Nine years after the onset of the international financial crisis, its effects are still with us.
These days observers worry about banks — European institutions like Germany’s Deutsche Bank, France’s Societé Generale, and Italy’s Monte di Pascoale, not to mention the zombie banks that populate the austerity-ridden eurozone periphery in Greece, Portugal, and Spain. These big banks are widely seen as global capitalism’s next weak link, capable of causing massive financial instability if they go bust.
Such concern isn’t particularly surprising — banks were at the center of the latest crisis from the beginning. Indeed, it wasn’t subprime market defaults that unleashed the destructive financial turmoil of 2007–8, but their ruinous impact on a major investment bank, Lehman Brothers. Lehman’s failure — and the state’s subsequent refusal to bail out the bank — created a credit crunch that sent the entire financial sector, as well as the world economy, into a tailspin.
As the US crisis morphed into the eurozone crisis, banks were again at the epicenter. The debt burden of peripheral states and the prospect of their default threatened the solvency of the entire European banking sector, which had lent to agents public and private.
Europe’s major banks, already troubled by their souring US investments (among other things) faced collapse. Only the quick substitution of bank-held debt for official debt — taken on from the troika of European lenders and the IMF in return for punitive fiscal austerity — saved them.
Yet here we are today, facing another potential wave of failing banks. The lingering instability highlights the hollowness of the G-20 countries’ pledges to reform the financial sector in 2008-09. Promises to “extend regulatory oversight and registration to Credit Rating Agencies,” “take action against non-cooperative jurisdictions, including tax havens,” and “prevent excessive leverage and require buffers of resources to be built up in good times” have yielded little substantive change.
Granted, bank reform legislation has been passed in both the US and Europe. The Dodd-Frank Act in the US, the Eric Liikanen working group recommendations in the European Union, and, ultimately, the Bank of International Settlements’ Basel III regulation all raised capital and liquidity requirements and produced new resolution mechanisms for banks.
But once the initial shock of the crisis passed, banks lobbied intensely to water down the rules, and regulators set an extremely low bar for compliance. The banking business, in short, resumed its old practices — but now in a financial landscape marked by even larger banks that posed far greater systemic risks to the world economy.
The Left and Credit
So as the banks have a field day, where is the Left?
Seemingly nowhere to be found. In the core capitalist countries, the Left has repeatedly failed to crawl out from its defensive trenches and seize the opportunity that the crisis opened. Proposals concerning the financial sector have been weak at best, limited to regulation and taxation measures, such as the popular “Tobin Tax.”
Meanwhile, questions about how banks should be organized and governed aren’t even raised. The Left has either latched onto market-based arguments of “let them fail” or turned to more benign liberal solutions like breaking up big banks. As a result, it has failed to contribute to crucial debates about modern capitalism’s pivotal institutions.
Part of the reason why is the Left’s profound weakness: it has little capacity to propose and implement new policies that benefit the working class. But the Left’s tendency to shy away from debates about banks and finance is rooted in other factors as well.
For one, the Left tends to emphasize production over circulation, the sphere where finance is located. As a result the role of finance is under-examined, dismissed as a big Ponzi scheme that capital escapes to when it’s faced with a “structural blockage” in the sphere of production.
At the same time (particularly since the 2008–2010 crisis), the Left has viewed credit with extreme suspicion, often seeing it as an inherent evil to be restrained.
But while the effects of financialization have been dire for many ordinary people, credit is central to any economy, capitalist or otherwise.
As pointed by the political economist, Costas Lapavitsas, originating in the pre-capitalist exchange of commodities (like cloth and foodstuffs), credit is predicated on the lender-borrower interaction: the lender knows something about the borrower’s material circumstances, then chooses whether to enter into a relationship defined by the “promise to pay.”
In capitalism — where loanable capital is common and often doled out by banks — the social relations behind credit are quite depersonalized. Borrowers are much more homogenized, and their ability to repay is gauged by purportedly objective criteria like present-day credit scores.
Banks integrate and mobilize these criteria — information that is unavailable to other economic agents — through their privileged access to the financial dealings of firms and households.
The ability to assess the soundness of a borrower’s “promises to pay” puts banks in a powerful position. And this position is reinforced by banks’ other information-gathering activities — account management, asset management, foreign exchange — which fall outside lending activities but are at the core of investment banking.
The terrain on which banks operate (and compete) has been in flux since the 1970s. Liberalization, deregulation (and capital-friendly re-regulation) of financial markets, and the rollback of public services have conspired with new technologies to create entirely new financial markets, products, and agents.
Financial income, in turn, has migrated to more and more sectors, including housing (in the form of mortgage payments), pensions (commissions and fees charged on private pension funds), and even utilities (bonds and similar mechanisms for financing infrastructure).
The rise of capital markets and the emergence of new financial agents have not caused the traditional banking sector to wither. New markets opened by public policy, new credit assessment instruments, and faster access to data have simply given banks new agents and markets to loan money to — like households, who have become the main recipients of loanable capital in most developed countries, particularly in the form of mortgages.
Banks have also entered the lucrative market of managing savings and financial assets. As a result, banks have grown bigger, with expanding balance sheets and increasing profits relative to the overall economy.
Contemporary states have helped spur this financialization of the global economy, expanding their purview far beyond constructing new financial markets or transforming the provision of different goods and services for capital’s benefit. Governments today play a paramount role in backing banks’ power.
The reason is fairly straightforward: banks hold, through deposits, “promises to pay” that have a shorter maturity than their assets (others’ promises to pay). Or, more simply, they owe more than they hold at any given time. This imbalance is a source of potential fragility, as was clear during the 2008 liquidity shortage.
In order to prevent boom-and-bust cycles, the state stepped in, providing a financial backstop through its control of the money supply. Banks are given exclusive access to central bank reserves, which banks use to settle their liabilities. By conferring on banks the ability to create credit (and money) — a right that other economic agents don’t have — states give banks an incomparable power over the rest of the economy.
The Case For Public Banks
The special relationship between banks and the state became clear in the recent financial meltdown. As trust in the money markets evaporated, banks became dependent on state institutions to survive, let alone thrive.
Banks relied on emergency loans from central banks to sustain their liquidity mismatch, which would have otherwise thrown them quickly into bankruptcy. Governments also restored their solvency through emergency programs. States bought billions of dollars of worthless assets (through the Troubled Asset Relief Program in the US, for instance) or added regulatory capital through contingent bonds and tax credits or public money transfers (as with the UK’s “temporary” nationalizations).
States provided implicit and explicit subsidies to banks by boosting guarantees on deposits, carrying out unprecedented quantitative easing programs that granted banks safe returns through asset buying, and lowering interest rates to historic lows, thereby reducing banks’ funding costs.
The transfer of public resources to private banks was extraordinary. Yet the rescue measures were wrapped in financial jargon and a sense of political inevitability, and so, despite some halfhearted grumbling by lawmakers, they largely escaped public scrutiny.
That may be changing. The state’s heavy footprint in the financial sector is making it increasingly difficult to argue banks should remain privately owned. Why should profits accrue to shareholders, after all, when the risks and losses are socialized?
Public banks are not a novelty of course. Many countries, such as Germany and France, have long had such institutions, either in the form of commercial banks or development banks that provide loans to specific economic sectors.
And public ownership alone is no silver bullet for challenging global capitalism and its attendant crises. More often than not, these banks behave no differently than their private counterparts, or are controlled by public bureaucracies that end up serving particular private interests.
Simply put, public ownership of banks is necessary but not sufficient.
For public control to be liberatory, it must be part of an expansive vision that reshapes the practices and uses of credit along egalitarian lines. Private finance has promoted the commodification of (and shaped the organization of) key sectors like health and education. Taking control of credit must mean democratizing access to these essential services.
On the question of bank governance, it is not enough to have public officials in charge. Unions, social movement actors (like consumer organizations), and elected officials from both local and central government must have a role in their management. A progressive finance policy can only be enacted when a variety of societal actors, who all possess specific knowledge and interests, have a say in the organization and provision of credit.
Considering the global nature of contemporary finance, any plan to socialize the credit system — and reform the relation between money, credit, and state — must also take into account the highly unequal power relations that characterize the global economy.
US, as issuer of the dollar, controls a quasi-world currency that’s commonly used to settle international liabilities even between non-American agents. This gives the US immense power over the world economy, unmatched by any other country.
Through its own banks, the US controls the quantity and price (interest rates) of dollars used across the globe. (The euro — which is primarily controlled by Germany, the eurozone’s biggest economy — also enjoys global reach.)
In this context, any attempt to socialize the credit system must take into account the specificities of each country: how it is integrated into the world economy and how it can be disconnected from the chains of international finance and gain the space it needs to pursue its own economic and social policies.
Its balance of payments position, external indebtedness, and foreign currency reserve position are constraints that have to be dealt with on a case-by-case basis. For instance, it is difficult to imagine how any peripheral country in the eurozone could nationalize its banks without breaking with the euro, regaining sovereignty over its own currency, ending central bank independence, and introducing strict capital controls.
After years of financial crisis, rising inequality, and “secular stagnation,” the time is ripe for the Left to advance an egalitarian project that places finance at the center. This doesn’t mean a “one size fits all” program. Each country will have to devise its own socialized system of credit. But the goal will be clear, across borders and states: a more equitable, democratic international economic order.