Friday, 5 February 2016

Financial crisis: Why and what's the reason for?



There’s an old Bob Dylan song called ‘Who killed Davey Moore?’ It’s the tale of a boxer killed by a fatal punch and the song recounts the protests of those involved – the referee, the crowd, the gambler, his manager and his opponent – that they weren’t the ones really responsible for his death. “It wasn’t me that made him fall,” they all cry. “No, you can’t blame me at all.”

That song springs to mind whenever anyone apportions blame for the 2008 financial crisis. There are no shortage of culprits. And given that the world may experience similar economic tremors in the near future, the question of who is to blame is extremely relevant.

Who really did make the system fall?

Culprit # 1 Senior Bankers

Bankers are, unsurprisingly, the most likely suspects. Adjectives like reckless and greedy have clung to banks like leeches since 2008 (which may be an apt analogy). But according to Dutch author Joris Luyendijk, the fatal flaw was not so much greed as wilful incompetence. The recently released movie The Big Short exemplifies, he says, the atmosphere in run-up to 2008. Days in which extremely clever finance geeks took advantage of the fact that senior managers in most banks had no idea what was really going on in their organisations. The impenetrable financial products they devised combined to make them vast fortunes and lay the seeds for financial meltdown.

Luyendijk quotes former UK Chancellor Alastair Darling who laments the fact that top managers in US and UK banks “failed to understand – or even ask – what was making them so much profit and what were the risks.”

He attributes this failure to lack of personal liability. In the days before the Big Bang, financial firms were organised as partnerships, rather than publicly floated corporations which any person, or hedge fund or other company could buy shares in. Partnerships ensured managers kept an unblinking eye on their organisation’s activities, says Luyendijk, because if things went awry they were personally liable for the cost of mistakes. But when partnerships were taken over by publicly floated banks or the investment divisions of major banks began marketing their own financial products, this discipline was lost.

I believe that while deliberate blindness on the part of senior managers was a factor in the financial crisis, it is far from a complete explanation. Firstly, bank executives were not as unaware as Luyendijk or The Big Short suggest. From pooled mortgages, to Libor and Forex fraud, the idea that senior executives were utterly oblivious to the machinations going on beneath them is not credible. When apologies become necessary, incompetence is always preferred to culpability.

In 2004, it was agreed that banks needed to have capital or deposits worth a mere 8% of the risky loans they had on their books. That agreement, known as Basel II, was “largely written by the banks themselves” says Mark Blyth in his book, Austerity: The History of a Dangerous Idea. Banks became massively indebted in the early 21st century (they still are) and that was a conscious decision on the part of senior managers; a way of securing more profit by increasing the amount of money they loaned out. European banks, especially, became chronically ‘over-leveraged’ and may yet have to be recapitalised ‘on a scale yet unimagined’. To blame all this on unruly traders is way too convenient.

Second, the financial crisis was not just about the risk-laden products, the famous mortgage backed securities, collaterized debt obligations and credit default swaps, that boomeranged on the institutions that devised them. It spread across the world with such devastating effect because other institutions – other banks, companies, governments and NGOs – bought those toxic assets. And they bought them because they seem to embody the irresistible combination of low risk and high yield.

Lastly, risk-taking by banks was not merely an internal transgression. They were subject to pressure, possibly decisive pressure, from outside …

Culprit # 2 Shareholders

“In the run-up to the financial crisis, shareholders failed to control risk-taking in banks,” concluded the UK Parliamentary Commission on Banking Standards, “and indeed were criticising some [directors] for excessive conservatism. Some bank leaderships resisted this pressure, but others did not.”

So it wasn’t just that senior executives in banks failed to control super-intelligent and ambitious underlings who could reel off all the prime numbers up to 100 in 2.5 seconds. As directors of publicly floated companies, they were also under constant pressure to deliver greater and greater profits for the owners, the shareholders. And aware that if they didn’t succeed, they needed to look elsewhere for regular remuneration. In the words of Citigroup chief exec Charles O Prince in 2007, (in an article written by Luyendijk) “as long as the music is playing, you’ve got to get up and dance.”

To whose tune were the senior bank managers dancing? Other banks, primarily. Financial behemoths like Barclays, JP Morgan and Deutsche Bank top a list of 147 multinationals who literally own each other through interlocking shareholding. Other major shareholders include hedge funds, fantastically wealthy individuals and pension funds.

What these owners have in common is a need to maximise yield. According to Paul Mason, economics editor of Channel 4 News, big institutional investors such as pension funds, in their pressing need for higher returns on their investments, have become “crucial drivers of instability”. The signature products of the 2008 crisis, mortgage backed securities and collaterized debt obligations, seemed, before they exploded, low risk. So major shareholders were happy to buy them and to breezily criticise banks for ‘excessive conservatism’.

What lies at the root of this predilection for risk-taking among shareholders is the same weakness that Luyendijk criticises bank executives for – that if things go drastically wrong, they know they won’t be accountable. Just as bank executives are cushioned by a lack of personal liability, so shareholders enjoy the protection of limited liability.

Limited liability means that shareholders can lose only their investment in a company; they are never on the hook for the entirety of its bad debts. It is a right granted by the state. Limited liability first originated in Britain in the 1850s and was opposed in an earlier time by the father of market economics, Adam Smith, because of the dangers he saw in separating ownership and management.

The situation is complicated by the fact that, while shareholders seem very adept at pressurising the managers of the corporations they own to maximise profit without heed to public welfare, they are positively impotent when it comes to reining in harmful behaviour. Senior managers seem able to set their own pay which has mushroomed to 180 times that of the average worker in Britain. When shareholders do revolt over excessive executive pay – as they did at Shell in 2009 - they find that their opinion is merely advisory. In many ways, the senior management of large, shareholder-owned corporations are a law unto themselves.

So some have concluded that protecting the public from the selfishness of corporations requires removing both the limited liability of shareholders and the personal liability of company directors. The most effective way of curbing predatory practices is to withdraw limited liability and hold the shareholders and directors of these enterprises personally liable,” argues Essex University’s Professor of Accounting, Prem Sikka.

Sikka wants alternatives to the corporate model – mutuals, cooperatives, not for profit and worker owned enterprises – to thrive and be promoted by government. “All are subjected to community pressures and control by employees, savers and consumers,” he says. “They see something beyond making a fast buck.”

The trouble is, during the crisis of 2008/9, the eyesight of these supposedly alternative enterprises seemed as myopic as anyone else’s.

Culprit # 3 the global market

The list of mutuals in Britain felled by the financial crisis is embarrassingly long. The Dunfermline Building Society, the Scarborough Building Society, the Chesham Building Society, the Derbyshire Building Society and the Cheshire Building Society all either collapsed or had to be bought by other financial institutions. In the case of the Dunfermline, the Bank of England bailed it out and ran it for a time.

Building societies don’t have shareholders. They are owned by, and in theory accountable to, their members – people who have mortgages or savings with them. But, though they didn’t create the banks’ financial ‘weapons of mass destruction’, they were just as reckless with the way they lent money.

In May last year, regulator Andrew Bailey, the chief executive of the Prudential Regulation Authority, warned building societies that they must not return to the ‘fatal’, high risk lending that helped trigger the financial crisis. He cited evidence that building societies were resuming the pre-crisis practice of making loans many times larger than their customers’ income and property.

These failings are not limited to Britain. In 2009 two of Germany’s famous state-owned Landesbanken, were forced to merge after they had borrowed too much capital and invested it in toxic US sub-prime mortgage assets. Four others had to be bailed out by state governments in Germany to the tune of millions of euros.

In Spain, savings banks, known as cajas de ahorros, are owned by non-profit foundations and dedicated to charitable activities as well as savings and mortgages. But they were at the heart of the implosion of Spain’s housing bubble. Of 45 cajas in existence at the start of the crisis in 2007, only two survived. The rest collapsed and had to be taken over by banks or the government. The effects have been catastrophic. Hundreds of Spaniards have been evicted every single day and the unemployment rate has reached a staggering 25%.

The financial crisis may have been hatched in corporate-land but it unfolded like a virus throughout the world because of markets. And allegedly alternative enterprises were as starry-eyed about these markets as anybody else.

Why then did alternative enterprises, which presented themselves as different to soulless, money-grubbing corporations, turn out to be not so different after all? Partly, because of a lack of real accountability. Though they were accountable in theory, they weren’t in practice. German Landesbanken had advisory boards that were meant to keep senior management in check but merely rubber-stamped their activities. In Britain, the Cooperative Bank’s woes can be attributed to the fact that its elected board didn’t have the knowledge or confidence to challenge the ‘incredibly optimistic’ assumptions of the management team. In this sense, the corporate and mutual sectors suffer from a similar affliction – out of control senior executives.

We don’t live in democratic societies. People don’t have the knowledge, time or inclination to hold the powerful to account. Without a conscious change in that level of knowledge and intention, mechanisms of accountability will remain empty shells.

But perhaps the problem is deeper still. The Marxist economist Andrew Kliman argues it is foolhardy, in a capitalist economy, to expect nationalised or worker controlled banks to behave differently to their corporate equivalents. “In order to survive, a state-run (or worker-run) bank must pursue the goal of profit maximisation, just like every other bank,” he says. “As long as there is capital, what are actually in control are the economic laws of capitalism.”

Those economic laws of capitalism mandated that building societies and other mutuals compete with major banks for market share and profitability. And doubtless many members, at the time, agreed with these aims. Governments in Britain have since the 1980s relied on rising house prices to ensure re-election. When that measure goes into reverse, as it did for the Conservatives in the early ‘90s, they watch as erstwhile supporters desert them in droves. Pensions funds are a ‘crucial driver of instability’, yet many millions rely on them to deliver high investment returns to fund their pensions.

This is not to descend into the ethical void and assume that everyone is equally guilty. Some people are infinitely more culpable than others. A tiny elite get to set their own pay. A tiny elite have been bailed-out by government and their wealth rescued by state action. A tiny elite get to make – and rig – the rules of the game. But, as in Dylan’s Davey Moore parable, it is the rules of the game that need altering. The blame game confers only an ephemeral pleasure. A bit like shopping.

Saturday, 23 January 2016

Should the Left support Basic Income?

This article first appeared on the New Compass website


2016 will see basic income rise up political consciousness. Trials and referenda will take place across Europe. Should the Left support basic income? Half a century ago, the famous psychoanalyst and Frankfurt School theorist, Erich Fromm, examined the psychological effects of giving everyone a guaranteed income. His thoughts are instructive. He thought it a 'great step' but that without other changes, it is not enough to really change society.


From occupying the fringes of debate just a few years ago, basic income – the idea that the state should pay an unconditional income to each person as of right – has swiftly climbed up the political agenda. Finland has announced a basic income trial, Utrecht and 19 other Dutch municipalities are planning to introduce a pilot scheme some time in 2016 paying a small group of benefit claimants €876 a month. Also this year, notwithstanding the opposition of the Swiss Parliament, Switzerland will hold a referendum on the nationwide introduction of a basic income set at a much higher level - US$ 19,800 a year.

What should be the attitude of the libertarian Left to basic income? Is it a way of liberating people from an increasingly cruel and, in any case vanishing, welfare system and exploitative job market? Or does it shovel free money towards the already wealthy and save a dysfunctional capitalism from itself?

Before jumping to conclusions, it is worth weighing the opinions of radical thinkers throughout history on basic income. The idea is far from new. The English revolutionary Thomas Paine proposed something similar in 1797. And the German psychoanalyst and Frankfurt School theorist Erich Fromm advocated ‘a universal subsistence guarantee’ in his famous 1955 book The Sane Society. In 1966, he considered the issue in more depth in an essay entitled The Psychological Aspects of the Guaranteed Income.



Individual freedom

The most important reason for accepting the concept of a basic income, Fromm says, is that it would drastically increase the freedom of the individual. Up to this point in history, freedom has been constrained by the use of force on the part of rulers, but also by “the threat of starvation against all who were unwilling to accept the conditions of work and social existence that were imposed on them.”

A guaranteed income becomes for the first time possible in conditions of economic abundance or, in Murray Bookchin’s phrase, post-scarcity. This lifts the threat of starvation and makes genuine independence feasible. “Nobody would have to accept conditions of work merely because he otherwise would be afraid of starving – a talented or ambitious man or woman could learn new skills to prepare himself or herself for a different kind of occupation,” Fromm writes. “A woman could leave her husband, an adolescent his family.”

This “right to live, regardless”, as Fromm puts it, is the most important justification of a basic income, in my opinion. We live in societies in the West which are stiffening the ‘threat of starvation’ just as economic abundance becomes a realisable possibility. Over 90% of unemployed Greeks and nearly two-thirds of Spaniards, countries where unemployment is staggeringly high, do not receive any unemployment benefits. An estimated 1.5 million people in Britain use food banks. Welfare benefits have become increasingly conditional on satisfactory ‘job search’ activities, conditions which are imposed on sick and disabled people as well, with the withdrawal of income an ever-present threat.

What this means is that many more people than before are dependent on others, often older relatives or partners, and powerless before a labour market eager to exploit them. Or simply destitute. Precarious ‘bullshit’ jobs, or ‘shit work’ as Spanish labour unions call them, have mushroomed. In Britain, research has shown that spiralling flexible employment practices are causing widespread anxiety, stress and ‘depressed mental states’ because of the financial and social uncertainty they entail.

A basic income could restore independence and freedom to people whose lives are increasingly blighted as a result of economic circumstances, performing a role similar to that undertaken by trade unions and collective bargaining in the era of full employment. “Income from labour will be renegotiated,” says Enno Schmidt, one of the organisers of the Swiss group, Generation Basic Income. “No-one can be blackmailed with their existence” to do work they don’t wish to. “With a basic income, I can say no to a bad deal.”

The non-work society

Basic income can liberate people from the necessity of making a living and allow other non-market activities to flourish that, while not materially productive, nonetheless make life meaningful and have important functions. This might be looking after children, artistic creation, managing a chronic illness or education for the sake of it, not utilitarian ‘self-improvement’. “This right to live, to have food, shelter, medical care, education etc,” writes Fromm, “is an intrinsic human right that cannot be restricted by any condition, not even the one that the individual must be social ‘useful’”.

This principle, of “the right to live regardless”, whatever someone’s personal utility might be, should, in my opinion, adorn any society that does not seek to oppress its members. However that society is organised.

To the above activities should be added democratic self-management of the community. Genuine democracy is not possible in a time-pressed, hurried society. Basic income should increase the free time available to many members of society and make direct management of the community feasible, not just theoretically desirable. The practices of democracy could be learnt by experience if work fades into the background.

To many of its advocates, basic income is explicitly about relegating the centrality of work in people’s lives, permitting a collective breathing space for other, undirected activities to come to the fore. Marilola Wili of Generation Basic Income maintains that the idea represents a paradigm shift in what work means. It can “unpredictably set human forces free in ways one may have never thought about”, she says.

The great step

However, basic income alone will not produce the paradigm shift that is required. “The great step of a guaranteed income will, in my opinion, succeed,” writes Fromm, “only if it is accompanied by changes in other spheres.” The danger of a basic income is precisely that it assumes changes in other spheres are not necessary and merely bolts on to our current capitalist society, leaving its deep flaws intact.

One such area is consumption. Basic income has been presented as a solution to the lack of demand in the economy. Under this justification, basic income becomes the ‘salvation of capitalism’, by buttressing weak consumer buying power and replacing the economically destructive growth of household debt and credit. Basic income stimulates the economy and increases corporate profits while, at the same time, giving workers more freedom and nullifying the threat of impending technological unemployment. What’s not to like?

Actually plenty. Under this scenario, basic income becomes a crutch that permits an ecologically and socially destructive economic system to preserve itself, neutralising its contradictions and performing a redistribution of wealth to blunt its oligarchic tendencies. Corporations can continue selling endless individual gadgets, continue forming monopolies, continue commercialising the pores of everyday life, and continue offshoring production to areas of the globe with dirt cheap labour and transporting the goods back to the rich world, thus causing global warming. They can continue doing this because basic income intervenes to ensure a market for their products in the wealthy countries.

Fromm contrasts two types of consumption; ‘maximal’ consumption which we currently have and ‘optimal’ consumption, which entails consumption for public use through amenities like theatres, libraries and parks. “Guaranteed income without a change from the principle of maximal consumption would only take care of certain problems,” writes Fromm, “but would not have the radical effect it should.”

I believe that a serious post-capitalist Left cannot just pit good collective consumption against bad individualised consumption. Myriad individual products make life function and liberate people from toil. But it is abundantly clear that a radical change in consumption needs to take place. Goods needs to be built to last, disposable consumption ended and the practice of transporting products across the world vastly curtailed. In short, the capitalist engine behind contemporary consumption needs to be switched off. “Such a change from maximal to optimal consumption would require drastic changes in production patterns,” writes Fromm, “and also a drastic reduction of the appetite-whetting, brainwashing techniques of advertising.” This is something basic income alone will not do. And it should be remembered that the western lifestyle of the 1960s, the lifestyle Fromm derided as ‘maximal consumption’, is considered healthy and moderate in retrospect by many climate activists, compared to hyper consumption now.

However, it must be borne in mind that Fromm wrote his essay at the height of the post-war boom and in the wealthiest country in history at the time, the United States. In 2016, it is quite conceivable that basic income will be employed to keep consumption going at ‘basic’ levels should a new and drastic economic crash occur, one that cannot be bailed out by governments. Basic income could, therefore, perform a rescue act to stop society from collapsing. Which is rather a different thing to providing a long-term surrogate for the perpetually expanding market that capitalism requires but cannot itself manufacture.

Not just for the precariat

It should also be recognised that basic income, in its pure form, is not just for the so-called precariat. The Dutch pilots are for benefit claimants only but under most basic income proposals everyone gets the same, wealthy and poor alike. A basic income would be paid to all adults. It is conceivable that a basic income would allow the wealthy or comfortably off to stop working altogether, become self-employed or switch to a less demanding job. These are quite plausible scenarios, and many wealthy people do seek an escape from their high-pressure lives. But, equally, it could also simply supply an additional mass of money to the already wealthy, an issue that applies particularly to the’ basic income max’ proposals of $20,000 or $30,000 a year. This money could be used to buy more property or invest on the stock market. Thus actually reinforcing inequality and bolstering financial speculation.

Fromm concludes that the “full effect” of guaranteed income will only happen if combined with a change in the habits of consumption, a new humanistic attitude and a “renaissance of truly democratic methods”. He envisages a new Lower house (he was living in the US at the time so presumably he means the House of Representatives) which summarises “decisions arrived at by hundreds of thousands of face to face groups, active participation of all members working in any kind of enterprise.” He warns of the danger of a state that nourishes all acquiring dictatorial qualities that can only be “overcome by a simultaneous, drastic increase in democratic procedure in all spheres of social activities.”

I believe a ‘welfare state’ that restricts itself to automatically paying all members of society a guaranteed income would actually have much less power than one that makes welfare provisional on myriad conditions and intrudes shamelessly into the lives of benefit recipients. However, Fromm is right that the ‘great step’ of a basic income is not a panacea. Any just society should grant its citizens economic freedom, and for that reason alone the Left should support a basic income. But basic income does not render other changes in society any less necessary and we should not be lulled into thinking it could.