Committee for the Abolition of Illegitimate Debt

For a country whose most famous son M.K. Gandhi once said, “The world has enough for everyone’s need, but not enough for everyone’s greed,” India’s contemporary banking sector crisis provides the perfect muse to deep dive into Eric Toussaint’s riveting teardown of the world of big banks. And the pieces that emerge coalesce to reflect a dystopian image of the world of finance capital. A world where banks, in collusion with institutions and governments of the most industrialised countries, have helped enrich those at the top of the food chain while slowly but surely aiding in the dismantling of the social and economic rights of the masses lower down on the economic pyramid.

Toussaint’s Bankocracy is a necessary primer for anyone wanting to wrap one’s head around the problems plaguing banks in our country today because it lucidly helps establish the genesis of the global financial crisis of 2007-2008 and shares the lessons one ought to learn if history is to be prevented from repeating itself. A historian and political scientist who is a founding member and a spokesman of the Committee for the Cancellation of Third World Debt (CADTM), Toussaint’s signal achievement is in unravelling the complex web of linkages between the lenders, big corporations—the main borrowers—and governments, and how these structures have been put to use.

Transfer of wealth

In Toussaint’s words: “The public debt system as it functions in capitalism is a permanent mechanism for the transfer of wealth produced by the people to the capitalist class. The crisis which began in 2007-2008 reinforced this mechanism because the losses and debts of major banks were transformed into public debt. On a very large scale, governments socialised bank losses so that banks could continue to make profits, which are then redistributed to their capitalist owners.”

Using Europe as an example, the book shows how this played out. While public debt in the Eurozone had started to decline between 2000 and 2007, the borrowings by banks, households and non-financial companies had continued to grow. And suddenly after 2007, public debt surged across the countries using the euro as the global financial crisis triggered by the bursting sub-prime bubble in the U.S. sparked bank bailouts worldwide. By 2011, gross public debt in the Eurozone had climbed to 82% of its gross domestic product GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. (GDP) from 66% in 2007, while banks’ debts had soared to an astronomical 333% of GDP.

Toussaint establishes how, starting in the late 1970s, the political class across the developed western world systematically watered down and rolled back regulatory oversight of the financial sector. From the whittled down framework of the Roosevelt-era Glass-Steagall Act, which had ensured a strict separation between commercial lenders and investment banks in order to protect depositors, the neoliberal push for deregulation in the 1980s gave rise to conditions that allowed banks to abandon their ‘originate-to-hold’ business model and instead ‘securitise’ and sell their loans. The mad scramble to securitise across 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). classes and trade these securities was accompanied lock-step by the ‘animal’ urge to speculate as the pursuit of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. became an end in itself.

The memorable line from the 1987 Hollywood classic Wall Street where Gordon Gekko (the fictional financial trader played by Michael Douglas) nonchalantly asserts “greed is good” captures the credo of the era, a time when any regulation of the capitalist system was seen as too restrictive.

The upshot was the extreme concentration of capital. Drawing from data from the Bank for International Settlements Bank for International Settlements
BIS The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.

http://www.bis.org/about/ , the International Monetary Fund 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 and the European Union’s Liikanen Report, Toussaint shows that in 2013 the total international assets of banks exceeded a staggering $100 trillion—to put that figure into perspective, the combined nominal GDP of the world’s three largest economies in 2016, namely the U.S. ($18.6 trillion), the EU ($16.4 trillion) and China ($11.2 trillion) amounted to less than half that figure at $46.2 trillion according to data from the IMF. And the size of India’s nominal GDP in 2016 was a fraction at $2.2 trillion.

Hunt for higher returns

If one were to add the assets under ‘shadow banking’—special purpose vehicles created by banks themselves to carry out ‘high-risk, high-reward’ speculative financial transactions outside the purview of national or international regulatory oversight—that figure from 2013 swells to at least $140 trillion. Speculation has spread its tentacles across markets and asset classes sparing nothing in its wake—from stocks, bonds and currencies to foodgrains and oil—all fair game in the ever-widening hunt for higher and higher returns.

In chapter after chapter, Toussaint painstakingly lays out the rapacious onslaught the capitalist project has unleashed upon labour and the majority of the world’s populace. And as he academically chronicles, with extensive footnotes and cross-references, the ‘too-big-to-fail’ banks have repeatedly not shied away either from testing the boundaries of the law: be it money-laundering for drug cartels, using banking secrecy laws to justify their complicity in tax evasion, or tampering with interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. .

But this book with its polemical title on the undue power banks have today to determine policy is not just an empty Marxist diatribe against capitalism. Instead, Toussaint maps out an alternative path. A path that should be particularly germane to policymakers in India today given the magnitude of the bad loans and stressed assets problem banks are saddled with. And the solutions don’t involve public bad banks and asset reconstruction companies and insolvency and bankruptcy codes.

After all, complicated problems require radical approaches and Toussaint’s prescriptions could surely fit that bill. If Gandhi’s credo can be reinvoked, there is after all enough for everyone’s need.

Bankocracy; Eric Toussaint, Aakar Books, ₹595.

Source : The Hindu