‘recovery’.
The delightfully named Merryn Somerset Webb is clear that world capitalism is still in trouble. She writes for investors in the FT Money section. Stock markets have now recovered enough to make them look expensive by historic comparisons. The broadly based US Index – the S&P 500 – is currently trading at a P/E (the ratio of company stock market values to profits) of 19 times. This is high, a level that has preceded big market falls in the past. Webb then lists the reasons to be miserable for investors. UK unemployment has risen to 2.5million and inflation is close to twice the Bank of England’s preferred level. The international landscape is dangerous. The key US housing market is seeing repossessions increasing, house prices fragile and mortgage rates due to rise. The IMF is still seriously concerned about the stability of US and German banks. The Euro-zone is struggling to resolve the Greek budget crisis with Spain, Portugal and Ireland watching nervously. Their borrowing rates are edging higher.. China, the economy hoped to rescue the world, has taken sharp action to damp demand as a bubble threatens in the housing market. Webb’s advice is clear – stop buying shares.
The nightmare scenario is that a new bout of crisis will derail the IMF’s plans to restructure the global economy with a strong international regime of bank regulation. Tensions between nation states, exaggerated by crisis, may yet paralyse the possibility of international action. The summit two weeks ago of the BRIC nations (Brazil, Russia, India and China) may prove historic. Their avowed goal is to “have a fundamental role in the construction of a multi-polar, equitable and democratic world order.” They will push for a change in voting arrangements for the I
MF and World Bank’s at the forthcoming G20. We shall see where this leads. Perhaps the final UK leaders’ debate on ‘the economy’ this Thursday will shed light on these historic developments. Or maybe not.
‘Doomsday machine: can we afford our financial system’ Martin Wolf, Financial Times 21/4 /2010
‘IMF calls for taxes on bank balance sheets’ FT 21/4/2010
‘Moody’s chief admits to failings but defends Wall Street fees’ FT 24/4/2010
‘In Japan, bankers balk at stricter regulations’ New York Times (Global edition) 23/4/2010
http://en.wikipedia.org/wiki/International_Monetary_Fund
‘Watching out for more economic dark clouds’ Merryn Somerset Webb FT
24/4/2010
http://www.morningstaronline.co.uk/index.php/news/content/view/full/89268
Liam redux 
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