10-15-08, 9:02 am
Last week the major economies of the world, including the US, European Union, China, Russia and Brazil, carried out an unprecedented and coordinated reduction of interest rates in an effort stabilize the global financial crisis. The effort itself was not immediately successful. But it dramatically raised hopes that world leaders will not permit divisions to forestall much needed cooperation to halt the most serious financial collapse since the Great Depression.
Now it appears that the United Kingdom's decisive lead in moving to partial bank nationalization as the key step in stabilizing financial markets, has forced every nation's hand comply with it action as the standard for the international response, including the United States. (After all, imagine what safe haven bank depositors and investors would seek when forced to choose between an array of European government guaranteed banks, or a private US one whose ability to protect deposits or repay debt is in doubt.)
After a costly delay caused by the Bush administration resisting Fed Chairman Bernanke's pressure to adopt this step with its Reaganite 'markets always good, government always bad' ideology, doing additional damage to the economy, the US has agreed to join the effort pledging to commit immediately up to $250 billion to take equity positions (ownership) in failing banks. Much of the EU, and Russia have also committed themselves to similar efforts. China, of course, need not take this step, as its banks are already nationalized!
This conclusion of the past month is stunning indeed. While many watched aghast as the Dow Jones Industrials lost over $2 trillion of value in a week, the more immediate and serious threat to the 'real economy' was freeze in global credit markets that occurred after US Treasury Secretary Paulson declined to bail out Lehman Brothers investment bank. Lehman's bankruptcy revealed that bank's assets were exceedingly leveraged, beyond any expectation.
Suddenly, bank interest rates on the short term loans they make to many businesses, and to each other, skyrocketed. Credit markets froze, particularly the short term credit that businesses and banks engage in to finance everyday operations like payroll, maintenance, and supplies. That credit is an essential lubricant that keeps the US capitalist economic system running.
Without credit – not just money, but also trust – a significant economic contraction will quickly ensue. Unemployment will spike. Businesses will fail by the tens of thousands, even millions. This is the immediate way in which the financial crisis is wrecking not just Wall Street, but Main Street – the place where goods and services are exchanged by real people, also performing real jobs. And it comes on the heels of a very significant energy shock, rising food prices, and another bad year in the 30-year decline of real wages and incomes for most US workers.
There have been many recessions since the late 1960's initiated by financial instability. Most however, except the 1981-82 recession, did only minor damage to the real economy, and what damage was done was relatively easily absorbed by increased government expenditures on unemployment insurance, welfare, education, state and local government assistance and grants. Injections of 'liquidity' through the Federal Deposit Insurance Corporation (FDIC) or the US Federal Reserve System – guaranteed deposits to prevent bank runs, lower interest rates on government securities that make borrowing easier – acted like the oil in an engine that just occasionally runs a quart low.
But in this one, the damage to the real economy unfortunately is already severe. Businesses are failing at a high rate. Home values have lost 20 percent, with probably at least 10 percent more to go. Foreclosures are skyrocketing. As are layoffs in construction and manufacturing. Mid-priced chains like 'Ruby Tuesday,' 'Starbucks,' 'Applebees' are closing by the hundreds. Working families who own their homes use them to leverage their standard of living, pay for education, health care and retirement. They are a principle foundation of state and local tax bases, schools, hospitals and public services. And they are all at risk. Halting the financial collapse is essential. However it will not be sufficient to prevent a serious recession. At best, it will slow the crash down and give breathing room to launch a successful recovery program.
Why is nationalization necessary, economically? The fundamental problem in the financial crisis is that large and important banks critical to the financial system hold highly inflated financial assets backed by very over-rated mortgage security products. Those assets have deflated. A government rescue of failing banks whose bankruptcy will destabilize the financial system is in the public interest if it restores stability and unfreezes the credit system.
But a government cannot guarantee either stability or the taxpayer investment if it pays more than market value for the deflated assets, which would inherently reward those brought the system to its knees, and stimulate yet another round of speculation and amplified instability. Plus, market value cannot be determined in a market where trading has (had, before Monday) stopped. One thing that is known is the current stock prices. By nationalization – 'equity stakes' – at or near market prices, the government gets by far the most security on all fronts for its money. The immense public sums already committed by the coordinated world treasuries far exceed the capability of any private sponsor.
The details of the US Treasury nationalization plan, which were released today by President Bush, follow the UK lead, and demonstrate how extraordinary features of this crisis are compelling a greater socialization of the financial system in each country, and more powerful means and tools of international cooperation.
First, the banks chosen for the largest portion of the 'equity stakes' are are not the weakest, but the strongest banks: Bank of America, Citigroup, Wells Fargo, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Bank of New York (Mellon), Merril-Lynch. To do otherwise would likely cause the collapse of the most solvent, 'least unprofessionally' managed institutions – not a stabilizing move.
The authority exercised by these ownership shares will be similar to a public utility – a non-profit entity wholly attached to the US Treasury department. In addition a certain percentage of any increase in stock value is returned as a 'warrant' to the Treasury Department. Partial Nationalization of the strongest banks permits the government much greater power to better solve impediments to transparency and incentives to fraud than any other move. It gives the government direct rights and responsibilities as stakeholders in investment activity at the heart of the financial system.
The interim head of this entity will be a former leader of Goldman-Sachs. No doubt reflecting a striking new formation – a purer one perhaps – of state-finance-monopoly capitalism, than has ever before existed on such a scale. Many will reasonably question who is taking over who here! Nonetheless I think time will tell than an important realignment has happened. For one, the presidential campaign will now have to focus their attention on what the proper public role should be in the new relationship with finance capital, and international finance capital as well.
Second, to protect small businesses and prevent runs on their bank deposits, FDIC insurance was made unlimited for them, and increased to $250,000 on all other accounts. This is intended to prevent runs on smaller financial institutions as depositors rush toward the government backed ones. The outcome of this is less certain.
Third, the Federal Reserve will guarantee interbank – 'senior' – debt, hopefully freeing up credit markets.
Unaddressed except by its absence in the list of reforms is the fact that existing instruments of international coordination have serious defects, and continuing coordination depends on their repair. Neither the IMF nor the World Bank currently have the resources or influence, nor are they properly constituted with representation from all the real wealth centers of the world, nor are their operations sufficiently transparent, to inspire any confidence equal to the panic spreading around the globe. Russia, China, India, Brazil, South Africa – just to name a few of the vital economies, are not even represented. The noted G7 group of 'leading' economies also excludes these vital economies. If ever there was a time to put aside parochial and imperial interests, it is now. If ever there was a time to take the many good proposals for reform of global institutions off the shelf and into serious planning, it is now. If ever there was a time in which correcting the harsh inequities of global growth in the past decades, it is now. Failure to harmonize world interests in addressing the crisis has in the past caused World Wars. 40 million died in the last one before the long simmering idea of the United Nations could be born. Let us not defer obviously needed renewal of international institutions until after another conflagration!
The coming recession is likely to result in over 10 percent offical unemployment, and likely 20 percent or more if you count discouraged workers. No one knows the true figure – but the damage to the real economy, both nationally and globally, even if the financial collapse ends today – has already been severe. The Great Depression provides a comparable historical example: Roosevelt's bank reforms halted the 1930 financial collapse by 1933, but it took World War and public stimulus equal to over 100 percent of GNP to recover from the depression. The victory of the Obama campaign assumes ever greater significance and import as a broad-based, aggressive program of pro-worker, pro-people public interventions in the crisis that is quickly spreading to kitchen tables, tent cities, heatless homes, jobless communities of the US, and the world, becomes each day a more urgent necessity.
Even Obama's increasingly renown coolness of temperament seems well-suited to the turbulent waters he will be called to navigate. Yet Obama will be challenged to be even bolder, even more prepared to make fundamental structural changes in the operation of the US Economy, than was Franklin Roosevelt. He will need help. Mobilization of all the victims of this crisis to demand change is the help he needs most. A filibuster proof majority in both houses of Congress is now a necessity for sound coordinated public action. A McCain victory – even assuming the best intentions of the Senator – can only bring further political and economic paralysis: which will ruin us all. Senator Obama introduced his own proposals for stimulus yesterday, and they were concentrated as they should be in job-creating actions in the tax code, infrastructure programs ans specific subsidies, and investment in education and health care. He also made a call for extended unemployment benefits. This is vital for the likely 10-20 percent of the workforce that will lose their jobs in 2009. But here, I believe, much more needs, and can, be done than extending unemployment benefits in order to secure the fastest recovery for working people.
It is perfectly practical, and much more consumer and labor friendly, as well as a stabilizing influence, for government to enhance its policy of unemployed benefits or welfare by also becoming the employer of last resort. There are zillions of public infrastructure tasks desperately in need of workers. There are millions of youth desperately in need of national service and jobs. There are large numbers are in need of support for retraining with more education and extended benefits.
The depression can best be addressed, with the least debt or inflation, by putting people directly to work producing real values, or by improving and updating their overall skills. Even if the government 'last-resort' workers are paid less than a comparable private or area rate, the over all impact on worker incomes, GNP and performance will still be dramatic and positive compared to the unemployment or welfare transfer payment.
Some may wish to impose upon this agenda a requirement that the 'last resort' wage be the 'union' wage, arguing that a less wage undermines union labor, which should be the standard. A test that the program must surely fail. To adopt it in effect asserts all workers should be driven out of the private labor market. That is a shortsighted approach and does not appreciate the potential of a full employment, rising education, public works approach to remove poverty and set a floor on incomes and raise the bargaining power of organized workers.
In the Great Depression workers and hunger marchers raised the demand 'Work or Pay' that led to establishing unemployment insurance. But we should not lose sight of the fact that the preference should be 'Work.' Now as then, if the panic can be halted, there are other steps of course: health care, energy, environmental protection all are demanding our attention. And a full stable recovery cannot ignore any of them. But halting the panic, and keeping people from starving – that comes first.
The next task is to keep people from starving.
