Thursday, 18 June 2009

King's Men Discuss Egg Restoration Options

So Obama announces a new system of banking regulation which the FT editorial describes as structurally 'inelegant' but politically feasible - easier to get through Congress that a complete system re-design - and quite substantial in terms of content. Meanwhile the Governor of the Bank of England makes a public bid for more regulatory influence whilst the Chancellor remains apparently convinced that all is for the best in the best of all possible worlds of regulation. What are those of us outside the rarefied world of banking to make of all this ?

Basically these are 'All the King's Horses and All the King's Men' arguing about how best to put Humpty-Dumpty together again. Larry Elliot is scathing:
"...[after the] most serious financial meltdown in living memory. .....the government is planning no more than a slap on the wrist for the discredited bankers. The message from London – and from the Obama administration in Washington today – is that the chance for radical overhaul has been ducked."
Mervyn King's position is interesting because, on the surface, it appears more radical than that of either Darling or Obama. He wants to insure against systemic risks. He says its not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. But his answer is:
"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements. Or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three. Privately owned and managed institutions that are too big to fail sit oddly with a market economy."(My emphasis)
There is nothing here, on either side of the apparent argument, which questions the dominance of our banking sector over other bits of the economy. There is just a technical argument about how best to get the system working again in the long term and how to technically prevent another lash-up of the scale of last autumn. Nothing about breaking the banks up into manageable proportions. Nothing about holding on to some bits of the current nationalised banks as regional or industrial development finance agencies, nor even anything on the scale of Glass Seagall.

This, of course is a reflection of the big difference between now and the post 1929 period. Then the problem for Obama, Darling and King's predecessors wasn't simply an apparent systemic failure but the existence of systemic alternatives in the form of the still young Soviet Revolution and Fascist Germany. No such alternative exists today and it is very, very striking how little progress the Left has made in building any support for such an alternative despite the depth of the crisis.


  1. Charlie,

    Posting in two sections because of word limit. I think the view taken here is way too pessimistic for the reasons I have set out in various blogs. Basically,

    1. We are in the tenth year of a 25 year Long Wave upswing.
    2. This upswing is likely to be more powerful than all previous ones because of the degree to which the development of new technology impacts it on both a deep and widespread basis, in both production techniques, and products.
    3. The last Long Wave, which began in 1949, was largely a matter of existing developed economies leading the field – the exception being the role of Japan – and was limited by the existence of the Stalinist states, and their influence in the Third World with various Nationalist movements. This one is being led by China and other Asian developing economies, whose growth rates are multiples of the growth rates achieved by the leading economies in the last boom. In addition these economies – China and India in particular – have vast reservoirs of peasants that can become new workers, and also have vast potential for the development of domestic markets capable of swallowing up huge amounts of commodities not just from their own production, but new types of production from the West.
    4. The West – Britain and the UK in particular – have been held back during the early stage of the boom because of their debt overhang, and the related role of huge monopolies that have tied up Capital in unproductive uses. GM, Chrysler, Ford being the obvious examples. The boom is now providing the basis for a massive restructuring of western Capital away from those sectors, and into far more profitable activities. The drive now by Obama and the US state to pump money into research and support for “Green” Technology shows how this is likely to be effected. In fact, all of this new production is high-value added, high profit production – often it employs very highly skilled complex labour, thereby having a relatively low organic composition of Capital, which is why the Rate of Profit is high.
    5. Unlike the post-war boom, Capital is free to roam the globe in search of profits – Globalisation. We have for the first time, something approaching a real World Labour Market, which is why wages and conditions are under threat in the West – and Marxists have to understand that and stop pretending to workers that “more militancy” or “Government Action” can in some way overturn the laws of economics – and also why we are beginning to see large migratory flows of workers as well as Capital. Exchange Value now dominates a much larger sphere than it previously did, and that opens up the possibility of much greater accumulations of Surplus Value.

  2. Will Hutton, amongst others have been saying for years that the Chinese miracle – which for all the hype is really only the NEP on steroids – would collapse. It hasn’t, and doesn’t look like it will. I watched a programme last night about China and the role of Deng Xiao Ping. There was only a brief reference, but it said that he had studied under Trotsky in Russia. His argument in proposing the “Open Door” policy was that Mao had not allowed for the bourgeois “stage” of economic development in China, by which he meant the accumulation of Capital, and the development of a sizeable and cultured proletariat. It was necessary to go back, and go through that process. Now, this is actually the argument Lenin gave in relation to not only the NEP, but his attempts to attract Armand Hammer and other western Capitalists to set up in Russia in the early 20’s. Lenin argued that they would fulfil several roles. Firstly, they would provide much needed consumer goods for the Russian population. Secondly, they would provide much needed Capital. Thirdly, they would provide the training for Russian managers and workers in the latest techniques. Finally, they would act as a competitive whip on the Soviet State owned enterprises, forcing them to become efficient. Lenin failed to attract many beyond Hammer, but I think that its difficult to see much in those ideas that differs from those set out by Deng. His argument for the need for rapid industrialisation is also similar to that put forward by the left Opposition in the 1920’s.

    Having said that, I don’t want to equate Deng with either Lenin or Trotsky. The latter were also arguing the need for Soviet Workers to educate themselves as quickly as possible, and to bring even these Joint Ventures under Workers Control as soon as they could do so. Deng was not even in favour of independent Trade Unions let alone Workers Control, and none of the “socialistic” development going on alongside this “State Capitalist” development in the USSR, which requires the establishment of the fullest Workers Democracy. That being said the kind of rapid industrialisation going on in China, is not only acting as an economic motor for the world economy, it is also creating the very conditions of a rapidly growing, powerful, educated and cultured proletariat that could decide that it wants to move down that road, and take the Chinese leaders at their word, whether those leaders meant those words or not.

    Similarly, the boom in the West has already led to a growing confidence amongst workers. The strikes in recent years in Germany, the resistance of French Workers, a and even the growing militancy of British workers in the refinery strikes etc. are a reflection of that.

  3. Arthur,
    No, I don’t quite accept this. I recognise all the factors you mention of course, but I’m not convinced by the manner in which you stitch them together.

    Firstly, yours is a global focus and I was specifically writing about the UK. Whether or not Long Waves exist - I remain unconvinced, albeit with an open mind about their existence and, especially, their predictability – it is quite possible that any particular national economy might suffer from such a paradigm shift. Think about how the Indian cotton industry was systematically destroyed by the development of early textile manufacturing in the north of England for instance.
    Secondly, I fully agree about the absolute centrality of China and the other BRIC economies: in many ways their surpluses from the expansion of productive capacity have funded much of the huge credit bubbles in the West. These bubbles have sustained (some would say artificially sustained) demand in the so called developed world and most especially in the heartlands of international finance, the USA and Britain. The bubbles are underpinned, ultimately, by Chinese, BRIC, Oil State and, to some extent, Japanese and German capital. The UK has developed an international niche in the vast banking and secondary banking system which has grown up around the management and trading of these monies; to a considerable extent the UK State’s tax take depended on this.
    I very much doubt that the status quo ante can be restored. Depending on the level of internal political pressure in their respective nations, the BRIC countries turn from being export led manufacturing colossi to economies characterised by the increasing development of domestic demand for consumption - for instance by developing western style welfare states. (You certainly don’t need to evoke any parallels with the NEP, or assume Deng was only tactically taking a ‘capitalist road’, to imagine this occurring). In any event, after last autumn’s scare I suspect they are not looking to increase their exposure to the vagaries of the New York and London centred international money markets.
    So Britain needs to increasingly focus on the sort of high value Green production you refer to and ‘our’ banks need to be directed/forced/encouraged to finance such initiatives. I see absolutely zilch about this broad perspective embedded in either Obama’s new banking regulations or in the spectrum of debate which runs from Darling to Mervyn King. They want to restore what was there before with added safeguards. Hence the title of my post.
    Any upsurge of worker militancy in the UK is likely to be defensive- action against corporate lay offs etc (as at Lindsey) or in resistance to public spending cuts. I think the Labour Movement is terribly weakened compared to a generation ago and is unlikely to win very many of these battles, but let’s see as the situation develops. I hope I’m wrong on this last point.

  4. Charlie,

    I'm not sure what you are disagreeing with. There is no doubt that Long Waves exist, the debate is only about their cause, and whether those causes are endogenous or exogenous to the system. That is your paradigm shifts such as the consequences for the Indian Textile industry. By the by.

    I think that in the US there is increasingly a development of a new "Green technology" sector. They are ideally placed to develop it. They have a very good motive to reduce dependence on oil and other carbon fuels, they have good reason to drastically reduce input costs, they have a comparative advantage in terms of technology industries, they have a vast internal market in which new technologies can be developed with the full benefits immediately of economies of scale, they have vast quantities of capital that can be thrown at such production, and large reserves of skilled workers.

    And Brown has now proposed a $60 billion fund to assist developing economies deal with climate change. Where will much of that fund go? To but the new green technologies produced in the UK, US and Western Europe. Everywhere I look I see opportunities for vast new areas of productive investment. Even African economies are developing. Saudi Arabia nd other Gulf States are investing in agriculture in Africa to meet their own needs. Angola has huge investment projects for agricultural development to take advantage of rising world food prices. The list is endless. If I were a Capitalist, to be honest, I think I would be spoiled for chocie at the moment to decide where to invest, because there are so many really lucrative potential opportunities.

  5. On the point about industrial action, the action of tanker drivers last year to win a 30% pay increase wasn't defensive. The pay rise won by IGM workers a few months ago who won I think around 12%, wasn't defensive.

    I agree that on the whole at this stage actions will be defensive, for the reasons I have set out previously in relation to the UK, US and Western Europe. But, from the information we can gather from Asia the struggles there certainly do not appear defensive, they are for independent trade unions where none existed, for above inflation pay rises, for better conditions and so on. Even the struggles now in Iran I would say are offensive not defensive in nature, however, they turn out.

  6. Arthur,
    On the Long Wave (Kondratievian or otherwise) issue you have me at a disadvantage. I am not an economist, and you are. I am not going to pretend to have done the reading required to take on an expert in their own field. That would be insulting to you and shaming to me: people who don't listen to particular sources of expertise are just arguing to defend their position, not discover any truth. However, I do note that the Wikipedia entry - an unreliable source, I know - specifically mentions that that many economists don't accept the existence of this phenomena. For myself,as a causal reader on such matters, I can only say the various versions of the Long Wave theory I have stumbled across have intrigued but not totally convinced me. Too often, it feels, people fiddle with the basic idea to make the theory fit the facts - for instance, even Paul Mason (whom I generally admire) in his new book resorts to arguing that part of the explanation of recent economic history can be founded in overlapping Kondratiev waves.

    On the 'Green Revolution' point I have been influenced by Mike Davis' view of the forces behind Obama. (I blogged about this here I think there is going to be a struggle in the Obama administration between those forces who want a newer, greener production orientated capitalism and those who want to restore the status quo ante of Wall Street dominance.

    I rarely comment on foreign affairs, at least outside bits of Europe and North America, as I'm well aware of my own lack of specialist knowledge ( despite having an ex-World Service producer for a life partner!).

  7. I'm sure there will be a struggle, but I think for now and a considerable period hence Money Capital is cowed, certainly I'd think Bernie Madoff should be cowed facing 150 years in gaol.

    But, even if Wall Street becomes more powerful again, and I'm sure it will, that does not contradict a focus on Green technology. Wall Street only makes Profits and capital gains by investing in shares and commodities - plus other derivatives of these - and so the question is what are the companies whose shares it will favour, what are the kinds of commodities that will be significant within the specific economic framework? However, powerful Wall Street, it won't be indifferent about investing in Buggy Whips as opposed to microchips!

    Even died in the wool oilmen like T. Boone Pickens are now putting huge amounts of their personal wealth into developing new energy technologies etc. Even J.R. Ewing himself in real life has converted all of his multiacre farm to solar and wind power, and now sell power to the US electricity suppliers!

    And the fact is that its these new industries where huge profits are already being made, whereas the old industries like autos simply can't compete. If I were a Wall Street banker and was advising clients where to invest it would be far more likely in some new technology industry like biotech, than in General Motors.

  8. Arthur,
    I don’t think Wall St is, in general, weighing up the options for investing in green technology rather than General Motors. In the 1960s 50% of all US profits came from industrial enterprise and only 15% from financial activities. By 2005 the position had almost reversed with only 15% of profits coming from manufacturing and around 40% from financial activities (See What Wall St wants to do is restore the status quo ante from before the Credit Crunch when it can play with Chinese and BRIC surpluses to its heart’s content in purely financial products rather than advancing any great amounts of credit to American industry to retool in either a ‘green’ or a ‘grey’ way. That’s the struggle I think Mike Davis was referencing.