New Communist Party of Britain
New Communist Party of Britain
adopted December 2015
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.
Banks are supposed to match lenders and borrowers and keep money sound by maintaining its purchasing power. In search of higher profits they've 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. Over the past 40 years the size of the banking system has undergone a dramatic shift, with total assets rising from around 100% in 1975 to around 450% of GDP in 2013. Foreign banks now constitute around half of the British banking sector with assets totalling around £2,750 billion. The foreign assets and liabilities of banks trading in Britain account for over 350% of British GDP, more than four times the median figure for Organisation for Economic Co‑operation and Development (OECD) countries.
The Bank of England has estimated that banks could double from their current size to over 950% of GDP by 2050 and would represent a rise in banking assets from over £5,000 billion to around £60,000 billion.
In recent history it has been maintained 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 and for banks there is still no end in sight to their problems.
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. First they tried to sell the problematic high‑risk assets but not surprisingly nobody wanted to buy them, so the banks in an attempt to rebalance their books started to flood the market with the easier to sell non problematic assets, thus reducing their price. This resulted in the problematic 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 Royal Bank of Scotland and LloydsTSB and nationalised Northern Rock. Effectively the Government nationalised almost £500 billion 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 and by 2014 it had further grown to 126%. The Conservative government explains this increase in debt as a result of the previous Labour government's overspending; this was not the case — it was the bail‑out of the banks and extra spending in benefits to the millions of workers who had lost their jobs and the loss of tax revenue from the same. In 2013, at the diktat of the European Union, LloydsTSB was re‑branded into two separate entities Lloyds and TSB with TSB being sold to the private sector in 2014.
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, there was not enough money in the right pockets to buy back the goods that had been produced.
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 they were already highly indebted? Though to a certain extent this money trick has been pulled off with household debt rising from 122 per cent in 2012 to 146 per cent in 2014.
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” 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 British GDP growth suggest that little of this new money has actually fed into the real economy.
The printing of money to buy assets that no one wants devalued the currency. The more pounds there were, without being backed by increased production, the less each pound was 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. Once QE was switched off the pound started to rise against other currencies reversing devaluation making imports cheaper and making exports more expensive.
Because of the run down in manufacturing it wasn't possible to take advantage of the lower pound and now that the pound is rising there's even less of a chance of that happening. Britain needs higher investment and higher wages, not manipulations of the currency.
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 and public services. This is above all a sign that this 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 investment deepening the slump even further.
From 2008 when banks were bailed out by the government and workers were suffering from the crackdown on wages and loss of benefits you would have thought that the banks would have been contrite. No, they have just continued their old ways of using whatever method legal or otherwise to generate profits. Since 2012 British banks have been fined by the authorities for the London interbank lending rate (Libor) scandal which forced the resignation of Bob Diamond Chief Executive of Barclays. In 2012, the British banks Standard Chartered and HSBC were convicted of Money Laundering. In 2014, RBS, HSBC, Citibank, JP Morgan and UBS were convicted for conspiring to manipulate foreign exchange rates when it was found that the banks allowed a "free for all culture" on their trading floors.