Central Bankers: A blind guide dog

by Michael Roberts

‘Forward guidance’ is the central bank buzz-word.  Three of the top four central banks in the world have now officially adopted it.  And the fourth has already made it very clear where its monetary policy is going.  Forward guidance is an attempt by the leading central banks to indicate more clearly what monetary policy will be for a reasonable period ahead along with the conditions for sustaining it. It aims to allow households, businesses and financial markets to know what to expect in central bank base rates for the foreseeable future.  In the current environment of low growth, high unemployment and an overhang of capacity, central bankers hope that forward guidance will exert downward pressure on long-term interest rates as economies recover.

Following their December 2012 meeting, US Federal Reserve policymakers announced their new policy of ‘forward guidance’. The Federal Open Market Committee (FOMC) said it forecast that a target range for the federal funds rate of 0-0.25% will be kept for as long as the unemployment rate remained above 6.5%, inflation between one and two years ahead rose no more than 50bp above the FOMC’s target of 2% a year, and longer-term inflation expectations remained ‘well anchored’. The FOMC reckoned that this meant the federal funds rate would be unchanged at least through mid-2015. The thresholds for unemployment and inflation were not trigger points for an immediate change of policy, but points when the FOMC would consider its options.

More recently, the European Central Bank has adopted its variation on ‘forward guidance’. In July, its governing council said it expected to keep its refinancing and deposit rates at present levels ‘for an extended period of time’, assuming it was right in its forecast of subdued inflation, weakness in the Eurozone economy and low credit growth.

And only last week, the Bank of England (BoE) joined the party, when its new governor, Mark Carney, former governor at the Bank of Canada, made his first monetary statement and announced that the BoE would introduce forward guidance too. The BoE followed the Fed, as usual, in almost exactly the same terms of guidance. It pledged to keep its base rate at its lowest level in its 300-year history until unemployment falls to 7% from its current level of 7.8%. How long would that take? The UK’s Monetary Policy Committee (MPC) reckoned that that unemployment ‘knockout’ target would not be reached until mid-2016 after the creation of about 750,000 more net jobs. However the MPC couched that guidance with some caveats. If the annual inflation rate looked like staying at 2.5% or higher in the medium-term, or if inflation expectations were out of control, or if the policy was threatening financial stability, then interest-rate policy could change earlier.

The reality is that ‘forward guidance’ from central banks is to the blind capitalist investor is being done by blind guide dogs.  Neither Bernanke nor Carney have any idea where unemployment, GDP growth and inflation will be next year, let alone in two or three years time.  The efficacy of this new policy is thus shot through with holes.

Forward guidance is really an addition to quantitative easing (QE), the policy of the central bank buying financial assets, like government or corporate bonds and printing the money to do so.  The idea is that with interest rates already near zero, the only way for the central bank to stimulate the capitalist economy is to boost the quantity of money rather than lower its price (interest rate).  But QE is based on a fallacy that increasing supply of money can lower its cost or price, in other words, the price of money can be set exogenously to the transactions made by banks and other lenders and borrowers of money and credit.  Actually, the demand for money is endogenously, by the decisions of capitalists to invest and consumers to buy (see my posts, http://thenextrecession.wordpress.com/2013/06/26/the-failure-of-qe-2/  and http://thenextrecession.wordpress.com/2012/08/25/qe-uk-banks-and-the-economy/).

While investment remains low and consumption is muted, the demand for more money is low.  So all that happens to this supply of ‘liquidity’ is that it flows into the purchase of financial assets and property, the unproductive sectors of the economy.  So the stock market is booms and house prices inflate, while the real economy stays weak.  A recent paper by Vasco Curdia and Andrea Ferrero at the Federal Reserve Bank of San Francisco (Efficacy of QE) found that the Fed’s QE measures from 2010 had helped to boost real GDP growth by just 0.13 percentage points and the bulk of this ‘boost’ was thanks to forward guidance, namely convincing investors that interest rates were not going to rise.  If that factor had been left out, the US real GDP would have risen only 0.04 per cent as a result of QE.

So if QE continues and interest rates are kept low until 2016 as Carney and Bernanke plan, then any boom will take place in property and the stock market not the real economy.  Already we have seen a sharp rise in home prices in both the US and the UK in the last year.

The UK’s consumer price inflation has always been higher than in the rest of Europe, partly because the UK is a rentier, service economy, with monopoly companies in many key sectors, which have pricing power, while pro-capitalist governments have raised indirect tax rates in many sectors, like travel, insurance, energy.  The inflation figure for July is just out at 2.8 yoy, down slightly from 2.9% yoy in June.  That’s still way higher than Carney’s target of 2% a year.  Factory gate inflation rose at its fastest pace in six months and further rises look set to come, with manufacturers crude oil input costs rising at their most rapid rate in over a year.

Even more significant is the move up in house prices.  The Royal Institution of Chartered Surveyors’ monthly survey pointed towards the biggest rise in house prices since 2006 and official data showed house prices rising faster than inflation at an annual 3.1%.  House prices in London were racing along at 8.1%.

And this is at a time when UK average earnings from work are rising at just 1% a year.  Indeed, wages in the UK have seen one of the largest falls in the European Union during the economic downturn.  Average hourly wages have fallen 5.5% since mid-2010, adjusted for inflation.  That is the fourth-worst decline among the 27 EU nations. Across the European Union as a whole, average wages fell 0.7%.  Only Greek, Portuguese and Dutch workers have had a steeper decline than the UK in hourly wages.  The Institute for Fiscal Studies said that a third of British workers who stayed in the same job saw a wage cut or freeze between 2010 and 2011 amid a rise in the cost of living. “The falls in nominal wages… during this recession are unprecedented,” the IFS said.

So with the biggest fall in real incomes in a generation, what does the UK’s new governor do?  He announces ‘forward guidance’ that will mean higher house prices and bigger speculative profits for the stock market.  After doing so, Carney had a weekend off in upper-class Oxfordshire, the British version of the US east coast Hamptons.  Apparently, according to news reports, Carney is a clubbable, “very social” man who mixed “among the movers and shakers” of Canadian society.  Now he has joined the so-called Chipping Norton Set — the group of powerful friends who live in Oxfordshire, including UK PM David Cameron and members of the international media mogul family, the Murdochs.  Carney is married through his wife Diana into a family of British aristocrats.  Diana is apparently “an outspoken economist who has written about the need to rebalance global wealth towards the poorest!”  economist who has written about the need to rebalance global wealth towards the poorest”!  A senior UK government source described Carney as “the perfect Davos man” — referring to the annual gathering of decision-makers in the Swiss ski resort where contacts and smooth-talking oil big deals.

So the Fed and the BoE will continue with useless ‘forward guidance’ that will only fuel a credit boom for the rich, while inflation and house prices spiral for the rest of us.  It’s the rich leading the blind.

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Detroit: motors, money and the municipality

by Michael Roberts

Last week, the mayor of Detroit, America’s 18th largest city and the home of the flagship of Main Street America, the US auto industry, filed for bankruptcy with debts hitting $18-20bn.  On the same week, the behemoths of Wall Street, Goldman Sachs, JP Morgan etc announced profits nearly back to their pre-crisis levels.  Those two bits of news just about sum up the winners and losers out of this crisis.

The aim of government policy nearly everywhere has been the restoration of the profitability of the capitalist sector, particularly its large companies, at the expense of the wages and conditions of working people, including their public services, pensions and welfare benefits.  In the financial crash, governments and the central banks reacted quickly with huge bailouts for greedy, corrupt and failing banks and in the case of the US launched the use of public money in billions to save the auto giants Ford and GM from bankruptcy.  The debts incurred from these bailouts and loss of public revenues from the ensuing Great Recession drove up the budget deficits and debt levels of the public sector, particularly the poorer and weaker cities and states in the US.

And Detroit is poor; it has a higher unemployment rate and high inequality of income and wealth, a falling population and declining industries (see http://blogs.ft.com/ftdata/2013/07/19/detroit-a-dying-doughnut/).  The bankruptcy filing follows decades of decline that have seen the automotive capital’s population fall from 2m in the 1950s to a little less than 700,000 currently – leading to a 40% drop in tax revenues since 2000.  America’s auto industry has suffered from foreign competition, poor technological development and bad planning decisions.  Ford, Chrysler and GM lose market share to the likes of BMW, Nissan, Toyota and even Fiat.  But what brought Ford and GM to their knees was no so much their poor vehicles sales but the huge losses they stood to suffer from their financial arms.  Increasingly, these companies got more revenue from selling credit and warranties and even mortgages through their ‘banking arms’ than through making and selling cars. When the financial crash came, that went down.

Defaulting on its debts would mean that Detroit cannot meet its obligations to its employees on wages and pensions and it cannot pay back the bonds held by pensions funds and Wall Street.  The city’s total debt is at least $18bn and could be as much as $20bn – $11bn of which is unsecured. The remaining $9bn that is secured will probably be paid back at 100 cents on the dollar.  The city’s unsecured debt includes $2bn of general obligation bonds and other financings, $3.5bn in pension liabilities that are underfunded and about $5.7bn in health and other benefits owed to workers.  Unsecured creditors say their worst case recovery would likely involve getting back 75 to 80 cents on the dollar.

Wall Street wants its claims met first.  Holders of the general obligation bonds argue that they should be paid before other unsecured claimants. Pension funds maintain that their rights are constitutionally protected and should have priority.  This circle will not easily be squared.  The city has had to borrow money to meet its already reduced operating budget and has cut services to the point where only a third of its ambulances are in service and only 40 per cent of its street lights work.  It now takes an hour for the police to respond to emergency calls.

Bankruptcy is the classic capitalist way of resolving the crisis: through the destruction of the value held by the current owners of the city’s debt and by reducing the incomes of the people working for the city.  After that, new capital can flourish on the ashes of the old.  The vultures are already picking at the pieces of Detroit real estate.  Rock Ventures has spent more than $1bn buying property in downtown Detroit.  These purchases are funded by hedge funds and by the very banks back in Wall Street that stand to lose some of the value of the Detroit bonds they hold.  Cheap real estate at bargain basement prices will compensate as poor people sell up and the better off leave the inner city.

Most of the city looks abandoned and broken down. But companies such as Quicken Loan, the mortgage originator, have moved into these cheaper areas and are buying up property by the street. Chrysler recently opened its first new Detroit-based corporate office in decades. Whole Foods, the upmarket food chain, has also opened its first outlet in Motown. And in September the city will break ground on its first urban tramline since the 1930s.Meanwhile back in Wall Street, all is bright and light.  Pre-crisis levels of profits are back.  The major banks made a combined $17.6bn in second-quarter net income, the best since the same period six years ago.

Of course, these are not the same banks that entered the crisis.  There has been a monumental restructuring and industry-wide profits are still down significantly. Even if the headline numbers for the survivors look attractive, they are still far from pre-crisis levels of profitability.  The average return on equity at the five big Wall Street institutions is 8.9%, less than half the returns reached in 2006 and 2007. But it is getting better, at the expense of the likes of the people of Detroit.

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Socialism is not a problem for the one percent.

laughing all the way to the, er, bank. With our money

You have to wonder given the massive bailout and rescue of capitalism and the bankers how any thinking person, especially a working class person, can make the argument that the reason for increasing costs and the need for tightening our belts is workers wages, benefits pensions or any other associated costs.

There are some really backward working class folks and by that I mean with a very limited class-consciousness, even to the point of arguing positions that are against their own self interest.  I can only assume that the reason for such stupidity is that they believe they are not much longer for their present lot and will soon be in the world of the hedge fund managers and other coupon clippers.  The American Dream fulfilled.

We have pointed out time and again on this blog, the massive amounts of cash in society and that there is no need for this austerity agenda other than the 1% have a lot of money and want more of it, including the funds needed to wage their predatory wars on behalf of the corporations.

Let’s look at one small example of the many examples.  I am talking about BankUnited.  BankUnited was one of the banks that went under due to the bursting of the housing bubble initiated by the collapse of the subprime market. The bank was taken over by John Kanas and his private equity backers, the Blackstone Group and the Carlyle Group.

Blackstone was founded by Peter Peterson a former US commerce secretary worth $2.8 billion according to Forbes and Stephen Schwartzman, a financier worth around $6.5 billion according to Forbes.  Carlyle’s founders David Rubenstein and William E Conway are worth $2.8 and $2.7 billion respectively.  Government service opens a lot of doors for the coupon clippers, the imbecile Dan Quayle sat on the board of Cerberus, another well-known private equity gang. He’s a moron but as a former US VP he can open doors for coupon clippers.

Anyway, Kanas, a banker himself, liked the idea of taking over this Florida lender that was in trouble. He made some nice cash selling his bank to the larger Capital One for $13 billion earning a handy $214 million in the deal Business Week writes.  Like all bottom feeders Kanas was on the lookout for good deals as the banks began to topple. He worked for another major coupon clipper and billionaire, Wilbur Ross and came across BankUnited.

Kanas, Blackstone and Carlyle put up $900 million to invest in BankUnited but what a deal the taxpayer gave them.  The FDIC ensured the coupon clippers that the deal would pay off by promising that the taxpayer would “eat” most of the future losses that would inevitably occur as a result of the poor banking practices that led to the crash. The deal also ensured that the taxpayers would, “….reimburse BankUnited for 80% of the first $4 billion in losses and 95% of all additional losses”, according to BW.  The taxpayer via the FDIC also gave the coupon clippers $2.2 billion in cash to help them along. Needless to say, this sparked a lot of interest in such deals from other scavengers throughout the land.

So Kanas came in, laid off more than 600 employees and as Business Week puts it, “built a commercial bank.”.  Yes, they build everything in society these guys. BankUnited now deals primarily in commercial business rather than residential mortgages.

It is well known that trillions of dollars were allotted to the bankers as them and their bankrupt system were dragged from the edge of the abyss.  Kanas admits that his deals would not have been possible without the taxpayer,“the deal covered losses for ten years” Business Week points out. Well, whoopy f*%king doo.

BankUnited has “a long life ahead of it” says Kanas.  Maybe it does, maybe it doesn’t. But this small example of the amount of money in society and what the political representatives of capital do with our wealth, crushes the argument that workers can’t make gains and deserve a more productive and secure life.  Billionaires make their money off the backs of workers with the help of their government that gives them the breaks.

The rich have always had socialism; they just oppose it for the rest of us.

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Why sell back the viable banks?

by Michael Roberts

As the scandals in the banks globally mount up since the financial collapse of 2008-9 (see my post, http://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/), with the latest being the Cyprus disaster (see my post, http://thenextrecession.wordpress.com/2013/04/11/cyprus-aphrodite-into-hell/), you’d think that at least the more radical elements of the economics profession would see the merits of taking into and keeping key banks in an economy in public or common ownership.  Then they could provide a proper public service for households and small businesses and provide financial support to any national plan for investment in infrastructure, the environment and jobs.

And yet there is little sign that most radical policies for reform of the financial sector would include public ownership.  Instead we are offered more effective regulation, tighter capital adequacy minimums, or divorcing speculative activities from retail banking, or breaking the banks up into smaller units so they are not ‘too big to fail’.  Take the position of leftist economist Yanis Varoufakis (http://yanisvaroufakis.eu/).  In a recent post on his blog (27 March), he explained his position on what to do about the Cypriot banks.  “I have noticed that a number of commentators have misunderstood my position on the Cyprus debacle and, more generally, on the question of how failed banks ought to be dealt with. As I made clear yesterday, I am all for bailing in the creditors, even the uninsured depositors, of failed banks. In fact I have been arguing this case for three years (see for example our Modest Proposal) so as to avoid the zombification of Europe’s financial system. BUT, I have also insisted that this must be accomplished centrally, by an ESM which, in collaboration with the ECB, takes equity in the failed banks, shrinks them appropriately, recapitalises the viable parts and then sells off the latter to private investors at a profit (TARP and Sweden circa 1992-like – my emphasis).

I have highlighted in bold that part of Varoufakis’ explanation. Even he sees no reason to keep the banks in public ownership once they have been cleaned up.  His solution is the ‘Swedish’ one, where banks were nationalised, cleaned up at taxpayer expense and then sold back to the private sector to recoup the public money – in Sweden’s case that deal broke even for the taxpayer. But why reprivatise these viable banks and return them to a new set of people set to commit the same disasters and scandals as the previous owners? Indeed, that is what happened in the financial collapse of 2008, with many banks in different countries owned by the state originally but sold off.

I am reminded of what Lenin said about public ownership of the banks in contrast (Nationalisation of the Banks, Lenin Collected Works, Progress Publishers, 1977, Moscow, Volume 25, pages 323-369): “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.

It is absurd to control and regulate deliveries of grain, or the production and distribution of goods generally, without controlling and regulating bank operations. It is like trying to snatch at odd kopeks and closing one’s eyes to millions of rubles. Banks nowadays are so closely and intimately bound up with trade (in grain and everything else) and with industry that without “laying hands” on the banks nothing of any value, nothing “revolutionary-democratic”, can be accomplished.

What, then, is the significance of nationalisation of the banks?  It is that no effective control of any kind over the individual banks and their operations is possible (even if commercial secrecy, etc., were abolished) because it is impossible to keep track of the extremely complex, involved and wily tricks that are used in drawing up balance sheets. founding fictitious enterprises and subsidiaries, enlisting the services of figureheads, and so on, and so forth. Only by nationalising the banks can the state put itself in a position to know where and how, whence and when, millions and billions of rubles flow. And only control over the banks, over the centre, over the pivot and chief mechanism of capitalist circulation, would make it possible to organise real and not fictitious control over all economic life, over the production and distribution of staple goods, and organise that “regulation of economic life” which otherwise is inevitably doomed to remain a ministerial phrase designed to fool the common people. Only control over banking operations, provided they were concentrated in a single state bank, would make it possible, if certain other easily-practicable measures were adopted, to organise the effective collection of income tax in such a way as to prevent the concealment of property and incomes; for at present the income tax is very largely a fiction.

The advantages accruing to the whole people from nationalisation of the banks would be enormous. The availability of credit on easy terms for the small owners, for the peasants, would increase immensely. As to the state, it would for the first time be in a position first to review all the chief monetary operations, which would be unconcealed, then to control them, then to regulate economic life, and finally to obtain millions and billions for major state transactions, without paying the capitalist gentlemen sky-high “commissions” for their “services”.

This seems like an excellent summary of the benefits of public ownership of the banks, including stopping privately-owned banks from helping tax dodgers avoid tax and criminals launder money, apart from losing and stealing money themselves.

And would taking over the banks and keeping them in public ownership once they are viable and clean again be popular?  Well, a recent poll in the UK found that fewer than one in 10 voters would back a swift return of Royal Bank of Scotland to the private sector and more than three-quarters believe it should stay in public hands for the time being (according to a new YouGov poll).  This stands in direct opposition to the UK government’s plan to sell off its 82% stake in the bailed out RBS before the general election in May 2015, even though – on current prices – this would involve a loss of around £20bn.  Only 9% of respondents told YouGov they would favour “a sale in the near future” to recoup whatever money is available now. Some 44% favour holding on to the stake in the hope that the share price will eventually climb, while a large minority of 32% favour holding on to RBS “for the forseeable future” and running the Edinburgh-based institution “as a nationalised bank”. Together, that means 76% are against the option of early disposal – a crushing overall majority.
The views of the British public are eminently sensible.  In its latest Fiscal Monitor, the IMF calculated that around $1.7trn had been spent directly by taxpayers in the advanced economies to ‘bail out’ the banking sector in the financial crisis and so far only €914bn has been recovered through the sale of assets and other revenues collected from the bailed out banks. So 7% of 2012 global GDP has been used and only 3.7% of GDP has been recovered.  Indeed, only in the US is the taxpayer anywhere close to getting its money back (at 4.2% of GDP compared to a bailout of 4.8% of GDP spent).  In most other economies, the recovery rate is less than 25% after five years.


Most taxpayers are never likely to get their money back.  But governments are waiting for the first opportunity to sell the taxpayers stake in the banks, even if it is at a loss.  And, of course, the idea that the state should own and run these banks in the interests of the majority is an anathema.

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EuroZone: Cypriot bank heist

by Michael Roberts

In the early hours of Saturday morning, the Euro leaders, led by the Germans, the other northern European states and Christine Lagarde from the IMF, held a gun to the head of the newly-elected president of Cyprus Nicos Anastasiades  and gave him an offer he could not refuse.  Either he accepted that the cash and savings deposits of ordinary Cypriots would be raided to the tune of 6.7-10% or there would be no funding for Cyprus’ banks that were bust.  Anastasiades has a reputation as a political ‘bruiser’ who campaigned under the slogan “the crisis needs a leader”.  Well, he fell at the first hurdle.

The deal will be voted on Monday in the Cyprus parliament while the banks remain closed through to at least Tuesday.  If it fails to back the deal, Anastasiades has warned that Cyprus’s two largest banks will collapse.  Cyprus Popular Bank could have its emergency liquidity assistance (ELA) funding from the European Central Bank withdrawn immediately.  As Anastasiades stated, it was put to him by the EU leaders that “we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis”.   Neoclassical economist and Nobel prize winner Christoforos Pissarides, who heads the newly-formed National Council for the Economy, echoed these words, when he said there is no other option than taking these measures, otherwise the country’s credit system would crumble leading the country to chaos.  “This may be a painful solution but it is the only hope we have to save the economy of Cyprus.”

Cyprus needs €17bn in funds to cover the losses its wildly over-extended banks have made on all the loans they made to property developers on the island – and most important, to Russian oligarchs and Greek shipping magnates that have now turned sour.  The Cypriot government had been bailing them out up to now but has now exhausted that capability.  But the EU-IMF Troika was worried that a straightforward bailout to the Cypriot government would mean a total support to Russian mafia depositors that have been using Cypriot banks as money launderers  and it would also double the public sector debt ratio for Cyprus to 145% of GDP by end-2013, with every likelihood that it could never be paid back.

So the EU leaders took the unprecedented step in taking the ‘insured deposits’ of Cypriots as part payment for the funding.  The one-off levy will raise about €6bn of the €17bn needed.  In return the depositors will get shares in the banks!  Even Ireland, whose banking sector was about as large relative to its economy as Cyprus’ (bank assets are eight times annual GDP) when Irish banks were forced into a bailout in 2010, never agreed to taking people’s savings.

Not surprisingly, Cypriots reacted angrily. Hundreds of account-holders gathered outside branches of Cyprus co-operative banks, which normally open on Saturdays, after emptying ATM machines of cash at the start of a three-day holiday weekend.  “They’ve cheated us, they said they’d never allow a haircut on deposits,” said Andreas Efthymiou, a taxi driver, referring to a government pledge to seek alternative ways of rescuing the island’s banks.  Christos Pappas, a financial services worker, said: “I tried to transfer cash online as soon as I heard the news, but the account had already been blocked.”
EC official Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.   Cypriot finance minister Sarris was shame-faced: “I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” he said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”

So here we have Cypriot banks who have been laundering money for Russian oligarchs, lending to all and sundry in speculative ventures, Icelandic style.  Now they are bust and who is to pay?  Not the Russian oligarchs.  If it had been them, all their deposits could have been forfeited or the bank levy could just have been applied to those with over €100,000 on deposit.  And it’s not the owners of Cypriot sovereign bonds who bet on the government continuing to allow the banking spree.  No, the Greek and Russian banks that own Cypriot debt, or the hedge funds that bet on a bailout,will be laughing all the way to the banks.  No the main payers are the poorer Cypriot deposit holders and Cypriot taxpayers.  If you have €30,000 in the bank as your only savings, you will be losing €2000 forever. And that €2000 is much more important to the small saver than the rich Russian oligarch.
And the taxpayers still get hit with a large increase in debt payments to make down the road and increased taxes now.  Also the government now plans to privatise the utilities to meet part of the bailout bill.  Cyprus also the potential for offshore gas supplies.  No doubt revenues from those will end up in the hands of creditors rather than as better incomes for average Cypriots.   Already, as a sweetener, Anastasiades has hinted that he would offer depositors equity returns, guaranteed by future natural gas revenues. “Half of the value of the haircut will be guaranteed by natural gas proceeds”.So Russian oligarchs will get some energy revenues.

The immediate issue  is whether this heist will spark runs on banks in other countries.  If your cash in the bank is no longer safe from the Euro thieves, people may prefer to keep it in the UK or the US or under their beds.   EC official Asmussen, the leader of the heist, said the Cypriot government and the ECB were closely monitoring deposit flows, including on an intraday basis, for signs of a bank run and insisted those with accounts in other bailout countries need not fear for their holdings since the rescue programmes are already fully funded and would not need to dip into deposits for more cash.  But the idea of guaranteed deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks.  If the Eurogroup can impose this on Cyprus, it can do so elsewhere too.

The cruel irony is that even with this heist on depositors to pay for recapping banks that remain in private hands, and even with EU-IMF loans to repay government creditors, such will be the depression that ensues in Cyprus that the Troika’s target to getting the public debt ratio down to 120% (still double the target of the EU’s fiscal compact) will not be achieved.  So Germany and the rest will probably have to revisit Cyprus either for another heist  or for a further transfer of funds.

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A right Royal banking fiddle

by Michael Roberts

The taxpayer-owned UK bank, the Royal Bank of Scotland (RBS), has been fined £390m for its role in the illegal fixing of the interbank interest rate, Libor.  This is in addition to the fine being imposed by US regulators for the same offence.

As I explained in previous posts
(http://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/), Libor sets the floor for many other borrowing rates that affect you and me, like mortgage rates, bank deposit rates and short-term corporate borrowing.  It is supposed to emerge from the process of the ‘free market’ in the demand and supply of loans.  But now we know that for years, the major international banks (up to 20 banks) rigged the market by fixing the rate by secret negotiation between traders, and especially within each bank.


So the Libor each day was more a product of football match fixing than due to the ‘free flow of market agents’.  As a result, the interest rates for borrowers across the world were distorted and lenders and borrowers alike were defrauded.
As Costas Lapavitsas and Alexis Stenfors put it in the FT (http://www.ft.com/cms/s/0/1054054a-7052-11e2-85d0-00144feab49a.html#axzz2K455wHkY):
“manipulation results in a wealth transfer across society in favour of banks. Equally serious is the impact on monetary policy. As long as Libor undershoots the actual money market rate, the central bank – where it uses Libor as a signal – is conducting policy on the wrong basis, with significant costs. It is reasonable to surmise, for instance, that central banks’ response to the 2008 liquidity crisis was too slow because the rates at which banks transacted were by 2007 probably substantially higher than Libor.”

Originally, the scandal came out from the activities of another UK bank, Barclays, which eventually led to sacking of its ‘dynamic’ chief executive, Bob Diamond and for which it was fined $450m.  But now the rigging activities of RBS appear to have been even worse.  And this is the shocking point – this Libor rigging went on under the ‘watchful’ eye of the current chief, Stephen Heston, appointed when the bank was nationalised by the UK government after it was brought to its knees by the previous management under the notorious Fred Goodwin.  It is now revealed that for two years after Heston got the job, the Libor traders in this publicly-owned bank carried on rigging the rate knowing it was illegal and the current management of the bank did nothing for a year and then took another year to dig out what was going on.

Stephen Hester says:“We condemn the behaviour of the individuals who sought to influence some LIBOR currency settings at our bank from 2006-10.”  But the regulator cites RBS for a breach in 2011: “RBS did not begin to put such systems and controls in place until March 2011 and its initial measures were inadequate because they did not address the risk that Derivatives Traders would make requests to Primary Submitters…”

The head of the trading department has been sacked, but needless to say, Heston, his senior management and most of these traders have got off without a single sacking, let alone a criminal charge or conviction.  Indeed, the government prefers to carry on with ‘business as usual’, in the hope that as soon as possible, the bank’s share price can get back to the level that the taxpayer paid for its shares, in order to re-privatise the bank.  Based on this policy, the government will allow these criminals to get off Royal scot-free!
Sure, £390m goes into the taxpayers’ purse in fines, maybe.  But that money comes out of the profits of RBS and thus out of the dividends due to the state.  So it is Peter to pay Paul.  It repeats the main lesson
(http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/). 

The nationalisation of RBS and Lloyds Bank was carried through just to bail out the banks.  It was not to give control to the electorate.  The former Labour government and this coalition government continued with the policy of ‘arms-length’ control.  That means the banks were left to continue with their criminal activities and their executives were excused any wrongdoing.  Rather than use public control to provide a proper banking service to the economy, the banks are to be readied for their return to private ownership for profit.

As Lapavitsas and Stenfors say: “Libor-fixing is an institutionalised private meeting of banks that ends up serving their interests. The answer is public intervention in the rate-setting process, whether through the central bank or otherwise. That is the real policy solution.”   Unfortunately, nothing will change.

SOME QUOTES
“Britain is very good at banking.  Recently there have been some ghastly mistakes – yes, we buggered up – but the percentage of bankers who have misbehaved is tiny. The City is moving towards a healthier capitalism… We’re now prepared to criticise ourselves and are becoming more open about the fallacies in our system… We need a more moral approach to capitalism. A healthier capitalism – not tighter regulation, which hinders banks’ ability to lend and support society in the way it is meant to. A strict legal approach – essentially box-ticking – is not the best way to regulate a bank. We need to find a commonsense approach, a way of introducing the moral over the legal.”  Roger Gifford, Lord Mayor of the City of London, FT 1 February 2013.
“Banker bashing is a bad thing – if you wake up every morning to be lambasted in the headlines, it is less likely that you will want to work in the field and that reaction will hurt the economy.   The UK must stop attacking the industry if it wants to remain a good place for global finance”  , Bill Winters, ex-head of JP Morgan investment banking, 6 February 2013, City AM

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The never-ending banking story

by Michael Roberts

It’s a never-ending story.  The global banking sector remains deep in the sludge of scandal, corruption and mismanagement.  It continues to fail in its supposed purpose, namely to provide liquidity and credit to households to buy ‘big ticket’ items (or even cover monthly outgoings) and to businesses to enable them to pay for working capital and investment to grow. And yet in 2012, bank share prices have rocketed by over 25%, more than the booming stock market indexes.

During the financial collapse of 2008, the US banking industry wrote down $600bn in assets and its stock market value plunged $1trn.  However, the authorities (the Federal Reserve and the Treasury), ‘on behalf of the taxpayers’, bailed out these errant banks with cash, guarantees and loans worth well over $3trn.  Now in recovery mode, there are fewer banks but they are bigger and are up to their old tricks just as much as before.

Take the UK banks: Barclays has been fined $450m for its part in the so-called Libor scandal, where banks’ traders colluded to fix the interest rate for inter-bank lending, which sets the floor for most loan costs across the world.  That rigging meant that local authorities, charities and businesses ended up paying more than they should for loans.  HSBC was indicted by the US Congress for laundering Mexican drug gangs money and breaches of sanctions on Iran (as was Standard Chartered).  Lloyds Bank, along with all the other banks, has had to compensate customers for misselling them personal injury insurance to the tune of £5.3bn, money that could have been better used to fund industry and keep loan terms down.

And there is RBS.  This British bank was brought to its knees in the financial collapse by a management led by (Sir) Reg Goodwin, knighted for his services to the banking industry (!).  Goodwin was noted for his bullying and his penchant for risk and huge bonuses.  He left, but not without taking a fat pension and handshakes from the RBS board, as have all the senior executives of the banks when they have been  asked  to ‘step down’ following a scandal.  Nobody has been charged or convicted in a criminal court for any actions by the these global banks since the scandals and illegal activities were revealed

(see my previous post, 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/).

On the contrary, the banks have shrugged off all these scandals. JP Morgan continued to run a risky trading outfit out of London engaged in outsized trades in derivatives, the very ‘financial weapons of mass destruction’ (to use the world’s greatest investor,Warren Buffet’s term) that triggered the 2008 crisis.  The ‘London whale’,  as it was called, eventually lost the bank $6bn!  And remember, this was in 2012, not 2008.  The main trader, Bruno Iksil, told his senior executives that he was worried about the “scary” size of the trades he was engaged in.  But they ignored him.  And the US supervisors of the bank, the Office of Comptroller of the Currency, supposedly now closely monitoring the banks, also did nothing.  By March 2012, the trading losses were mounting and made public but still JP Morgan’s chief executive Jamie Dimon said that the matter was just “a tempest in a teapot”.

This response was typical of bank management.  Bob Diamond, the former head of Barclays, eventually sacked over the Libor scandal, but only because the Bank of England governor, Mervyn King insisted, made the statement that “For me, the evidence of culture is how people behave when no one is looking”.  Exactly, and it is clear what the banking culture is, namely to use customers money, taxpayers cash and guarantees and shareholders investments to try to make huge profits through risky assets and then pay themselves grotesque bonuses.  And nothing has really changed.  Only this week, the head of Barclays’ private wealth management section was sacked because of “cultural shortcomings” in his section.  Apparently, a secret report had found that the bank engaged in getting “revenue at all costs” and employed “fear and intimidation” on staff to do so.  This report had been suppressed by the head of the division, who was a close ally of Bob Diamond.

And that’s still not the end of it.  It has now been revealed that during the financial collapse when Barclays was threatened with partial nationalisation, that the Barclays board loaned money to Qatar who then invested in the stock of the bank to the tune £12bn.  In this way, the bank avoided state control by issuing more loans!  It is still not clear what “commissions” were paid to Qatari investors.  Dexia, the Belgian bank, eventually forced into nationalisation, also tried the same trick in 2008 and so did the rotten Iceland bank, Kaupthing, which ‘lent’ money to a Qatari royal who invested it back into the bank.  The Qataris took ‘commission’ and if the shares were worthless, it made no difference to them.  It just added to the losses of the bank and to the cost to the taxpayer in any bailout.
Nobody has been charged for these immoral and probably illegal activities. Instead, what has happened is that rank and file bank workers, most of whom have not been involved these scandals and risk taking ventures, but just do work in back offices or at counters, have been sacked in their thousands to reduce costs.  And more jobs are going each month.

The extent and nature of these continuing scandals have forced even supporters of ‘free markets’ and the City of London, like former finance minister under Thatcher, Nigel Lawson, to call for the full nationalisation of RBS!  The bank is already 82% owned by the taxpayer, but that means nothing because the taxpayer has no say in how the bank is run, what bonuses are paid and what the bank does with deposits, loans and investments.

That’s because the government does not ‘interfere’ and stays at ‘arms length’, waiting indeed to reprivatise the bank as soon as possible.  It has not done so, so far, because RBS shares remain so low that the taxpayer would lose something like £30bn on its original purchase of shares.  However, Lawson now says, that far from privatising it, the bank should be fully nationalised and the government should intervene in the bank to “turn it into a vehicle for increasing lending to business”.  Lawson went on to say that the banks ‘talk the talk’ about conducting themselves properly from now on but behind the scenes they apply huge lobbying to avoid any further regulation or increased liquidity ratios and risk control.

As we have seen, that lobbying has worked, as the G-20 financial stability board has backed down and relaxed and delayed tighter regulation (see my post http://thenextrecession.wordpress.com/2013/01/07/banking-business-as-usual/).  Lawson commented “I don’t think the government needs to be frightened of the banks in the slightest.  One hears from time to time of threats that they will up sticks (i.e. leave the UK), but that’s a load of nonsense”.

Behind the scandals lie the more significant questions of: what are banks for and are they adding any value or service to society?  This issue is hidden in a veil of complexity by bank boards.  They try to claim that they are such complex institutions that only extremely highly paid and clever people can run them.  Well apparently, that has not worked out so well.  The accounts of the major banks are, in the words of one of the world’s leading banking analysts, Meredith Whitney, “incredibly hard to read”.  And yet as Whitney says, it’s not really that difficult; “after all, banks make money by selling products and the margin on those products, same as any other business”.  

But we also know that these overpaid bank executives have no idea of the fire they are playing with when they push the resources of the bank into various risky trades ans assets.  The financial regulators try to work out how to measure the risk involved in holding various assets like loans, mortgages, bonds and the derivatives of these assets.  But a new report by the world’s bank regulators found that there was not just not enough information to judge whether a bank has taken on too much ‘risk’ or not (bcbs240).  They reckoned that banks’ risk measurements could be off by as much five times!  God help us.

Recently there has been a debate among mainstream economists about whether the finance sector adds any value at all to an economy.  In the US, the finance sector ‘contributes’ 8% of all income in the economy.  In a new paper, two scholars charted the rise of the finance sector, which, surprise, surprise, was not in more lending to industry or households, but in creating mortgage backed assets and other exotic financial instruments to sell toxic rubbish to each other (Growth_of_Modern_Finance).  What the study shows is that much of banking has not been to help industry and households, but to engage in ‘trading’, which basically means, in the words of Michael Lewis book, Liar’s Poker, the “ripping off of fools”.
Financial markets are inefficient in allocating credit and savings (http://www.voxeu.org/article/why-financial-markets-are-inefficient) and the finance sector is inherently unstable and liable to collapse (Minsky, Shiller etc.).  Above all, far from adding ‘value’ to an economy, the sector reduces the available resources for productive (in the capitalist sense) investment and instead channels surpluses into fictitious capital and much of these capitals are ‘value destroying’ activities.

The neoclassical economist, John Cochrane, has sort to argue that this is nothing to worry about because eventually such investment is eliminated by the rational forces of the market (size_of_finance).  The problem is, even if the market can allocate resources ‘efficiently’ as the neo-classical school claims, the experience of the rise in the financial sector in the last 30 years is that it can take an awful long time to do it.  And then it only ‘rationalises’ these fictitious investments ‘out of the market’ by financial collapse and the ‘collateral’ destruction of productive capital and labour too.

What the continuing banking scandals show is that the global banking system has not really changed its culture or its raison d’etre and it cannot.  It must drive the bulk of its activities towards maximising profits and that means towards areas that have higher risk and not towards ‘low margin’ loans to industry of households.  And the so-called regulators cannot reverse this.  They have been lobbied and badgered by the banks not to ‘restrict’ their activities ‘too much’ or make them hold too much cash or capital to cover losses because that will not make them profitable.  And commissions set up to recommend drastic restructuring of the banking sector (Vickers in the UK, Volcker in the US), like breaking them up so they are not ‘too big to fail’, or dividing banks into retail and investment operations, have been shelved or ignored.  Nigel Lawson’s solution remains the only practical and effective way of turning the banking system into a service for society not a value-destroying monster.  See the pamphlet by the UK’s Fire Brigades Union on the arguments for the public ownership of the banks (s-time-to-take-over-the-BanksLR.pdf).

"Like" the FFWP page on Facebook at: http://www.facebook.com/FactsForWorkingPeople

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Banking: business as usual

by Michael Roberts

It's back to business as usual for the global banking system.  After years of deliberation and lobbying by international banks, the Basel Committee on Banking Supervision, headed by outgoing Bank of England governor, Mervyn King,  has announced its rules on global banking to ensure that a banking crash as was experienced between 2007 and 2009 cannot happen again.  And what has the Basel Committee (representing 27 financial centres around the world) come up with?  A so-called liquidity coverage ratio (LCR) that is supposed to provide a benchmark to ensure that banks have enough cash and liquid assets to cover any collapse in the value of assets or loans that the banks have on their books.

The LCR  is in addition to higher minimum capital ratios that the banks must have (more equity investment relative to loans and risky investments).  But the Basel Committee's final proposal just gives everything away to the banks.  Apparently banks can still buy 'toxic' assets like mortgage-backed securities and corporate stocks and call them safe investments and the amount of liquid (easily sold) assets like cash that the banks must hold has been sharply reduced from original proposals.  And the LCR does not need to be met fully until 2019!  Who knows what state the world economy and the banking system will be by then.

As one banking analyst put it:  “This is quite a lot more favourable to the industry than I and the market were expecting. The changes to the asset definitions and the outflow calculations in particular look like a fairly massive softening of approach."   The conditions have been watered down so much that most international banks meet the LCR and capital ratio targets already.  The Basel Committee has merely endorsed where the banks are now.  But it has given those banks that do not meet the targets yet another seven years to do so.  So the risk of financial collapse has thus not really been reduced.  Indeed, the banks are already getting back to their bad old ways.  In 2011, banks increased their investments in junk-rated stocks and bonds by 74%, while holding down lending to companies the need finance for investment or households needing mortgages.

Matt Taibbi in an excellent Rolling Stone article (http://www.rollingstone.com/politics/news/)recently summed the way the banks have been bailed out massively by taxpayers round the world, driving up government debt ratios to post-war highs.  As Taibbi says, politicians and bankers colluded to lie about the size of crisis to begin with; then they lied about the size of the bailout needed; then they lied about how the bailouts would restore bank lending to households and corporations; then they lied about how healthy the banks were; then they lied about reducing the top bankers' bonuses; and then they lied by saying any bailout would be temporary.

Capitalist states committed their electorates to providing a permanent guarantee that banks will be bailed out and supported whatever - and the banks remain in private hands.  "All of this - the willingness to call dying banks healthy, the sham stress tests, the failure to enforce bonus rules, the seeming indifference to public disclosure, not to mention the shocking lack of criminal investigations into fraud by bailout recipients before the crash - comprised the largest and most valuable bailout of all" (Taibbi).  To which I could add the ensuing scandals revealed in the Libor rate fixing; the laundering of Mexican cartel drug money; the breaking of sanctions against Iran; and the mis-selling of  personal pensions and insurance (see my previous posts, http://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/ and http://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/).

And now we have the Basel Committee basically agreeing to allow the banks to resume 'business as usual' in return for which they must meet some minimal standards of probity by 2019.   No wonder Taibbi sums up the whole outcome of bailing out the bankers, as building a " banking system that discriminates against community banks, makes 'too big to fail' banks even to 'bigger to fail', increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments rather than to compete for small depositors."

So no change there then.

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Sovereign Debt Crisis: Our Suffering is Their Abundance

Even before Rupert Murdoch’s News Corp swallowed the Wall Street Journal, that newspaper was renowned for its free marketer editorials and opinion pieces. Not only has this policy remained intact under Murdoch, but also the coverage of news and features is now fully in line with the right-wing editorial policy.

So I was quite surprised a week ago to find, tucked away on page A-11 of the November 30 edition, a piece by the WSJ’s Stephen Fidler that actually hinted at the identity of the real beneficiaries of the bailouts and debt crises:

“Despite the complications, this week's deal on Greece's debt points to an (almost) iron rule of sovereign-debt crises: Significant losses fall on taxpayers in creditor countries because debt originally extended by private creditors, one way or another, ends up on the balance sheet of the public sector.”

This sounds eerily like the searing indictment of the bailout in a recent book by York University professor David McNally:

“In short, the bad bank debt that triggered the crisis in 2008 never went away – it was simply shifted on to governments. Private debt became public debt. And as the dimensions of that metamorphosis became apparent in early 2010, the bank crisis morphed into a sovereign debt crisis. Put differently, the economic crisis of 2008-9 did not really end. It simply changed form. It mutated.

“With that mutation, the focus of ruling classes shifted toward a war against public services. Concerned to rein in government debts, they announced an age of austerity—of huge cuts to pensions, education budgets, social welfare programs, public sector wages, and jobs. In so doing, they effectively declared that working class people and the poor will pay the cost of the global bank bailout.” (Global Slump, p.4)

There has been much talk of these austerity cuts falling on corporations and workers, on rich and poor alike. The catch phrase is “shared sacrifice”. But as McNally explains:

“The ultimate purpose of all this is to preserve capitalism and the wealth and power of its elites. And so far the bailouts and their aftermath have decidedly served that end.  As a columnist with the Times of London observes, ‘The rich have come through the recession with flying colours … The rest of the country is going to have to face spending cuts, but it has little effect on the rich because they don’t consume public services.’  The candidness of this statement is to be appreciated. But there is one error in this passage. These cuts do in fact have an effect on the rich: they help them. After all, they are essential to the massive transfer of wealth from the poor to the rich that funded the rescue of the world banking system, the bailout of corporations, and the salvage of the investment portfolios of the wealthy.” (Global Slump, p.5)

How big was this bailout, this “massive transfer of wealth from the poor to the rich”?  Including loans, loan guarantees and outright handouts, McNally puts it at between $20 and $30 trillion – pretty much in line with other estimates, including last year’s audit of the U.S. Federal Reserve System.

But wealth knows no shame: the corporations and the super-rich not only profited grossly from the huge transfer of wealth, they now blame the resulting swollen public debt on the victims. For example, they blame the $2 trillion in cumulative U.S. state and municipal debt on public workers’ wages and pensions and on the cost of providing essential services to the poor, the disabled, and the elderly.  Politicians of both the Democratic and Republican parties agree on the need for cuts to all of these – they only disagree about the size and the pace of those cuts.  Meanwhile, in Europe, the Greek, Spanish, Portuguese, Irish, and Italian working classes are told that they are to blame for the sovereign debt crises in their respective countries. But as the Wall Street Journal’s Fidler observed in his previously referenced, and surprisingly candid, article:

“Lenders as well as borrowers created the crisis. For a decade after the euro's creation, investors and banks in Northern Europe financed directly or indirectly the deficits of governments like Greece, or the mortgages and construction loans of Spanish homeowners and builders, at very low interest rates. Their subsequent calculation that those investments were too risky to go on created the crisis.”

Fidler goes on to comment on the most recent terms for “settling” the Greek sovereign debt crisis, and notes that while it won’t alleviate the intense suffering imposed on the Greek people, it will indeed share the suffering – with the Northern European workers (Fidler calls them “taxpayers”, but there’s no doubt which taxpayers will bear the brunt of the burden):

 

“But now, particularly after the proposed buyback of some of the remaining private-sector debt, a vast majority of Greece's debt will be held by the public sector—the euro-zone governments and their bailout fund—the European Financial Stability Facility—as well as the European Central Bank and the IMF.

They will thus have the onus to make sure it is manageable. Costs will fall on the shoulders of taxpayers in Northern Europe, in spite the past best efforts of their governments to avoid it. Getting to this point has been a tortuous journey, not to speak of a very painful one for the people of Greece. And it isn't yet over..”

Shakespeare observed in the opening scene of Coriolanus, “Our misery is their abundance; our suffering is a gain to them.” So it was. So it is. And so it will remain. Until we throw off their yoke.

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Reject austerity: Fight back against the coupon clippers

Here's one reason your public services are cut

Steven A Cohen is a rich man.  He is the head of SAC Capital Advisers, one of the "Biggest names in the hedge fund world" says the Wall Street Journal. If you work for a living its not likely you'll be using the services of SAC Capital Management. SAC helps those who prefer not to work for a living.

The FBI have been trying to build a criminal case against Cohen as a partner in one of what the WSJ claims is the "most lucrative insider trading scheme" ever.  Cohen's firm has a $14 billion fund and brings some of the best returns on Wall Street.  "Returns" are like wages for the coupon clippers except they don't have to do any real socially productive labor* to achieve them; "returns" are dependent on others to do that.

Cohen has done very well as $10 billion or so of the $14 billion fund is "his own money" according to reports. That depends which side of the class divide you're on of course as all the overtime in the world couldn't bring $10 billion in to a wage workers' savings account. If our economic status in society was dependent on the sacrifices we make for the common good, a social worker or war veteran would be a millionaire and Donald Trump or the hedge fund managers (15 of them earned $25 billion in 2006)  would be begging at a freeway on ramp.

The FBI has accused Mathew Martoma, one of Cohen's underlings, with securities fraud and insider trading and have been trying to get him to turn on his former boss claiming that the two of them participated in the scam.  It seems Martoma got a hold of confidential information about a drug trial from a neurology professor  at the University of Michigan.  Using this information Martoma traded shares based on this illegal information as did his boss which allowed the fund to rake in a handy $246 million in profits.  As they can't yet prove Cohen knew about the information, he is named as "portfolio manager A" in the filed complaints.  For snitching on Martoma, the esteemed professor has been given immunity from prosecution.

Basically, the complaints against the two claim that they shared this information and used it to trade in the shares of two companies involved in the drug trials, Elan Corp and Wyeth Pharmaceuticals, now part of the giant Pfizer Corp.  Rather suspiciously, a week before poor results of the trial were made public which sent share prices south, Cohen and Martoma began selling "hundreds of millions of dollars" of the shares and----get this---- made bets that the share prices would head south; some insight, some savvy eh! See, if workers had those sort of smarts we'd be rich.

Technically, you can get long sentences for insider trading as, after all, your stealing directly from other coupon clippers.  But as the Journal reports, most of those caught in insider trading scams who cooperate with the government serve no jail time at all. The esteemed professor is "very thankful" he won't serve any jail time says the Journal.

The health industry is very lucrative field for making what the bourgeois refer to as "illegal profits".  "If you have a pending application for a new drug, the difference between yes and no on approvals can be tens or hundreds of millions of dollars." says  Rod Rosenstein, a US attorney for the state of Maryland. When we consider the sales of some of these drugs like the statins, we are talking about billions of dollars.  It's no wonder they call them "blockbusters".   It's no different than having your capital employed in the movie industry.  That profits come from the unpaid labor of the worker is no matter, it is legal theft.  Swapping a $10 bill for a $20 would be considered an unfair exchange and cheating, but paying labor power less value than its use creates is revered activity, the epitome of success.

Outside of the extraction of surplus value from labor, this type of theft is rampant and amounts to trillions of dollars.  Part of it included in the more than $26 to $32 trillion estimated to be stashed away in offshore accounts. It's not just health care either, "The markets are awash in insider trading..." says Bloomberg Businessweek. I take that to mean what it says, that the markets are awash in insider trading. And it's from the horses mouth.

Just as an aside, we should consider another source of funds when we are asked for "shared sacrifice" and the need for austerity in the form of slashing of public services and jobs, and that's what they call the Shadow Banking Industry. According to the Financial Stability Board, worldwide assets in shadow banking totaled $67 trillion in 2011 with the US accounting for 35% of that figure. The Shadow banking industry has little regulation,  like most of the 1%'s activity that affects our daily lives, determines whether we eat or starve, we are not privy to it.

Most workers understand this sort of thievery goes on in the abstract but for me, and this might be a little selfish, I have to constantly remind myself of it ( and anyone else that might listen) as a means of defense against the onslaught of lies, trickery and arguments about hard times and merits of so-called capitalist democracy that we are forced to endure from the mass media, the pulpit, the universities and other institutions of theirs.  We cannot stand against this ideological warfare and more importantly fight for an alternative to this madness if we do not lay bare the objective truths, if we do not allow objective reality to prevail.

We do not live in an economic democracy. Their financial books and industrial methods are secret. Who knows about the Financial Stability Board or the Bank of International Settlements or the inner workings of the Business Round Table, the National Association of Manufacturers or other institutions of national and global capitalism?  I was trained to read their serious journals, we can't fight the class that rules without understanding what they're thinking and discussing about how they can best govern society and facilitate the plunder of its wealth.  But I come across institutions daily that I never knew existed like the Financial Stability Board.  These structures are part of the interconnected web of capital that links them all together and helps to maintain a semblance of stability in their rapacious quest for surplus value. Capital abhors obstacles, interruptions in the process of accumulation and exploitation of labor and it demands a certain honor among thieves and between nations, an impossible dream in a social system based on thievery but try they must, the consequences of conflict in the nuclear age are too dire.

We cannot begin to transform society, to see another way forward, to rid ourselves of a system of production that makes a commodity out of everything, art, water, air, the human body, if we don't reject in our own consciousness the alien view that society cannot provide a decent and productive existence for all humanity; that poverty is the fault of the poor.  Yesterday, more than 100 workers died in a fire in a factory in Bangladesh.  They died, like the 23 or so who died in a similar fire in a factory in North Carolina some years ago because they were unable to escape, there were no emergency exists.  In the NC incident if I recall, the doors were blocked to stop the workers' stealing out for a smoke.  Many of these workers' were women, possibly children.  They were murdered by the institutions of capitalism and those who perpetuate it and enforce its rule. These conditions are not accidental.

The alternative to this madness is for us to collectively own, manage and determine how we produce the necessities of life and how we allocate the capital and the labor to facilitate that process in a way that is harmonious with the natural world.  A global federation of democratic socialist states. We can only gain by hasting the demise of a social system that has reached a historical dead end.

* For the capitalists, "productive" labor is that which produces surplus value.  Surplus value is the difference between the value of the commodity produced and the value of the capital involved in the production process and is the source of profit.  "To be a productive laborer.." wrote Marx, "....is therefore not a piece of luck, bit a misfortune." Capital Vol 1 Chap XV1  By socially productive labor I am referring to the production of use values, products society needs to maintain our existence and improve it.

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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 (http://www.ft.com/cms/s/0/a2ea734a-2e7f-11e2-9b98-00144feabdc0.html#axzz2Cfd8hPGi).

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 (http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf) 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 (http://www.motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street).

It is this idea that Britain’s Fire Brigades Union (FBU) has recently taken up (http://www.fbu.org.uk/?page_id=6204).  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, http://thenextrecession.wordpress.com/2012/08/20/capitalist-crisis-theory-and-practice/) 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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