The crisis of 2007-9 was a systemic upheaval rather than just the result of poor regulation, or of speculative excesses of finance. It was a crisis of financialised capitalism. Financialisation is a structural transformation of advanced capitalist economies, resulting in asymmetric growth of the circulation of money relative to production and allowing finance to penetrate even minor niches of social and personal life. Hence a systemic failure of private banking could become a global crisis.
Low-income workers, for instance, are heavily concerned about pensions, savings, and insurance. The burden of debt – both mortgage and personal – has become a permanent fixture of modern working-class life. Meanwhile, inequality has been exacerbated by bankers and financiers earning astronomical bonuses while shifting the costs of crisis onto society.
Radical activists have long sought to raise demands for improvements in the conditions of workers here and now. In the case of the financial system, such demands could raise broader issues of controlling the economy as a whole. Reorganising the financial system under contemporary conditions could pose a direct challenge to capitalist relations.
It is unfortunate, consequently, that the left has been unable to influence public debate – not to mention policy – in the UK and elsewhere. There are several reasons for this, including prolonged organisational decline.
When the crisis broke out, much of the left turned to the concept of financialisation for an explanation. This has been the most promising theoretical development within the socialist movement during the recent period. Indeed, the concept originated within the left – primarily but not exclusively in the current represented by the work of writers such as Harry Magdoff and Paul Sweezy around the US-based Monthly Review.
Rethinking the financial system is a systemic and political task for the left. Given the financialisation of capitalist economies – with Britain in the vanguard – reorganising finance could have major ramifications for both economy and society. There could be immediate benefits for workers and others in terms of employment, housing, education, health and consumption. More broadly, finance could be restructured in ways that facilitate greater popular control, thus helping the struggle to transform the economy in a socialist direction.
How, then, to rethink the financial system from a socialist perspective? The answer depends on grasping the underlying trends of financialisation, three of which are fundamental. First, large corporations have been financing investment largely out of retained profits, while also being able to obtain external finance in open markets. They have become less dependent on banks; indeed, they possess independent capacity to engage in financial operations for their own profit.
Second, banks have correspondingly transformed themselves. They have rebalanced their lending toward individuals rather than corporations; they have also turned to fees and commissions from mediating in open financial markets, rather than earning interest from outright lending. Thus, banks have added investment banking to their usual commercial banking activities.
Third, workers have been driven into the financial system. Real wages have been stagnant or falling across mature capitalist countries for decades. Public provision in pensions, housing, education,
health, and so on, has retreated, forcing people to seek private provision, which is typically mediated by banks and other financial institutions. Attitudes to debt and private financial gain have also changed, encouraging workers to borrow as well as get caught in housing bubbles.
These trends underlie the gigantic crisis of 2007-9. They have been fostered by financial deregulation, but their roots are deeper than mere regulatory looseness. The traditional role of the capitalist financial system is to support accumulation by mobilising loanable capital, which is then advanced to industrial enterprises. Contemporary finance, however, has far surpassed this. It now mobilises idle money across society, while earning a large part of its profits by mediating financial transactions or lending to individual workers.
Financial profit today is not simply a share of surplus value created in production. It also arises from the re-division of loanable capital that is traded in financial markets, as well as from expropriation of workers’ income. Some of the primeval character of the moneylender – usurious and predatory – has resurfaced in modern finance. Thus financial institutions have been able to make fabulous profits (up to 45 per cent of total US profits in 2002) even though general profitability has remained problematic.
Financialisation has been far from a spontaneous or natural development of capitalist economy and society. It has relied, critically, on state-sponsored financial deregulation as well as on the retreat of public provision from welfare and popular consumption. It has also relied on state institutions – typically the central bank – to intervene in crises, most egregiously in 2007-9. The state could play this role because it commands, first, tax revenues and, second, the ultimate means of payment, central bank money.
The broader economic and social outcomes of financialisation have been uniformly negative. Average rates of growth among developed countries have dropped in every decade since the 1980s. Major financial crises have regularly gripped the world economy. Productive capacity in mature economies has shown little dynamism, while unemployment has generally grown. Real wages have stagnated and personal indebtedness escalated. The capitalist class has acquired new layers of fabulously rich functionaries of finance, who have no quarrel with the ‘captains of industry’.
Measures to reverse financialisation are in the immediate interests of workers and society as a whole. The strategic direction is unambiguous: strengthen the public and collective against the private and individual. This means, in the first instance, establishing public banks to replace private ones, which have failed unequivocally and conclusively.
Public banks would divest themselves of investment banking, reversing the catastrophic mix of commercial with investment finance. Speculative and crisis-prone investment banking activities would be reduced across the financial sector. Public banks would then focus on restoring basic credit and monetary services, thus redressing the failure of private banks, which often treated these services as feeders for investment banking.
There is an urgent need to reorganise provision of credit and monetary services. Credit for housing and other mass consumption has a utility dimension, as do simple money services, such as deposit keeping and money transmission. Public banks would provide both, safely – and without the extortionate charges of private banks.
Public banks would also take over the bulk of credit provision for small and medium enterprises. Such credit also has a utility aspect, while its repayment can be predicted with reasonable accuracy, as long as speculative excesses are avoided. Steady supply could be an important means of maintaining output and defending employment, both of which collapsed in 2008-9 as private credit shrank.
Such measures could improve conditions for many. But public banks could also play an important role in changing the structure of contemporary economies, raising afresh the issue of socialist transformation. Above all, public banks could help redirect aggregate investment toward new productive activities.
Infrastructure is in urgent need of renewal across much of Europe and the US. There is strong popular demand for clean energy production as well as energy efficiency for homes, cars, transport, and so on. Public credit could be a major lever supporting public policies in all these areas, preventing domination by private capital as well as ensuring the prevalence of social criteria in decision-making.
Restructuring the economy and undertaking long-term investment would inevitably bring public banks into conflict with large corporations and open financial markets. Thus, it would raise issues of general regulation of finance as well as control over large capital, and hence of the economy as a whole. Challenging capitalism and effecting a socialist transformation of the economy would be naturally placed on the agenda. What form this might take is impossible to predict, and would depend on coalitions of social forces and the balance of class struggle.
But some initial measures are evident: above all, controls over interest rates and statutory regulation of financial prices, quantities and operations. Note that manipulation of interest rates is already effectively in place – central bank rates have been kept very low by historical standards in the US since 2001, and even longer in Japan. It is time that this policy, which has largely benefited private banks, served broader social purposes.
In short, establishing public banks could be an important step in reshaping finance, reversing financialisation, and shifting the economy in a socialist direction. But to this purpose the internal organisation and management of public banks would have to be appropriately structured. Public banks would have to be transparent, accountable, incorporating a full range of popular interests, and run on strict norms of public service.
Democracy has been absent from the financial sphere in recent years, with financial institutions being based on unbridled greed. The results for society have been catastrophic. There is a well of anger with banks and financiers. There is also a strong but muted search for alternative ideas. For the first time in many years the left might find that it is swimming with the tide.
Costas Lapavitsas is professor of economics at the School of Oriental and African Studies, London, where his research concentrates on finance and money. For more on public-controlled banking, see our special feature from Dec 2008/Jan 2009, available in the archive at www.redpepper.org.uk
Hilary Wainwright argues against reclaiming populism for the left and for a leadership that supports people’s capacity for self-government
It may seem as though these apps are working for us, but we are also working for the apps, writes Kurt Iveson
It's over 100 years ago that domestic workers began to organise to demand the same rights as other workers. Yet with LSE cleaners on strike this week, historian Laura Schwartz asks: how much has really changed?
Omar Barghouti asks whether Donald Trump, in his recent break with America’s long-standing support for the two-state solution, has unwittingly revived the debate about the plausibility, indeed the necessity, of a single, democratic state in historic Palestine?
Glenn Greenwald was interviewed by Amandla Thomas-Johnson over the phone from Brazil. Here is what he had to say on the War on Terror, Trump, and the 'special relationship'
In 1972 David Widgery wrote about the bitter intensity of love in capitalism
Andrew Dolan on how the left must match the anti-establishment rhetoric of the right, but with a different politics
Emma Snaith speaks with directors Emer Mary Morris and Nina Scott about the power of theatre to encourage community resistance to estate demolitions.
In the first of a series of interviews with migrants' rights and racial justice activists from the US, Marienna Pope-Weidemann speaks to Peter Pedemonti, co-founder and director of the New Sanctuary Movement in Philadelphia
Photos from The World Transformed festival in Liverpool, by David Walters
Red Pepper’s race section: open editorial meeting 19 April
On April 19th, we’ll be holding the second of Red Pepper’s Race Section Open Editorial Meetings.
Changing our attitude to Climate Change
Paul Allen of the Centre for Alternative Technology spells out what we need to do to break through the inaction over climate change
Introducing Trump’s Inner Circle
Donald Trump’s key allies are as alarming as the man himself
Secrets and spies of Scotland Yard
A new Espionage Act threatens whistleblowers and journalists, writes Sarah Kavanagh
#AndABlackWomanAtThat – part II: a discussion of power and privilege
In the second article of a three-part series, Sheri Carr reflects on the silencing of black women and the flaws in safe spaces
How progressive is the ‘progressive alliance’?
We need an anti-austerity alliance, not a vaguely progressive alliance, argues Michael Calderbank
The YPJ: Fighting Isis on the frontline
Rahila Gupta talks to Kimmie Taylor about life on the frontline in Rojava
Joint statement on George Osborne’s appointment to the Evening Standard
'We have come together to denounce this brazen conflict of interest and to champion the growing need for independent, truthful and representative media'
Paul O’Connell and Michael Calderbank consider the conditions that led to the Brexit vote, and how the left in Britain should respond
On the right side of history: an interview with Mijente
Marienna Pope-Weidemann speaks to Reyna Wences, co-founder of Mijente, a radical Latinx and Chincanx organising network
Disrupting the City of London Corporation elections
The City of London Corporation is one of the most secretive and least understood institutions in the world, writes Luke Walter
#AndABlackWomanAtThat: a discussion of power and privilege
In the first article of a three-part series, Sheri Carr reflects on the oppression of her early life and how we must fight it, even in our own movement
Corbyn understands the needs of our communities
Ian Hodson reflects on the Copeland by-election and explains why Corbyn has the full support of The Bakers Food and Allied Workers Union
Red Pepper’s race section: open editorial meeting 15 March
On 15 March, we’ll be holding the first of Red Pepper’s Race Section open editorial meetings.
Social Workers Without Borders
Jenny Nelson speaks to Lauren Wroe about a group combining activism and social work with refugees
Growing up married
Laura Nicholson interviews Dr Eylem Atakav about her new film, Growing Up Married, which tells the stories of Turkey’s child brides
The Migrant Connections Festival: solidarity needs meaningful relationships
On March 4 & 5 Bethnal Green will host a migrant-led festival fostering community and solidarity for people of all backgrounds, writes Sohail Jannesari
Reclaiming Holloway Homes
The government is closing old, inner-city jails. Rebecca Roberts looks at what happens next
Intensification of state violence in the Kurdish provinces of Turkey
Oppression increases in the run up to Turkey’s constitutional referendum, writes Mehmet Ugur from Academics for Peace
Pass the domestic violence bill
Emma Snaith reports on the significance of the new anti-domestic violence bill
Report from the second Citizen’s Assembly of Podemos
Sol Trumbo Vila says the mandate from the Podemos Assembly is to go forwards in unity and with humility
Protect our public lands
Last summer Indigenous people travelled thousands of miles around the USA to tell their stories and build a movement. Julie Maldonado reports
From the frontlines
Red Pepper’s new race editor, Ashish Ghadiali, introduces a new space for black and minority progressive voices
How can we make the left sexy?
Jenny Nelson reports on a session at The World Transformed
In pictures: designing for change
Sana Iqbal, the designer behind the identity of The World Transformed festival and the accompanying cover of Red Pepper, talks about the importance of good design
Angry about the #MuslimBan? Here are 5 things to do
As well as protesting against Trump we have a lot of work to get on with here in the UK. Here's a list started by Platform
Who owns our land?
Guy Shrubsole gives some tips for finding out
Don’t delay – ditch coal
Take action this month with the Coal Action Network. By Anne Harris
Utopia: Work less play more
A shorter working week would benefit everyone, writes Madeleine Ellis-Petersen
Mum’s Colombian mine protest comes to London
Anne Harris reports on one woman’s fight against a multinational coal giant