I’ve just returned from visiting Slovenia where I was invited to deliver a lecture on Socialising banking for the Institute of Labour Studies in Ljubljana and also to participate in a seminar with others, including economists from Die Linke, the German left party and Syriza from Greece on the role of banking and debt in the current capitalist crisis and Mick Brooks, the joint author with me of the UK’s Fire Brigade Union pamphlet on the banks (see s-time-to-take-over-the-BanksLR.pdf).
My paper for the lecture is here (Presentation on banking in Slovenia 140314) It has a simple message: that banking in a modern monetary economy should be a public service for the people, whether they work for an employer or run a small business. This aim can only be achieved through nothing less than full public ownership of the major banks, which must be democratically accountable and controlled by the people and which must act within a national (or even international) plan to meet the social needs of the people, not the profit of a few.
As I try to to show in this paper and in previous posts on this blog (see https://thenextrecession.wordpress.com/2010/09/15/banking-as-a-public-service/ and https://thenextrecession.wordpress.com/2012/11/19/marx-banking-firewalls-and-firefighters/), banking crashes can trigger crises in capitalism and generally they make the depth and loss of resources during those crises larger and any economic recovery weaker than average – as this graph from the Bank of England shows: in ‘average’ capitalist recession, recovery to the previous peak takes about one year. So there is only one year’s waste of resources. When a banking crash is also involved, it takes three years on average. But so humungous was this banking crash, global and extensive, that only the US economy is matching that average. Europe is still unable to return to the previous peak of economic activity after five years.
One feature of the global banking collapse in 2008 onwards was that governments bailed out these banks with huge dollops of taxpayers’ money and extra borrowing. According to the IMF, straight cash injections were equivalent to 7% of national GDP, or which less than half has been recovered from the banks since then.
And since the banking crash and the ensuing Great Recession, public debt has rocketed and now millions of households are being asked to pay for this disaster in programmes of ‘austerity’ (a word used in times of war hardship or depressions). But it’s ‘business as usual’ for the banks: they continue to engage in scams, risky investments and outright fraud, while top bankers pile up their grotesque bonuses yet again. Yet nobody apart from outright ‘Wolf of Wall Street’ fraudster, Bernie Madoff, has been charged and convicted on any crime.
My paper goes into examples of ‘business as usual’ but I bring to your attention another recent article by Ben Strubel, a former investment banker, who exposes in yet more detail the sheer scandal of the banking business in the hands of just a few huge global banks, but also copied by the smaller banks (see http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html). And in a recent Rolling Stone article by Matt Taibi, he shows just how appalling the Libor interest-rate rigging was – pervasive and damaging to the tune of over £100bn (http://www.rollingstone.com/politics/news/the-vampire-squid-strikes-again-the-mega-banks-most-devious-scam-yet-20140212).
The financial sector has grown hugely as part of the modern capitalist system in the last 30 years – the theme of ‘financialisation’ in the ‘neo-liberal era’ since the 1980s.
But it makes no contribution to creating new value. It merely redistributes value already created, supposedly to enable investment to take place more efficiently. Even that role has been usurped by what is basically hedge-fund activity i.e. just betting on where the prices of financial assets like stocks, bonds, currencies, commodities and the derivatives of these will go – up or down? This activity is not only value-less (as I show in my paper) but also positively damaging to the productive sectors when these ‘financial instruments of mass destruction’ (to use the famous phrase of billionaire investor, Warren Buffett) blow up.
Indeed, Warren Buffett has commented just this week on hedge fund investing, pointing out that it does not even deliver decent returns for his fellow investors compared to just investing directly. At the 49th annual meeting of his holding company, Berkshire Hathaway, the ‘Sage of Omaha’ said the instructions laid out in his will advised his wife to invest 90 per cent of the money she inherits in a low-cost S&P 500 index tracker, and the other 10 per cent in short-term government bonds. In other words, avoid all investment funds run by highly paid investment banks and hedge funds. Study after study has shown that very few active fund managers outperform their benchmark over any meaningful period of time, and those that do are invariably difficult to predict in advance.
This was also the conclusion reached by Strubel in his article. His calculations show that investing directly and not through managers would have produced five times as much return.
So, not only is banking and financial investment worthless in creating value, it is mostly a huge selling scam designed to rip off rich investors. Of course, from the point of view of labour, we have no interest in or sympathy with the rich being ripped off. However, the failures and losses suffered by the banks and investors from this will also have repercussions for millions through job losses, wage cuts, higher interests and premiums, as we have seen.
In my paper, I argue that the proposed reforms of the banking system, more regulation, higher capital adequacy ratios, breaking up the banks into smaller bits, separating the risky investment arm from the ‘safe’ retail and commercial arms and a financial transactions tax – all these will not be enough to make banking a public service. We need public ownership of the main banks globally and in each country. If we stop short of that, as nearly every set of reform proposals does, like for example, the recent one proposed by the Keynesian-style think tank, Class, promoted the British trade unions
(2014_Banking_in_the_public_interest_-_Prem_Sikka),
then it will fail to do the job.
But how to make state-owned banks democratic and accountable to the people and not just huge bureaucratic inefficient monoliths? At the ILS seminar in Slovenia, some excellent answers were provided by Philipp Hershel from Die Linke in his important banking paper Socialisation of German banking and also by Dimitris Liakos from Syriza in his LIAKOS SPEECH-1. In my paper, I argued that publicly owned banking must be democratically accountable and controlled by its own workers, consumers and the government. That means directly elected boards, salary caps for top managers, and also local participation. I constructed a provisional schema for this.
Most important, as the chart shows, banking must be integrated into a national plan for investment and growth to plan the economy for social need and not profit. Of course, that would not be possible without public ownership of the ‘commanding heights’ of the productive corporate sectors too. One goes with the other.
The people behind the Institute of Labour Studies have now formed a political party, the Initiative for Democratic Socialism, which has joined a coalition with two other radical and socialist parties to run in the upcoming Euro elections as the United Left. The United Left has adopted a programme that includes a publicly-owned and democratically controlled banking service. The UL will be part of the pan-European Left Bloc led by Syriza’s Alexis Tsipras in the Euro elections. See http://euobserver.com/news/123367.
ADDENDUM: see this by Bill Black on the Libor scandal
Michael Roberts Blog 
hi all on MR blog. This seems an appropriate theme to ask Michael and other Marxist economists to engage in the debate raging in Scotland regarding the future currency an independent Scotland would use and the nature and structure of banking in such a situation. Keith from Aberdeen
Keith
I’m planning to do a post on this but not had the time so far
It is precisely this type of a analysis which is missing in the debate over Scottish independsnce which is being dominated by various strands of neo liberal thinking over whether a future Scotland can use the £ and whether a future Scottish state could afford to underwrite (private) Scottish banks. There is a radical independence movement with aspirations along the lines described by Michael. It would benefit from a version of your paper specifically addressing the Scottish situation.
One could mount a plausible argument that our big banks are in fact Western “oligarchies”, and that they are much powerful than the rag-tag outfits that rule eastern europe and Russia.
The elephant missing from this excellently designed room is POWER. Even if we get a majority for sensible public-ownership in elections, the ruling capitalist class, the bourgeoisie, will not permit its implementation. And it has the power to stop majority measures. It will defend its class interests at any cost, including the cost of a bourgeois democratic regime. As we have seen a thousand times in bourgeois military dictatorships (like the Kissinger-Pinochet coup in Chile in 1973). More temporary emergency dictatorships are brought in all the time (India under Indira Gandhi, for instance) even when the risk to the bourgeois regime as a whole is relatively distant.
It really is too bad that Marx never wrote the part of Capital dealing with the role of the state in the economy. In periods of transition like the present (ie transition from one mode of production to another, like from slave-ownership to feudalism, feudalism to capitalism, or our own transition from capitalism to socialism) the role of the state, ie direct political intervention in the economic sphere of society takes front seat. Marx and Engels highlight this time and again in their other writings, as Lenin shows and brings out in The State and Revolution, but the direct authority of Marx focused on this as an integral part of Capital would save a lot of debate.
Because the state is so much more than government or god help us all parliament. It interfaces physically with society through the bureaucracy, administering bourgeois class interests, and most particularly through the military and police, enforcing bourgeois class interests.
Which is why our subject is well named Political Economy, of course.
The fact is that military state intervention in the economy is just as much a regular and necessary part of capitalist economic life as are crises and depressions. It can’t be wished away as exceptional freakish behaviour, as an anomaly.
So developing a feasible programme of public ownership in the financial sector is the simple part. Putting such a programme into practice in the teeth of ruthless military (and media) hostility is quite another. As in most socialist questions, the answers might be simple, but they aren’t easy.
You mention the international dimension a couple of times. First, with reference to some sort of hypothetical international plan; second, by mentioning “…public ownership of the main banks globally…”.
Given the global field of operation of large banks (and other financial institutions), it strikes me that this is vitally important if these proposals are to have any realism. But of course there is no overall global legal authority to control such banks, or draw up such a plan.
Can you think of any sort of viable half-way house?
You are right – international action will be essential, but as in all cases of labour struggle, that does not rule out national action. Indeed, national action is essential in order to galvanise international action. Even the institutions of capital not have proper control or regulation of the multi-national banks,even they wanted to, as we have seen. The BIS, Basel-3, IMF etc have not been enough. The ECB and the European Banking Union is a response to the banking disaster in EU countries. But it too will fall short. An international plan, whether just in Europe or globally, would require the committed action of several major economies led by socialist governments, just as the UN, IMF etc were products of the commitments of the largest capitalist governments post-war. So there is no ‘viable’ half-way house except a ‘socialist coalition of the willing’.
Reblogged this on Alejandro Valle Baeza.
Atheist prayer: Dear Lord, save us from the socialist bankers.
Thank you very much for this welcome intervention. The framework provided is quite useful, and much more needs to be done on this.
I also agree with the ‘Choppa Morph’ that our models need to be posed alongside question of power, in all of its manifestations. That is, we need to have much more concrete ideas of what alternatives exist and the underlying social relationship of power that have sustained any banking alternatives and that are also potentially undermining them now.
At the great risk of self-promotion, I’ve started some work on this now in the context of development studies. I’ve written a couple occasional papers for a group of solid, progressive researchers at the Municipal Services Project. I link them here:
State-owned banks and development: Dispelling mainstream myths
http://www.municipalservicesproject.org/publication/state-owned-banks-and-development-dispelling-mainstream-myths
Reclaiming Turkey’s state-owned banks
http://www.municipalservicesproject.org/publication/reclaiming-turkeys-state-owned-banks
The papers have been written for a general audience, but you’ll recognize some underlying radical themes.
Three points need emphasizing:
(a) there remains enormous material capacity in public banking globally, some 25% of all financial institutions are ‘state-owned’ according to 2012 World Bank figures. This is much higher in many of the large emerging capitalisms like Turkey, Brazil, India, China, and so on.
(b) There is nothing at all necessarily progressive about public banks. This is a Keynesian/institutionalist error. Rather, we must investigate the social content of the state banks and what relationships of power have been institutionalized. In many cases, neoliberalized state banks are far more aggressively anti-labour that any private bank would dare to be. State banks may provide an alternative, but only potentially so. This fully depends on underlying social forces and organization.
(c) Any serious analysis of alternative banking, therefore, must integrate an understanding of bank workers and their labour into the framework. This has by and large been ignored by progressives.
My apologies if my comment extends too long.
In solidarity,
Thomas
https://soas.academia.edu/ThomasMarois
Good points Thomas