Nationalize the Banks! No More Bailouts for the Rich!

by Andrew Pollack / December 2008

US bankers had much to be thankful for this Thanksgiving. Citigroup, the country’s largest bank, got a package worth $306 billion in investment and guarantees from the government, and its rivals expect to be next in line. The Fed committed $800 billion more to try to revive the flow of credit. And Bloomberg News totaled up promises made to the country’s banks and came up with a figure of $7.76 trillion, half the country’s annual Gross Domestic Production.

But no matter what portion of these trillions end up actually being spent, the underlying systemic crisis will only be resolved either on the backs of workers, or by the seizure by those workers of the institutions which created the crisis.

Citigroup Bailout

Late Sunday night, November 23rd, Federal regulators approved a plan to stabilize Citigroup by having Washington assume billions of dollars of the bank’s losses.

After the firm’s stock lost half its value in a week, plunging the Friday before to $3.77 (down from $50 in 2007), Citigroup asked Washington to bail it out. In what has become a recurring pattern, banking and government officials negotiated through the weekend to come up with a deal in order to forestall overseas markets from plunging when they opened early Monday.

The bailout came only days after Treasury Secretary Henry Paulson said there would be no more bailouts until President-elect Barack Obama took office. But after Citi's stock plunged, its Director, Robert Rubin (who preceded Paulson at Treasury, worked with him at Goldman Sachs, and is a key Obama adviser), called to tell him he had to act.

(Originally called First National City Bank, then Citibank and Citigroup, we will refer to it hereafter as “Citi,” the name on its logo.)

Obama’s choice for Treasury secretary, Timothy Geithner, head of the Federal Reserve Bank of New York, played a crucial role in the negotiations.

The government will guarantee up to 90% of $306 billion in Citi-held residential and commercial real estate loans and other assets. In exchange, the government will get $27 billion of preferred stock with no voting rights.

"It strikes me as unbelievably generous," said a former Fed official.

Citi is the biggest so far of the institutions said to be “too big to be allowed to fail.” What’s more, it’s the broadest in scope to earn this label, with more than $2 trillion in assets and operations in 107 countries, and with tentacles in virtually every sector of the economy.

In the last two years the company has made announcements of job cuts totaling 75,000. By this November its stock market value had dropped to $21 billion, down from $244 billion two years prior.

This is only the latest chapter in Citi’s long and shady history.

From the US occupation of Haiti at the beginning of the 20th Century to the IMF-imposed “structural adjustment” of its last quarter, Washington has repeatedly used diplomatic, economic and military force to secure the ability of Citi to invest in the Third World, and to protect those investments.

In February 1933, the bank’s head, Charles Mitchell, under grilling by the Senate Banking Committee, admitted to evading taxes and unloading worthless bonds on unsuspecting investors. He was fired by the bank, and Congress passed the Glass-Steagall Act, intended to separate commercial banking from investment and insurance firms, and to curb speculation. The Act’s coauthor, Senator Carter Glass said of him, "Mitchell more than any 50 men is responsible for this stock crash."

Since its 1812 founding, Citi repeatedly changed its legal and organizational form to avoid regulations and laws restricting its grasp. Along the way it engaged in countless fraudulent and duplicitous schemes, being found guilty of lying and theft as recently as last year by the state of New York and the country of Norway.

At the time of its merger with financial services giant and leading insurer Travelers, Glass-Steagall was still on the books, but the head of Travelers, soon to be CEO of Citi, Sanford Weill, said “the legislation will change...we have had enough discussions to believe this will not be a problem." And it wasn’t: then-President Clinton and his Treasury Secretary Rubin ignored the blatant violations of the Act represented by the merger, and then facilitated passage of the Gramm-Leach-Bliley Act in 1999 which removed the formal obstacles to what Citi had been doing already anyway.

Its major competitors – whose own stocks have crashed in recent weeks – Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley, have similarly deep roots in the country’s economy. The Big Three automakers, for instance, owe more than $100 billion to bankers and bondholders, who are increasingly nervous about being paid back. And auto parts suppliers and individual car owners own dozens of billions more.

So it’s not surprising that the Washington Post reported that regulators drafted the Citi plan with an eye to using it as a template for future bailouts of other banks.

New Federal credit measures

Aware that measures taken so far had not unfrozen credit markets, on November 25th the Federal Reserve and Treasury committed up to $800 billion to bolster securities based on homes, cars, and tuition.

None of the money goes directly to homeowners or individual debtors. What’s more, the $600 billion in securities backed by the new funds are only those of Fannie Mae and Freddie Mac’s, which excludes the vast majority of homeowners. And the spillover drop in rates for homeowners in general won't help the almost 12 million unable to refinance because they owe more than their home is worth.

The $200 billion backing securities based on car and student loans and credit card debt will only cover securities based on newly-issued consumer debt.

But one analyst told the Post that the new program proved the government had become “the go-to place” for aid. Said NYU economist Nouriel Roubini: “The Fed and other central banks that used to be the 'lenders of last resort' have become the 'lenders of first and only resort.’”

Involving itself in consumer debt, even via the circuitious route of backing securities, mean the Fed and Treasury have come close to becoming “a government bank,” said the Post. The paper added: “Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.”

In the same vein, New York Times business columnist Floyd Norris noted: “Since the government has a printing press, it need never be short of dollars.

But, he warned: “As the nation’s obligations rise into the trillions, at some point investors may begin to question whether a government running huge deficits can also credibly promise that the dollar will not lose its value. Such a worry conceivably could push up the very low interest rates the Treasury now pays to borrow from foreign investors to foot an ever-larger rescue bill.”

Bloomberg Totes Up the Tab

The week of Thanksgiving a media frenzy began after Bloomberg News totaled up all the money given or promised to banks and corporations, arriving at a figure of $7.76 trillion. This figure is more than ten times the $700 billion in the Paulson Plan, and about half the value of all the goods and services produced annually in the US. Commentary on the report claimed that the figure surpassed the combined cost of the Lousiana Purchase, the Marshall Plan, the New Deal, the Korean, Vietnam, Iraq and Afghanistan wars, NASA’s moon missions, and the S&L crisis.

The figures in these comparisons were adjusted for inflation, but are still misleading as they do not take into account growth in GDP. Thus, for instance, the Louisiana Purchase’s cost represented a bigger percentage of the country’s much smaller economy at the time, and the same (to lesser degrees) for the other programs cited.

The $7.76 trillion figure includes both the $1.4 trillion already spent, and the much larger portion only promised. What’s more, the latter amount includes not just actual loans or cash infusions but also guarantees. This is not to say that all or a big portion of these promises won’t be fulfilled, and even the guarantees have a real fiscal cost to the taxpayers who must stand behind them. It also includes investments, which certainly won’t earn as big a return for the government as it would for private investors, but is nevertheless not a 100% gift – except in political terms.

Still, these huge amounts should fuel outrage. Most obviously they prove the money is there for more direct aid to individual debtors and, through funding of jobs and services, to the whole working class.

And such aid is becoming a dire necessity, even a matter of life or death, for the millions threatened by the impact of a crisis nowhere close to reaching bottom, and likely to drag on for years.

In November news came out of misery spreading in every part of the country, in every type of workplace. The elderly, the disabled, children are all being denied services or kicked out of centers and group homes, and the workers staffing them laid off. The number of Americans on food stamps reached a record high of 30 million in November, and food pantries’ traffic is mushrooming, even as their funding is shrinking. Reports came out showing the US, with already the greatest income inequality and poorest healthcare quality among developed countries, has sunk even further behind.

Yet the safety net woven over time since the New Deal has been hacked to pieces, with some of the biggest chunks taken out by the long knives of the Clinton Administration. As a result millions who would previously have been eligible now can’t get welfare, food stamps, unemployment or other government benefits and services.

And there are more cuts to the safety net coming: On November 25th Obama announced that his budget director would go through the Federal budget “line by line” to find places to cut. At the same time he announced he was going back on his promise to repeal President Bush's tax cuts for the rich, allowing them to stay in place until the end of 2010.

Oh say, can you see?

What’s more, the dawn’s early light is shining none too brightly on any part of these secrecy-enshrouded giveaways.

On November 18th Fed head Ben Bernanke declared:“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting. We think that’s counterproductive.”

Requiring the Fed to disclose loan recipients might set off panic, said financial consultant David Tobin. And of course it might fuel already-high outrage about the giveaways.

Even the politicians who voted for the bailouts claim outrage at not knowing where the money is going: “Whether it’s lending or spending, it’s tax dollars going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a Republican who serves on the House Financial Services Committee.

In its efforts to come up with a giveaway total, Bloomberg had to file a Freedom of Information request, and filed a federal lawsuit seeking to force disclosure of which banks were borrowing under the new programs and what collateral they put up.

How Real Are the Losses?

We mentioned above the uncertainty about how much the bailout will end up costing (and in any case there are many more programs, each costing hundreds of billions, sure to be announced in coming months). But equally uncertain is the reality of the trillions in corporate debt, assets and value which these bailouts are supposedly protecting.

It is estimated that the crisis has erased $23 trillion, or 38%, of the value of the world’s companies, a figure based on drops in value of corporations on the world’s stock exchanges.

Yet 38% of the world’s productive resources have not been physically destroyed. Nor has the $223 billion wiped off Citi’s balance sheets in the last two years led to the destruction of an equivalent stock of goods. No-one can anyone reasonably claim that the dozens of trillions in the credit default swap market, or the hundreds of trillions said to be tied up in derivatives worldwide, have any meaningful correlation with the $55 trillion in global GDP.

True, an ever-growing percentage of the world’s capacity for producing goods and service is sitting idle. But what is the real connection between this and the vast sums of money under discussion?

This question is crucial since one section of the ruling class will try to recoup as much of these trillions as they can at workers’ expense. On the other hand, other capitalists will try to get much of these sums written off the books as part of the purging process, described below, which is essential for capitalism to dig itself out of a crisis of this depth.

Understanding where these astronomical figures come from requires a look at the concept of “fictitious capital,” which Marxist economist David Harvey defines as "money thrown into circulation as capital without any material basis in commodities or productive activity." Ironically its origins lie in the development of the credit system and of corporation stocks, both used in normal times by profitable companies to fuel ordinary activities.

Capital raised by such means are used for investment purposes, i.e., to generate surplus value. But once such debt or stocks is created, they are in turn traded to reallocate claims on ownership of the given company, and the market in them begins to take on a life of its own – especially in periods when the underlying corporations lose productive outlets to invest the money for which such credit was originally designed.

Thus, says Marx, "With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital or even the same claim on a debt, appears in different forms in different hands. The greater portion of this 'money-capital' is purely fictitious."

In periods of expansion, such credit allows for accumulation of capital and is in fact necessary to tide over the capitalist during the time lags between various parts of the production and circulation process. But in periods of economic crisis and uncertainty, such credit markets are used as alternative sources of profit, as profits from productive activities shrinks.

What’s more, as corporations became more self-financing over the course of the 20th Century, the role of banks or stock markets as gatherers of money for investment purposes dramatically shrank. The revival of banks’ role in investment in the latter part of the century came primarily not to facilitate investment in new manufacturing or services, but in order to fuel credit-based purchases by consumers to prop up tottering production.

This new wave of credit in turn became the base of a pyramid of financial instruments, each layer of which garnered profits from the one below it – until the entire house of cards crashed (as they had previously in the 1870s and 1930s,, the two previous Great Depressions).

But until such crashes occur, says Marx, “Profit can be made by using borrowed capital to engage in (speculative) trade, not backed up by any tangible asset.”

Marx noted the role of the Bank of England in issuing notes “not backed by the metal reserve in its vaults.” It created “tokens of value that are not only means of circulation [i.e. play a role in realizing profits on real production], but also forms additional - even if fictitious - capital for it."

However Marx reminds us not to ignore the exaggeration in the sums attached to reports of troubled capital markets: "To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.”

In the same vein, he writes that although "the public stocks and canal and railway shares had already been depreciated to the amount of £114,752,225, unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital."

The same could be said of comparisons between the real resources of the country, or world, today, and the trillions quoted in the Bloomberg account – even when considering only the amounts actually committed and not just promised.

Note also that Marx includes in his list of caveats the possibility of capital squandered in worthless ventures. So it’s not irrelevant that trillions are being wasted on derivatives, and more trillions squandered to bail out the wastrels, especially as capital will try to make workers pay the price of as much of this as they can. This is just another reason to take control of the economy out of the hands of those who have proven once again their inability to manage either “real” or “fictitious” investment.

Is a “stimulus package” the solution?

In November, 387 economists cosigned a letter to Congress calling for quick passage of a new stimulus package “on the order of 2-3% of GDP ($300-$400 billion).” This amount is pretty modest, especially in comparison to the amounts discussed above, and in any case is similar to the amount proposed by Obama and Congressional Democrats. And their justification for such a measure shows they see it as reinforcing, not threatening, the system: “The sharp falloff in demand means there is little reason to fear enlarged deficits will raise interest rates and deter private investment. It is far more likely that an effective stimulus package will promote investment by improving prospects for higher sales and profits.”

But how can investment be promoted when the banks are sitting on the money given them by the government for lack of productive opportunities?

Keynesian measures, in the downturn portion of the five to seven year business cycle, or a longer-term (25 or more years) depressive wave, can moderate the speed and extent of the decline, and even attenuate some of the accompanying misery. But it can’t address the underlying causes of those downturns. In fact the mushrooming public and private debt since World War I, and even more so since World War II, has been one long effort by capital and its states to ward off systemic collapse. So a few hundred billion more is not going to make a difference.

What’s more, in the long run Keynesian measures only work to the extent there is unused capacity in the economy. Once that evaporates, Keynesian stimulus measures lead to greater inflation and public debt and deficits – the price for both of which is dumped on the working class – and which lead to withdrawal of funds from debtor countries (today, the US) by countries who have been propping up their trade and currency.

What’s more, in a deep, once-in-a-century crisis of the type we are now experiencing, no amount of stimulus can on its own restore the rate of profit to a point where new investment massive enough to end the crisis can take place.

Ernest Mandel, in “Long Waves of Capitalist Development,” points to the kind of huge changes needed for such a turnaround: “From a technical point of view, a new expansionist wave would require an explosive increase in the rate of accumulation and therefore in the average rate of profit and a no less remarkable expansion in the market for commodities.” He says “technical” because whether such dramatic changes occur depend on the political will and ability of the capitalists to try them, and of the working class to resist.

“The necessary economic preconditions for such a long-term sharp increase in the average rate of profit” would have to include some mixture of the following: “chronic mass unemployment tending to erode real wages and workers’ self-confidence, militancy, and level of organization and to significantly increase the intensity of labor, heading toward a sharp upward shift in the rate of surplus value; massive devalorization of capital through increasing elimination of inefficient firms, not only small and medium-size but also large ones, including many multinationals (i.e., a new leap forward in concentration and capitalization of capital); new radical reductions in the costs of equipment, raw materials, and energy; massive applications of new technological innovations; [and] a new revolutionary acceleration in the rate of turnover of capital.”

Cleary the ruling class has begun efforts to carry out some of these measures. The mergers and wiping of bad assets off the books as is already taking place among huge banks, and the mergers and shedding of productive capacity by manufacturing corporations such as has already occurred in steel, and seems in the offing in auto, are examples of the devalorization of capital referred to.

Daily News business columnist Peter Siris called for just such a devalorization of capital and savage attacks on the working class: “We have gorged on spending for too long. There are too many houses, cars, restaurants and stores. No matter what anyone says, businesses are going to have to close and capacity is going to have to be cut back.

“No one called for a bailout” of Circuit City and other failing retailers, he said. “As they went bankrupt, they closed stores. Their closings hurt their employees and shareholders, but it helps the economy; because it takes out capacity and lets others stabilize their businesses and pick up share.

“It is too bad the same cannot happen in autos and housing. If we could bulldoze 500,000 homes, home prices would right themselves quickly. Fixing the automobile industry will be even more difficult. There are too many factories making too many cars. No matter what anyone says, we will have to go through a tough time before the economy stabilizes.”

Siris is but one voice in a large chorus of business columnists and politicians calling for autoworkers’ contracts to be torn up, their health and pension benefits to be gutted. Times business columnist Joe Nocera said GM had to “cram down a new contract on the UAW” (but he thinks it is politically safer to have Obama force it on them rather than a bankruptcy court).

Whether such attacks, and more that will follow if the autoworkers succumb, are on the scale Mandel says are necessary in such deep crises (i.e. on the scale of those undergone during conditions of war and fascism in the 1940s), is not yet clear. It depends on the will and power of the two contending classes.

But such epic events also open the eyes of workers to the possibilities latent in the system for escaping its web. In describing the massive destruction of capital required for the rulers to escape a crisis, Marx adds that “The contradiction between the social power into which capital develops and the private power of the individual capitalists over production becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions.” That is, to the possibility of, and need for, socialism.

Even economists blinded by bourgeois ideology can see on a factual level the truth of this, even if they shrink from its political implications. Thus economics professor Paul De Grauwe, no fan of socialism, nonetheless writes in the Financial Times: “This liquidity crisis is the result of a co-ordination failure: bank A does not want to lend to bank B, not necessarily because it fears insolvency of bank B but because it fears other banks will not lend to bank B, thereby creating insolvency of bank B out of the blue. Bank lending comes to a standstill because banks expect bank lending to come to a standstill.” He sees only one way out: Governments “must take over [temporarily] their banking systems. Governments are the only institutions that can solve the co-ordination failure, because once the banks are in the hands of the state, they can be ordered to trust each other and to lend to each other.” De Grauwe demands similar government action in the nonbanking sector, and the substitution of public for private debt, all to eliminate similar coordination problems.

Similarly the claims cited above that the Fed’s new programs represent a de facto creation of a “government bank,” while overblown, do indicate a growing recognition of Marx’s point. The concentration of capital in a crisis which leads to greater monopolization in the banking sector, which then, as the crisis deepens, requires the assumption of their functions by the state, shows to all who can see that the formal, if not yet the political, conditions for their taking over by society as a whole are present.

Nationalize the Banks!

Part of launching a counteroffensive to head off the beginning wholesale attack means discussing these phenomena with workers, boosting their confidence by helping them see the inherent weaknesses of the bosses’ system. One way to do so is to use the media debate about the “socialization of risk” and the so-called “nationalizations” which the bailouts are said to represent, to start a discussion among workers about the possibility of, and need for, nationalizing the banks, as well as the “real economy” to which their funds flow.

Last month we quoted Lenin’s taunts against liberals who shrink in fear from the thought of nationalizing the banks. In the article we quoted (“The Impending Catastrophe and How to Combat It”), Lenin makes clear why capitalism makes such a step both possible and necessary, in terms strikingly reminiscent of today’s crisis.

“The banks,” writes Lenin, “are the principal nerve centers of the whole capitalist economic system. Banks are so closely and intimately bound up with trade and industry that without ‘laying hands’ on them nothing of any value can be accomplished.”

To overcome this, Lenin argues, “Only the amalgamation of all banks into one would make it possible to exercise real control. Only by nationalizing the banks can the state put itself in a position to know where and how, whence and when, millions and billions of rubles flow. And only control over the banks would make it possible to organize real and not fictitious control over all economic life, over production and distribution.”

This is required among other reasons because Lenin’s Russia was experiencing a similar “lack of transparency” to the one we encounter today, and a corresponding need for workers to force open the books of the exploiters. (Yet when it comes to workers’ money, bourgeois norms allow for no such right of privacy: “When a banker publishes information about a worker’s wages and productivity, this is regarded as legitimate and fair.

Bourgeois society regards itself as entitled “at any moment to expose the ‘luxurious living’ of the worker, his supposed ‘laziness,’, etc.” Thus today the lies in the media about autoworkers making $70 an hour, the majority of which are in fact sums set aside for health and pension benefits, and the lies about the Jobs Banks for unemployed autoworkers, through which in fact much useful work in the community is provided.)

Takeover of the banks, says Lenin, can only be the prelude to nationalization of the productive sector: “Modern capitalism, under which the banks dominate production, has carried the interdependence of the various branches of the economy to the utmost. The banks and the more important branches of industry and commerce have become inseparably merged. This means that it is impossible to nationalize the banks alone.” Industry and commerce as well must be taken over, he urges, and nationalizing the banks (and combining them into one public bank) greatly eases doing so.

Today such measures are also necessary to wipe out the trillions of dollars of fictitious capital (at the ruling class’s expense), and gain an accurate accounting of the physical and human resources really available to society, but sitting idle because of the crisis. Such measures alone will allow workers to set up a rational, planned, democratic system of accounts to fund the goods and services needed by workers.

The Workers’ Action Program proposed by Socialist Action includes a number of measures directly addressing these issues of exploitation, theft, concentration and business secrecy described above:

Nationalize the entire banking system under workers’ control! Open the capitalists’ books so we can determine what has been stolen, hidden or squandered! Make the banks, corporations and ruling class pay the full price of the crisis!

For worker’s control of corporations in manufacturing and mining, energy, and transportation. For election of committees of workers to run these industries!

Merge the nationalized banks into one public institution under the supervision of workers’ committees, which could then decide how that public bank’s funds can be used to rebuild society!