‘But the banks are made of marble...'

"But the banks are made of marble, with a guard at every door, and the vaults are stuffed with silver, that the worker sweated for ..." -- "The Banks are made of Marble" was written circa 1948 by Les Rice and recorded by Pete Seeger among others.

By John Rainford

July 2, 2015 – Links International Journal of Socialist Renewal -- Across Africa, western Asia and Latin America in the 1980s, the growth of per capita GDP was brought to a halt. This was not a recession, it was a severe depression, and its cause was profligate lending by banks in the 1970s.

In the 1960s, the Eurocurrency (as opposed to the euro) had been invented. US dollars deposited in non-US banks and held there in order to avoid restrictions of US laws became negotiable financial instruments that formed the basis for an unregulated market specialising in short-term loans.

In 1964 the market was estimated at US$14 billion, but by 1978 it was close to $500 billion after it became the chief mechanism for investing the massive oil profits of the Organization of Petrol Exporting Countries (OPEC) cartel, which managed to quadruple oil prices in 1973 and treble them again in the late 1970s. In 1970, the average price for a barrel of oil was US$2.53, in 1980 it was about $41.

Awash with petro-dollars, the global banks threw money around like it was confetti. This was particularly so in Latin America where the three largest loan recipients, Argentina, Brazil and Mexico managed to accumulate debts of between US$60 billion and $110 billion by 1990, often enough used to finance grandiose projects of dubious value. The scale of these loans was enormous, in 1970 only 12 countries had debts over $1 billion and there was no country in the world with debts over $10 billion.

The Latin American countries’ debts were so large that the likelihood of repayment was close to zero. But as long as the banks were earning interest on them, at an average just shy of 10 per cent, they weren’t unduly concerned.

In the early 1980s, however, when Mexico became the first of the Latin American debtors to announce that it wasn’t able to pay, panic set in as it dawned on the banks that had thrown money at the country that it was them facing bankruptcy, not Mexico. Had Argentina and Brazil acted in concert with Mexico, all of the lender banks would have been insolvent and the world economy was more likely than not to have collapsed.

The arrangements made for re-scheduling the debts were overseen by the International Monetary Fund (IMF) which imposed structural adjustment programs that reduced tariffs, cut social spending, privatised state enterprises and established a new neoliberal economic order.

As the unenforceable promise of neoliberal-led prosperity gave way to increasing inequality, instability and poverty, the urban poor rose in revolt in cities across Latin America that included Buenos Aires, Guatemala City, Mexico City, Sao Paulo and Rio de Janeiro. In Caracas, Venezuela, in early 1989, two days of rioting and protests was met by a police and military invasion of the poor barrios that resulted in the killing of between 400 and 1000 people.

This mass rejection of neoliberalism eventually led to the rise of social movements and new political parties across Latin America, with three countries – Bolivia, Ecuador and Venezuela   raising the banner of socialism.

The global financial crisis that erupted in 2008, and whose consequences are still being felt around the globe, is another crisis courtesy of finance capital. It had its origins in the US when interest rates fell from 6 per cent in January 2001 to 1 per cent in mid-2003. This led banks and other financial institutions flush with cheap money to conclude that lending to home buyers at risk of being unable to afford their repayments was a safe bet.

Between 2002 and 2007, sub-prime lending increased from 3 per cent of residential mortgages to 15 per cent. The home loan portfolio of one of the largest predatory lenders, Countrywide Financial, went from $62 billion in 2002 to $463 billion in 2006.

By 2005, 43 per cent of first home buyers paid no deposits on their purchases and the median first-time buyer entered the housing market with a deposit of just 2 per cent of the sales price. In the last quarter of 2005, new mortgage borrowings increased by $1.11 trillion, taking outstanding mortgage debt to $8.66 trillion, almost 65 per cent of US GDP. These loans were bundled together in financial derivative products known as collateralised debt obligations which were parcelled into tranches of debt then on-sold to banks and investors around the world with the assistance of AAA credit ratings from conflicted agencies handsomely paid for their stamp of approval.

When interest rates began to rise in 2006, the housing bubble burst. Mortgagees defaulted and the housing market went into steep decline.

The first institutional casualties came in July 2007 when two Bear Stearns hedge funds holding almost $10 billion in mortgage-backed securities collapsed. Two months later Northern Rock became the first British bank in 150 years to fall victim of a bank run. Rescued by nationalisation, Northern Rock’s demise showed how unregulated banks went from prudent lenders of depositors’ money to profligate lenders of borrowed money. Short-term borrowings from international money markets made up 73 per cent of its funds, with just 27 per cent sourced from deposited savings.

When the money markets dried up, Northern Rock went under. It was closely followed by Bear Stearns whose sub-prime bets led to a government guaranteed takeover after its market value dropped from $20 billion to $236 million. Barely six months later, the US government carried out the biggest nationalisation in history, rescuing the mortgage lenders Fannie May and Freddie Mac, whose debts at the time stood at $1.6 trillion. To prevent General Motors and Chrysler from break-up and bankruptcy, the US government bailed out the auto industry at a cost of some $80 billion.

In early 2009, the US banking system was effectively insolvent with capital of $1.4 trillion and financial losses of $3.6 trillion and had to be bailed out by the US government following the collapse of the investment bank Lehman Brothers, which filed for bankruptcy on September 2008 with debts of $613 billion – the largest bankruptcy in history.

In January 2009, the Bank of England cut interest rates to 1.5 per cent, the lowest rate since 1694. Two months later rates were lowered to 0.5 per cent, accompanied by a policy of quantitive easing – effectively printing money.

 Direct intervention in the financial sector left the UK government owning more than 50 per cent of all mortgages and bank retail accounts, together with more than half of all loans to small and medium sized businesses.

The need for state intervention that came from profligate bank lending was slow to be learned in the Eurozone countries. Immediately after the collapse of Lehman Brothers, the first ever meeting of Eurozone heads of government took place, attended by the then British Prime Minster Gordon Brown.

As Brown later wrote in an article in the International Herald Tribune in August 2011: “I explained that European banks were undercapitalised by billions and that the prospect of them collapsing jeopardised the safety of the entire European economy – we could not run capitalism without capital … In fact, half of America’s toxic sub-prime assets had been bought by reckless institutions in Europe … Yet even as the crisis grew, it was difficult to get Europe’s leaders to accept that it was anything other than an Anglo-Saxon one. By convincing themselves that the problem was simply fiscal, they have drawn back from taking action.”

At the time of this meeting in 2008, the banks and financial institutions in Europe were recklessly lending money to Greece, as a cursory glance at the country’s public finances would have shown. Two years later, when the bailout of Greek debt began, these institutions had lent Greek governments €310 billion. The IMF, European Union and the European Central Bank (the Troika) have since then lent €252 billion to Greek governments. Of this, €149.2 billion has been spent on the profligate European banks and financial institutions and €48.2 billion used to bailout the Greek banks. Private bank debt has been all but discharged and become public debt.

At present, Greece’s debt is close to €325 billion, with the Troika holding about 80 per cent of it. In 2010 Greek debt was 133 per cent of GDP, this has now risen to 174 per cent as a consequence of austerity measures imposed on Greece in return for Troika funding.

This debt can never be paid off. It is reminiscent of the reparations forced on Germany at Versailles following the end of WWI. John Maynard Keynes, the British economist who was an official representative of the British Treasury at Versailles, was so concerned by the proposed scheme of reparations that he resigned in protest against them and published his views on their effects in The Economic Consequences of the Peace.

Keynes argued that the reparations needed to take proper account of Germany’s capacity to pay and that failure to do so would not only bring Germany to its knees but threaten the rest of the world economy as well. He calculated that £2 billion would cover the cost of the damage done by Germany and given this was within its capacity to pay, this sum should be the final settlement demanded by the Allies. With the economy in ruins and its people suffering from food shortages, Germany had to be given some incentive for the future. Instead, under the proposed scheme, a country that had been defeated and demoralised was condemned to penury, “Germany has in effect engaged herself to hand over to the Allies all of her surplus production in perpetuity.”

The overall amount that was eventually determined in 1921 was £6.6 billion, to be paid off in annual instalments, and the economic collapse predicted by Keynes soon followed.

This was a lesson learned following WWII when the London Conference of 1953 cancelled 50 per cent of Germany’s external debt and tied the rest to the rise of export surpluses.

Defaulting on unaffordable debt payments is neither unprecedented nor necessarily unproductive. Russia defaulted in 1998, and when Argentina defaulted in 2001 it stimulated an economy that had been stagnant for years.

The fiscal discipline now demanded of Greece comes from the EU Stability and Growth Pact introduced in 1999. Designed to ensure that fiscal indiscipline at a national level does not compromise monetary rigour at the supranational level, the Pact requires each member state to stay within the limits of government deficits of 3 per cent of GDP and debt of 60 per cent of GDP. A large number of EU countries have, at various times, been in breach of the Pact’s provisions. The two leading economies of the Eurozone, France and Germany, have breached the Pact repeatedly and with impunity.

It’s no coincidence that the Treaty of Maastricht, which introduced the euro common currency in 1999, had its origins in a committee set up by the French president of the European Commission, Jacques Delors, which was largely made up of central bankers.

The initial institutional arrangements that provided for European integration were best described by Perry Anderson in The New Old World:

a customs union with a quasi-executive of supranational cast, without any machinery to enforce its decisions; a quasi-legislature of inter-governmental ministerial sessions, shielded from any national oversight, operating as a kind of upper chamber; a quasi-supreme court that acts as it were the guardian of a constitution which does not exist; and a pseudo-legislative lower chamber, in the form of a largely impotent parliament that is nevertheless the only elective body, theoretically accountable to the peoples of Europe.

Its raison d étre is overwhelmingly about the promotion of free markets, and its driving force is to clamp a neoliberal straitjacket onto the Eurozone economy.

Resistance to this led by SYRIZA in Greece has proved to be contagious, with the rise of anti-austerity movements across Europe led by Podemos in Spain. It is for this reason that Greece has to be plunged into penury.

As Anderson aptly put it:

The operative maxim of the EU has become Brecht’s dictum: in case of setback, the government should dissolve the people and elect a new one.