Barely two weeks after the Governor of the Bank of England (BoE), Mervyn King, launched the government's brand new "special liquidity scheme" - the largest bailout of the banking system in British history - the latest edition of the BoE's twice-yearly "Financial Stability Report" came up with a surprise announcement: that the "worst is over". Or at least, this was how the headline of the Financial Times translated the terse and somewhat ambiguous wording of this official report, just as most economic experts and newspapers did, on the same day.
Since the BoE was unlikely to argue that the tens of billions of pounds of taxpayers' money which had been offered to the country's six biggest banks were wholly unnecessary after all, this could only be understood as an attempt to prove that the BoE's bailout of the banking system was the magic wand capable of conjuring the financial crisis out of existence.
However, this announcement was in stark contrast with just about every indicator available, particularly with the simultaneous announcement that house prices had begun to fall for the first time since 1996 and that mortgage approvals had been going into free fall for over 3 months, reaching a level not seen since the housing slump of the early 1990s.
A bailout or not a bailout?
The first reaction of the beneficiaries of the BoE's "special liquidity scheme" - the six biggest banks - after its announcement, was to complain about being expected to pay a commercial fee in return for their bailout. Stock market operators, however, made no mistake about the real winners from this scheme: the price of these banks' shares went up immediately, thereby reversing a downward slide which started a long time ago, months before the impact of the US subprime crisis began to be felt in Britain.
The financial cost of the gigantic mess that this bailout is meant to clear out, is illustrated by the sums on offer. At the time of the scheme's announcement, the BoE's official figures show that it had already extended £25bn worth of loans to the big banks for a 3-month period. In addition, nearly half this amount had been loaned for shorter periods. And, of course, this did not include the loans made to Northern Rock which, being nationalised, is now allocated to a different page of the state's accounting book. And although no record of these sums have been published so far, one can guess that they are within the range £25bn to £40bn.
In Mervyn King's own words, the new lending scheme has "no arbitrary limit on it." In a first interview, King claimed that the total amount needed by the banks would probably reach £50bn. But shortly after, he corrected this initial statement by mentioning the figure of £100bn or more, if necessary. The funds will be lent in the form of state bonds, for periods of one year, extendable to 3 years. Any kind of "good-quality asset" will be accepted as collateral, including so-called "collateralised debt obligations" (CDOs). In and of itself, however, this is a contradiction in terms as the credit quality of these CDOS is, by definition, virtually impossible to assess, since they are built from packaged slices of debt of various origins - which can be anything from credit card debt to mortgages of any quality. In other words, whatever it claims, the BoE is effectively inviting the big banks to deposit more or less any "toxic" junk they wish in its vaults in return for sound taxpayers' backed assets.
Predictably, Mervyn King was adamant that the Bank of England was not playing the fireman for the benefit of the banks, insisting that " It's not true that they are being bailed out in any sense." For good measure, he added that "the purpose is to protect the rest of the economy from the banks, not to protect banks from their previous decisions."
Nevertheless, lending tradeable government bonds to the big banks in return for the now valueless assets they hold, following their past speculative spree on the debt market - even if it is at a (small) fee and for "only up to 3 years" (sic!) - is indeed, to "protect banks from their previous decisions." In fact, it is doing even worse than that. It is giving them the means to indulge in exactly the same kind of crazy profiteering in the few areas which are not frozen to a standstill yet. While the availability of cheap credit is vital for some activities, such as consumer credit and mortgages, the mere fact that credit is more expensive spells huge potential profits for the banks in activities where the level of interest rates is not so important for the time being - such as takeovers and acquisitions, for instance, which still seem to offer some golden opportunities these days, judging from some of the huge deals which have been concluded since the credit crunch started in earnest.
Of course, the BoE is quick to point out that it has demanded from the banks that they should take a number of steps in order to "deserve" the "trust" which is put in them by the government. In particular, they are supposed to come clean about the real nature of their present assets - and they have to go to their shareholders in order to ask them for some fresh cash. However, as always in the relationships between the state and big business, all of this remains "voluntary": there is to be no legal compulsion for the banks to comply and, of course, no mechanism to ensure that they do. Whether they do or not, the state will "voluntarily" surrender dozens of billions of pounds of public money into their hands.
Apart from the fact, that yes, this is an outright bailout, it is not just protecting the banks from the consequences of their past greed, but in fact, offering them an even more important role in society by entrusting them with large amounts of public money, with no real control over their actions whatsoever. But in addition, there is something obscene in suggesting that the banks should go "voluntarily" to get some fresh cash from their shareholders, while guaranteeing that, whether they do or not, they will get the state funds they want, anyway.
One particularly blatant case in point is that of RBS. Last year, just as the credit crunch was breaking out in Britain, the RBS board decided to go on a shopping spree in Holland and clinched a deal worth £56bn by buying part of the ABN Amro bank. Due to the problems it would have faced in the new climate of crisis, if it had decided to raise funds by issuing new shares or borrowing on the money markets, the choice was made to pay a large part of the sum in cash. As a result RBS came out of this deal with much reduced capital - in fact, far lower than international banking standards permit - and, in addition, it had to write off almost £9bn worth of "toxic" bonds, with the largest part coming, ironically, from ABN. Finally, RBS did go to its shareholders for more cash, but only because it had no other choice and not without announcing 7,000 job cuts in order to wet the appetite for profits of its biggest shareholders. If there was ever a bank which has been digging its own grave knowingly for the sole purpose of making profits, it is RBS - something that it is already making its workforce pay for, at a very high price.
So, one would have good reason to ask why it is that the banks' big shareholders, who have been making a hefty packet out of the banks' huge profits over the past years, especially out of the frantic speculation which caused the current crisis, are not being asked systematically to bailout their milch cows themselves? Why should public money be used to bail out these parasites when there are so many areas that are desperate for public funds?
Moreover, not only is there no guarantee that the BoE's costly magic wand will do anything to resolve the crisis, but there is a very real possibility that, by creating imbalances elsewhere, it will trigger another crisis, this time in the monetary sphere. No state can manufacture money indefinitely without its economy - and its population - having to pay a price for it at some stage, not even the most powerful state of all, as the economic history of the US shows. Britain is not even a powerful state and its economy is more dependant on today's sick financial sphere than any other industrialised country. As a result, it is more vulnerable to monetary imbalances than most - something which is already illustrated today by the fall of the pound against the euro over the past months.
So, one would have reason to wonder whether the side-effects of the BoE's medicine may not turn out to be, if not worse, at least as bad as, the disease it is meant to cure. But then, in this crazy economic system, no-one can answer such a question. And least of all the BoE officials and government ministers whose main concern is to meet the wishes of the big banks in the first place.
Claiming that the worst may be over, soon...
So what does the BoE's report actually say, two weeks into this new era of banking bailout? Basically, its main argument is that the market is "overstating" the depth of the credit crisis. Having done much figure-crunching, the BoE's statisticians claim to have worked out that the billions of pounds worth of "toxic" debt certificates which have become unsaleable and are in the process of being written off by Britain's big banks, because they are now considered worthless, were in fact grossly undervalued by an "over-pessimistic" market. On the basis of some obscure calculations which are not spelt out, the BoE report reaches the conclusion that this undervaluation could be as high as 100%. As a result, past estimates which put the potential cost of the credit crisis to the British banking system at over £200bn, should be cut by half, to a maximum of £100bn. One could also wonder if, by any chance, this result might have anything to do with the unofficial figure given by Mervyn King for the total value of the BoE bailout scheme!
In any case, according to John Gieve, the BoE's deputy Governor, this means that, assuming the right protective and proactive measures are taken (like the bailout scheme), "while there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months."
The lesson that is meant to be remembered from this report is two-fold. Firstly, banks, financial institutions and individual capitalists should refrain from any panic and return confidently to their usual profit-making businesses, without any exaggerated caution, which could otherwise threaten to paralyse the economy and possibly deepen the crisis far more than necessary. Secondly, while the house is not quite entirely in order, most of the real mess has been cleared out and it is only a matter of months before its redecoration is completed. In the meantime, Mervyn King's jumbo "special liquidity scheme" will be there to ensure that the banks' ability to lend is restored - in fact, for far longer than "the coming months" mentioned by John Gieve, since it will be in place for at least 3 years, thereby showing that the BoE itself is significantly less confident about the future than we are meant to believe!
This being said, such a prognosis rings rather hollow and even suspect, coming from an institution which has warned against the dangers involved in reckless financial risk-taking for so long - although without doing anything against it, not even within the limits of its regulatory powers - but proved unable to forecast the crisis it had warned against, let alone prevent it, before it was already hurting.
In this respect, of course, the BoE is in no way different from all the other central banks and international financial institutions. Faced with the built-in unpredictability of the chaotic operation of the capitalist system, they have only a limited idea of what is really going on and certainly no clear idea of what the future has in store. The best they can do is to measure, after the event, the damage caused by the systemic madness of capitalist profiteering. And even then, such measurements have to be taken with a truckload of salt, due to the short-sightedness of the system's own "experts".
So, for instance, each one of these institutions has its own estimate of the likely cost of the credit crunch to the financial system. The OECD - the organisation of the industrialised countries - puts the worldwide cost of the crisis at around £230bn, whereas the International Monetary Fund is a bit more pessimistic, with a £320bn figure. But which is the right one?
In fact, despite their enormous size, these figures assume that the crisis will remain confined to the credit, housing and related markets, without even engulfing the total stock of existing unsaleable "toxic" assets, whose combined nominal value in the US, Britain and the euro-zone alone is estimated to represent around £450bn - which leaves plenty of space for the final bill to increase. Furthermore, none of these institutions has even started to assess the potential cost of the crisis' impact on the productive economy - which is already affected, if nothing else, in the form of construction firms being sent to the wall by the cancellation of housing contracts. And this is not to mention a cost on which it is far more difficult to put a figure - the social cost of workers losing their jobs, families being evicted, government public and social expenditure being cut, etc...
The truth is that neither the BoE nor its national or international counterparts have the means to produce any kind of reliable assessment of the situation as it stands, nor of how it will develop, let alone to change the course of events. At best they can tinker with the system, not regulate it and even less, manage it.
... but fearing the worst
Ironically, leaving aside its dubious statistical calculations on market over-valuation and under-valuation, what permeates the BoE's report from beginning to end is a rather more pessimistic (one should say, realistic) view of the potential dangers built into the present crisis.
Put in a nutshell this report stresses again and again that, while the "worst is over" or nearly so, there is every reason to be wary about the possibility of a serious aggravation, should financial institutions fail to put on their best act in order to help to re-energise investment in general and lending on the money markets in particular.
To put it another way, this reports tries to hammer in the idea that if the financial institutions nurture "exaggerated" fears of a meltdown, this may turn into a self-fulfilling prophecy, whether this meltdown is preventable or not in the first place. This may well be the case. However, it does not follow from this that the credit crisis can be talked out of existence, even with the backing of an armada of statistics and the authority of the BoE, nor even drowned under the billions of pounds of the "special liquidity scheme", in fact.
However, it would be just as true to say that, conversely, in the past period of lending frenzy, talking up the credit rating of any mortgage debt in the name of ever-increasing housing prices was a self-fulfilling prophecy. It had no bearing on reality but produced, nevertheless, the huge speculative housing and credit bubble which is bursting today. This is just another case of the same kind of "exuberant irrationality" which, in the words of Alan Greenspan, a former president of the US Federal Reserve Bank, drove the meteoric rise of the stock market in the years leading up to the "dotcom crash", in 2000-2001.
But then the workings of capitalism are irrational and this is precisely where lies this irrationality: when irresponsible capitalists compete for what they see as the quickest way for them to make profits (or protect them), regardless of the consequences for the economy as a whole, thereby distorting blindly the markets in which they operate and pushing them far beyond the limits of what they can tolerate. By which time the speculative bubble they have created bursts, resulting in a crisis and untold damage.
This is why, when the BoE goes on to list the "vulnerabilities which financial firms should be prepared for, to help mitigate the associated stresses in the financial system, should they crystallise", apparently expecting yesterday's speculators to get their act together in order to sort out the mess they have made, it is living in cloud-cuckoo land, but certainly not in the real world of capitalist irrationality and profiteering.
The BoE report presents a comprehensive list of these "vulnerabilities" and their potential impact on the real economy.
Ranking first in this list, is the risk of a prolonged period in which the interest rates required on the debt market would remain high, as is the case today, thereby making many more bonds unsaleable (i.e. impossible to sell without making a big loss). Since a large part of the big banks' capital (up to 88% in one case) is made of debt bonds, this would reduce their capital as well as their profitability, thereby threatening to create havoc on the stock market. Even more importantly, it would reduce their ability to borrow in order to fund their normal activities, thereby increasing even more the cost of credit in the real economy, for companies as well as individuals. Worse, the resulting disruption could then feed back into the financial system, by reducing the value of even more financial assets and pushing interest rates further up - leading to a self-feeding vicious circle whose outcome would be hard to foresee.
Despite all the reassuring headlines, therefore, the BoE is indeed fearing the worst, because what it is describing is nothing less than the sort of self-feeding mechanism which led to the catastrophic hyper-inflation in Germany, in the 1930s. No, the worst does not look like it is over!
"Potential" dangers which are already there
Other "vulnerabilities" listed by the BoE report are more a statement of facts, describing dangers which are already biting, rather than potential sources of problems for the future.
So, "commercial property companies" are listed, rightly so, since the commercial property industry has been in trouble since the end of last year, with prices, rents and demand for new builds falling, while already-built properties remain empty.
Then comes what the report calls "highly indebted corporations", by which the BoE refers to so-called "private equity" businesses, in other words raiders who borrowed heavily in order to buy companies and strip them of their assets, before selling them on at a big overall profit (usually, at the cost of many jobs as well). For various reasons - partly tax-related, but mainly due to the then huge supply of cheap credit - such business practices have been a fad in the City over the past few years. However by now, the disproportionate indebtedness of these companies means that many of the corporate bonds they issued to finance their buy-out operations have become virtually unsalable, and therefore worthless - which is why claiming that the present crisis is confined to housing-related debt and has not dented the production economy is already a dangerous illusion.
The potential danger of this was shown recently by the case of the Boots group of pharmacies, which became a "private equity" company last year, in one of the largest such deals in Europe, worth £11bn. Due to the developing credit crisis, the eight banks involved in the deal (including Barclays and RBS) kept the £9bn worth of corporate bonds which had been issued, without trying to sell them on, for fear of having to sell them at a big loss.
At the beginning of this year, the same banks tried to offload some of these bonds by offering just under 9% of the total at 91% of their nominal price. But buyers were not interested, unless the banks undertook to compensate them, in case the bonds' value went down on the market. This being unacceptable, the attempt failed and the banks retain this huge number of sterile bonds, which may not be "toxic" in the sense that subprime mortgage bonds are, because, so far, there is no doubt about Boots' profitability, but are nevertheless an unusable part of their capital.
The next main "vulnerability" listed in the report, is the bankruptcy of a major financial institution - whether a British one or a foreign one to which British banks might have a large exposure. Again, this has already happened - twice, in fact. Firstly, there was the collapse of Northern Rock, to which many British banks had an undisclosed exposure. The bailout of the bank through its nationalisation resolved the problem, since the backing provided by the state to Northern Rock restored the credibility of its debt bonds and relieved the banks of any further worries in this respect - which was precisely the name of the government's game in nationalising Northern Rock, given the size of its overall debt, which was huge for such a relatively small bank. Then came the collapse of the US bank Bear Stearns, in March. Again, no-one knows exactly which bank held debt certificates issued by Bear Stearns, nor to what tune. The takeover of Bear Stearns by the powerful JP Morgan bank at a bargain basement price, which was engineered by the US government, gave a tough time to its shareholders. But the respectability of JP Morgan somewhat reinforced the "toxic" debt of Bear Stearns. Does it mean that this debt is any less "toxic" now? No, but this operation gave a breathing space to the British banks and allowed them to ignore Alistair Darling's request to disclose and, if need be, write-off the Bear Stearns' debt they held. No doubt, however, the Bear Stearns iceberg will resurface one way or another at some point.
No bailout for the working class!
Last in the BoE's list of "vulnerabilities" - and this, in and of itself, is significant in many ways - comes what the BoE calls "high household indebtedness". In this case, the danger is due, as this report says in its inimitable jargon, to "a tail of households who appear to be vulnerable to a tightening of credit conditions." But unless the BoE sees the British population as a kind of alligator whose "tail" represents 80% or so of its body, this is certainly the understatement of the century!
Well, indeed, there is a large section of the population which is not just "vulnerable" but already directly hit by the tightening of credit - or to put it more precisely, by the rise of interest rates on all forms of loans and credit cards, and the increasingly drastic conditions one has to fulfill in order to obtain a loan or a mortgage and now even, a credit card.
That British households - not just a few, but the majority - have a high level of indebtedness is old news. Britain's total personal indebtedness passed the trillion pounds mark last year, making the indebtedness of British households the highest in the world, in absolute terms, relative to their income and relative to the country's GDP. The BoE report's own figures - which, curiously, understate those commonly quoted by economic commentators - admits that, in Britain, average household debt shot up from 100% of net income in 2001 to nearly 170% this year. Of course, these average figures conceal large social differences - whereby debt represents a much higher proportion of income among the poorest than among better- off layers.
A large part of this indebtedness - around 125% of income on average - is housing, due to a housing bubble which, in some respects, turns out to be even worse than in the US. Indeed Britain was at the very top of two of the IMF's "league tables" of unruly housing markets last year. It came in second position behind Ireland in terms of "housing sector inflation" (i.e. average housing price increase minus general inflation) over the decade finishing in 2007, at 150% as opposed to 50% in the US which is in 13th position. And it came in, in third position behind Denmark and the Netherlands in terms of total outstanding mortgage debt relative to GDP (83% in Britain compared to 76% for the US).
Over the past few months, there has not been a week in which one or another of Britain's mortgage lenders has not announced new restrictions on its lending operations.
First came, at the end of last year, the end of all mortgage deals involving loans higher than 100% of the purchased home. By April, it had become virtually impossible for first time buyers to find a mortgage unless they were able to make a down-payment of 15 to 20% of the house price. As to those households - estimated to be anywhere between 1.4m and 2m - which are due to come out of their initial fixed-rate mortgage period this year and will have to find a new regular mortgage for their homes, they will be confronted with a very serious problem, since they will have to find a mortgage to cover most of the house's initial price at a time when house prices are going down. In short they will be in the same situation as first time buyers, but with the added risk of losing their homes. This is why, not only the least well-off stand to be squeezed out of the housing market in Brown's "nation of homeowners", but the number of repossessions is already increasing, with the Confederation of Mortgage Lenders expecting it to go up by 56% this year, to 125 a day, after a 21% increase last year. And since there are no affordable homes for rent on offer as alternatives, particularly in the big towns, this raising the spectre of rising homelessness - something that the BoE does not factor in, in its costing of the crisis!
Published figures already confirm that what could be expected is already happening. The BoE released figures showing that, by March, the number of mortgages approved had been nearly halved compared to a 12 months ago. However, other figures issued at the same time by the British Bankers' Association show that the total value of these mortgages was only 15% down over the same period - meaning that the average value of approved mortgages is up 60% compared to a year ago. And this at a time when average house prices have already gone down by 1% year on year. In other words, these figures confirm not only the contraction of the housing market, but, above all, the fact that the least well off among homeowners and house buyers are already being squeezed out of the market.
The fall in house prices, which might have been an advantage to some house buyers, is more than compensated by the rise in mortgage rates. Despite three consecutive cuts in the BoE's base rate, despite Darling's and Brown's high-profile admonitions to the banks that they should "voluntarily" pass on these rate cuts to borrowers, this has not happened. Quite the opposite, in fact, since at the very same time as the BoE was announcing its bailout, with Darling promising that this would spell relief for hard-pressed borrowers, a number of lenders, such as Nationwide and Bradford & Bingley, withdrew their remaining cheaper deals.
There were numerous reports about a scheme allegedly agreed informally between the big banks and the government as part of their bailout, which would provide households under threat of repossession with what some pro-government papers described as a "mortgage holiday". In fact, the only scheme backed by the government - with no actual money put behind it so far - is based on the idea that defaulting owners would remain in their homes as tenants of their mortgage lenders, paying discounted rents which take into account the amount they have already repaid. The trouble, however, is that such schemes have already been created by specialist companies and have turned out to be scams in which defaulters were effectively forced to sell their homes at a very low price and still pay high rents. And there is no reason to believe that the banks will be any less reckless in their attitude to defaulters.
However, the reason why household indebtedness is quoted as a potential "vulnerability" by the BoE report, although it does not spell it out, has to do with the very important role played by re-mortgaging in maintaining the level of, and even increasing domestic consumption, despite the fact that the purchasing power of a large part of the population was going down due to stagnating wages or even wage cuts. Because over the past few years, when house prices were constantly going up, and all kinds of cheap mortgages were available, many households, among the better-off layers as well as in the working class, financed a large part of their extra expenditure by remortgaging their houses or borrowing money for a few years, using their homes as security. And it was not just expensive redecoration, giant flat screen TVs, or new kitchens which were financed in this way, but also holidays, university fees for the children and, in the poorest families, accumulated credit card bills - in other words day-to-day expenditure.
If this source of cash disappears, which is already what is happening now, this spells a reduction in the overall spending of the population. How drastic? No-one can be sure, nor can anyone say what will be the consequences for the real economy and, in particular, for jobs - and yet, this is a very real danger, since a sharp rise in unemployment would amplify considerably this process.
What is certain, however, is that while the BoE is conscious of this danger, it has no plan to do anything about it. Mervyn King was at least more honest than Alistair Darling when he stressed that his bailout of the banking system was in no way intended to be a bailout of hard-pressed households.
In other words the working class will have to bail itself out of this crisis if it is not be made to foot the bill with which the banks, the capitalist class and its trustees in government are conspiring to present it! And to this end, it will only be able to rely on its own weapons, those of the class struggle, by using the collective strength of its millions of members, in order to force the tiny minority of capitalist parasites who are responsible for this mess to pay the cost and clean it up. But, ultimately, if society is to be freed from the repetition of such costly crises, which have been on-going for the best of the past century, it is capitalism itself which will have to be overthrown and replaced with a social organisation free of any form of profiteering.