Economic Hell in a Handbasket

I received an email that I was going to post as a comment on someone's blog about the recent intensification of the economic crisis and then realized there wasn't one.

So here it is -- a somewhat different perspective coming from an avowed revolutionary socialist and non-American. BTW, the title of the blog is mine, not his.

I'm distributing this message widely, including to forums where it is off-topic, because the escalation of the economic crisis with the collapse of Lehman Brothers, the fourth biggest investment bank in the US (and fifth biggest in the world) is very important - and millions of ordinary working and middle class people are undoubtedly rightly concerned that their savings may be at risk.

First, a confession: I had wrongly thought that legislation had not been passed to compensate the first £35,000 of your savings (in an individual bank). At the time of the run on Northern Rock last year, only the first £2,000 and 90% of the next £33,000 was covered. However, I noticed that many of the national newspapers today said that the first £35,000 is fully covered. I have checked the website of the Financial Services Compensation Scheme (FSCS) - http://www.fscs.org.uk - which confirms the £35,000. [If a national newspaper lied on a matter as important as this and were found out, their reputation would be in tatters and they could presumably be sued.] I would strongly recommend you checking that website (if you live in the UK) rather than taking my word on how the crisis may affect you.

However, the website also points out (on http://www.fscs.org.uk/industry/ funding) that the levy on financial institutions yields a mere £4.10 billion a year. This is chicken feed compared to the vast sums owned or borrowed by the big banks. The Bank of England, which had previously pumped £50 billion in the markets was pumping another £20 billion today. Meanwhile, there are strong rumours (including on the front page of the Financial Times and even the Sun) that AIG, one of the world's biggest ensurers and best known as the sponsors of Manchester United, could be next. The FT front page article mentions that they are getting an emergency $20 billion loan (and I read elsewhere that they asked for $40 billion). Loans to banks that may end up failing, risking taxpayers' money (or greater government borrowing that taxpayers are ultimately liable for), could be regarded as a scandal - but central banks and politicians have little choice if they want the capitalist system to continue!

The Tories today are calling for the compensation scheme to increase the guaranteed amount to £50,000, offering help to get quick legislation through parliament - which I suppose shows that the sort of people they are most interested in protecting are those with savings over £35,000 (who can't be bothered to divide their money across different banks or put it in a building society, Northern Rock or the government's National Savings & Investments, to be on the safe side).

But if your bank goes under, how quickly would you get your money back? One of the problems of the previous scheme was that it could have taken many months, but I can't see any proof (on the FSCS website for example) that that is not still the case.

The Tories have previously suggested that they would not bail out a bank in trouble - but this point was in a Sunday Herald article that many would have missed, and they would really have little choice but to nationalise any high street bank that goes under. Investment banks are different in not directly affecting millions of ordinary people. If a New Labour, Tory or Liberal Democrat government allowed any large high street bank to collapse, they would have to compensate savers - with the prospect of huge demonstrations and possibly a general strike, forcing action with the real possibility of a socialist revolution if they didn't. And realistically, nationalisation is a much better option from a government's point of view than letting a bank go under, because it avoids the windfall that borrowers, including mortgage holders, would receive by not having to pay the money back to a bankrupt bank! [Many US banks have already gone under, and I read today that half the banks in the USA are expected to follow them or be taken over in the wake of Lehman's collapse, so the situation is different there.]

Anyway, according to falls in stock market share prices yesterday and today, HBOS (Halifax Bank of Scotland) is most in danger of all the UK banks. At one point yesterday, HBOS shares were down 36%, and they ended 17.55% down; they fell another 30% today (and are 28.17% down at the time of writing this, as revealed by a quick internet search). RBS (Royal Bank of Scotland) shares fell 10% yesterday and are currently 14.20% down today. Barclays shares fell 9.84% yesteday and are 15.26% down today. These are all in the top 100 companies on the UK stock market (the FTSE 100) which has fallen to its lowest point for three years. In the past, big business investors were almost guaranteed to make huge amounts of money from the work of ordinary people, and the best news from all this market turmoil is that that period is over - permanently! Of the minor banks not in the FTSE 100, Bradford & Bingley did worst yesterday, falling 15.44%, but it is only 6.35%
down today.

I generally prefer to give links to articles in the mainstream press, sometimes including text of articles, where required to justify my assertions. I read left-wing sources too, but my analysis tends to be better than theirs (in my not-so-humble opinion) and some of their points are unrealiable, sometimes obviously completely wrong. To what extent it is clumsiness rather than infiltration to damage an organisation' s credibility, or over-exuberance, is a matter of opinion. I will however give a link to an article on the Scottish Socialist Party website about the collapse of Lehman Brothers (which amazingly is now accessible without putting the "www." at the start of the web address!) at http://scottishsocialistparty.org/economic-crisis/september2008.html. It is probably better than most analyses made by socialists because it is written by Raphie de Santos, former head of equity derivatives research and strategy at Goldman Sachs International. As a warning, I read today an earlier article by him in the Scottish Socialist Voice (in issue 329, 15-28 August that is not on-line) which said "If the world's population were all to consume as much petrol as the average citizen of the United States then the known global oil reserves would last four days!" A quick calculation: with the population of the USA about 250 million and the world 6.5 billion, if only people in the USA used oil, it would run out in 104 days! It is contradicted by a later claim that "the reserves of extractable oil are known. There will come a point in the future where peak oil production will be reached and after that the demand will far outstrip demand [sic: he obviously meant supply] - the range of estimates for this to happen are between five and ten years." What is annoying about most articles in the left-wing press is a lack of references to back up claims like these.

I'll include below a section of a document I finished writing yesterday, entitled "Strategy for Proportional Representation- based Socialism". You can read it in full at http://www.PRsocialism.org/strategy.htm or read and discuss it at http://groups.yahoo.com/ group/PRsocialism. Note that some of the points are contradicted by what I wrote above.

Economic crisis will provide opportunities to put socialism on the agenda
As chancellor, current British prime minister Gordon Brown claimed to have ended the cycle of boom and bust, which has proved impossible under capitalism. The New Labour government borrowed heavily to prolong the boom and we are now entering a severe recession. Big business and its New Labour allies are trying to make working class people pay for their crisis – escalating food and fuel prices and a housing slump, with big cuts in living standards unless we go on strike.
The credit crunch is mainly blamed on “subprime” mortgages in the USA , sold to people with a poor credit history and with high interest rates starting low. This caught many ordinary people out, since most US mortgages are at a fixed rate for the entire term, which (due to high inflation) could lead to many banks around the world that have lent the money for such “prime conforming” mortgages facing bankruptcy. New Labour would probably bail other banks out like when it nationalised Northern Rock (and like the US government recently did with Fannie Mae and Freddie Mac which guarantee only prime conforming mortgages) or lent £50 billion without revealing to whom, but other governments may adopt a different approach.
[On the day I finished writing this document, the US government indeed failed to step in to save Lehman Brothers, the fifth largest investment bank in the world, and it went bankrupt. This is having a big knock-on effect on shares in other banks around the world, with the shares of HBOS (Halifax Bank of Scotland ), RBS (Royal Bank of Scotland ) and Barclays particularly collapsing, despite the Bank of England pumping another £5 billion into the market today. Barclays reportedly tried to launch a takeover for Lehman before it collapsed; we can speculate whether its takeover attempt was an indication that Barclays has a lot of spare money to spend on the takeover, a bluff (to pretend it is not in financial difficulties) , a panic measure (perhaps because it has lent Lehman a lot of money that it could now lose with the bankruptcy) or a desperate attempt to improve its balance sheet with public money (the denial of which caused the takeover attempt to collapse). Whatever the cause, the big fall in Barclays’ share price today will knock confidence in its solvency. If I had savings in HBOS, Barclays or RBS, I’d withdraw them ASAP! The adage that such institutions are “too big to fail” now seems out-of-date, and even if New Labour nationalises more UK banks (which the Tories say they wouldn’t do), shareholders can expect little or nothing for their shares. The collapse of a high-street bank would entail many waiting months for compensation for their savings (if indeed they don’t lose them); New Labour has promised an improved compensation scheme but legislation for it has yet to be passed and banks have refused to finance it in advance. Those with mortgages in a collapsed bank wouldn’t have to pay it back, so some working class people will gain from this financial chaos!]
The economic crisis will therefore be much more severe than most analysts are predicting. To avoid imposing massive tax rises or making massive cuts in public spending, most capitalist governments will probably try to borrow their way out of the crisis. New Labour’s net borrowing has rocketed to around £40 billion a year during the boom, and is on course to rise much higher still as we enter recession. This makes a mockery of Brown’s claims to have been a “prudent” chancellor and his allegations that there is “a black hole in the Tories’ spending plans” (with them promising tax cuts for the rich at their 2007 conference). The Tories and Liberal Democrats are hypocritical too in condemning Brown’s handling of the economy when they plan the same level of borrowing if they came to power.
So how should socialists respond to the economic crisis? Merely pledging a series of reforms that involve greater public spending (such as improving public services, increasing pensions and other benefits or increasing wages) is both an insufficient response to the scale of the problem and could easily be argued against (by pointing out that such reforms could not be afforded without much greater borrowing than already planned by mainstream parties). In my view, we need to point out the need for a sudden and thorough change of society – i.e. a socialist revolution (a term that many socialists are reluctant to use even if they agree with it, but I am less reluctant than most and even include “revolutionary socialist” in my main email address).

--
Steve Wallis (Glasgow, Scotland)
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For discussion of the credit crunch, go to
http://www.revolutionaryplatform.net/forum/index.php?board=156

For discussion of 9/11 conspiracy theories, go to
http://www.revolutionaryplatform.ne/forum/index.php?board=89