IMF turmoil adds to sense of crisis

At another time, the fate of the head of the International Monetary Fund would not have mattered too much. But photos of Dominque Strauss-Kahn being led away in handcuffs by New York police have unsettled global markets.

And with good reason. The IMF, along with the European Union and the European Central Bank (ECB) is centre stage in a drama that has all the makings of an unravelling of the global financial system that would put the 2008 crisis in the shade.

Strauss-Kahn was due to hold talks in Europe today over the details of financial support to Portugal, which faces state bankruptcy, and about Greece, which is heading for default on its foreign debt despite a huge bail-out last year. Instead, Strauss-Kahn is due in court to face sex allegations relating to a hotel maid.

Most economists believe that Greece will default, with some loans having to be written off and longer repayments granted for the remainder. But the implications of such a move are so serious that Strauss-Kahn and European leaders like Germany’s Chancellor Merkel were desperate to find another solution.

Earlier this month, José Manuel González-Paramo, an ECB executive board member, said a Greek debt restructuring would be a disaster for the eurozone. There would also be knock-on effects on the balance sheets of banks in France, Britain and Germany that hold Greek debt. The risk premium demanded on Greek debt by international investors has rocketed.

"A restructuring would have legal and systemic consequences that are difficult to calculate right now but would in all probability be bigger than after the collapse of Lehman Brothers," he said. Just in case anyone needs reminding, when Lehman Brothers filed for bankruptcy in September 2008, it triggered a seizure at the heart of the global financial system and led to the deepest recession since the 1930s.

Greece’s predicament is just one of the consequences. Despite massive cuts in public spending - average pensions were cut by over 20% last year and civil servants wages slashed by 15% - the government’s deficit has actually risen because the recession has reduced tax and other revenues.

The country's debt has spiralled to 142% of national income. Portugal's total has reached 93% of GDP. Britain's annual debt of 10.5% last year pushed its total to 80%, compared with Germany's 83% and France's 82%. Greece’s Socialist Party government has announced plans to cut an extra €23bn in expenditure by 2015 and privatise €50bn in public assets, leading to threats of more strikes. There have been nine general strikes in the last 12 months.

At moments of crisis, the role of individuals like Strauss-Kahn – who played a key role in brokering help for Ireland, Portugal and Greece – is critical. So the enforced absence of the head of the IMF is not exactly what global capitalism was looking forward to this week.

As a former French finance minister, Strauss-Kahn personally knew most of the key leaders and officials managing the crisis. He was also due to challenge Nicolas Sarkozy for the French presidency next year on behalf of the country’s Socialist Party. That now seems improbable, leaving Sarkozy to walk home.

And if you think the financial crisis is confined to Europe, think again. President Obama has called on Congress to raise the upper limit on the federal deficit, which is currently running at $14 trillion a year. Yesterday he warned that if investors "around the world thought the full faith and credit of the US was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system".

If you’ve got any spare cash, it might be a good time put find a suitable mattress.

Paul Feldman

Communications editor

Ireland and Britain in the same boat

You would be wrong if you thought that Ireland’s banking and budget crisis that has all but overwhelmed the country’s government, couldn’t repeat itself in Britain. In fact, the two countries’ fates are inextricably linked.

Ireland’s banks are essentially insolvent. They don’t have the money to cover the write-offs of loans to property developers that have gone sour. And the Irish government doesn’t have the money to bail them out. That’s why Dublin has had to bite the bullet and go cap in hand to the European Central Bank (ECB) and the International Monetary Fund (IMF).

The price to be exacted for a bail-out is destined to fall on the backs of Ireland’s workers. Public sector workers have already had their wages reduced by 15%. Further cuts are planned, along with tax rises and a reduction in the minimum wage, plunging the economy into even deeper crisis.

British banks have a massive exposure to debt-ridden Ireland. According to the latest figures, their total lending to Irish households and companies totals a mammoth £140 billion. The Royal Bank of Scotland, which is largely owned by the British taxpayer, is the most exposed at £54.4 billion, a third of which is residential mortgages.

Clearly, British banks are going to have go whistle for most of these loans, which explains why coalition chancellor George Osborne is so keen to lend Ireland billions (which would have to be borrowed as the British exchequer’s coffers are largely empty too).

It gets worse.

British banks, like their Irish counterparts, are also insolvent, despite commitments from the state amounting to £1.2 trillion following the global financial meltdown of 2008. A recent report by the New Economics Foundation, Where did our money go? warns:

“Based on Bank of England data, banks now appear to face a funding cliff. In order to maintain existing levels of activity they currently have to borrow £12 billion a month; the projections we reproduce in this report indicate that in 2011 they will have to borrow £25 billion a month. We believe the public sector is likely, once again, to be asked to bail out the banks for the emerging funding gap.”

Other analysts suggest that British banks will require another £1 trillion in 2011 as existing loans mature and need refinancing. There is no way that the Lib-Con coalition can stump up this kind of money, despite the savage cuts in public expenditure planned for the next four years. The banking system all but failed in 2008 – it may well do this time around.

Those who still insist that the crisis is largely “ideological” had better wise up. There is an objective, evolving global crisis of the capitalist economic and financial system. It is having a direct impact on governments, tearing them apart as in Ireland or rendering them helpless and ineffective as in Washington.

The bail-outs of 2008 only postponed matters. Mountainous debts and valueless securitised assets dominate the balance sheets of the banks. As the IMF-ECB team will insist in Ireland, those who work, add value and are the source of profits will be told they have to sacrifice their living standards and futures so the bankers can survive for another day.

Quite simply, it’s a price not worth paying. A revolutionary reorganisation of society on both sides of the Irish Sea, restarting the financial system on a new, co-operative basis, is rapidly becoming the only practical alternative


Paul Feldman
Communications editor

Banks star in the 'Great Escape'

When President Obama informed the White House press corps yesterday that he would shortly sign into law a package of measures that would ensure that the financial collapse of 2008 could not happen again, he was promising something he could not possibly deliver.

Congress has created a compromise bill that is so cumbersome that many critics see it as unworkable; it has nothing to say on “leverage” or borrowing to fund speculation; plans to break up big banks are on the back burner; and the United States has no international agreement on its approach.

In the meantime, the conditions that gave rise to the global financial crash of 2008 remain very much in place, with warnings that a new bubble is ready to burst. The system remains weighed down by debt at every level – financial, state and household.

Congress has created more than 2,300 pages of new regulations, which will be supplemented by more than 250 rule-making interpretations. Words and no teeth, according to investment adviser Terry Savage, who says: “Yet when it came to the basics, like requiring brokers to act as ‘fiduciaries’ – putting their client's interests ahead of their own and fully disclosing any conflicts – this simple act was consigned to a ‘study group”. And when it came to prohibiting the banks' risky activities … the law will take as long as 10 years to fully go into effect.”

Even the Financial Times views the new legislation as relatively harmless. Senior writer John Authers, whose new book is a gripping tale called The fearful rise of markets, writes: “After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago, it looked as though the Great Re-regulation might turn into a Great Revenge, as politicians planned to squeeze the banks. Now, for the banks it begins to look like a Great Escape.”

First Goldman Sachs was fined just $550 million for betting against itself with no admission of guilt. This is just three days’ revenue for the investment bank and reflects the power of Goldman Sachs, whose former employees include the treasury secretary Timothy Geithner.

Authers, whose book warns that the rise in markets in the last year has no connection with reality, admits that the bill Obama is about to sign does not tackle the “central issue of leverage”, through which banks and others borrowed to multiply many times over the effect of their investments – and their eventual losses.

His concern at the political failure is barely disguised: “Having toyed with going too far, politicians and regulators have not gone far enough in the needed re-regulation. That is worrying for the long-term health of the financial system, but good for shareholders in financial stocks.”

Meanwhile, at a global level the story is more or less the same. The Bank for International Settlements (BIS) is drafting new rules about the levels of capital that banks should have. But all the indications are that attempts to raise thresholds to curb excessive and speculative lending will be omitted when the BIS publishes its proposals later this year.

The moral of the story is this: politicians can huff and puff all they want and play to the public gallery over the banks. But when it comes to the crunch, the capitalist state is under the thumb of financial markets that have a compelling logic, life and power of their own as Greece, Ireland and Spain have already found out. Despite bailing out the banks, he who pays the piper does not, in this case, call the tune.

Paul Feldman

Communications editor

The truth behind Brown's boom

A committee of MPs today blames the “reckless behaviour” of the banks for the financial crisis, which is as neat a way of any of letting the New Labour government off the hook as any yet devised.

The Treasury committee’s view of the collapse of the financial system is partial and one-sided and a bit short on history. If the banks were reckless – and they were – it was because they were encouraged to be so. And no one in government complained as the tax receipts rolled in, especially not Gordon Brown who was chancellor for the decade when the credit-fuelled boom took off.

Why were the banks “reckless” and take extraordinary risks with their lending? That is the question. Why, as the committee asks, did bankers make “an astonishing mess of the financial system”? The answer usually given is that they were “greedy” and simply loved piling up the bonuses and forgot to look out for tomorrow.

That doesn’t really get below the surface, however, and puts the collapse of the global financial system down to a few badly-behaved individuals. The real truth is that the so-called boom Britain has experienced was only made possible by a massive extension of credit (and its opposite, debt) under the direction of the government.

It is not that Brown did not know what was going on. His government actively encouraged London to become one of the centres of fantasy finance, which inevitably contributed to the series of bubbles that have now burst and broken the back of the global economy in the process.

Verification of this comes from the Institute of Fiscal Studies, whose director Robert Chote, shows how the Treasury actually knew that the boom was not what it appeared to be. Between 1998 and 2008, output in the economy was 3-4 per cent above its sustainable level, he estimates, in what he calls “an alternative view of history”.

This view, he said, would “cast a much less flattering light” on Brown’s record as chancellor. “It would certainly suggest that he should have been running a much stronger fiscal position.” In plain English, Brown’s officials suspected it would end in tears, and should have reined in spending, but decided to keep the illusion going in the hope that the days of boom and bust were a thing of the past.

Chote explains how much of the so-called boom actually amounted to an increase in share and house prices, which people cashed in on to fuel consumer spending on imports. Yet this activity was treated as if it were a sustainable growth in the real economy. Apparently, the Treasury is now rewriting history to try and disguise what happened.

Of course, the banks contributed. Why shouldn’t they have? They are in business to make money and if that could be done by recycling dodgy loans as securities, creating more and more complex ways of moving funds around the globe, increasing profits as they went, they knew that the government was behind them all the way, to the point where Brown told them in June 2007 that they had created a new “golden age” in the City.

Ultimately, the banks and the government responded to the fact that the only way that the expansion of the goods-producing side of the global economy could be maintained was through greater and greater amounts of fictitious or fantasy finance. The collapse of one has revealed the massive over-capacity and over-production in the other, which is why trade has collapsed around the globe. Global capitalism as a whole is unsustainable any way you look at it and the best way to mark May Day is to renew our efforts to put it out of its misery.

Paul Feldman
AWTW communications editor

The horse has bolted

Current and former leaders of global agencies are leap-frogging each other with increasingly dramatic attempts to give expression to the scale and rapidity of the disintegration and collapse of the world’s financial and economic systems. Their warnings contrast sharply with the feeble efforts of national government agencies like the UK’s Financial Services Authority (FSA).

Michel Camdessus, former managing director of the International Monetary Fund (IMF) went large last week, declaring: “This crisis is the first truly universal one in the history of humanity. No country escapes from it. It has not yet bottomed out.” He was foreshadowing yet another of the IMF’s series of ever-more pessimistic forecasts published yesterday that calmly predicts that the global economy will contract this year for the first time since World War II.

Moreover, the impact in the UK will be more severe than in any other developed capitalist economy, the IMF warns. Figures on public finances confirm a rapid spiralling of state debt in the wake of the financial crisis, mounting unemployment and collapsing tax revenues. Next year, the IMF estimates that the Treasury will have to borrow a record 11% of gross domestic product – far more than has ever been borrowed before in British history and higher as a proportion of national wealth than in the United States.

Camdessus’s observation makes the otherwise stunning admission in the opening sentences of the report on the global banking crisis from Lord Turner, head of the FSA look pretty tame in comparison. “Over the last 18 months, and with increasing intensity over the last six, the world’s financial system has gone through its greatest crisis for at least half a century, indeed arguably the greatest crisis in the history of finance capitalism,” he writes.

After pointing the finger at New Labour for promoting “light touch regulation”, Turner admits that markets are irrational but then insists it’ll be OK, apparently, if we tighten regulations this time around. A phrase about shutting stable doors after the horse has bolted springs to mind.

In common with most observers and analysts, Turner mistakenly attributes the global production shutdown, with unemployment spiralling to new records in every country, to bad behaviour in the world of finance. The real source of the crisis actually lies in the system of capitalist production whose expansion is founded on debt of all kinds.

Following the 1929 crash, despite multiple failed attempts at government intervention, the crisis stretched throughout the 1930s becoming known in retrospect as the Great Depression. The Second World War reduced the no longer profitable pre-war surplus productive capacity to rubble and bloody corpses.

Then, and only then, credit expansion freed the insatiable self-movement of capital expansion in post-war spurts of growth. These produced the transnational corporations, built on cheap labour and the wreckage from a series of worsening crises, and spawned the global financial system which has now disintegrated.

Turner wants to get the carnival back on the road, replaying the same show, saying that the global economy needs “the existence of large complex banking institutions providing financial risk management products” which “inevitably involve at least some position taking”.

This is wishful thinking. The crisis is incomparably deeper than any other time in history partly because no-one knows the size of the balloons of credit which have yet to burst and the real state of bank finances. For example, no one in government can actually account for the vast sums allocated to bank bail-outs in America and the UK. They have disappeared into a financial black hole.

There’s an opportunity to discuss non-capitalist solutions and policies for this dangerous crisis at LEAP’s Capitalism isn’t Working conference next month.
.
Gerry Gold
Economics editor