As I was preparing this review a couple of items in the news caught my eye. One was that George Osborne in Brussels was arguing for a reduction in the regulatory burden on the City of London which he claimed was damaging the ability of financial institutions to promote economic growth.
The other was that despite wrecking one of Britain’s largest banks HBOS back in 2008 and despite a new report exposing their role, none of the three former top executives would even be fined because a six-year statute of limitations ran out last year. HBOS, itself the result of a disastrous merger of the Bank of Scotland with the Halifax, was taken over by Lloyds which shortly after also had to be rescued with a government bail-out of £20 billion.
Neither of these items would have come as any surprise to the author of Bankocracy, a book which is replete with comparable examples from across the EU and the USA. Eric Toussaint is perhaps best known to readers in Britain for a series of exceptionally useful primers on issues relating to the IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.
When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.
As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).
The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
http://imf.org , the World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.
It consists of several closely associated institutions, among which :
1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;
2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;
3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.
As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
http://worldbank.org and the debts of “developing” economies and as a leading figure in the Brussels based Committee for the Abolition of Third World debt. More recently he acted as coordinator of the Truth Committee on the Greek Public Debt set up by the Greek Parliament. Bankocracy first appeared in French in 2014 although the English edition contains a brief postscript which refers to Syriza’s failure to take up any of the proposals of the Truth Committee. It also provides a sharp dissection of the way the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.
ECB : http://www.bankofengland.co.uk/Pages/home.aspx ’s priorities since its creation have been the protection of the interests of European banks and the richest 1% which remains very relevant to the unfolding disaster in Greece. Hopefully, Toussaint and his collaborators on the report will soon provide a more detailed examination of recent events across the Eurozone.
In the meantime the translation of Bankocracy into English is very welcome. This is not another book retelling the narrative of the financial crisis of 2007/8 in great detail. The opening chapter “2007-8: The explosion of private debt” summarises the critical issue in a dozen pages. The speculative bubble Speculative bubble An economic, financial or speculative bubble is formed when the level of trading-prices on a market (financial assets market, currency-exchange market, property market, raw materials market, etc.) settles well above the intrinsic (or fundamental) financial value of the goods or assets being exchanged. In such a situation, prices diverge from the usual economic valuation under the influence of buyers’ beliefs. in the US housing market which burst in 2007 had such calamitous consequences internationally because of the build-up over previous decades of high levels of private debt among households and within the financial sector itself. The debts of governments in most countries only rose significantly as a result of the crisis and the bail-outs of the banks themselves.
Toussaint does not explore the broader theoretical debate among economists about the relationship of financialisation to crises in general although there is a brief nod to the work of Marxists such as Chesnais and Husson in France, and Lapavitsas and Onaran in Britain, on such issues. Rather his focus is very much on the specific contribution of the banking system to the crisis and the costs and consequences of those bail-outs. He shows in detail how the largest banks across Europe in particular have, with state support and infusions of billions of cheap central bank money, not just survived the crisis but seen their profits restored at the expense of the vast majority.
One particular strength of the book is the clarity of its explanations of a wide variety of complex terms and institutional practices within the financial sector which many people find mystifying. If you want to understand what’s meant by shadow banking, credit-default swaps, leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. , and securitisation, or the consequences of the Basel 2 (and the new Basel 3) Accords on capital-asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). ratios for the banks internationally – this is the book for you (although for a less obviously radical but frequently amusing and more wide-ranging lexicon I’d also recommend John Lanchester’s How to Speak Money).
Another strength is that the book exposes banking criminality and scandals as much more pervasive than a few ‘bad apples’ to use the old cliché. As a consequence of successive waves of deregulation of the banking system since the early 1970s all manner of swindling and dubious practices became rampant across the whole of the financial sector. The involvement of HSBC in tax evasion and drug money laundering is one example Toussaint explores in detail but there are many others. As he reveals it’s not just that the big banks are ‘too big to fail’. Major banks and bankers (with the occasional exception of a junior trader caught fiddling his accounts) are as he puts it ‘too big to jail’. “Banksters” is one term he doesn’t use but a reading of his book soon reveals how apposite it is.
There is too much material here to summarise adequately but three more themes are worth noting in brief. One is how banks in the wake of the subprime housing market collapse switched into speculation on the commodity markets driving up the prices of raw materials and agricultural produce to record highs in 2007-8 and once again in 2010. JP Morgan Chase and Goldman Sachs together came to own more metal storage warehouses than Glencore the world’s largest mining company. The point was to hold commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. off the market in order to drive prices up further. It’s worth adding that in 2015 as the banks offloaded their stocks they helped to drive prices down again rapidly, inflicting serious damage on the exporting economies.
Another related theme concerns the consequences of what’s known as Quantitative Easing or QE, essentially a process whereby central banks, especially the Federal Reserve
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.
FED – decentralized central bank : http://www.federalreserve.gov/ , Bank of England and the ECB ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
https://www.ecb.europa.eu/ecb/html/index.en.html , have pumped huge quantities of new ‘virtual’ money into the banking system. Yet despite this, and unprecedentedly low interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -rates, bank lending for investment in the productive sectors of these economies remained weak. Instead the money helped fuel further speculative bubbles in property and stock-markets globally. Toussaint correctly predicted in 2014 that one or more of these bubbles was likely to burst with serious consequences for the global economy. What the ECB did succeed in doing in response to the Eurozone crisis in 2012 was to prevent another wave of banking collapses by issuing over a trillion euros in new ‘liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ’. But Greece of course was denied access to such funds after the election of Syriza.
The book concludes (apart from the new postscript) with a chapter on Alternatives. These are divided into various sections. The first is headed “Immediate measures for finance in general and banks in particular” and contains a list of 18 concrete measures approved by the CADTM. These include radically reducing the size of banks, restoring the former split between commercial and investment banking, prohibiting derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). and various types of speculation. The second section provides arguments for a comprehensive socialisation under popular control of the financial sector. Others refer to ending austerity and debt audits such as those undertaken by Toussaint and the CADTM in Latin America and now Greece.
There is little here with which I would disagree. I would question whether the division between immediate measures and the socialisation of the biggest banks could ever be sustained in practice. As we have seen in Greece even where banks are supposedly ‘publicly owned’ they can still engage in the same dubious practices such as facilitating capital flight and tax evasion as their private competitors. Toussaint’s conclusion, that left-wing governments must really get to grips with these issues if they are to deliver any significant improvements for the vast majority, is certainly correct.
Bankocracy by Eric Toussaint, 334pages, £15 - 20€.
To order a copy of Bankocracy, click here.
13 April 2016, by Eric Toussaint , Michel Husson , Costas Lapavitsas , Ozlem Onaran , Patrick Saurin , Stathis Kouvelakis , Francisco Louça , Stavros Tombazos , Michael Hudson , Giorgos Galanis , John Weeks , Miguel Urbán Crespo , Pete Green , Gilbert Achar , Alan Freeman , David Harvey , Andy Kilmister , Philippe Marlière , Thomas Marois , Sabri Öncü , Susan Pashkoff , Alfredo Saad Filho , Benjamin Selwyn , Pritam Singh