Saturday, November 03, 2012

Banks and the Crisis

Many seek out solutions without understanding the causes. Marx wrote extensively on money and banking and credit yet how convenient it is to forget his conclusion that it is the entire capitalism system not simply individual aspects of its functioning that is the problem. Theorists seem to forget that the capitalist system remains, in all essentials, the same as it was when Marx studied in the British Museum. Lest we forget, the source of all Rent, Interest and Profit is the unpaid labour of the working class. It’s not a revolution if you’re only taking out the bankers. The bankers are not wicked finance capitalists against whom the anger of workers should particularly be directed, just capitalists with their capital invested in a particular line of business, no more no less reprehensible than the rest of the blood sucking parasitical capitalist class. Recessions are inherent in the boom bust cycle of capital. “Greedy bankers” are a scapegoat distracting from the fact that this will happen again and again and again. Blaming them alone implies you could have a nicer capitalism with good bankers. Pinning the blame on “greedy bankers” lets the rest of the culprits off the hook. This is not just a financial crisis, but a crisis of the whole capitalist economy in which the whole business and political class are fully implicated.
If a few get rich while millions lose out, then this is capitalism working as it only can work. If there is slump followed by boom followed by slump, then capitalism is working as it should. It works the only way it can work – in an anarchic and chaotic manner, oblivious to the misery and suffering it creates. As usual it is the working class that suffers the cutbacks, the reduced standard of living, and the vicious and austerity programmes that every such crisis engenders.

That capitalism is chaotic is evident. Its frequent bubbles and recessions — its unavoidable features— become global. The disasters get bigger, and nastier.
There can be no such thing as a permanent boom. Marx, the first person to provide a convincing analysis of how the capitalist economic system worked, explains how capital accumulation proceeds by fits and starts, periods of relatively rapid growth being followed by periods of contraction and stagnation. The graph of long-term growth under capitalism is not a straight line moving up from left to right but a jagged line with peaks and troughs, with each peak normally higher than the previous one. Marx argued that this cyclical pattern of growth was not just accidental but was inevitable under capitalism - it was the way capitalism functioned and developed, its “law of motion” as he put it - with each period of rapid growth ending in a slump and each slump preparing the conditions for the next round of growth. Capitalism is driven, not by consumer demand, but by the drive to make and accumulate profits as further capital and that this is by no means a smooth process.

In order to maintain or increase their share of the market and realise the surplus value embodied in their products, capitalist firms are compelled by competition to reduce their costs by improving their productivity, in particular by the introduction of more productive machines. This leads to an increase in overall productive capacity. During the period of recovery that follows a slump this poses no problem as the market is beginning to recover and expand again. However, as the competitive pressures to increase productive capacity continue, the point is eventually reached when productive capacity in a key industry or group of industries comes to outstrip the market demand for its products. At this point a crisis of overproduction breaks out. As profits fall, production is cut back, workers are laid off and, through the knock-on effect on other industries, the market shrinks, so inaugurating the period of slump. During the slump, the least productive machines are taken out of production and capital is depreciated or simply written off. This purge of under-productive machinery and over-valued capital eventually creates the conditions which allow capitalist growth to recommence, so beginning the boom-slump cycle again. This is how capitalism has developed and continues to develop.

A key factor in this is that capitalism’s financial apparatus is largely built on confidence that transactions will be smooth and payments will be met. When this confidence in the efficiency of trade and commerce starts to ebb then things can take spectacular and serious turns for the worse. The erosion of financial confidence is one of the ways in which a downturn in one sector or country can spread to others.

The financial crisis is a reflection of the fact that stock exchange and foreign currency gamblers have realised that countries have expanded their productive capacities beyond market demand. One consequence of the past period of slow growth was that significant amounts of profits were not being reinvested in production but, instead, being held in liquid form and invested in financial assets with the aim of making as large a short-term profit in as short a time as possible. All the multinational corporations had treasury departments engaged in financial speculation of one form or another whether on the stock exchange, the bond market, currency transactions, commodity markets or dodgy hedges such as derivatives.

This extra demand for financial assets, deriving from non-reinvested profits, has driven up their price, so creating the anomalous situation of a stock exchange boom in what is essentially a depressed economy. Most of the financial transactions that took place were not investments of productive capital- not used to set up factories or to buy machinery, equipment or raw materials-but are to buy and sell shares or bonds or foreign currencies or commodity futures or property or failing companies to asset strip them. Such purely financial transactions are utterly unproductive, even from a capitalist point of view. Not only do they not result in the production of a single extra item of wealth but they don’t even increase the amount of surplus value available for sharing amongst the various sections of the capitalist class. It’s a zero-sum game. As socialists have always maintained, stock exchanges are places where capitalists gamble and try to cheat each other with a view to acquiring as large a mass as possible of the surplus value that has already been produced by and robbed from the workforce.

Marx dealt with the illusion that money can give rise to more money without production in Volume 3 of Capital, chapter 29, where he introduced the concept of “fictitious capital” (imaginary wealth). Examples of those are government bonds, the price of land, and stocks and shares. Marx called these “fictitious” capital because the capital sum did not really exist, only the estimated future income stream did and that depended in the end on future production. What the banks have been doing in recent years was to increase the amount of such fictitious capital by turning mortgage repayments into bonds – “securitising” them.

Marx also in Volume 3 examines “interest” and “profit of “enterprise” – the former being the revenue that the money capitalist is entitled for loaning capital to the industrial capitalist, while the latter is the profit the industrial capitalist receives after paying that interest to the money-capitalist. His observations reveal why it is so easy for bankers to be cast in the role of villains, while those capitalists owning actual means of production appear in a more favourable light. Money seems to have the magical power to breed more money. It thus appears at first glance that profits can emerge regardless of production. Overlooked is the intervening process of production, which is the actual source of the interest earned. This illusion is reinforced by the fact that individual money owners can indeed loan money for non-productive uses. Yet that freedom to direct money towards non-productive sectors, or to engage in speculation on fictitious forms of capital, only holds true for individual capitalists. If a large portion of the industrial capitalists were to withdraw from production, so as to become money capitalists, the ultimate source of profit would quickly dry up and the rate of interest would plummet.

Nevertheless, if we view the capitalist world from the perspective of the individual interest-bearing capital, it seems that profits can materialise out of thin air, without actual production. Marx thus calls interest-bearing capital the “most superficial and fetishized form” of the capital relationship, where capital “appears as a mysterious and self-creating source of interest, of its own increase.” Instead of appearing to be one part of the total surplus-value, interest seems to arise from an inherent property of capital itself, so that any owner of it is entitled to interest. With interest, we are one step removed from the actual process of production; and from the exploitation of labour that occurs within that process. This fact is at the root of the tendency for people to view money capitalists as inhabiting in a rarefied world where it is not necessary to get one’s hands dirty. The money capitalists who engage in this mysterious process, whereby money is able to breed more money, both dazzle and disgust those who must earn a living in more pedestrian ways.

What some argue is that if the interest that the money capitalists earns seems to spring out of thin air, the industrial (productive) capitalists, in contrast, seem to earn their profits from the sweat of their brow. Their “profit of enterprise” – which is what remains after they pay money capitalists interest – appears to be the fruit of functioning capital, rather than the fruit of owning capital. Just as there is an abstraction from the actual production ( exploitation) process in the case of interest-bearing capital, in the case of profit of enterprise the production process is separated from capital itself, so that it appears merely to be labour process. Profit seems to accrue to industrial capitalists as payment for a useful function performed in that labour process. The fact that industrial capitalists play an active role in the production process provides a basis for the claim that they are preferable to the money capitalists who do nothing more than provide the investment. Marx’s theory of surplus-value brings to light the ultimate source of capitalist wealth.

Some apologists for capitalists say productive businesses produce value. Speculation is the use of money-capital, not to invest in the production of new wealth and new surplus value, but unproductively to try and swindle other capitalists’ out of their past profits. It’s a zero-sum game in which the total amount of profits remains the same but merely gets redistributed differently amongst capitalists depending on their speculative skills.

Real value is only created by the worker. It is labour power, which is a source of more value than it has itself. The capitalist, having bought the labour power, engages the worker to work for longer than is required to produce the value of that labour power, and so surplus value is produced. It is working for the capitalist clas that we produce a greater value in the form of the commodities we create than the value of the wages we receive. Out of this “surplus value”, the capitalists obtain an income to support his consumption but also the new capital to reinvest in their business enterprises.

So ultimately the source of capitalist profits is the difference between the price of product of labour, and the cost of hiring the specific types of labour involved in realising it. That is, between the value of the work we do, and the cost of maintaining and reproducing our capacity to do that work. Once that profit has been realised, there is no hard and fast rules determining how that profit is divided among the various members of the capitalist class. It becomes a matter for legal and contractual relations between capitalists, as they use a variety of rights to secure their share of the profit, with landowners securing rent, financiers securing interest. Each takes a profit from the total of surplus value extracted.

For all its worth, the distinction between productive and non productive capitalists remain a question of who gets what share of the unpaid labour of the working class.

Workers are exploited by virtue of the fact that we produce surplus value for the capitalists which is appropriated and used for their own ends. Nothing to do with low wages or being harshly treated. Exploitation is something which is built into the very nature of the employment relation itself which implies the division of society into employers/owners and employees/non-owners .

In fact, capitalism is not interested in producing things as such. It is only interested in profit expressed in money terms. Investing in the production of goods and services is an inconvenience which it has to go through in order to achieve its aim of ending up with a greater financial worth than it started with. Thus the purest form of capital is finance capital and, from the capitalist point of view, the most convenient way to make more money is to do so by financial dealings of one sort or another. It’s an illusion of course. It’s production, not finance, that makes the world go round. The financial world cannot go on feeding off rising paper asset values for ever. Reality must intrude at some point. But capitalism without finance capital is inconceivable; so too, therefore, is capitalism without financial crashes.

Capitalism is not a place (‘financial centres’) or a thing (‘multinational corporations’ ), it is a social relationship dependent upon wage labour and commodity exchange where profit is derived from capital’s theft of unpaid labour. Concentrating on “nasty” financiers and multinationals and defining “capitalism” in those terms can only end up as a massive diversion from the goal of abolishing the capitalist system.

This idea that bankers are any worse than other types of capitalists is not convincing. To repeat ad nauseum. The capitalist class as a whole, and all of the individual capitalists, enrich themselves thanks to workers adding more new value to the commodities they produce than the value of the wages received as payment for their labour-power. Any party to this exploitation of labour – whether the capitalist who lends the investment funds, the capitalist who supervises the commodity production process, or the capitalist who is tasked with selling the commodities – is entitled to a piece of the action and therefore share equally in the blame. It is nonsense to argue that one type of capitalist is more or less culpable than the others. The relations between capitalists is very much like those between a gang of thieves, who cooperate to pull off a heist and then divide the loot among themselves. Conflicts easily arise from such an arrangement: as a bigger share for one means a smaller share for the others. “Wall Street vs. Main Street”. It is more a re-distribution of booty among the robbers. Such squabbles are of little concern to the person who has been robbed. In the end it is just the old “divide and conquer” approach with a subtle new twist – instead of dividing the working class, the internal divisions of the capitalist class are emphasised to deflect attention from the actual real class divide that exists.

The task for socialists is not to drive out speculators from capitalism to perfect the system but to move beyond production as merely a means of capital accumulation.

It is no co-incidence that the cries for banking reform invariably comes during economic depressions. The lubrication that keeps the capitalist machine running – the money markets – are dysfunctional.

Who are the people who find a difficulty in paying for the money they use? Not the working class in any sense of the word. Not the large capitalists, for they control the powers of government and have a currency suitable to their interests. There is left the small capitalist and shopkeeping section, who, fond of calling themselves the “middle” class, find themselves unable to hold their own positions against the giant production and “chain store” system of distribution that is crushing them out in all directions. Hence this howl for an extension of “credits” and the introduction of “cheap” money for the purpose of paying their debts. There is no chronic shortage of purchasing power. Sufficient to buy the product is generated as wages and profits in the course of production. Slumps are not caused by an absolute shortage of purchasing power but arise when, because of falling profit prospects, capitalist firms choose not to spend all their profits on fully renewing or on expanding production.

As Marx identified “So long as things go well, competition effects an operating fraternity of the capitalist class…so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it is no longer a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, ie, to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface…”

 Marx also pointed out that “the moneyed interest enriches itself at the cost of the industrial interest in the course of a crisis” Bankers are enriching themselves at the expense of industry and workers, in other words. So whats new?

The economist David Harvey has explained that the losses of the crisis are finally distributed between factions of the capitalist class, and between the working and capitalist classes, and whatever the power struggle that ensues, the necessary result will be the destruction of value (closure of workplaces, the laying off of workers, destruction of surpluses, defaulting on debt, cutting of state services, and so on) so that a new round of capitalist accumulation can begin. The sad but inevitable reality of capitalism.

The present banking crisis is not all that complicated. When borrowing became less available and more expensive banks came unstuck. They found that, when their loans came up for renewal they had to pay more interest on them than they were getting from those they were lending money too. Since banks make a profit by paying depositors and creditors a lower rate of interest than they charge those they lent money to, this meant they were making a loss. That’s what can go wrong when banks can’t get hold of other people’s money on the right terms. What can also go wrong is that they make unsound loans - the sub-prime situation. If they buy a house and the lend someone the money to buy it, if that person defaults they are left with the house. In normal times they can resell it but because there has been overproduction in the housing market they are finding that they can’t get the same price for it as they paid for it. In other words, they lost money.

In fact this effective overproduction in the housing sector could be said to be what has provoked the present financial crisis.

Some in America seek a solution in the likes of the State Bank of North Dakota. That a bank owned by state authorities weathered the recession was perhaps more a reflection that the state’s economy is primarily based on agriculture and oil , both involved in current boom times. Nor was the state particularly exposed to the sub-prime disaster “North Dakota really didn’t participate in subprime to a significant degree. I mean, that was–you know, it was sort of a flyover state. All of the aggressive subprime lenders apparently didn’t think there were enough folks in farms that they could get to lever up to take on these dodgy loans.” Yves Smith. author of the book ECONned and creator of the website

In Scotland, we have the almost unique bank success story (but with differing outcome) of the Airdrie Savings Bank. Bucking the trend, it lent 24% more in 2010 than it did in 2009 and posted for the same period a rise in profits of 21%. Yet “North Lanarkshire has been particularly rocked by the recession, including above-average redundancies, because the economy is not as diverse as some and there remains a heavy reliance on sectors that seem more susceptible to economic shocks” as one report describes.

The Koran prohibits something called riba, loosely translated as interest. In the Middle Ages the dogma of the Catholic Church banned usury, defined as charging money for a loan. Well, but not quite. No-one may charge money for a loan but they may take the profits of partnership, provided that they takes the partner’s risks. They may buy a rent-charge; for the fruits of the earth are produced by nature, not wrung from men. They may demand compensation – “interesse” – if he is not repaid the principal at the time stipulated. They may ask payments corresponding to any loss he incurs or forgoes. They may purchase an annuity, for the payment is contingent and speculative, not certain. What was banned, then, was only the certainty of being paid a pre-fixed sum of money for the loan. The very word “interest” derives from one of the ways of getting round the ban on usury. Islam permits those sort of partnerships as well as a number of other arrangements which allow the payment of a pre-fixed sum of money for advancing money. Salaam (“sale contract with deferred delivery”), arboum (“sale contract with a non-refundable deposit”) and murabaha (“deferred sale financing”). So, while Islamic banks do not borrow money on the money market, they can still make what are in effect loans which bring in money for them. This involves converting interest into a rent or a profit share

What socialists say about the banks is not regulate them, nor nationalise them, but make them redundant. Abolish them, along with all the rest of the complicated, financial superstructure of the capitalist production-for-profit economy. The mythology surrounding the power of banking helps those who take the view that this vast institution is so necessary that the prospect of a world without money would be unthinkable. Let’s abolish capitalism and live in a moneyless, propertyless world without banks. That means moving from a demand for ‘regulation change’ to one for ‘system change’. Perceived wisdom is that it should be easier to make socialists in a recession when the shortcomings of capitalism are more evident. This capitalist recession will eventually end and the economy at some time in the future will inevitably return to growth. If there are more socialists at that future time, then at least one positive outcome will have resulted from this sorry and preventable mess.

“…no kind of bank legislation can eliminate a crisis” – Marx

 The only way to solve the worlds problems is to escalate and intensify the class struggle. Capitalism is subject to periodic slumps and is a global system, global economic crises are inevitable from time to time. I’d like to think that this would trigger off a world-wide movement for global socialism but experience has unfortunately shown that there is not necessarily a fixed one-to-one relationship between economic crises and the growth of socialist ideas. Other factors too are involved and only time will tell how the socialist movement will fare.

Post script
Credit/Money Creation

Federal Reserve Bank of Dallas explains on its website: “Banks actually create money when they lend it.” the author informs us. This website creates a lot of misunderstanding because of that staement. The New York Federal Reserve gives a rather more sophisticated explanation. But it is all made very clear on Page 57 of Fed Today

The theory that banks can create “money out of nothing” comes in two forms.

In the crude version, it is argued that if the banks have to keep 10 percent of their assets as cash (as used to be the rule; it’s now as low as 1 percent) this means that if someone deposits $1000 in a bank that bank can then lend out $9000. Actually, what it means is that it can lend out $900.

The more sophisticated version takes over from here and assumes that the $900 is then spent and that the people who receive it then deposit it in one or other bank. These banks can then lend out 90 percent of what has been deposited with them, or between them a further $810. So that means that the original $$1000 has already become $1710. In other words, the banking system this has “created” an extra $710 “out of nothing”. But the process doesn’t stop here. The $810 also ends up with the banks, who then lend out a further $729. The process continues until, in the end, the banking system has lend out a total of $9000.

Banks can’t and don’t “create credit”. They can only lend out what has been lent to them, ie other people’s purchasing power. So, bank credit only re-arranges, not increases purchasing power.Banks are financial intermediaries that borrow money from some people and then lend it others. Banks fund loans to customers by a mixture of two methods, one of these is using money deposited with it from customers , the other is through the wholesale banking market, i.e. effectively money deposited with it from other institutions .Generally, small banks are deposit-rich and large banks are deposit-poor. Large banks loan out more money than has been deposited with them by borrowing from small banks. Small banks themselves borrow from depositors and other banks as well. An entire national economy can loan out more money than has been deposited in its banks by borrowing from foreign banks. The origin of their profits is the difference between the rate of interest they charge those they lend to compared to that they have to pay those the borrow from. An alternative to saying banks ‘create’ money is just to say that they help circulate it. The only body which can create additional purchasing power is the government via its Central Bank. It can in effect print more money.

Banks are not the only actors involved in the process – a bank makes a loan but that is not immediately redeposited, it gets spent on consumer goods or turned into productive capital so all these things have to happen first before it ‘comes back’ into the banking system, so the bank is not necessarily the active subject in all of this, so it’s not just like the banks sitting in isolation of everything deciding to create money out of nothing, if all the other activity didn’t happen then the banks wouldn’t be able to do what they do. It’s ‘created’ as a result of activities going on outside and outwith of the banks themselves, it’s not about them ‘creating’ credit and at some point it then having to react with the real economy, it’s about the activities of the real economy dictating it’s need and the banks responding to it.The fact that the bank doesn’t create money becomes obvious during a commercial crisis, during which too many depositors try to redeem their IOUs (their deposits) than can be redeemed- a run on the bank.

Money! What is money? Money is a ticket that enables one to buy goods with, just as a railway ticket enables one to ride on the train goes the argument . The more tickets one has in one’s pockets, the more he can buy. These tickets are, therefore, merely media of circulation, purchasing power. They may be made of anything . The material is of no consequence. What is of consequence, though, is the quantity of money in circulation. The mortal sin of the banks is that they refuse to issue enough money, or credit, to enable the “common man” to procure the necessities of life. Therefore, the power to issue money and credit based on social wealth must be taken over by a state-owned . Money, it explains, causes commodities to circulate, but herein it is certainly deceived by appearances. In reality, the movement of money is simply the reflex of the circulation of commodities. Money only realises the prices of commodities. Given the velocity of money, among other things, the quantity of money required in a community is just the amount sufficient to realise the prices of the goods to be exchanged. More than this the system cannot and will not absorb. For money, in the sphere of circulation is an effect not a cause. Hence, there is nothing seriously wrong with money, as such. Consequently, to increase the quantity of money will not put more goods into the hands of the people. Such an increase, in place of causing a greater quantity of commodities to circulate, can only have the effect of cluttering up the machinery of exchange. To advance as an argument for such an increase that many people are suffering because they have not the money with which to buy the necessities of life is not an argument for the relief of distress. Many are deeply moved because many are scarcity amidst plenty. It is a condition the reason for which baffles them. They can see easily enough that the products of labour are not properly distributed. That does not require much brain work . But they do not have sufficient insight into the capitalist system to be able to understand that this condition arises from the fundamental contradiction of the system. This fundamental contradiction is that goods are socially produced, but individually appropriated by the private owners of the means of wealth production. The profit system, albeit appropriately modified, must be maintained at all costs. Hence, they want to retain the capitalist system, but at the time escape the inequalities and distress which it produces. So when they speak of changing the system, what they have in mind is an indefinite idea of correcting some of its faults. Yet those faults will only end when the means of production are brought into common ownership and democratic control so that they can be oriented towards directly satisfying people’s needs – when banks, money and all the rest of the buying and selling system will have become redundant.

Post-post Script

Class is defined by the position in which you stand with regard to the means of production. In capitalist society there are two basic classes: those who own and control the means of production and those who own no productive resources apart from their ability to work. The job you do, the status it might have, the pay you receive and how you chose to spent it, are irrelevant as long as you are dependent on working in order to live. This means we are living in a two-class society of capitalists and workers.

The existence of a “middle class” is one of the greatest myths of the twentieth century. In the last century, the term was used by the up-and-coming industrial section of the capitalist class in Britain to describe themselves; they were the class between the landed aristocracy (who at that time dominated political power) and the working class. However, the middle class of industrial capitalists replaced the landed aristocracy as the ruling class and the two classes merged into the capitalist class we know today. In other words, the 19th century middle class became part of the upper class and disappeared as a “middle” class. The term, however, lived on and came to be applied to civil servants, teachers and other such white-collar workers.

Having to work for an employer was how Marx defined the working class. Commodities express the amount of labor time embodied in them and that is how Marx has defined money.

The traditional division between “working class” and “middle class” implies that there is a conflict between these two groups, with the middle class being better paid, educated and housed, often at the expense of the working class. In order for the Left Liberal politics to maintain its appeal, the enemy had to be found, not in the abstract workings of a social system, but in the concrete everyday realities. The owning class is too remote to be tangible, and certainly too remote to be vulnerable. So the Leftist Reformists dragoon the “middle-class” into the role. Their immediate enemy is the “middle class” ie the lower /middle echelons of management, civil servants , social workers, teachers and all the other functionaries of capital. Making a supposed middle-class into an enemy is as divisive as anything dreamed up by the owning class.

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