Tuesday, March 29, 2011

Cooking the Books: Was the crisis just a mistake? (2011)

From the March 2011 issue of the Socialist Standard

The Financial Crisis Inquiry Commission set up by the US government reported at the end of January. They concluded that the crisis of 2007 and 2008 was the result of “human action and inaction, not of Mother Nature or computer models gone haywire”, but “of human mistakes, misjudgments, and misdeeds” and so avoidable (http://www.fcic.gov).

Obviously, the crisis was the outcome, even if unintended, of decisions by humans to behave in particular ways, but that’s not at issue. We need to know why the economic decision-makers involved took the decisions they did. What was the context of their decisions? What were the constraints acting on them?

The driving force of capitalism is the pursuit of profits by competing enterprises. As the Commission put it, “in our economy, we expect businesses and individuals to pursue profits…” If there is a chance to make a profit from some activity then the businesses in that field will go for it. If the profits are high enough then other businesses will enter the field to share in the bonanza.

This is what happened in the US. From 1997 until 2006 there was a boom in house building and buying. Big profits were to be made from lending money either directly to housebuyers or to businesses that did so. Easily able to borrow funds at relatively low rates of interest, the Wall Street investment banks decided to get in on the act, and in a big way,

“The large investment banks and bank holding companies,” the Commission reported, “focused their activities increasingly on risky trading activities that produced hefty profits.” The prospect of making “hefty profits” out of lending money to build and buy houses led them to borrow more and more money to take part in the chase after them:
“In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly. For example, as of 2007, the five major investment banks – Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – were operating with extraordinarily thin capital. By one measure, their leverage ratios were as high as 40 to 1, meaning for every $40 in assets, there was only $1 in capital to cover losses.”
Note the matter-of-fact acceptance here that banks cannot create money out of thin air but are dependent on themselves borrowing the money they lend.

The Commission criticised the investment banks and other financial institutions for taking such risks but could those involved in making these decisions have decided otherwise? Could they have decided to forgo the chance of making the ‘hefty profits’ that were there to be taken? No, because if one of them decided not to pursue these profits, the others would have enthusiastically taken their place. It wasn’t a mistake on their part. Given the competitive, profit-seeking nature of capitalism they had to take the decisions they did. In that sense the financial crisis was not avoidable.

It was outside the remit of the Commission to examine the housing boom whose collapse in 2006 triggered the financial crisis. They merely recorded that “when housing prices fell and mortgage borrowers defaulted, the lights began to dim on Wall Street”. If they had gone further into the housing boom and why it ended, they would have discovered that it was a classic case of the pursuit of profits leading to overproduction (too many houses being built in relation to what people could afford to buy) and perhaps revised their view that “the profound events of 2007 and 2008” were not “an accentuated dip in the financial and business cycles we have come to expect in a free market economic system.”

Look back, move forward

Cross-posted from the Socialism Or Your Money Back blog

Two things are utterly predictable whenever there is a mass protest, or a demonstration of significant size, and the anti-cuts demonstration organised by the TUC on 26 March was no exception. The first is that the police will do their best to turn it into a riot and to intimidate all present with violence. The second is that, regardless of police actions, most people will come away with a new sense of purpose and meaning in their lives – awake and invigorated, full of the collective joy that spontaneously arises when human beings get together to show their strength of feeling or merely their urge for festivity. After many decades of a relatively lonely and boring struggle to survive, a struggle that those in power have faithfully promised us will get worse in the coming years, people will have come home on 26 March at the least relieved that "I'm not alone".

That's the positive side. Unfortunately, with the decline of the traditional left and trade unions in this country and around the world, and the accompanying lack of faith in democracy and political parties, it's hard to know what exactly to do with those feelings – how to transform a feeling of solidarity and commitment to opposition into something that will last, something capable of delivering long-term, lasting change for the better.

That lack of faith is not just confined to the mass of people who are not ordinarily involved in politics. It is sometimes declared to be a positive thing from those committed to radical change. The thinking is that the traditional political parties and trade unions and so on have held us back – their ideas have been tried and failed and defeated, and their hierarchical structures and outmoded ideas are boring and not fit for purpose. Instead, we are to celebrate spontaneity and freedom – to get together in small groups and do exactly whatever we want.

There is something to the argument, but it has lost its appeal in the face of a major attack from the ruling class and its representatives who control the state machine. An extremely serious economic crisis that started with the banks has changed the game. The rich were rescued by huge state bail-outs. The costs of the crisis were shifted instead to the state – and the state intends to shift the burden to us, by slashing our jobs, pensions, social services, benefits, and so on. The attack is organised and centralised – shouldn't the opposition be too?

There are no easy answers to these questions, and we don't pretend there are. But perhaps it's time to hear once again a voice that has been marginalised for over a century. From the formation of the Labour party in 1906, and then the Russian revolution in 1917, socialism has come to mean either state management of welfare capitalism, or state dictatorship over a centralised economy. But these rightly discredited ideas marginalised a previously existing conception that it might be worth reviving. The word socialism was already beginning to lose its original meaning by 1894, which caused William Morris, one of the Victorian age's greatest polymaths, to say:
"I will say what I mean by being a Socialist, since I am told that the word no longer expresses definitely and with certainty what it did ten years ago. Well, what I mean by Socialism is a condition of society in which there should be neither rich nor poor, neither master nor master's man, neither idle nor overworked, neither brain-sick brain workers, nor heart-sick hand workers, in a word, in which all men would be living in equality of condition, and would manage their affairs unwastefully, and with the full consciousness that harm to one would mean harm to all—the realization at last of the meaning of the word COMMONWEALTH."
The 20th century did its best to let the curtain fall for ever on this vision of socialism, but a small number of dedicated activists have done their best to keep it alive. We in the Socialist Party count ourselves among their number. We say that it is right that people have lost faith in traditional politics – it has proved by its actions what it is all about. But to say that therefore we must give up on a vision of the future, and an organised commitment to attaining it, is to throw the baby out with the bathwater.

The inspiring struggles for democracy and against austerity we are seeing emerging around the world have a common cause – they are the divided and isolated battles of workers against the relatively united attack of the world's ruling class in its attempt to resolve its economic crisis. We need to follow the ruling-class example – come together and organise in order to resolve the crisis in our way. That is, by organising a political party dedicated to taking state power out of the hands of the ruling class, and to establishing socialism. And given the extremely serious nature of the ecological catastrophe we are all facing, this is not just a nice idea. Increasingly, it's a matter of survival.

Stuart Watkins