Tuesday, 27 January 2009

Bank expropriation is rational, but neither socialist nor sufficient

by Paulo L dos Santos

The chronic banking crisis is flaring up again. Banks in the US and Britain continue to hemorrhage capital as recession and falling asset prices add to their losses. CDS spreads on bank debt are back on the rise. And the only thing propping up bank shares are daily promises of innovative ways to inject billions of fresh public money into the sclerotic veins of privately-run banks.

The latest such cures being prescribed involve either state-backed insurance of bank assets or the establishment of a state-backed ‘bad bank’ that would buy and hold toxic assets. The argument behind them, made most clearly by Paul Myners of the British Treasury, is that if the public takes on the bulk of the asset risks and losses lurking in bank portfolios, banking will become profitable once again, helping their private recapitalisation, and an eventual resumption of normal lending levels.

Why should the public lose its shirt to restore profitability to a sector that has pocketed billions as it created a crisis that will likely cost tens of trillions of dollars? Because, Mr Myners states without the distraction of substantiation, ‘The capacity for soundly managed banks and markets to support the generation of wealth in the economy could never be matched by the public sector’. The same argument has been made recently by The Economist and Alan Greenspan, also on the basis of pure chutzpah.

Yet the evidence supports a much dimmer view on the ‘entrepreneurial’ capacities for ‘wealth creation’ of private banks. Leading private equity boss Guy Hands recently commented to the Financial Times that, to his mind, British banks have lost all capacity to make loans to corporations in the domestic real economy. In my recent study of the activities of top international banks, I have documented what has been keeping them busy and profitable. The picture that emerges is one of remarkably well remunerated parasitism.

Even when they actively made loans, Citigroup, Bank of America, HSBC, Barclays and RBS centered their lending on mortgages, credit card and other loans to individuals, and loans supporting financial engineering. Lending to individuals has transferred increasing shares of wage income into bank profits, and its high profitability was a central contributor to the current financial crisis. Financial engineering operations aim to capture capital gains that are significantly funded from the mass of retail investors through fees and systematically lower returns on their pension, education and other savings. Lastly, banks have drawn astronomical revenues from card fees and other account service charges paid by clients to access and use their own money and accounts: a total of US$ 50 billion for Bank of America, Citibank, HSBC and Barclays in 2006.

In addition to being remarkably poor value for public money, plans to insure bank assets or create a public ‘bad bank’ are almost guaranteed not to work. They assume it is possible to identify and fence off ‘bad assets’ and quantify associated losses. This is impossible at this early stage of what will likely be a protracted recession. Any such programme would be followed by a steady stream of new losses, triggering new panics, renewed instability, and new cuts in lending. Ask the Japanese.

That takes me to the question of nationalisation, which, for all the recent hand wringing in the financial press, is a monumental non-issue. Bank losses will continue to mount and private appetite for investment in banks is unlikely to improve for many years. Gone are the good old days when Western states could count on their wealthy political clients in the Persian Gulf to pitch in the odd billion to support their private banks. In this setting, states will have little choice but eventually to nationalise weaker banks. That, in turn will likely send remaining private investors in other banks running for the exits, as recently argued in the New York Times.

The question is how banks will be nationalised and run. The Economist demands that any necessary nationalisations be undertaken ‘at market prices’, without seriously considering what those would be had states not supported banks. And both British and US governments have noted their commitment to run their investments on arms-length bases, leaving control to the officers and major shareholders that created the current financial mess.

There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks—or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.

Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves—after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.

State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.

These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality.
Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.

Monday, 26 January 2009

Gender and Finance

by Christina Laskaridis and Nuray Ergunes

The differences between genders have received little attention in the analysis of the capitalist system because women’s unequal state within society stems from patriarchal relations which are accepted as natural. Mainstream economics’ lack of insight into the interactions between non-economic and economic relations is a major reason for this ignorance.

As the expansion of financial relations changes that interaction, generally and specifically, through the intrusion into non-economic spheres, we seek to examine the gendered impact of these changes. Whereas, the gendered division of labour has been reasonably well explored, the gendered relations within finance are less so. How gender inequality is manifested during a period of financialisation will be explored through a series of blogs-to-come under the following issues:
a) With a detailed focus on microcredit, we will investigate how financial relations have penetrated the household sphere. Neoliberalism’s removal of social safety nets and privatisation of social welfare are the key factors here and are determined through class relations. It has allowed microcredit, sometimes labeled a ‘poverty management strategy’, to target women, adding a debt burden to women’s inequality.
b) The falsehood of microcredit as a solution to combat neoliberalism can be explored by examining certain characteristics of women’s work, and thus a gendered approach to the exploitative nature of financial inclusion can be developed.
c) Given that finance’s impact differs across genders, we will explore the extent to which financial products and conditions of disbursement and repayment can be differentiated between men and women.
d) Economic crisis tends to exacerbate existing inequalities: e.g. daughters are taken out of school, women take on extra work whilst still maintaining the household. We will explore the impact of the current crisis on women in developed and developing countries.;
e) The demands by civil society for a better financial architecture in response to the current crisis will remain incomplete without considering the above issues.

Underlying these areas of interest is an investigation of how the economic and non-economic spheres interact. This differentiation may be less distinct when considered in light of the increasing informality of women’s labour, especially in developing countries. Discussion of these recent changes of women’s position in the economy, is required to introduce more concretely the topics we will examine.

As a result of neo-liberal policies an increase in poverty and unemployment has been a worldwide phenomenon. In the name of fighting poverty, global management strategies have been developed, some of which have actually become socially threatening. One of these is microfinance, which has mostly targeted women based largely on the argument that it would strengthen and enhance their status. This argument relies on the peculiar characteristic of women’s labour, being determined through patriarchal relations. Characteristics such as being more reliable, self-sacrificing and easy to control are seen through examples of women’s lack of right to their income, expenditure of their income on needs of the household including children and through the efficacy of social pressure in the re-payment system of micro-credits.

In fact, microfinance leads to the commodification of women’s labour through finance. Increased labour market flexibility is one of the core patterns within financialised capitalism, the basic features of which are: increased informal labour, the removal of collective bargaining, increased income inequalities and the expansion of women’s labour. In other words, it means expansion of the gender-based labour market structure and the spread of production into small enterprises and households, especially in developing countries where the production is export-oriented and an increase in informal labour has meant the feminisation of labour. Throughout this process home-based work has had its social base widened. The reason for this is to resolve the conflict between women’s societal role (such as being wife, mother, daughter), and the role of labour needed by the capitalist system, which is flexible and cheap. Not only have these processes have been reinforced through microfinance but microfinance adds a burden of repayment into women’s life, with it’s associated anxiety and stress.

Although women’s labour has increased in the informal area, the unemployment ratio of women has increased in the formal employment area. The determination of formal employment by the structuring in the informal employment area has other dimensions. Within this context, women’s labour, which is determined by the patriarchal system, has formed a model of new employment and labour relations which is characterised by low wages, long working hours and unsecure working conditions. This form of labour is typical of the financialised capitalism era.

Friday, 16 January 2009

CDS Central Clearing – will it really help?

by Duncan Lindo

Credit Swap Clearing House to be running by year end” claim the headlines. But is the current lack of CDS central clearing really the cause of our multi trillion dollar financial crisis? If central clearing had been in place between 2001 and 2007 would it have averted the crisis? The only reasonable answer is no.

The authorities are reacting to the failure of markets by simply trying to implement markets twice as hard. Moreover we are witnessing a scramble between regulators to talk tough, act decisively and win the mandate for post-2008 regulation with little thought about what needs regulating and how.

Two of the largest alleged benefits are reductions in credit and operational risk but the advantages over the OTC market are slight and the impact on the causes of the crisis minimal. Prevention of a systemic chain of derivative counterparty defaults is a noble aim – but collateral agreements meant even Lehman’s default did not trigger such an event – 200mUSD of losses per bank is estimated not 20-40bnUSD per bank. A central clearer or an exchange should improve discipline and reduce operational risk – but the OTC market has shown it can clear up its act (e.g. tear ups, compression, clearing up confirms etc) and there’s nothing to suggest operational risk in the CDS market is systemic.

On these issues you might argue central clearing is marginally better than not but it’s hard to argue they are really fundamental to trillion dollar losses.

Transparency and prices are other areas mentioned. Apparently “buyers and sellers will know what they buying and selling” on an exchange (what an extraordinary thing that they collectively invested trillions of dollars without knowing that before!). In fact might not the reassurance of a clearing house further discourage active investigation and analysis by investors?
The same goes for prices. A clearing house will determine prices for every contract every day but very few of the outstanding contracts trade every day. The exchange will have to invent (“model”) the missing prices. It seems very likely that a clearing house publishing prices will only reduce the incentive for participants to use their own analysis and judgement. Isn’t this exactly the opposite of what is required?

Credit Risk Transfer started as bespoke, private and negotiated deals between those bearing credit risk (e.g. bank loan desks) and investors. Deals took time, details were analysed. Over time, and with the help of the dealers, the contract has become more standardised, information more social, markets more liquid; easier to trade in fact. In the moments before the crisis break there were many buyers and sellers, many transactions, much information about underlying corporate credits: few would have argued (in particular for standard corporate credit) that the market was not efficient. Yet the price was simply wrong. Risk premium was far too low.

The reaction to this market failure is to try even harder for the market. A clearing house is yet another step in the march of standardisation, liquidity and faster, easier trading. Is that really going to improve the quality of prices?