On Thursday this week the 25 leaders of the G20 grouped of developed capitalist and developing capitalist countries meet in London, in what is being billed as the most important global economic crisis for 75 years. They are supposed to come together and come up with a mutually-agreed plan to tackle the global economic crisis that continues to gather in fury, despite what some dewy-eyed optimists might say, as well as putting in place the preconditions to ensure that the current crisis is never repeated. Don't count on it. The one-day meeting will issue a communique that is all sweetness and light, to be sure, but don't expect the problems facing the world economy to be solved on Thursday.
A critical reason why this meeting cannot solve the problems facing global capitalism, other than the absurdly short period of time that the leaders are willing to devote to the problems at hand, is that the key leaders of the most important developed capitalist countries do not agree about what has caused the crisis. There is a fundamental division between the Anglo-Saxon economies--the US, Canada and the UK--and the 'social market' economies--notably France and Germany--about why this crisis has emerged. Don't get me wrong: all 5 countries agree that the crisis has been propelled by the excessive risk-taking of US finance capital. Where they differ is in their understanding of why this propellant has assumed the destructive force that it has.
The US and British position is one that is probably most widely trotted out by the English-dominated global financial media. For Barack Obama and Gordon Brown the key problem facing the global economy has been the seizing up of the financial markets as a consequence of a 'flight to safety' engendered by the collapsing value of 'toxic assets' such as 'collateralized debt obligations'. The answer, then, is to pump money back into the system in order to get banks in particular but also non-bank financial institutions to start to lend money and advance credit again. Public sector deficits--like those created by Barak Obama's US$787 billion stimulus bill--and looser monetary policy--like the Bank of England's adoption of 'quantitative easing' to put more money into the economy, and thus ease the availability of money, and hence of lending--are the way to kick-start a financial sector that is right now unwilling to take chances to start taking chances again, lend, and get the US and world economy moving again.
The French and the Germans have a very different view. For Angela Merkel and the French policy-making elite, the problem is not too little money; it was the fact that there was too much money sloshing around the global financial system. For the French and the Germans, the response of the US Federal Reserve, under the then Chairmanship of Alan Greenspan, to the last 2 significant global events in finance--the 1997 Asian crisis and the financial impact of the terrorist attacks of 9/11--was to loosen up the availability of money in order to keep the financial markets working. This loosening encouraged excessive risk-taking on the part of global finance capital, in pursuit of profit-driven growth that was by definition unsustainable. In this view, the chickens were bound to come home to roost, and they have, with a vengence.
It's going to be hard for Angela Merkel and Barack Obama to reach agreement when they don't even agree as to what caused the problems in the first place. But here's the rub: they're both wrong. Both the Anglo-Saxons and the social market economies fail to grasp the essential characteristics of the crisis of global finance capital: finance capital has become steadily and increasingly divorced from the 'real' productive economy that produces the goods and services that people need. Moreover, in becoming divorced, global finance capital has contributed to the crisis in global manufacturing: a crisis that is well-documented to be threatening the Detroit car industry, to be sure, but which is the result of widespread, deeper, structural and systemic problems. The branch of global productive capital that makes the goods and services that people actually need has yet to find a convincing way out of the productivity and profitability-driven crisis that was unmasked in the 1970s. Finance capital, which was supposed to help sustain profits in the productive economy, has not helped; in many cases, realizing there was not enough money to be made by the 'Masters of the Universe' in the productive economy they have invented new and more esoteric ways of trying to make paper profits on the back of an inability to produce anything of worth to anybody in need. The global economic crisis has been driven by finance capital becoming increasingly divorced from the reality facing the productive economy, and the only way of dealing with the long-term issues created by the crisis and maintaining capitalism as a viable mode of social and economic organization will be to re-connect finance to industry--there is a need to shorten up and tighten the chain between credit and creditor.
The Anglo-Saxon economies want the developed capitalist and developing capitalist countries to do more, in terms of spending, to try and address the crisis. The social market economies want greater regulation of global finance. Both answers only go part of the way to addressing the problems of the global economy; more spending, yes, but redistributive spending that puts money in the pockets of people that actually spend, who tend to be those in the lower 60 per cent of the income distribution. Greater regulation, of course; finance capital cannot be allowed to run rampant. But together they are not enough, given the failure of finance to address the core needs of industry under modern global capitalism.
The communique that is issued on Thursay will praise existing efforts at fiscal stimulus, without committing anyone to more; it will highlight the need to increase financial regulation in the medium-term, which is not the here and now; it will stress the need to clean up bank balance sheets, without making any commitments to nationalization, which at this stage is probably inevitable for some key global institutions; it will lambast protectionism, even though in the months following the last G20 meeting 17 of the 20 countries increased protectionism; and it will give the International Monetary Fund more money, but more money for reasonably well-off developed capitalist countries rather than the developing capitalist countries whose people are, literally, dying as a result of the crisis. None of the core problems facing the G20 will be, in the end, comprehensively addressed. The crisis will continue: for it is a global crisis rooted in the disconnection between finance and production, and in the massive increase in global inequality that such a disconnect has fostered over the last 20 years.
Monday, March 30, 2009
Tuesday, March 3, 2009
global economic crisis and the case for nationalization
March 1 2009 was an awful day on financial markets around the world. The economic crisis that erupted into the public eye on September 15 2008, and which fundamentally transformed the dominant approach to governing neoliberal capitalism in the developed capitalist countries, is deepening. Let there be no doubt: things will get worse, because this crisis has been a long time coming. Over the course of this decade the developed capitalist economies allowed current account deficits to build up, in large part because they imported consumer goods from China to a far greater degree than they were exporting to the rest of the world. Normally, such a deficit would have put pressure on currencies: but with the Chinese accumulating foreign exchange reserves, this safety valve did not work. China thus sustained global imbalances.
At the same time the developed capitalist economies let investment outpace the savings needed to pay for the investment; in the US in particular, savings rates are dismal. Notwithstanding the creation of ‘innovative’ financial products designed to attract savings (such as sub-prime mortgages) but which instead turned into ‘financial weapons of mass destruction’, to borrow Warren Buffet’s phrase, investment was financed by attracting inflows of capital into the US from the oil producers, China and other developed capitalist economies. Such inflows were never sustainable in the long term without major adjustments in the US economy. Moreover, that investment that did take place was often channelled into unproductive residential construction rather than productive capacity expansion. Similar patterns were witnessed elsewhere: the UK, Ireland and Spain come to mind. The developed capitalist economies did not enhance the productivity of capital but rather allowed financial accounting profits to boom.
Concurrently, governments in the developed capitalist economies, most notably the US under George Bush, introduced government spending and taxation policies that reinforced the consumer-led boom that they were creating. By not considering the relationship between spending and taxes, governments produced a slide into budgetary deficits that will only be corrected through, at some point, a severe structural adjustment.
Capping all this was business. Finance capital was neither regulated nor supervised, allowing credit and house-price booms, booms that morphed into bubbles that were sustained by flows of Chinese money into the US dollar and into US Treasury bills. Companies became even more led by the short-term dictates of senior managers that had to show ever-increasing profits and dividends to major shareholders. In order to do this, increasingly private capital started engaging in financial activities of questionable morality. They did this because the ethics of business during the decade deteriorated behind the mask of ‘corporate social responsibility’, encouraging corruption on a scale that, in the Madoff affair, is historically unparalleled. This is the world that we have allowed to be created in the early years of the 21st century.
The inauguration of Barack Obama and the introduction of his economic recovery plans have not stopped the rot, as witnessed by yesterday’s chaos on global financial markets. In the last few weeks the deepening crisis of the American and British financial sectors in particular has led to widespread speculation that in both the US and the UK there is going to have to be some kind of nationalization of it. Nationalization is needed because certain banks, particularly in the US and the UK but also in other parts of Europe are all but insolvent, having too little capital and too many bad debts. They will go under unless taken over by the government, and, in the eyes of many, they cannot be allowed to go under, because the web of finance capital is so tightly interwoven into the interstices of our society that their failure might threaten the very viability of capitalism as a mode of organizing social and economic life. In a very real sense, banks such as Citigroup are ‘too big to fail’.
Of course, nationalization has already, to a degree, happened, if we define nationalization as the systemic transfer of the ownership of assets from the private to the public sector: the UK government owns 95 per cent of the Royal Bank of Scotland, all of Northern Rock, and in the US the government already controls 36 per cent of Citigroup, with probably more to come. Around the world major financial institutions now rely on large amounts of taxpayer money. Increasingly, government is needed to save capitalism from itself.
In the US in particular nationalization is viewed with dismay by many as a harbinger of ‘socialism’. Despite the fact that Alan Greenspan, the former Chairman of the US Federal Reserve, whose belief in the self-regulating power of the market set the tone for the excesses of the decade, now believes that nationalization may be necessary, and despite the fact that some Republicans in the US Congress believe nationalization is needed, there is still reluctance to bite the bullet. Ben Bernanke, Greenspan’s successor as Chairman of the Fed, has been at pains to claim that nationalization is not on the cards: but he has defined nationalization as governments seizing banks and starting to directly run them. This is definitely not on the table: if nationalization occurs, it will see governments around the world stepping in to temporarily take over financial institutions in order to clean up their balance sheets and make them viable once more, before eventually privatizing them. Social democratic Sweden of the 1990s is the model for the policy-makers advocating this kind of intervention, for this is exactly what Sweden did.
In the developed capitalist economies there is a fundamental belief that private capital does a better job of allocating financial and physical resources than governments using state-owned enterprises to pursue a set of economic objectives. This is the reason that private ownership in developed capitalist economies is preferred to public ownership--nationalization--by the government. However, the supposed benefits of having private capital dominating business decision making in developed capitalist economies are not what they seem. I can think of 4 supposed benefits from having private capital dominate the business affairs of the developed capitalist economies:
1. Private firms have to respond to market demand for their goods and services, which means that firms must respond to the preferences of consumers. Government companies, subsidized by the state, do not have to respond to consumers. Allowing consumers to express choice fosters competition between private firms and in so doing increases efficiency, leading to the creation of more goods and services for everyone than would be the case if state-owned enterprises dominated the developed capitalist economies.
However: the efficiency of capital has nothing to do with the ownership of capital. Efficiency, which should be sought, requires competition; many private sector companies operate in oligopolistic markets with only a few rivals, with whom they often collude implicitly and explicitly. When this happens, private capital does not have to respond to the needs of consumers any more than monopolistic state-owned enterprises have to respond to the needs of consumers. In this instance, it is the lack of competition that precludes efficiency improvements, not ownership.
2. Private capital cuts government interference in the economy.
However: private capital has to be heavily regulated, in order to prevent oligopolistic abuses of corporate power, and such regulations represent government intervention in the day-to-day running of capital. Indeed, the history of the decade is that regulation has to be substantially enhanced if the abuses of the past few years are not going to be repeated. Private capital and state-owned enterprises are both subject to government regulation.
3. Private capital has to raise investment capital on financial markets, and to do this they must secure the confidence of financial markets that they are well run and effective in the markets in which they operate. State-owned firms, on the other hand, can raise money from governments and do not have to demonstrate to disciplinary financial markets that they are well run.
However: investment capital from financial markets for private capital may not be available to firms seeking to make long-term investments because of the short-run profit-obsessed time horizon of the financial markets. The lure of quick returns for the financial markets got us into this mess; it also guides how they allocate money to private capital.
Which means that: financial markets cannot be relied upon to make good decisions about the investment needs of private capital.
Moreover: in many instances private capital does not turn to financial markets to raise investment capital; instead, they reinvest their profits. This source of finance is available regardless of the character of corporate ownership.
Finally: in some countries the only reason state-owned enterprises cannot not raise investment capital in financial markets is because of government regulations which prevent them from doing so. This need not be the case, in which financial markets can still discipline the activities of state-owned enterprises. Suggestions by some that state-owned enterprises, by competing for investment capital with private capital, ‘crowd out’ investment, have been demonstrated to not be true.
4. While private capital does not require government resources, state-owned enterprises do. State-owned enterprises therefore increase government spending, weakening monetary policy and forcing central banks to set higher interest rates in order to sustain monetary policy.
However: if private capital does not invest in expanding productive capacity, as was the case during this decade, growth will eventually deteriorate because of a lack of corporate investment, with implications for jobs, equity and social justice.
It is clear to me that the case in favour of the private ownership of capital is not what it is made out to be. There is a strong case that can be made that the financial system as a whole should be treated as a public utility, in which the distribution of investment capital would be done on the basis of democratically-established criteria. This would of necessity involve controls on the international movement of capital and controls over the pattern and pace of investment within a country. As Leo Panitch and Sam Gindin have recently noted, ‘the point of making finance into a public utility is to transform the uses to which it is now put.’
At the same time the developed capitalist economies let investment outpace the savings needed to pay for the investment; in the US in particular, savings rates are dismal. Notwithstanding the creation of ‘innovative’ financial products designed to attract savings (such as sub-prime mortgages) but which instead turned into ‘financial weapons of mass destruction’, to borrow Warren Buffet’s phrase, investment was financed by attracting inflows of capital into the US from the oil producers, China and other developed capitalist economies. Such inflows were never sustainable in the long term without major adjustments in the US economy. Moreover, that investment that did take place was often channelled into unproductive residential construction rather than productive capacity expansion. Similar patterns were witnessed elsewhere: the UK, Ireland and Spain come to mind. The developed capitalist economies did not enhance the productivity of capital but rather allowed financial accounting profits to boom.
Concurrently, governments in the developed capitalist economies, most notably the US under George Bush, introduced government spending and taxation policies that reinforced the consumer-led boom that they were creating. By not considering the relationship between spending and taxes, governments produced a slide into budgetary deficits that will only be corrected through, at some point, a severe structural adjustment.
Capping all this was business. Finance capital was neither regulated nor supervised, allowing credit and house-price booms, booms that morphed into bubbles that were sustained by flows of Chinese money into the US dollar and into US Treasury bills. Companies became even more led by the short-term dictates of senior managers that had to show ever-increasing profits and dividends to major shareholders. In order to do this, increasingly private capital started engaging in financial activities of questionable morality. They did this because the ethics of business during the decade deteriorated behind the mask of ‘corporate social responsibility’, encouraging corruption on a scale that, in the Madoff affair, is historically unparalleled. This is the world that we have allowed to be created in the early years of the 21st century.
The inauguration of Barack Obama and the introduction of his economic recovery plans have not stopped the rot, as witnessed by yesterday’s chaos on global financial markets. In the last few weeks the deepening crisis of the American and British financial sectors in particular has led to widespread speculation that in both the US and the UK there is going to have to be some kind of nationalization of it. Nationalization is needed because certain banks, particularly in the US and the UK but also in other parts of Europe are all but insolvent, having too little capital and too many bad debts. They will go under unless taken over by the government, and, in the eyes of many, they cannot be allowed to go under, because the web of finance capital is so tightly interwoven into the interstices of our society that their failure might threaten the very viability of capitalism as a mode of organizing social and economic life. In a very real sense, banks such as Citigroup are ‘too big to fail’.
Of course, nationalization has already, to a degree, happened, if we define nationalization as the systemic transfer of the ownership of assets from the private to the public sector: the UK government owns 95 per cent of the Royal Bank of Scotland, all of Northern Rock, and in the US the government already controls 36 per cent of Citigroup, with probably more to come. Around the world major financial institutions now rely on large amounts of taxpayer money. Increasingly, government is needed to save capitalism from itself.
In the US in particular nationalization is viewed with dismay by many as a harbinger of ‘socialism’. Despite the fact that Alan Greenspan, the former Chairman of the US Federal Reserve, whose belief in the self-regulating power of the market set the tone for the excesses of the decade, now believes that nationalization may be necessary, and despite the fact that some Republicans in the US Congress believe nationalization is needed, there is still reluctance to bite the bullet. Ben Bernanke, Greenspan’s successor as Chairman of the Fed, has been at pains to claim that nationalization is not on the cards: but he has defined nationalization as governments seizing banks and starting to directly run them. This is definitely not on the table: if nationalization occurs, it will see governments around the world stepping in to temporarily take over financial institutions in order to clean up their balance sheets and make them viable once more, before eventually privatizing them. Social democratic Sweden of the 1990s is the model for the policy-makers advocating this kind of intervention, for this is exactly what Sweden did.
In the developed capitalist economies there is a fundamental belief that private capital does a better job of allocating financial and physical resources than governments using state-owned enterprises to pursue a set of economic objectives. This is the reason that private ownership in developed capitalist economies is preferred to public ownership--nationalization--by the government. However, the supposed benefits of having private capital dominating business decision making in developed capitalist economies are not what they seem. I can think of 4 supposed benefits from having private capital dominate the business affairs of the developed capitalist economies:
1. Private firms have to respond to market demand for their goods and services, which means that firms must respond to the preferences of consumers. Government companies, subsidized by the state, do not have to respond to consumers. Allowing consumers to express choice fosters competition between private firms and in so doing increases efficiency, leading to the creation of more goods and services for everyone than would be the case if state-owned enterprises dominated the developed capitalist economies.
However: the efficiency of capital has nothing to do with the ownership of capital. Efficiency, which should be sought, requires competition; many private sector companies operate in oligopolistic markets with only a few rivals, with whom they often collude implicitly and explicitly. When this happens, private capital does not have to respond to the needs of consumers any more than monopolistic state-owned enterprises have to respond to the needs of consumers. In this instance, it is the lack of competition that precludes efficiency improvements, not ownership.
2. Private capital cuts government interference in the economy.
However: private capital has to be heavily regulated, in order to prevent oligopolistic abuses of corporate power, and such regulations represent government intervention in the day-to-day running of capital. Indeed, the history of the decade is that regulation has to be substantially enhanced if the abuses of the past few years are not going to be repeated. Private capital and state-owned enterprises are both subject to government regulation.
3. Private capital has to raise investment capital on financial markets, and to do this they must secure the confidence of financial markets that they are well run and effective in the markets in which they operate. State-owned firms, on the other hand, can raise money from governments and do not have to demonstrate to disciplinary financial markets that they are well run.
However: investment capital from financial markets for private capital may not be available to firms seeking to make long-term investments because of the short-run profit-obsessed time horizon of the financial markets. The lure of quick returns for the financial markets got us into this mess; it also guides how they allocate money to private capital.
Which means that: financial markets cannot be relied upon to make good decisions about the investment needs of private capital.
Moreover: in many instances private capital does not turn to financial markets to raise investment capital; instead, they reinvest their profits. This source of finance is available regardless of the character of corporate ownership.
Finally: in some countries the only reason state-owned enterprises cannot not raise investment capital in financial markets is because of government regulations which prevent them from doing so. This need not be the case, in which financial markets can still discipline the activities of state-owned enterprises. Suggestions by some that state-owned enterprises, by competing for investment capital with private capital, ‘crowd out’ investment, have been demonstrated to not be true.
4. While private capital does not require government resources, state-owned enterprises do. State-owned enterprises therefore increase government spending, weakening monetary policy and forcing central banks to set higher interest rates in order to sustain monetary policy.
However: if private capital does not invest in expanding productive capacity, as was the case during this decade, growth will eventually deteriorate because of a lack of corporate investment, with implications for jobs, equity and social justice.
It is clear to me that the case in favour of the private ownership of capital is not what it is made out to be. There is a strong case that can be made that the financial system as a whole should be treated as a public utility, in which the distribution of investment capital would be done on the basis of democratically-established criteria. This would of necessity involve controls on the international movement of capital and controls over the pattern and pace of investment within a country. As Leo Panitch and Sam Gindin have recently noted, ‘the point of making finance into a public utility is to transform the uses to which it is now put.’
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