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Sun

17

Aug

2008

How’d they do that?
Sunday, 17 August 2008 19:41
by William Bowles
“Some greed is necessary to keep capitalism going. But too much greed will bring it down. Even Adam Smith, the father of [capitalist] economics, understood that capitalism requires some degree of trust.”
‘BLAME THOSE GREEDY BANKERS’ Robert Reich, of the University of California at Berkeley, and a former US labour secretary.
The global crisis of capitalism is ‘explained’ as being the “credit crunch” and all the fault of bad loans made by banks and mortgage lenders, but is this really the truth or are we being misled by a complicit corporate/state media? You might have noticed that when the ‘sub-prime’ mortgage fraud broke, the UK media were telling us that it was a “US problem” and couldn’t affect us, and indeed, they still refer to it in these terms as the initial cause of the credit crunch. The truth however, lies elsewhere.

There’s a programme on Brit TV called ‘How did they do that?’ that explains how for example, they put the lead in pencils, so it occurred to me that it’s a perfect metaphor for ‘explaining the credit crunch’ and the associated ills of capitalism, so how’d they do that, allegedly explain that the cause of the economic crisis is the so-called credit crunch? Like what happened to all the credit, where’d it go?

So-called consumer capitalism runs on credit, that is to say, banks and other financial outfits lend money to consumers and charge interest on the loan, so the money (profit) made is based entirely on the interest charged on the loan. Controlling the credit available is done by altering the rate of interest charged on the loan. Raise the interest and less credit is available, lower it and more credit is available.
“Put it this way: Anybody who thought the news from the U.S. mortgage front was terrible ain't seen nothing yet. The ratings agencies are downgrading at an ever-increasing pace. They downgraded $85 billion in mortgage securities in the third quarter of 2007, $237 billion in the fourth quarter, $739 billion in the first quarter of this year and $841 billion in the second. The next two quarters could be worse, given the falling U.S. employment numbers. (The official unemployment figures, it should be noted, severely underestimate the true jobless figure. It excludes those who have stopped looking for work and also those 150,000 youngsters who arrive onto the labor market each month who have yet to be employed.)” — ‘Walker's World: The recession spreads’ By Martin Walker, Washington (UPI) Aug 6, 2008
Seems simple enough doesn’t it? Of course a person’s credit line is based upon their (theoretical) ability to repay the loan, plus the interest of course. Thus knowing what ability the creditor has to repay the loan is crucial. All fine and good when the banks used depositors money to advance loans, the type and size of the loan was based upon the bank’s assets and the creditor’s ability to repay it. But in the 1970s, all financial institutions were ‘deregulated’, that is to say, what had previously been an illegal act was decriminalized.

Banks could now use depositors money any which way they chose, for example investing in the futures market (hedge funds), and even selling the loans on to a third party, so that the bank no longer owned the loan and in return they got a transaction fee as well. In theory the risk is spread because the loans (mortgages for example) are ‘packaged’ with all kinds of other financial ‘instruments’.

But what if the loans are bad, for example the so-called sub-prime loans? Works well when there’s lots of credit available at a low rate of interest and in any case, the banks are no longer responsible as they’ve sold on the loans to other financial institutions (including other banks!). Effectively it’s an enormous, multi-billion pound chain letter (and as we know, chain letter scams are illegal).

The problem however is that under corporate capitalism all the financial corporations are cross-owned and furthermore, investment in these corporations comes largely from giant investment funds owned by insurance companies, who in turn are major shareholders in the banks they invest money in, a situation made worse by the global nature of corporate capitalism. But what made this possible?
The Royal Bank of Scotland (RBS) released its figures today (8 August, 2008) for the first six months of the year and they made the second largest loss in British banking history, £791 million and the ironic fact is that RBS owns most of its own debt!
It’s an established fact that over time, the rate of profit falls and for a number of reasons, all related to the nature of the capitalist economy such as saturated markets, competition from other capitalists, revolutions in production which lower the cost of production. Eventually, the rate of profit falls, shareholders whinge and new ways of maintaining and increasing the rate of profit have to be invented. In an attempt to address this problem, under capitalism profit rates can be raised by suppressing incomes, exploiting new markets, consolidation (buy-outs and takeovers which in theory lower the cost of doing business through so-called rationalization which means laying off workers).

But the most imaginative solution to the problem is produce wealth by sleight of hand or fraudulently is the term I prefer.
“Enter our financial engineers. They don't deal in metals or megabytes, they deal in companies that make them. “Combining them, financing them, taking them apart, putting them together again. That's the stuff of modern fortunes.

“But what of those risks? The engineers that assemble these deals say all the risks can be laid off on other engineers and their clients.

“And by investing in each other, everyone's money will be safe. Profits without risk.

“They even thought they could do that with sub-prime mortgages - home loans to people who really couldn't afford them.

“They bought each other's debt and erased one another's risk by dealing with one another in a giant chain letter.” — ‘BLAME THOSE CLEVER BANKERS’, Professor Peter Morici

Clever? However, this is not new, speculation in shares was the primary cause of the ‘29 Wall Street Crash and resulted in the Glass-Steagall Act that regulated, that is controlled what financial institutions such as banks could do with depositors’ money. And more to the point, the Prof doesn’t identify how this came to be, instead, he paints a picture of a bunch of whizzkids (who he calls engineers) playing the markets, dreaming up all kinds of complicated and fraudulent scams, all of which is true except he doesn’t mention how this came to be. In the 1970s in response to yet another crisis of capital (the falling rate of profit) triggered by the oil crisis of 1972-73 (itself the result of the big oilcos losing ownership of the oilfields in Saudi Arabia and Iraq), in the US the Glass-Steagall Act was abolished and in the UK, regulation of the banks and other financial institutions was likewise removed. A new government body was created called the Financial Services Authority (FSA) which in theory oversaw the actions of financial companies. But lacking any legal framework with which to control what banks did, it is largely a toothless institution, relegated to ‘oversight’.

Under such circumstances it is only a question of time before the entire swindle collapses under its own contradictions, for in reality no real wealth is being produced, it’s all so much paper.

And whilst billions are being further impoverished by capitalism, the really, filthy rich are not only getting richer but their numbers have increased by 8% over the past year, for they measure wealth not in bits of paper but real wealth, that is to say, capital (even if diminished in value). Belt tightening for the rich ain’t the same as belt tightening for the poor.

At the root of it all is the drive for profit, private profit and the scale of the ripoff is truly staggering with an estimated $1 trillion (and rising) being, as they say, written off. It’s important to understand that the $1 trillion or so being injected into the world economy by the central banks is to replace the money stolen by private capital through speculation (hedge funds and so forth) and the creation of fraudulent loan schemes.

Step forward government or should I say governments, and whose money do they use to bail out capitalism? Yours and mine. But it doesn’t end there, the $1 trillion-plus bailout is the thin end of the wedge. As the crisis ripples through economies, it impacts on everyone and everything.

Under capitalism money is both a means of exchange and a commodity, and under so-called consumer capitalism, consumption is fueled by credit—live now, pay later. In order to fuel credit the central banks print money and the money is ‘injected’ into the economy and regulated by the interest rate charged to borrow it.

In theory the total volume of money in circulation is directly related to the productivity of the economy, that is, the real economy, the production of goods and services. But in a ‘consumer’ economy, the supply of money is determined by the overall level of debt which is geared to consumption, not production. The so-called advanced economies no longer base their ‘GDP’ on actual production but on consumption, consumption based on access to credit. Restrict credit and consumption falls and the entire house of cards comes tumbling down which is precisely what is happening now.

The situation came about in part because to reduce the cost of production (in order to maintain the rate of private profit), beginning in the 1970s the trend has been to relocate production to the lowest cost countries starting with countries like Mexico and those in Central and South America and then further afield, Taiwan, then Vietnam, and now China and India.

The relationship between the two is blindingly obvious. In order to purchase the products they no longer produce requires access to credit. We need only look at the loss of jobs in the real economy and the overall fall in real income over the past decades, a fall made up in part by access to credit, to see how the current situation came to pass.

Add to this chaos the distortions produced by the US’s war economy (itself running on public debt) and between the two we have a recipé for disaster, for in order to fund the multi-trillion dollar cost of war, public services of every kind have to be cut back which in turn leads to a further reduction in jobs which of course are needed in order to buy not only consumer products but essentials like food and clothes and of course to pay the mortgage.

Very quickly the situation spirals out of control, negative feedback kicks in, so-called stagflation, that is, a stagnating economy and an inflationary price spiral, each fueling the other.

Could strict regulation have stopped this from happening? Actually it’s a dumb question, it’s like saying what if we didn’t have an economy based upon consumption fueled by credit. Or more to the point, what if we didn’t have governments bent on conducting wars of aggression based upon controlling resources that fuel an economy based on credit? Well precisely.
 
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