The public row which has developed between the private banks and the government, reported in both the Financial Times and The Independent today, demonstrates both the limits of Keynesianism and makes clear the relation and difference between it and a fully socialist economic approach.
Regarding the row, as The Independent notes in its leading article today: 'The Government has already bailed out the banks with extra liquidity and injections of new capital. The Bank of England has acted drastically to reduce interest rates and is poised to go further. But so far the banks have still not responded with loans, mortgage rates or credit lines to their customers. As yesterday's CBI survey of smaller businesses illustrated, most firms are experiencing a drastic reduction in bank credit and a tightening in terms.'
These actions by banks threaten the entire economy - and therefore the well being of everyone. As The Independent notes of any proposed Keynesian economic recovery package to meet the economic downturn: 'The sort of fiscal stimulus now being planned can counter this by putting more money into people's pockets and providing more jobs through public investment. The problem of today – as in the great crash – is that the contraction comes hard on the heels of a banking and stock market crisis. Putting more money in the pockets of taxpayers, particularly at the lower end of the scale, can help. But it cannot work alone. For that you need credit to become more freely available at an attractive price.'
The paper then notes: 'From the banks' point of view, that [refusal to lend adequately] may be understandable. They badly need to rebuild their capital base and avoid a return to excessive risk. But from the nation's viewpoint, this is only making a bad situation worse. Banks must support the reflation package by restoring lending. If they will not do it of their own accord, then the Government should use the influence of its new shares and its powers to push them into more responsibility.'
The Financial Times, similarly in an editorial, deals with the same topic - warning of a threat of nationalisation if banks continue to act in their present fashion: '“Neither a borrower nor a lender be” was not intended as advice for bankers. Someone should tell them.
'The purpose of the recent round of recapitalisations was to strengthen banks so that they could continue lending during a global downturn. But banks are not doing so. They must. They are vital utilities – a modern economy cannot function without credit...
The Financial Times notes: 'Banks around the world have been recapitalised. Governments bought shares in them, increasing the banks’ risk-capital buffers. The banks were injected with enough capital not only to make up for the losses they were expected to make in the downturn, but also to allow them to expand their lending without the capital cushion becoming too small relative to the banks’ assets.
'Newly fortified, banks were supposed to become trustworthy borrowers and confident lenders. Expecting further losses, however, they have clammed up. They are wary of extending their balance sheets further. This is, in part, because they are still traumatised after a near-death experience. Many banks have also seen their top management decapitated. Finally, investors and banks have become so risk-averse that even government guarantees on lending are not convincing. Despite being underwritten by the US government, perceptions of the risk on Citigroup’s debts have remained stubbornly high.
The Financial Times argues: 'Governments can do more to support lending. They can reassure markets that capital ratios are supposed to fall in the downturn and that they stand behind the banks. Finance ministries around the world can recapitalise further. Central banks can expand their lender of last resort functions.
'If evidence emerges that banks are not lending because they are hoarding cash to pay off the expensive preference shares taken by governments, the rescue can be restructured. One option would be to give governments more control of the banks; another would be to reduce the short-term costs of the capital.
The paper concludes: 'even if governments ensure that lenders are solvent and liquid, it could still be rational for each bank not to lend. Banks want safety in numbers when it comes to lending. But a lack of credit would force sound companies under because of a working capital squeeze.'
The Financial Times therefore warns: 'If bankers do not start lending of their own accord, governments will force them to.... Faced with this prospect [of lack of adequate lending], governments will have no choice but to step in.
'Politicians may attempt to lend directly, taking on credit risk to stimulate certain categories of lending and insurance. But banks, which have always been dependent on the largesse of taxpayers, could be forced to adopt central targets for new lending. This would overcome the problem of no institution wishing to be the first-mover. And banks would have little choice but to obey; if they are unco-operative, they could end up in public ownership.'
Regarding the same threat of bank nationalisation Nigel Morris, The Independent's deputy political editor, notes: 'The Government is using the threat of a wholesale nationalisation of banks in an attempt to force institutions to lend billions to small companies struggling to survive as Britain slips into recession.
'Downing Street yesterday made plain its fury over high street banks which refuse to use the massive injection of taxpayers' money they have received to come to the rescue of businesses hit by the credit crisis...
'The financial stimulus package is designed to breathe new life into the economy but Mr Darling fears the behaviour of the banks could undermine the moves... He is expected to announce controls on the interest rates charged on small business loans...
'Ministers are irritated that banks the Treasury bailed out are dragging their feet over passing on the money. The Treasury took stakes in HBOS, Lloyds TSB and Royal Bank of Scotland in return for £37bn of public funds. The banks promised to return lending to last year's levels. John McFall, the chairman of the Treasury select committee and an ally of Mr Brown and Mr Darling, raised the prospect of state control, saying: "If the banks do not play ball, and will not resume lending, then the demand for full-scale nationalisation may well grow."
'No 10 refused to rule out such a step, regarded by officials as the "nuclear option". Mr Brown's spokesman said: "In these circumstances, of course we have got to look at all the options. But we want to work constructively with the banks to ensure they fulfil the commitments they have entered into."
'Asked a second time about full nationalisation, he replied: "It would clearly be foolish for anybody to rule out specific options at this stage."The Government has made little effort to disguise its frustration at the behaviour of banks towards small businesses and mortgage-payers.
Morris concludes: 'Mr Darling is preparing to use his pre-Budget report to fire a shot across their bows with tough demands on lending. He is not expected to impose further legal sanctions on banks, such as the appointment of a powerful watchdog to monitor lending rates, but officials want to keep options in reserve if the banks fail to respond. '
This is the dilemma of Keynesianism. What if the banks refuse to respond to voluntarily to government 'influence'? Will the government then say 'private property is sacrosanct. We know that banks refusal to lend is disastrous for the economy. But private property, in this case in banks, comes before the health of the economy and therefore of society. To preserve private property, we must surrender and allow the economy to go into slump'. That is the capitalist answer.
Or will a government say: 'We have tried indirect methods of stimulating bank lending but these have not worked - the banks are using their claimed right as private companies, that is as private property, to refuse to lend. The interests of society, that is of economic development, come before those of private property. Therefore such decisions will be taken out of the hands of the banks. The banks will be nationalised, that is their position as private property abolished, in order to commence the necessary lending to maintain the economy.' That is the socialist answer.
The dilemma of Keynesianism, at least as orginally put forward by Keynes, is this: because it accepts capitalism, that is private property, as the basis of society Keynesianism can only use indirect methods (fiscal deficits, monetary policy, interest rate policy), to attempt to influence the most fundamental issue - the investment decisions in the economy. For, if you take away the right of companies to take investment decisions, you in fact abolish them as private property - that is you abolish capitalism.
Keynesianism can, therefore, deal with minor or moderate economic crises - in these indirect methods are sufficiently powerful to cause investment to recommene and therefore to overcome the economic downturn. But if the economic crisis is really deep such indirect methods are not sufficiently strong. Private compaies will not resume investment and the economy will go into a downward spiral. In those circumstances the only economic way out is take the investment decisions out of the hands of the capitalists and into the hands of society by nationalisation - which means going forward from a Keynesian solution to a socialist one.
In the UK will the present financial crisis require a Keynesian or a socialist solution to overcome it? Regarding the overall economy that depends on how deep the economic crisis becomes. Does the UK face a severe economic recession or an economic depression? Socialist Economic Bulletin at present, for reasons it has outlined, analyses that the UK faces a severe economic recession not a full blown depression - although the reverse outcome could occur if the US makes catastrophic economic mistakes. While the moral case for socialism remains overwhelming it is unlikely, in this country, that it will be impossible to get out of the current economic downturn without resorting to fully socialist measures - that is a wholesale programme of nationalisation. Considering the economy as a whole, a Keynesian/capitalist way to overcome the economic crisis will be carried out.
But that overall perspective not only does not apply to every country in the world it does not apply to every part of the UK economy. In the financial sector, both in the UK and in the US, what is faced is not recession but a catastrophic collapse comparable only to 1929. It is already the case that the most rational, and by far the cheapest, way to sort out the disastrous situation in the UK financial sector would be to proceed immediately to wholesale bank nationalisation. The immedite crisis, whereby the banks are refusing to lend even after the bail out packages, may make it the case that the only way out of the economic downturn is by wholesale bank nationalisation - a sort of Keynesian solution in the overall economy and a socialist solution in the catastrophically affected financial sector.
Indeed, t may be put more strongly. If the government retreats in face of the present policies by the banks, with their refusal to lend then it will not be possible to apply a Keynesian policy in the overall economy. Truly socialist policies, nationalisation, in the financial sector may well turn out to be the only way to apply Keynesian policies in the economy as a whole.
No comments:
Post a Comment