The Great Credit Crunch of 2007-10 was, it is almost universally agreed, brought about by the irresponsibility and greed of bankers. But the huge public deficits needed to prevent a melt-down of the financial system are to be paid for by slashing public spending and shrinking social protection for many decades to come. The welfare state is to be dismantled at a time when higher unemployment and an ageing population make this a certain recipe for misery. The cut-backs are a gamble that makes recovery more difficult but has one certain result – a boost to the privatization and commodification of pensions, health and education.
For the last two decades neo-liberals have been insisting that disaster would ensue if we did not have a bonfire of social entitlements. Public pensions were declared to be a nightmare in the making. Now the disaster has happened – because of the vices of financialisation, not the burden of welfare. The disease had quite different origins and causes from those that were forecast by the doom-mongers but the medicine needed for this incapacitating ailment is just the same as before.
It is truly astonishing that a crisis caused by the bankers has to be solved at the expense of nurses, teachers, pensioners, students and the unemployed. I believe that the bankers are still widely thought to be culpable but that few dare to defy the money markets and international financial agencies. Fear of the bond markets is excessive but not irrational. Countries that forfeit the confidence of the markets immediately find borrowing more expensive but the clincher is that, if confidence continues to plummet, then default and bankruptcy looms. As citizens of Argentina discovered in 2001, if that happens businesses collapse, everyday life becomes an obstacle course and savings are wiped out.
But while it is rational to take the markets seriously this should not mean capitulation before its false alternatives and truncated perspectives. Just as the draconian cuts menace hopes of recovery so the new regulatory requirements laid on the banks are pathetically inadequate and do little to prevent future financial crises.
The left’s response to the crisis has to be positive as well as negative. It must reach out to alternatives and these should centrally include the establishment of a public utility finance system, the levying of taxes on capital, the building of local networks of democratically-controlled social funds and a programme of diversified development. The aim of this package would be to stimulate investment-led growth, foster sustainability, encourage the formation of human capital, and yield a growth of productivity.
Before explaining what I mean by the above it will be helpful to identify the features of neo-liberalism which ensure that it fails even as it succeeds in gaining access to new sources of profit. The IMF and World Bank have aggressively promoted commercialisation of pension provision as Mitchell Orenson has shown in his recent study, Pension Privatisation. Between 1994 and 2008 thirty countries in Latin America and Eastern Europe were persuaded to abandon their public pension systems and replace them with personal pension funds managed by commercial finance houses. The international agencies resorted to shameless bullying, and what Orenson politely calls ‘resource leverage’. As he explains, countries in the midst of a difficult transition to democracy were denied all financial assistance unless they agreed to pension privatisation. In addition funds were made available by the World Bank to carry through campaigns of public persuasion and key individuals were offered inducements and attractive employment if they went along with the process.
The success of the campaign for pension privatisation has proved a comprehensive disaster for the countries concerned. The rocky state of stock markets has meant that the promised accumulation targets have been missed by a mile. But even in periods where stock markets grew the commercial funds suffered from exaggerated cost ratios. This is a central defect of the financialised model. Universal public schemes do not have the expense of marketing and customisation that plague private provision. In an attempt to solve this problem countries were often persuaded to make participation compulsory but the cost disease has remained. This is because either there is no effective competition in which case the suppliers exploit their monopoly position or there is competition (‘choice’) and there is an expensive marketing war between rival suppliers.
Other problems that beset the commercial provision of financial services are information asymmetry as regards contributors and information deficits as regards investments. On the one hand the finance houses have much more information than their customers and use this to secure advantages over them. On the other hand the Anglo-Saxon banks fly far above the ground level at which small and medium businesses exist and have no rational criteria to inform their credit decisions. Think of their folly in accepting so much exposure to subprime mortgages. Today a similar problem arises with respect to their reluctance to make any productive investments.
British and US savers have long experience of all these problems and have not been able to identify an effective remedy. Two problems are worth signalling since they go to the core of the neo-liberal regime. The advocates of neo-liberalism have been – as Peter Mandelson, the ‘New Labour’ strategist, once put it – ‘intensely relaxed’ about greater inequality. Yet at the root of today’s crisis is precisely the poverty associated with this inequality. The credit crunch in the US was triggered by the breaking of a speculative bubble in subprime mortgages – namely mortgages taken out by poor people (‘subprime’ borrowers) who could not keep up payments expected of them. And at an international level the poor earnings of Chinese workers and farmers furnishes too little demand to the world economy, generates huge trade imbalances and asset bubbles – and consequent threats to growth.
British and US savers now face ruinous shortfalls as a consequence of all the above problems – swooning markets, excessive costs, poor information and ballooning inequality. Yet in the UK the economies recommended by the Hutton report will push public employees into reliance on private sector suppliers who are insecure and costly. They will also weaken public sector pension funds which have a good record, with low cost ratios and at least some attempt to favour social responsibility. The Hutton report itself acknowledges that public sector pensions are not ‘gold-plated’ and that, at current rates, are set to decline as a proportion of GDP. The ‘average’ public sector pension is a little over £7,000 and half of all beneficiaries receive only £5,600. Britain’s pension problem is that pension provision is too low and too patchy. The state pension is among the lowest in Europe and half of the huge subsidy going to private pension savers goes to the top ten per cent of earners.
The recent attempts to widen coverage and improve regulation will make little difference. In the UK many employees are likely to opt out of the new personal pension accounts and the savings they make will be managed by commercial suppliers. According to the logic of a ‘race to the bottom’ it is sometimes asserted that because so many private sector employees have poor provision, public sector workers should be reduced to the same unfortunate position. Governments throughout Europe are seeking to impose this dismal proposition. The degradation of public provision leads to ‘implicit privatization’ as citizens are urged into the clutches of the financial services industry.
It might seem that President Barack Obama’s health care scheme bucks the trend but sadly this is not so. The scheme was vetted in advance by the insurance industry and big pharma. The new scheme offers new business to these interest groups and will lead to escalating costs. To rescue the programme from rising costs it will be found necessary to curtail the service available to patients – Obama has already cut back what is offered by the Medicare to pay for the new programme – robbing Peter to pay Paul.
So what is the best way to tackle all these problems? The short answer is a public utility finance system, that is, financial institutions that are run in the public interest rather than as casinos and which are, in a variety of ways, publicly-owned. We should note that elements of a public utility finance system – as in China, Germany and parts of Scandinavia – have proved more compatible with industrial investment. On the other hand public stakes in the banking system are useless unless there is a determination to use them. The US and British authorities have huge majority holdings in giant ‘zombie banks’ like Citi Bank and RBS and yet they have refused to use their power to revivify these concerns and ensure that they make credit available to small and medium enterprises.
However if there was a willingness to foster investment-led growth where could the resources come from and where should they go to? The Group of 20 have been obliged to consider a banking levy and a financial transaction tax, something like the Tobin tax. There is obviously great scope for such levies and they would have the double benefit of restraining speculative activity and raising revenue. While there can be a place for rather modest levies on some types of transaction the banking levy should not be modest at all. Justice and strategy both demand very stiff measures, tantamount to the socialisation of a swathe of the financial institutions. These banks were faced with ruin in 2007-8 and were saved by the public treasuries. For nearly two years the banks have been nursed and molly-coddled by the central banks. They have been able to borrow very cheaply and then lend the money out at very safe and advantageous rates. In some cases they could borrow from the central bank at less than 1 per cent and lend that same money back to the government (by purchasing bonds) at 3 or 4 per cent. Taking only a tiny amount of risk they could lend at 8 or 12 per cent to those with good collateral. Concerned mainly with reducing exposure they have denied credit to small and medium firms – hence the tenacity of the credit crunch. Thus the British government’s Special Liquidity Scheme allowed the British banks to borrow £165 billion at a discount to market rates; bonds floated by the banks worth a further £120 billion were made palatable by a government guarantee. (‘Banks on Methodon’, The Economist 24th July 2010). These figures should be borne in mind when considering the proposed annual yield of the levy on the banks in the UK– just £2 billion.
The banks have been so dependent on the tax payer and public support that there is an overwhelming case for large public stakes. The banks – large and small – could be obliged to issue shares equivalent to 40 per cent of their annual profits, to a regional network of social funds. Using these funds as their security the regional funds could then draw up – in association with local elective bodies – a ten year programme of productive investment, embracing both public and private ventures. Such a programme might include public universities and research institutes, green energy schemes, and universal access to broad band and other informational systems. The German experience of publicly-owned Sparkasse and Landerbank linked to manufacturing, and the Mittelstand or medium sized companies would be well worth studying. Also relevant is the experience of public sector pension funds in the US and UK and the Mondragon Group cooperative in Spain, with its special finance arm.
While I believe that this is the best way to finance the emergence of a public utility finance system, other sources of capital might come from a land tax on commercial real estate and a general share levy on large corporations. I outlined these possibilities in the conclusion to my book Age Shock; How Finance Is Failing Us, Verso 2006. The key device of the share levy requires corporations to issue shares annually worth 10 per cent of their profits to the regional network of public funds. The shares acquired in this way are not sold but the dividends they earn are applied to specific social priorities, such as funding pension provision. In Britain another potential source of public funds would be a rebate on the statutory interest payable on capital injected by the Private Finance Initiatives. Some £210 billion of PFI capital assets now earn an enticing rate of interest. Simply reducing the interest rate charged by NHS hospital contractors by 0.02 per cent could save £200 million a year. (Jesse Norman, ‘Hard Times Call for Rebate on PFI Deals’, Financial Times, 17/8/10).
The classic device of 20th century socialism was the nationalisation of industry. In the 21st century the key institution may well prove to be the publicly-owned and controlled financial fund. Private financial institutions are inefficient and risky, in contrast to the greater security and economy of public finance.
Robin Blackburn teaches in the Sociology Department at the University of Essex and at the New School for Social Research in New York. A former editor of the New Left Review, he is the author, most recently, of Age Shock: How Finance is Failing Us.