BANKS CAPTURE GOVERNMENT AT TAXPAYERS' EXPENSE

Below for all readers of ' An Unrepentant Communist' are some points relevant to Ireland's current Banking crisis and Finance Minister Lenihan's proposed NAMA "bad bank" scheme which are excerpted from an article by Willem Buiter, Professor of European Political Economy, London School of Economics. The full article, dated yesterday, 8 April, titled "The green shoots are weeds growing through the rubble of the ruins of the global economy", may be found on Professor Buiter's Financial Times blogsite at ft.com/maverecon.

The green shoots are weeds growing through the rubble in the ruins of the global economy
by Willem Buiter
April 8, 2009
The Great Contraction will last a while longer This financial crisis will end. The Great Contraction of the Noughties also will come to an end. But neither the financial crisis nor the contraction of the global real economy are over yet. As regards the financial sector, we are not too far - probably less than a year - from the beginning of the end. The impact of the collapse of real economic activity and of the associated dramatic increase in defaults and insolvencies by non-financial enterprises and households on the loan book of what is left of the banking sector will begin to show up in the banks' financial reports at the end of the summer and in the autumn. By the end of the year - early 2010 at the latest - we will know which banks will survive and which ones are headed for the scrap heap. With the resolution of the current pervasive uncertainty about the true state of the banks' balance sheets and about their off-balance-sheet exposures, normal financial intermediation will be able to resume later in 2010.

Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets. The banking establishment and the financial establishment representing the beneficial owners of the institutions exposed to the banks as unsecured creditors - pension funds, insurance companies, other banks, foreign investors including sovereign wealth funds - have captured the key governments, their central banks, their regulators, supervisors and accounting standard setters to a degree never seen before.
I used to believe this state capture took the form of cognitive capture, rather than financial capture. I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture. (emphasis in bold added)
History teaches us that systemic financial crises are protracted affairs. A most interesting paper by Carmen M. Reinhart and Kenneth S. Rogoff, "The Aftermath of Financial Crises", using data on 10 systemic banking crises (the "big five" developed economy crises (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992), three famous emerging market crises (the 1997-1998 Asian crisis (Hong Kong, Indonesia, Malaysia, the Philippines, and Thailand); Colombia, 1998; and Argentina 2001)), and two earlier crises (Norway 1899 and the United States 1929) reaches the following conclusions (the next paragraph paraphrases Reinhart and Rogoff).
First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent over six years; real equity price declines average 55 percent over a downturn of about 3.5 years. Second, the aftermath of banking crises is associated with large declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, but the duration of the downturn averages around 2 years. . . . . . Conclusion
There are signs that the rate of contraction of real global economic activity may be slowing down. Straws in the wind in China, the UK and the US hint that things may be getting worse at a slower rate. An inflection point for real activity (the second derivative turns positive) is not the same as a turning point (the first derivative turns positive), however. And even if decline were to end, there is no guarantee that whatever growth we get will be enough to keep up with the growth of potential. We could have a growing economy with rising unemployment and growing excess capacity for quite a while.
The reason to fear a U-shaped recovery with a long, flat segment is that the financial system was effectively destroyed even before the Great Contraction started. By the time the negative feedback loops from declining activity to the balance sheet strenght of what's left of the financial sector will have made themselves felt in full, financial intermediation is likely to be severely impaired.
All contractions and recoveries are primarily investment-driven. High-frequency inventory decumulation causes activity to collapse rapidly. Since inventories cannot become negative, there is a strong self-correcting mechanism in an inventory disinvestment cycle. We may be getting to the stage in the UK and the US (possibly also in Japan) that inventories stop falling an begin to build up again.
An end to inventory decumulation is a necessary but not a sufficient condition for sustained economic recovery. That requires fixed investment to pick up. This includes household fixed investment - residential construction, spending on home improvement and purchases of new automobiles and other consumer durables. It also includes public sector capital formation. Given the likely duration of the contraction and the subsequent period of excess capacity, even public sector infrastructure spending subject to long implementation lags is likely to come in handy. A healthy, sustained recovery also requires business fixed investment to pick up.
At the moment, I can see not a single country where business fixed investment is likely to rise anytime soon. When the inventory investment accelerator goes into reverse and starts contributing to demand growth, and when the fiscal stimuli kick in, businesses wanting to invest will need access to external financing, since retained profits are, after a couple of years of declining output, likely to be few and far between. But with the banking system on its uppers and many key financial markets still disfunctional and out of commission, external financing will be scarce and costly. This is why sorting out the banks, or rather sorting out the substantive economic activities of new bank lending and funding, that is, sorting out banking , must be a top priority and a top claimant on scarce public resources.
Until the authorities are ready to draw a clear line between the existing banks in western Europe and the USA, - many or even most of which are surplus to requirements and have become parasitic entities feeding off the tax payer - and the substantive economic activity of bank lending to non-financial enterprises and households, there will not be a robust, sustained recovery. (emphasis in bold added)

Understanding the Roots of the Great Slump of 2008

The capitalist system has proved very adaptable since Marx described in details its workings in the mid-19th century, not least because the state has become critical to ensuring the survival of capitalism at critical points in recent economic history. Now in 2008, we see the state being rehabilitated once again by the apologists for the free market system, the very people who denounced the role of the state in the economy a few years back. since in many cases throughout the world today, the state is being deployed using tax payers money to bail out the busted financial system.
The thirty years after 1945, saw the dominance of Keynesian economics in the western world, whenever the western economies slowed the state could intervene with an injection of liquidity. For thirty years the business cycle was smoothed and business grew in scope and scale, a process known now as globalisation. With the oil crisis of the 1970's, prompted by the assertion of some control over production by oil producing states, and a huge growth in inflation driven largely by organised labour in the western world seeking a more eqitable share in the wealth created , we see Keynesianism becoming discredited and elbowed aside as the ruling economic orthodoxy by the aggressively right-wing pro-big business approach of monetarism/neo liberal economics.
The advent of neo-liberalism was characterised by FOUR key features,

Firstly;- a direct attack on the bargaining power of organised labour through the demoralisation and fear that arose from mass unemployment. This was expressed by increased legal controls on trade unionism, and the parallel creation of a 'flexible' casualised labour force.

Secondly:- the privatisation of utilities and public services, creating a new and certain stream of income to private corporations.

Thirdly:-the freeing up of capital movements globally, allowing capital to be directed to areas of the world with the most profitable rates of exploitation.The City of London became the primary world centre for currency and commodity speculation, while the UK economy was steadily de-industrialised.

Fourthly:- workers savings for pensions, insurance and housing were transferred into the private sector. With mutuals such as building societies being transformed into plc's.

This 'financialisation' provided a new and critically important mechanism for the extraction of super-normal profit. The bulk of capital in public companies and high street banks now derives from the pension funds and and the savings of both employees and the greatly reduced non-monopoly strata . These funds earn a low and sometimes negative rate of real interest. However, around them lay clustered a complex array of financial vehicles for the very wealthy. Merchant Banks in the 1980's, hedge funds in the 1990's, and private equity and commodity index investors in the 2000's. These operate off-shore, do not pay tax, and secure immense profits. Hedge funds had ana average annual return of 19% throughout the 1990's, and they used our savings for leverage.
This system w as no more immune to capitalisms contradictions than its predecessors. The accelerated accumulation of capital placed pressure on average profit, and the export of capital to countries such as India and China generated huge imbalances in trade and currency reserves . Fatally the system fell prey to the inequality and poverty that itself had created. Workers could no longer afford to buy all the goods produced .
So to keep the casino wheels spinning, governments and banks between themselves colluded in the creation of massive levels of sanctioned debt, above all in mortgages. In the hands of finace capitals investment specialists this became the credit required for one last round of leveraged speculationin property, commodities, and private equity buy-outs.
Then the bubble burst, leaving working people the world over facing unemployment and repossession.
So this current, rapidly deepening world recession, is not about bonuses or the "culture of greed". It is all about recognising that the state for the past 30 years and more has been utilised throughout the western world to facilitate an increased rate of exploitation. Now the state must be rescued from being the handmaid of capital, to being a servant of all the people. For this it is essential that instead of being a sugar-daddy to the corporate sector, the state must take control of savings, pensions, and insurance. When this is achieved it will be possible to direct investment towards the truly productive economy and away from the parasitic economy of the financial sector. Speculative capital transactions must be stopped, tax havens scrapped, and wealth taxed.

When all this is understood, it becomes clear that once again the role of the state in the modern economy is up for serious discussion , and for that reason, the hegemony of neo-liberalism is drawing rapidly to an end, since it is the champions of unregulated capitalism, red in tooth and claw, who are looking increasingly out of touch with the new zeit-geist sweeping all before it.