The Final Countdown?
We are headed for the final catastrophic countdown, some pundits tell us. Others say that the latest “coordinated” bargains – mainly in currency “swaps” – offered by central banks around the globe will do the trick: they will enable the banks to deal with each other again economically and confidently. They will also help to save the Euro and the European Community.
If they don’t – if we have another collapse of the severity and complexity of 2008, we are warned that the entire global financial system could break down; and our political and economic leaders would be unable to do very much, if anything, about it. They might well, indeed, be paralysed by fear and a basic lack of understanding of what the crisis is all about.
There is very real justification for these concerns. Today’s crisis has been approaching for more than a quarter century. It is not a routine, manageable cyclical affair but a more fundamental crisis that some claim, tends to strike the global economy every forty to fifty years.
Accompanying this longer-term crisis is the pathetic inability of our political, economic and financial leaders to act effectively. They meet and talk. They make claims they cannot sustain. Governments are changed but the new leaders are as ineffective as the old.
That was the way it ran in the 1930s; that is the way it is today.
Fear almost always drives our leaders on. If fear is not on the agenda, it is always sitting at the table. Fear thumps at the heart of our policymakers. Fear sickens the guts of all of them – and most of us - everywhere.
When fear is the driving force, leadership lags behind or acts in desperation.
That is particularly the case at this late stage when everything conventional has been tried several times already and has failed. What is left except panic?
We must bear in mind that it is fear of a BANK collapse that preoccupies our leaders. Fear was centred publicly on American banks in 2008; more recently and especially right now, it is centred on European banks. The magnitude of the crisis has, if anything, increased in the three years between. All banks virtually everywhere are exposed in greater or lesser degree.
It is a fear that, in policy and practice, has compelled unique privileges for the biggest and normally richest banks. Unemployment of the masses can be borne; austerity for the already impoverished is seen to be necessary and unavoidable; but failure to “rescue” the banks, especially those too big to fail, would be intolerable. It conjures up the ultimate nightmares.
So governments, international institutions and the very rich demand cuts in the incomes and pensions of the relatively and absolutely poor in their societies while central banks propose some further easing of “credit” for the banks.
This is designed to increase their “liquidity” – that is, the money they have at their disposal - and the “confidence” they have crucially in each other.
Apart from the central banks, Eurozone ministers will shortly unveil their own proposals to “save the Euro.” It will probably be a “solution” which, in its essentials, is already well-worn. It can hardly be otherwise – it can hardly be innovative and imaginative - since it was promised for revelation in only “ten days” or, more precisely, at a summit ministerial meeting to be held on 9 December 2011.
Initially, the news from the central banks and from the Euro gentlemen was greeted enthusiastically.
The markets celebrated.
The resultant sudden sharp market volatility once more promised fortunes for professional traders; but it promised nothing to the poor and unemployed except more austerity and more misery in their everyday lives.
The market euphoria lasted twenty-four to forty-eight hours. The traders will continue to make money on the volatility of the markets in between spikes. The banks will continue to enjoy the affection of the rich and powerful. The poor and unemployed will protest again. They will strike again. They will initiate movements for fairness and against austerity – once again.
Among them there won’t be any euphoria. Not yet, in any event.
We have now received reports – probably more reliable than anything before – that the Fed made $7.7 trillion available to banks at giveaway interest rates in 2008.
It did nothing to resolve our financial or our real economic problems. It did yield $13 billion in profits to the major American banks; but it delivered even more misery to the ordinary homeowner and mortgagee, as well as to the skilled and unskilled man or woman looking for work. Indeed, everyone suffered more misery except those who were often the grossly greedy, incompetent and criminal bankers and their hangers-on.
Now we are again adding to the benefits for and bolstering the security of many of the unworthy at the cost of the unjustly deprived.
In defiance of the OWS and their supporters in the United States and around the world, we are, in virtual panic, doing what we have done before. Only this time, our leaders are implying, we will do it more thoroughly and with more devastating effects than ever,
This time the banks won’t be required to do anything that won’t make money for them at the highest level they can freely manage. They won’t be called upon to help the small businessman and the small – or big – entrepreneur any more than they did in and after 2008. They will not be required to do anything to provide jobs to the jobless or aid for the impoverished. They will be expected to do no more than look after themselves – as regally as they can.
Governments will do nothing effective to control them. They are much too fearful of the banks to do anything to regulate the banks or, for the most part, other financial operators. Their nightmares do not seem to revolve around the irresponsible or criminal acts the banks might perform but rather around the horror that they might fail – go bust and leave us to find our solutions to our financial and economic problems without them.
This is especially true of such banks as Goldman Sachs, Citibank, Bank of America, J.P. Morgan and the privileged few at the centre of the disasters that led to the Global Financial Crisis in 2008 and which have intensified or failed to moderate the resulting turmoil since.
This must stop. Governments must no longer fear the banks or their failure. Governments must govern by confronting the banks and especially the investment, too-big-to-fail banks as they confront the rest of us. If they are corrupt, they must face the law. If they are effectively bankrupt, their bankruptcy must be allowed to proceed in accordance with the law.
Governments must take their courage in both hands and deal with the banks in the only way which will resolve our problems. If the banks fail, individually or collectively, governments must take control of them.
If need be, they must take control of the whole financial system or as large a part of it as may be necessary for the stability and welfare of the economy and society. In this context, each of them will need to take effective control of their individual national financial system and play a responsible part in the global financial system as well.
If that system is to work in the interests of the people it must be managed in genuinely democratic ways, by the people for the people. Instead of providing funds to “bail out” zombie banks, governments and their treasuries and central banks must use those funds to buy out, take over or establish their own banks which will do what must be done to rescue the national financial system as well as the global financial system and the global economy.
In the unstable situation of today, a crucial responsibility of governments is that they should be on high alert to ensure that they can assume administration of a modern banking system whenever it may be required. Government officials should be ready to take over the administration of failed banks to ensure that payment of wages and other everyday financial transactions will continue without disruption while the failed financial system is being reconstructed.
The government is the only institution which can temporarily or permanently take over from the bankers. We must therefore be prepared to nationalise the national financial system in whole or in part at any time. If we have assurance of such an orderly takeover much of the fear of failure or collapse of the financial system will disappear.
In the longer term, events of recent decades have confirmed that the banks or a sufficient proportion of them must be nationalised or be effectively managed by governments in the future if we are to have stable, responsible finances, stable growth and employment and tranquil societies. The banks must then perform the tasks of intermediation between savers and investors that are their essential function.
In present circumstances, only governments can ensure that this essential function – the key to economic growth – can and will be carried out by the banks – preferably all of them, national and global, large and small.
In whatever term, short, medium or long, fixed capital investment, productivity and production are the keys to economic growth and the effective handling of debt. They represent the greatest of the many virtues in the economic and financial history of the United States and they are just as crucial to the stable and sustainable growth of smaller economies.
To allow some normality to return to national and global economies, a moratorium should be placed on sovereign and possibly other major forms of long and medium-term debt. This moratorium may be for a fixed period of, say, two or three years and it may apply only to certain clearly defined forms of debt. Sovereign debt in particular may be capable of multilateral negotiation, at least in some measure. In general, the breadth and depth of the moratorium should be sufficient to allow (1) what I have called a return to at least short-term normality for the current economy and financial system and (2) thorough examination of the causes of excessive indebtedness and the procedures that may fairly be adopted for elimination or management of such debt now and in future.
Already much of the debt has been lost by its longer-term investors. A moratorium would likely do little more than formalise investors’ loss of what little remains. Although the data available to me is not conclusive, such research as has been done suggests that a high proportion of nominal sovereign debt was already lost after the 2008 collapse and the continuing slide in market value, only partly offset by high yield, will eliminate most residual value before maturity. Only the traders in volatility on the money markets are likely to make much profit, almost entirely from successful speculative trading, in other words, transactions that have largely turned the money markets into betting shops.
One of the few more cheerful pieces of this sad history is that, so far, China appears to have maintained more control of its credit and debt and therefore to have helped stabilise to some extent the global debt situation as well as its own. There is evidence even of control of the kind countries like Australia used to maintain growth and stability in the more responsible years after World War Two from 1945 to 1970.
This was illustrated by a fancied “coordinated” action by China on 30 November 2011 which relaxed reserve requirements for its banks. This reversed the tighter reserve measures the Chinese Government had imposed in the previous year or so. It is of special interest in that the release of funds is more likely to be effective in easing credit than a lowering of interest rates might have been.
It is availability of credit rather than just the rate of interest that is important in reckoning whether credit is tight or easy. This aspect deserves more searching study and the Chinese approach may stimulate it.
That point is just one of many suggesting that we must try to get back to macroeconomic and financial policies of full employment and stable growth which were characteristic of the period 1945 to 1970 in several highly developed countries, including the United States and most West European countries.
Those policies were the essence of national policies and drove economic and financial systems securely and confidently through what could have been the difficult post-war years, from 1945 to 1970.
In summary, we must act to meet the immediate financial and economic crisis through public management of the financial system and the adoption of such measures as a carefully sculpted moratorium on debt. To meet the more fundamental crisis over a longer term, we must get rid of excessive market volatility and restore stable growth and full employment. That can be done nationally only through effective government policies applied within a rationally regulated market system and, globally, through effective international financial and economic institutions characterised by the models of the period 1945 to 1970.
If we are, right now at this moment, at the tipping point, now is the time to start serious negotiation to be followed by serious action. The alternative will be to encourage further economic, financial and social degeneration and a further – and accelerating - slide towards political, social and strategic collapse.
The countdown might then well be to conflict of a catastrophic kind on a catastrophic scale.
Author of “America’s Suicidal Statecraft: The Self-destruction of a Superpower”
3 December 2011