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