New Communist Party of Britain
It is not what the bankers and other company executives get paid that’s the problem, it is what they do. Excessive pay, after-all, can be taxed heavily. In the summer of 2012 the crisis has forced the ruling class to pull in some of their wayward controllers of profit such as Bob Diamond of Barclays Bank.
Banks are supposed to match lenders and borrowers and keep money sound by maintaining its purchasing power. They’ve not done this; the pound has lost 85 per cent of its value since the 1970s which has led directly to increased cost of imports and made it harder for exports to be “competitive”.
Over time they expanded into riskier and more complex activities, propelling the banks into an unprecedented position in relation to the economy as a whole. In the 1880s the assets of British banks were about five per cent of GDP. At the start of the 20th century the assets of Britain’s three largest banks were seven per cent of GDP. By the end of the 20th century they had grown to 75 per cent of GDP and by 2007 to 200 per cent, with return on equity rising from single figures to 30 per cent and foreign exchange trading rose 234-fold between 1977 and 2010.
But for some time they managed to maintain the illusion that the financial sector was Britain’s cash cow. By the summer of 2007 when the recession hit, the financial sector turned sour in more ways than one.
In the years immediately prior to the crisis the banks relied on the wholesale funding markets to borrow money to repay the loans that had been taken from the wholesale market in previous years. This sharp practise was doomed to end in failure when the final recipients of these loans, small businesses, retailers or workers, defaulted. In 2007 and 2008 the losses started to mount, the accountants demanded that the banks and other financial companies raise their working capital levels. They could only do this by selling assets. But since the problem high-risk assets were hard to sell, they sold the more highly priced low-risk equities, thus reducing their price. This resulted in the high-risk 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 safer assets becoming less safe. The end result was the near bankruptcy of several banks.
To stave off a banking collapse the British government took controlling stakes in RBS and LloydsTSB and nationalised Northern Rock. Effectively the Government nationalised billions of pounds of bad debts, moving them from the banks’ books to the Government. Between 1987 and 2008 Government debt ranged between 40-50 per cent of GDP; by the end of 2011 it had doubled to 81 per cent. The Conservative, Liberal-Democratic coalition (Coalition) government would like to explain this increase in debt as a result of the previous Labour government’s overspending; this was not the case.
It was not that spending increased rapidly, it was the taking on of the banks debts, the large “unexpected” fall in GDP and reduction in tax income and the increased benefits paid to the newly unemployed. All of these were directly a consequence of the capitalist crisis.
With a recession in manufacturing and retail sectors preceding the banking crisis, the Labour government attempted to stimulate growth by reducing interest rates to almost zero in the hope that this would encourage borrowing and spending. What they failed to appreciate was the limited effect that this would have in an economy that was already highly indebted. Why would anybody want to borrow more when small companies were already highly indebted to the banks and many workers had huge debts too?
In March 2009, when it dawned on the Labour government that the near zero per cent interest rates had failed to stimulate growth, the Labour government instructed the “independent” the Bank of England to print money, quantitative easing (QE) it was called, which George Osborne, Conservative Shadow Chancellor, at the time described as “the last resort of desperate governments when all other policies have failed”. When the Coalition government took over they continued the same policy and by the summer of 2012 the Bank had electronically created £375 billion of fictitious money and used it to buy Government debt from financial institutions and other private investors. The Bank said this would “lower longer-term borrowing costs and encourage the issuance of new equities and bonds”. However there was no guarantee or requirement for the financial institutions to convert this new money into real economic assets, rather than using it to make up for losses and bad assets or for new financial trading (speculation). The results of this “stimulus” in terms of UK GDP growth suggest that little of this new money actually fed into the real economy.
The printing of money to buy assets that no one wants devalues the currency. The more pounds there are, without being backed by increased production, the less each pound is worth. The result of devaluation, in a debased manufacturing economy, is imported inflation as more pounds are needed to buy imported goods and commodities such as oil. This inflation in imported inputs increases the prices of goods made in Britain, making it more difficult to export.
In parallel with quantitative easing, which was supposed to encourage growth, the Coalition government embarked on a vicious attack, austerity measures, on the social wage. This is above all a sign that this Coalition government is truly desperate and has effectively given up trying to engineer growth.
In themselves austerity measures are self-defeating in that they reduce workers’ incomes, reduce demand, reduce tax revenues and increase benefit payments. With the decline in demand capitalists cut back on production and investmen,t deepening the slump even further.