Credit crisis back with a vengeance as Bankia's customers take a hit

This column doesn’t usually express much sympathy with shareholders because a share gives the right to profits derived from other people’s labour. But the plight of shareholders in the Spanish bank, Bankia, requires us to make an exception.

Though shareholding in a joint-stock company predated the advent of capitalist production, it became one of its defining characteristics. To be a shareholder in an enterprise is, in fact, to be a capitalist.

These day, shareholders tend to be major financial institutions who’ve used their inflated holdings of other people’s cash to obtain part-ownership of global corporations. The day of the small shareholder has vanished, replaced by pension funds, sovereign wealth funds and the like.

These globalised ownership structures exist solely to extract value from the labour of people working on the production lines. These range from the sweatshops of low-wage countries like China, Latin America, Bangladesh, the Philippines to advanced, hi-tech production in Britain, the United States Europe and Japan.

We tend to worry even less about the fate of shareholders in banks, who hope and expect to become rich making money out of making money. 

Bankia, with Rodrigo Rato, former managing director of the International Monetary Fund as its chairman, was formed in 2010 from seven regional savings banks, following the global financial crash of 2007-8. All were dangerously exposed to the collapse of the property market.

As of 2012, when it was nationalised to prevent its collapse, Bankia was the fourth largest bank of Spain with 12 million customers. On the 25 May 2012, it requested a bailout of €19 billion, the largest bank bailout in the nation's history. Rating agency Standard & Poor reduced its credit rating to “junk” status, along with several other Spanish banks.

In 2011 the bank had offered shares for sale with the expectation of attracting new capital from international institutional investors. They wisely stayed away.

So the bank turned to its customers for help.

Hundreds of thousands of ordinary people who had their savings deposited in the bank were persuaded, or rather tricked, into exchanging their savings for shares.

The scale of Bankia’s losses mounts with every new assessment. The latest figure for 2012, published in March this year, puts it at €19.06 billion, the largest corporate loss in Spanish history.

Yesterday, for the first time, the savers-turned-shareholders were able to put their shares up for sale. They got a terrible shock. The price of shares on the Madrid stock exchange dropped like a stone. The bank had lost 99% of its value since it first entered the market less than two years ago.

The life savings of so many families have been wiped out. Completely.

This catastrophic collapse of value so far affects just a small part of the vast overhang of credit and debt left high and dry by the effects of the end of the post-war growth, seen most painfully in the receding European economy.

There’s much more to come. Bad debt has driven Slovenia’s economy into a recession. This afternoon infamous troika – the European Commission, the European Central Bank and the International Monetary Fund – will respond to Slovenia’s plan for bank recapitalisation costing €900m and a planned record sale of state assets.

But that’s a tiny amount compared to the spiralling, out-of-control credit crisis in China, without which even its slowing rate of economic growth would be impossible to maintain.

According to JPMorgan Chase unregulated, “shadow banking” is as large as 36 trillion yuan ($5.86 trillion). That’s equivalent to 69% of China’s gross domestic product and almost double what it was two years earlier.

The credit crisis which exploded in 2007-8 giving way to a global slump is far from over.  Very far. A renewed global crash can’t be far away. Bankia’s victims are amongst the first to feel its effects.

Gerry Gold

Economics editor

System overload brings meltdown closer

Screaming headlines and scary language convey the immediacy of a renewed economic collapse as financial markets demand political solutions to a runaway debt crisis on both sides of the Atlantic.

According to the International Monetary Fund there is now "serious risk" of eurozone contagion with "large" potential knock-on effects worldwide. "Market participants remain unconvinced that a sustainable solution is at hand."

An emergency meeting of European presidents and prime ministers has been called for tomorrow to try and head off the break-up of the eurozone single currency.

According to the Daily Telegraph’s Ambrose Evans-Pritchard: “Only Germany can save EMU as contagion turns systemic.” He says “Europe's leaders have finally run out of time…. they risk a full-fledged run on South Europe's bond markets and a disorderly collapse of monetary union.”

But Germany’s banks are already heavily exposed to Greek debt and helping Greece would only serve to accelerate the spread of the contagious crisis throughout Europe. Now Portugal’s new government has discovered a gaping hole in the country’s finances, just as Papandreou’s PASOK administration did when it came to power.

Leading business commentator Jeremy Warner does not mince his words: “Financial confidence is again fast evaporating, threatening to plunge the world back into deep recession and some of the hardest times since the 1930s. This might sound unduly apocalyptic, but not since the depths of the banking crisis have conditions looked as perilous as they are today.”

While the failure to resolve Greece’s debt crisis would detonate a global explosion, the much bigger Spanish and Italian economies are under attack by market speculators.

Spain’s cost of borrowing has followed Italy’s soaring rates to unsustainable levels as investors demand higher and higher rates to cover the mounting risk of default. But compare their single digit rates to the punishing greater than 20% now demanded from Portugal and Greece.

Using the terminology of war, global bond trader Pimco says a plan of "overwhelming force to let the markets know that once and for all you’re putting out the fire" in Europe, should start with letting Greece, Portugal and Ireland default.

Attempts to break the US impasse grow ever more desperate as the August 2 deadline for raising its self-imposed $14 trillion debt ceiling approaches. The Financial Times warns that the “US faces economic suicide if spending isn’t restrained”.

President Obama has embraced the latest plan from the bipartisan “Gang of Six” which would sacrifice health and welfare and lead to a dramatic increase in unemployment. Yet there is doubt whether the political will exists for the Republicans to sign up to the deal.

So what of the UK? With the worst ratio of combined public and private sector debt to national income of the world’s developed economies, it is the most vulnerable to a renewed global recession, which would turn to depression immediately.

Says Warner: “The deleveraging [debt write-off] pressures are at their most acute in the[UK] banking sector, where bad debts and higher capital requirements are driving a sustained contraction in available credit. To meet these higher capital requirements, banks must either increase the cost of credit, so as to attract the necessary equity, or significantly reduce the size of their balance sheet.”

As the panic begins, the solutions being promoted become more extreme every day. No manufacturer can avoid the inevitable consequences of a sharp reduction in production. Whilst previously confident global corporations proclaim their prospects for growth to retain shareholders’ loyalty, in the shadows they are taking every opportunity to “restructure”.

Millions of people across the globe are determined that they can’t and won’t bear the costs of the systemic implosion engulfing the capitalist system. The revolutionary wave that began in Tunisia and Egypt is gathering pace as people become ever more impatient with the pace of change.

In town and city squares new democratic forms are in formation that can replace the discredited political systems. The creative genius of the people must now turn to seizing the resources of the system of for-profit corporations that are the source of the crisis and replacing it with a global society producing for need.

Gerry Gold

Economics editor

End of an era

In a talk to black Londoners last night, American-born playwright Bonnie Greer remarked that we are witnessing the end of an era – the age of bling and its associated cultures. She is right. We have reached the end of the age of easy credit and growth-driven consumerism – along with all the illusions that went with it.

The ruling classes hope that the unprecedented £500 billion rescue package and interest rate cut announced by the New Labour government yesterday will stabilise the markets and prevent further gigantic meltdowns. But the biggest banking bail-out ever will certainly not prevent what the International Monetary Fund (IMF) describes as “a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.” As the IMF’s chief economist has said: “The situation is exceptionally uncertain and subject to considerable downside risks.”

The bail-out may provide temporary relief and give Brown some political credibility. But underneath the hopes, everyone is aware that it is a short-term fix which relies on a confidence trick. In reality, bail-outs simultaneously create the basis for even greater defaults – that of entire governments. It is one thing for Iceland or Ireland to underwrite their banks, it is another for Britain or the US. They will also lead to tax increases, inflation and public spending cuts.

J.K Galbraith, historian of the 1929 Wall Street collapse, speculated in his famous book, The Great Crash, whether it would ever be repeated. He concluded that there was a built-in disconnect between a “regulated” form of capitalism and the reality of the markets. As all speculative bubbles have shown, there are no limits to corporate and individual greed, and the willingness of people to take risks. Events today have proved him right.

A crucial difference between 1929 and today, however, is that the forces of globalisation have made it impossible to localise capital or debt. Globalisation has drawn the world’s population together in an entirely new way. It is not an American, British or even Western crisis. The near-collapse of the US mortgage giants, Fannie Mae and Freddie Mac, meant that a fifth of China’s currency reserves were also endangered. In fact, China stands to lose more than any other country for a US financial collapse.

At least one financial journalist has noted the helplessness of governments around the world. Anthony Hilton of the Evening Standard remarked that “no one has ever seen anything like this before, so they are making it up as they go along. As a result much of what they have done so far has contributed to make things much worse.” Hilton proposes that the IMF should be enabled to deal with the crisis as a kind of “neutral” overseer. Governments unable to face financial meltdown on their own, would be backed up by “a global policeman” (Brown’s words). However, the resources of the IMF are puny in comparison with the estimated black hole of $45 trillion in fantasy finance which is haunting the US financial system alone. It is simply impossible for the IMF to stuff the genie of global debt back into the bottle.

People interviewed yesterday in the streets of London expressed their anger at being held responsible for a mess that they had not created. “Let those who made the mess clean it up”, was the reaction of one young worker. Let’s go a step further. Global capitalism’s seismic disarray can only be “cleaned up” by a democratic ownership and control of the financial and economic system itself. Let’s make this the dawn of a new era in which there is a real future for the majority.

Corinna Lotz
AWTW secretary

One law for the rich...

The global credit crisis provides unparalleled opportunities to expose not just the failure of capitalism as an economic and financial system but also to confront governments like New Labour that are desperately trying to keep the show on the road, whatever it takes.

Ordinary people in financial difficulties as a result of losing their jobs, rising loan charges or lack of credit are left to their own devices. They are at the mercy of the very same banks that are being lined up for a massive hand-out. Increasing numbers of people’s homes are being repossessed while the bankers form a queue for state aid. As the old proverb goes, it’s one law for the rich and another for the poor.

The financial meltdown thus has the merit of clearing the air in a political sense. Who can deny now that the New Labour government is a corporate and bankers’ regime, which is deploying the power and resources of the capitalist state to try and save the system from itself? Where are the differences in outlook between New Labour and other capitalist parties like the Tories or Liberal Democrats? You can use a microscope if you want, but you won’t discover anything significant.

In these circumstances, there is absolutely no point in focusing protest and pressure on the New Labour government in the hope that it may somehow, in some miraculous, semi-religious fashion, undergo a conversion and become anti-capitalist. New Labour is what it is and has been since the Blair/Brown/Mandelson counter-revolution that began in the early 1990s. In fact, the cabinet reshuffle has only strengthened its business orientation.

Of course, this situation throws up its own problems. The conventional political approach on the Left has always been to make demands of government, especially ones elected under a Labour banner. As such an approach is today absolutely unrealistic and may even unwittingly reinforce the fast-disappearing credibility of New Labour, a new line of attack is required.

The labour and trade union movement should therefore seize the chance created by the crisis to campaign against the government, in the spirit that workers fought the Callaghan government in 1978-9, whose policies opened the door for Thatcherism (and later, Blairism).

Such a campaign could easily show how the crash of 2008 arises from a system based on the ruthless pursuit of profit and that alternatives are urgently needed. Policies developed in opposition to a bankers’ bail-out would raise the possibility of reorganising the economy along not-for-profit lines. This could best be done by revisiting some well-established principles in the light of conditions transformed by corpoate-driven globalisation.

They could, for example, incorporate new forms of democratic power in opposition to the authoritarian, capitalist state. Democracy could and should be extended through co-operative forms of ownership and workplace control of major corporations, enterprises and services. Restoring the right to strike and freedom for trade unions along with new social rights would be essential. Those Labour MPs like John McDonnell who are opposed to the government, could seize the initiative and demand that trade union leaders adopt this strategy and mobilise their members.

As to who is to implement such a programme, this extremely important question will need to be raised as part of the building of an independent movement against this government and the other parties waiting in line to either take over or join a coalition. As New Labour is patently not the vehicle for revolutionary (or even reformist) change, new political solutions will be elaborated and discovered in the course of building support for the campaign. The importance of taking the first steps along this path cannot be over-emphasised.

Paul Feldman
Communications editor

An 'orderly' failure

Manchester United have a new sponsor this morning – the federal government of the United States of America! Yesterday, the global insurance company AIG was in private hands. This morning, 80% of the shares are owned by the government following a hastily-arranged take-over to prevent the company’s total collapse and a systemic failure of the global financial system.

Such is the measure and speed of the unravelling of the credit crisis that significant financial institutions are passing into the hands of the US government. In a series of desperate moves, Washington has taken control of mortgage lenders Freddie Mac and Fannie Mae. Last night in an extraordinary step, AIG was loaned up to $85 billion in emergency funds in return for a government stake of 79.9%.

George Bush is not going into the insurance business, however, which is just as well for the rest of the planet. AIG will be kept afloat just long enough to sell off its assets and repay the loan. In other words, the objective is orderly liquidation (after which United will need new sponsors). In a statement, the Fed, America’s central bank, said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.

The dramatic moves came after earlier plans for a private sector bail-out were dashed by a further 21% slump in AIG’s shares, reducing the market capitalisation of the biggest insurance company in the world to just over $7.5bn (£4.2bn). AIG’s crisis has nothing to do with ordinary insurance, however. The corporation, which is a pivotal part of the global financial system, has lost billions of dollars on derivatives and mortgage-backed securities and is bankrupt.

And so the great unravelling goes on, with the mountains of fantasy finance created over the last 30 years taking their toll on banks, insurance companies, mortgage lenders and investment houses. Today, Lloyds TSB is arranging a merger with HBOS – whose shares have been driven down on rumours of a crash.

State intervention on both sides of the Atlantic cannot halt, stabilise or reverse this process. The accumulated debts in the financial system – running into thousands of trillions of dollars – are so enormous that they cannot possibly be absorbed through central bank actions. Nor will the crisis unfold in an “orderly” way. It is like the collapse of a house of cards - it has a momentum of its own, which is already taking its toll of jobs, pensions and people’s homes. Official figures released this morning show a leap of 81,000 in UK unemployment in August alone. The subsequent loss of purchasing power will fuel the recession and the drive towards slump.

To sit back and wait for the dust to settle would not only be foolish but irresponsible. The ever-closer alliance between the state and corporate finance has sinister political implications, with its echoes of the 1930s in Germany and Italy. We have to take maximum advantage of the crisis to make the case for revolutionary political and economic changes as the way forward. Our Stand Up for Your Rights festival on October 18 emphasises the need to take control of our lives away from New Labour, the state and the corporations. Register for the festival today!

Paul Feldman
Communications editor

Obama and corporate America

Barack Obama will make history as the first African-American to challenge for the White House. But will the Democratic Party’s nominee for US president have an equally historic impact on the military and corporate power structures that are viewed by many as the country’s shadow government? Indeed, would he want to? All the indications say not.

Obama is riding a wave of attacks on the Bush presidency, for its invasion of Iraq, for its indifference to the fate of ordinary people (as shown in New Orleans after Hurricane Katrina), for creating deeper and deeper inequalities and for taking America to the brink of presidential dictatorship by riding roughshod over constitutional rights.

But the Bush gang have always fronted for powerful corporate, financial and military interests and these are not leaving the scene anytime soon. Moreover, these elites are in some disarray as their world of free-market globalised capitalism falls apart around their feet. They will want an Obama presidency to come to their aid. On that score, they are likely to be disappointed simply because the White House doesn’t have that sort of power over the economy.

Danny Schecter, whose News Dissector website has played a major role in exposing the deceptions behind the selling of mortgages to people who could never really afford them (as well as the lies behind the invasion of Iraq), is not joining in the Obama-rides-to-the-rescue hullabaloo that is gripping the media on both sides of the Atlantic. Schechter cites the credit crisis as a reason for caution. At least one million families have lost their homes. Another two and half million are threatened. But the US political system has no plan for the crisis. In Schechter’s view not only do they have no “fix” – there may not be one because what’s involved is a structural crisis of American capitalism in an era of waning empire. “Many of the proposals being debated are tinkering with deeply flawed policies. They aim to bail the water out of the Titanic while it is sinking,” he adds.

Chris Hedges, a Pulitzer prize-winning reporter, who has just written a book about America’s Christian right, whose adherents will no doubt will be burning fiery crosses at the very thought of a black man becoming president, says bluntly: “The corporate state is our shadow government.” Candidates who promote corporate interests get corporate money. He writes: “Barack Obama's campaign message, filled with lofty promises of change and hope, is also filled with repeated reassurances to the corporate elite. Pick up a copy of Obama's book ‘The Audacity of Hope’. The subtext is clear. It is a steady reminder to corporate America, a reminder bolstered by Obama's voting record, that corporations would have nothing to fear from an Obama presidency.”

As a result, the same corporate donors, lobbyists, weapons manufacturers, nuclear power companies and Wall Street interests that give Hillary Clinton and Republican John McCain money, give Obama money. “They happen, in fact, to give Obama more. And the corporate state, which is carrying out a coup d'état in slow motion, believes it will prosper in Obama's hands. If not, he would not be a viable candidate.”

So both in Britain and America, the economic and financial elites are in a bind. Having captured the state, they find the state doesn’t command the power it once had as a consequence of the same corporate-driven globalisation process that produced a hands-off, deregulation approach. On the other side, the democratic credentials of the state are approaching vanishing point. The result is an increasingly dangerous power vacuum, into which Obama in America (and Cameron in Britain) is preparing to step. Beneath them, however, is a powder keg of discontent, disillusionment and hardship which they will be beyond their control. Then it won't be a case of "Yes we can", as the Obama slogan goes, but "No we can't".

Paul Feldman AWTW
communications editor

Brown's fantasy world

The Bank of England’s inflation report makes grim reading. Bland assurances about the strength of economic fundamentals as the credit crisis erupted in the autumn have been replaced, superseded with expectations of soaring inflation – “above 3% for several quarters”, and recession, with governor Mervyn King declaring: “The central projection is for growth to slow sharply in the near term, reflecting the squeeze on real incomes.”

All of this is explained by the anodyne “rebalancing of the economy”, as if things were under control. Nothing could be further from the truth. In reality, the UK, which under Gordon Brown’s 10 years as Chancellor had become entwined in and dependent on global financial markets is, like all other countries, being sucked into unprecedented economic storms.

Brown’s promise that New Labour will show that it can “manage” the economy to avoid recession is fantasy talk. For example, the £50 billion thrown at the banking system in a bid to unlock the credit freeze has made no impact whatsoever. According to the European Central Bank, the banks are using liquidity schemes like this simply to offload risky assets, while the Financial Times reports that the banks are looking at sums closer to £90 billion from the Bank of England. It’s a case of pick a number, then double, treble it or simply add loads of noughts!

The credit crisis, which deepens by the day in its impact on jobs, repossessions and consumer spending, marked the end of four decades of free floating currencies which began 40 years ago, on March 15, 1968. Then, the dollar was in crisis as the Tet offensive by the National Liberation Front and North Vietnamese Army turned the tide against the US. On that day in March, the American mint stopped the buying and selling of gold and ended the fixed dollar-gold exchange rate which had been at the foundation of the Bretton Woods post-Second World War arrangements set up in 1944. Three more years of running the printing presses later, on August 15, 1971, US President Nixon severed the dollar-gold link altogether, releasing a period of inflation that saw oil prices rising to historic levels to compensate for the declining value of the dollar.

For those familiar with the philosopher Hegel’s dialectic, the dollar-gold separation was the first negation of the post-war boom. It heralded the start of the period of globalisation – credit-led growth personified in world-straddling multi, then transnational and global corporations. Their vastly expanded, ecologically-destructive production of cheap-labour commodities could only be absorbed by consumers supplied with seemingly limitless debt funded by the promise of property prices rising without end.

Inevitably, as in all processes, finite limits were reached and opposite tendencies began to take over. By 2004, US consumers in particular were “all shopped out”. Consumption peaked. The second negation – the negation of the negation - marked by the sudden paralysis in credit markets last August, brought the ballooning of fictitious capital to a halt and ushered in a new period of unprecedented economic, social and political upheaval.

The contradictions inherent within capitalism, which were left unresolved by the incomplete process of 1968, have matured and deepened in the 40 years since. Food riots in more than 30 countries, and mass demonstrations by farmers against agribusiness corporations in India coincide with a growing movement against debt, foreclosure and repossession and strikes in as homes are lost, jobs are destroyed and incomes and pensions are hit by the deepening crisis.

These actions are coalescing into a new revolutionary possibility which demands the building of an independent revolutionary movement that can inspire and lead the challenge for power. The objective must be to replace a failed economic and social system based on profit with a new socialised system designed to satisfy needs identified through a greatly expanded democratic process.

Gerry Gold
Economics editor