Bad banks or bad capitalism?

The Spark November 2009 Philip Ferguson

One of the issues that has arisen with the current recession is the responsibility of banks for the partial meltdown in the financial sphere.  Sections of both the left and the right had traditionally targeted banks, a practice that has become more pronounced with the new recession.  For instance, on January 19 this year the Financial Times in Britain even ran a headline saying “Shoot the bankers, nationalise the banks.”  In New Zealand, Federated Farmers has accused banks of “profit-gauging” – rather rich when you consider the amount of profit made by Fonterra!  Traditionally, in New Zealand, right-wing nationalists such as Social Credit targeted the banks, a reaction to the fact that the social base of that movement – small farmers and small businessmen – were often squeezed by banks in terms of credit, mortgages, loans and so on. 

 Right-wing nationalism in New Zealand also targeted foreign ownership, preferring New Zealand workers to be exploited by good old ‘Kiwi capitalists’ rather than Australian, British, American and – especially – Asian ones.

 It’s therefore rather disturbing, to say the least, to see a section of the far left, in the form of the Socialist Worker group, take up the cudgels against the banks as some unique evil and then wed this to NZ nationalism by targeting only Australian-owned banks in New Zealand through their launching of their “Bad Banks” campaign.  At the same time these socialists have decided to target Australian-owned banks, Kiwibank is playing on NZ nationalism to drum up customers, with a massive, politically ultra-nationalist publicity campaign against Australian banks. 

 The Australian banks have actually weathered the global financial woes relatively well.  This is partly due to the loss of tens of billions of dollars by Australian banks following the deregulation of banking there by the Labour government in the early-mid 1980s.  Deregulation led to banks making incredible loans to cowboy corporates, most of which collapsed.  That experience led to a new era of managers and greater fiscal caution.  Four of the top 11 banks in the world, in terms of credit ratings, are now Australian and Australia’s eight biggest banks are all in the top 20 banks globally.

 An increase in funding from Australian banks to their NZ subsidiaries is also a factor in the stability of the NZ banking sector.  Another factor in NZ is that the functions of different types of banks have been less combined here, and in Australia, than in the US.  Thus in New Zealand, finance companies carried out activities which have become increasingly prevalent among banks in the United States and elsewhere, and so it has tended to be finance companies which have collapsed here, not banks.

 Moreover, what exactly is the difference between Kiwibank and the Australian banks?  The basic fact about banks is that they are businesses and Kiwibank is certainly that.  Government-owned it may be but, like much else that is owned by the NZ government, it is run to make a profit, not to perform a public service.  This would help explain why Kiwibank, and not any of the NZ subsidiaries of Australian banks, had the highest net interest margin in the June-December 2008 half-year.  Kiwibank, like all other banks, pays low rates of interest to small depositors – workers, especially poorer workers – and much larger rates of interest to middle and upper class depositors.  Like all other banks, it lends out money at higher rates than it pays depositors.  Moreover, since it’s not dependent on foreign funding it escapes the higher costs associated with such funding in a period of credit crunch, while the fact that it is based almost entirely on deposits meant that when interest rates on term deposits and the Official Cash Rate fell it had more potential for profit-making.

 In any case, the fundamental cause of the global recession has little to do with banks.  At a time when the market is clearly not working and governments are being forced to intervene, there are expanded opportunities for socialists to explain to a wider audience the fundamental failings of the capitalist system – why go off at a tangent and scapegoat banks, let alone do so on an economic nationalist platform which obscures the exploitation of NZ workers by NZ capitalists?

 The fundamental cause of the current global recession is the stagnation of the real economy – the economy where new value is produced in the form of commodities, goods and services produced to be sold on the market to realise a profit.  It is the stagnation of the real economy, the sphere of production, that leads to the massive flow of capital into the artificial economy, which is where financial services, currency trading, stocks and share buying and selling etc are located. 

 The stagnation in the real economy is the product of the law of the tendency of the rate of profit to fall.  What happens is that workers’ labour-power (capacity to work) creates new value, since workers can produce more in a working week than what they are paid for in wages.  This is the basis of profit.  The other factors in production – eg machinery, raw materials – simply transfer their own existing value into the value of the new products.  So far, so good.  However, capitalists are forced to compete against each other, to produce more goods more cheaply in order to gain more market share.  This means their capital invested in new machinery, plant, technology (constant capital) etc grows in proportion to the capital they have invested in labour-power (variable capital), the source of new, expanded value.  They can produce a bigger mass of profits, but the rate of profit falls, because it is measured over the combination of variable capital and a substantially expanding constant capital.  Eventually the rate of profit falls to a level at which they can either no longer fund a major new round of investment in industry and manufacturing and therefore invest in the artificial economy or simply decide that since profit rates are, at this stage, higher in the artificial economy they will invest there, regardless of their ability to invest in the productive sphere. 

 Essentially, this process led to the end of the long postwar boom (late 1940s to early 1970s) and the onset of a massive global economic breakdown of the early-mid 1970s, a far more serious crisis than the current recession.  Since that crisis, there has been no new protracted boom in the real economy.  There have been mini-booms, usually in some sphere of the artificial economy, such as the boom in share trading in the mid-1980s which ended with the crash of October 1987.  What essentially happens with each of these mini-booms is that the paper values of whatever is being traded become vastly inflated; eventually someone can’t or won’t pay the vastly inflated price and the balloon is burst.  However, all these mini-booms in the artificial economy – whether around buying and selling shares, speculating in currency and property, dealing in subprime mortgages and bundling them up into toxic securities packages – are the product of the stagnation in the real economy and, ultimately, the contradiction between the stagnation of the real economy and the booming of some part of the artificial economy brings each house-of-cards boom to a dramatic end.

 Where you locate the most important problem in capitalism also dictates what you will argue is the solution.  For instance, if the banks – or even the wider financial sphere – is the most important problem then the logical answer is greater government regulation.  And if the problem is foreign-owned banks, then the solution, logically, is economic nationalism.  In neither case is the overthrow of capitalism necessary or desirable.

 If, however, the key problem is the capitalist mode of production itself, and the cause of crisis is ultimately located there, then regulation and economic nationalism make no sense but are dangerous diversions, leading people up a political blind alley.  If the key problem is the capitalist mode of production, then only the abolition of that mode of production can put an end to the boom-bust cycle of the system, to the grind of daily exploitation, and to the poverty and misery that capitalism inflicts globally on the mass of humanity.  It’s the job of serious Marxists to clarify, not obscure, the core problem and the solution.