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New Communist Party of Britain

This is just one section of the Main Political Resolution adopted at the 2009 16th Congress of the New Communist Party of Britain.
An index to the other sections can be found here -> [2009 Policy Documents]

THE RISE AND FALL OF FICTITIOUS CAPITAL

Since 1995 the capitalist economies have experienced a roller−coaster ride. During the stocks and shares boom of 1995−2000, the FTSE 100 Index reached 6,950 in December 1999. Governments and treasuries, fearing an overheating economy, attempted to slow speculation and growth by raising interest rates to make the use of borrowed money expensive relative to the rate of return on capital. This slowed growth, increased unemployment and made conditions more difficult to fight for increased wages; in effect it passed the burden of the slowdown onto the working class.

By 2001 the United States, Britain and the euro−zone changed tack and started to substantially reduce interest rates, then reversed the trend in the autumn of 2003 such that the Bank of England base rate rose to 5.75 per cent by the summer of 2007. When the 2008/2009 recessions started to bite interest rates fell to 0.5 per cent by April 2009.

Manufacturing capitalists depend on stable interest rates to make investment decisions.

In contrast wildly fluctuating interest rates benefited finance capital as they could speculate and gamble on whether interest rates rose or fell. In doing so they found new ways to exploit this volatility by creating financial derivatives.

The “inventiveness” of the finance capital and the increased complexity of these derivatives has now completely outstripped the ability of central banks to supervise or to assess the total financial exposure within the system; they can now only act as a safety net or a siren call. At the end of 2005 the Bank of England warned that the continued “search for yield” could be leading some investors to underestimate risk, and that they might harbour overly optimistic views about the capability of policy makers to offset shocks to the macro−economy. Generally the scale of the problem only gets discovered when a company or bank goes into administration or has to report huge losses.

When Richard Nixon, in 1971, severed the link between the dollar and gold by withdrawing the US from the Bretton Woods International Monetary System, he opened a Pandora’s box where money became independent of commodity prices and gave bankers the unfettered freedom to create money without any relation to the overall wealth of society.

Despite there having been 100 significant banking crises since 1971, with the authorities having to rescue important parts of the US financial system four times, the ruling class, in 2006, they thought they had built a financially stable capitalist system, which they dubbed the Anglo−American model. Ruling class class pundits even described the economy as the “Goldilocks Economy” which was sustaining moderate economic growth with low inflation. Gordon Brown even proclaimed the end of boom and slump. However for the majority of the working class reality was fundamentally different, household incomes were falling whilst the costs of housing, food and energy were increasing — the only way workers could resolve their immediate predicament was by spending savings and then borrowing against future earnings so as to provide, in the present, a warm home and food for themselves and families.

The “Goldilocks Economy” with it’s moderate growth and low interest rates also had a low rate of return on capital, which was unsatisfactory to the capitalist class in their quest to increase profits. To increase the rate of return — profits — on capital, the industrial, merchant and finance capitalists went on a spending and borrowing spree. Industrial capitalists borrowed from the banks so as to increase the speed and quantity in which manufactured of goods could be produced so as to gross more profit. Merchant capitalists borrowed from the banks to gamble on the price of essential goods like food, housing and fuel. The banking section of the finance capitalists not only lent vast sums to the Industrial and Merchant members of their class but also bought equity in them themselves. They sold mortgages to customers who were buying houses from the companies they had bought into. The banks packaged these debts as credit derivatives or mortgage−linked bonds, and sold them directly to hedge funds, insurance companies and other financial institutes. The banks saw this as diversifying risk and held the belief that any collapse of part of the system could easily be absorbed by the financial institutes that remained, thus protecting the system as a whole and their “investments” in particular. The hedge funds and financial institutions even borrowed money from the banks to buy the packages that the banks were selling them, which generated even more packages for the banks to sell! In 2005 the market for derivatives was $500 trillion rising to, according to some estimates, $1,144 trillion by December 2007, or about 22 times world GDP.

Encouraged by this ever increasing demand for these packages, the rating agencies who were supposed to provide an independent risk evaluation accelerated the boom by giving them high credit scores, as by doing so they could acquire higher fees. By the first quarter of 2006 these packages contributed more than 45 per cent of their revenue. With money no longer based on commodity values and these packages not being traded in the market place, but bought and sold on a take−it−or−leave it basis, they were priced according to complex mathematical models. So to increase profits the banks had a vested interest in ensuring that the computer models over−estimated the price..

Towards the end of 2006, with the banks seemingly awash with money, ruling class pundits predicted massive consolidation in banking and insurance. The opening salvo was the €71 billion (£49 billion) battle for ABN Amro, the Dutch banking group. ABN Amro was that year bought by Royal Bank of Scotland.

By 2008 British banks had increased their debt from twice gross domestic product (GDP) in 2001 to 4.5 times GDP, with their debt ranging from 18 to 60 times their total assets. By increasing the ratio of debt to total assets they could, during the boom, maximise their rate of return.

By early 2007 Northern Rock declared that it could extend three times more loans, per unit of capital than five years earlier. Banks certainly weren’t conservative in that they had no concerns in lending to other financial institutes whose liabilities were 60 times their net assets. The banks were expected to be totally focused on generating huge profits for their owners and to stave off the prospect of being taken over by another bank. In the process they truly thought that they had realised the alchemists’ dream of turning lead into gold.

Unfortunately their euphoria had caused them to loose sight of the fact that they’d already ditched the link between money and gold in 1971. The corollary of increasing the rate of return through increasing the debt ratio to assets during the good times is that during the bad times, with little working capital, insolvency is just round the corner. Northern Rock, Halifax, Bank of Scotland and Royal Bank of Scotland have been rudely reminded of the dangers of minimalising working capital.

By the summer of 2007 the “Goldilocks economy” started to turn sour. The losses started to mount; the accountants demanded that the hedge funds and banks raise their working capital levels. This they could only do by selling assets. However, since the problem assets were hard to trade, they sold equities that were generally regarded as low−risk. This resulted in the problem assets appearing to perform better than the safer ones, which turned the world on its head, in that the riskier assets became less risky and the safest assets became less safe.

The financial sector was a big user of computer technology, having quickly recognised that trading by computer was cheaper and faster than using workers and could be quickly expanded in scale. As the fallout worked it’s way through the system it became clear that the crisis was being exacerbated by the computer models. These models had only been built on the basis of a growing market so when the data from a falling market entered the system they gave results that were counter−intuitive. One analyst reported that they were recording a one−in−every−100,000−year event on a daily basis.

As all the companies were using similar models, based on an inadequate theory, the problems were compounded by computer "herding" further distorting the market. This gives the lie to the fact that the higher ranks of finance capital are staffed by highly skilled and trained expert executives who need to be coveted by governments.

The credit rating agencies then entered the fray by downgrading billions of dollars of supposedly “ultra−safe” debt — causing prices to tumble even further. Everyone stopped buying the “packages” from the banks. Effectively the music had stopped and the banks were left holding a huge parcel of debt with very little equity to fall back on. So the banks cut lending, called in debts, refused to roll over overdrafts and in some cases demanded full repayment of loans early. So for all their financial innovation, for all their diversification, they weren’t protected at all. In the end the alternative was either bankruptcy or demand that the Government use the ultimate luxury of money, unfettered by commodity prices, by printing it.

In any recession there are always winners and losers, the advantage now seems to have swung back to industrial monopolists who, having pushed wages down, have managed to establish large cash hoards and are now on the lookout for increasing their monopoly positions. By April 2009 Oracle, the IT company, had bought Sun Microsystems for $7 billion and Petro−Canada had acquired Suncor Energy; Pfizer had bought Wyeth, a rival pharmaceutical company, for $68 billion and PepsiCo announced on that it was to buy its two largest bottlers for $6 billion.

The losers in this recession were the bankers whose predictions during the euphoria of 2006 has come back to haunt them. The consolidation has happened — Lloyds, TSB, Halifax and Bank of Scotland, Royal Bank of Scotland and Northern Rock are now under the umbrella of the state and being run for the benefit of the capitalists. However once their balance sheets have been replenished by monies stolen from the working class they will be returned to private ownership, maybe as one consolidated mega bank. All means to an end!!