The Bankers are the Culprits After All

Just when we were all (well, some of us, anyway) starting to think that perhaps we had been a bit unfair to blame all of the world’s current economic woes on the bankers, and that maybe after all we do need bankers and they do need to lend money and make a profit, I have come to realise that although we certainly do need bankers, the system really does need to change, and urgently.

We in the global North are suffering from economic conditions that are hurting our own working and unemployed poor, to the extent that in the UK our system of food banks – set up solely because there was a perceived need to support people who were ‘falling through’ the benefit system and actually unable to feed themselves and their families – is expanding, driven by increasing demand. And this at a time when the press is telling us that Things Are Getting Better, and that more people have jobs (though they also tell us that tax revenues are down because more of these people are self-employed or working part time, and on low incomes). Meanwhile food prices are soaring world wide, and only such items are textiles, plastic toys and cars remain relatively cheap (though the fuel to run the latter is of course prohibitively expensive) – and these only because they are made by workers who are being seriously exploited by multinational companies either in factories in Latin America and Asia or as migrant workers in the global North.

Thus large swathes of the manufacturing industries that used to sustain parts of the UK – and the picture is similar across the developed West – have now been outsourced to poorer countries in what we used to call the Third World where labour costs are cheaper and labour rights are non-existent or have been severely curtailed in agreements made between the big corporations and governments desperate to attract foreign capital investment. This is well known. However, what I hadn’t realised until recently is how much of all this is driven by financial institutions and their need for investment opportunities – so we are back to the bankers again.

The financial crisis of 2008–2009, which directly precipitated the world into a deep recession from which we are only just emerging, came about because of risky loans made to, among others, people taking out mortgages on property that subsequently fell in value. These bad debts, packaged and frequently changing hands in the financial markets without proper checks, caused the enormous failure of confidence that very nearly brought the whole international financial system down in ruin, and we ordinary taxpayers in the West are still paying for the bailouts and other government interventions that were required to prevent that global financial failure. It is a matter of debate whether the conditions that led to the financial crisis arose from the extensive deregulation of financial markets that occurred in the late 1980s and early 1990s, in the wake of the departure of large-scale manufacturing in the global North and the resulting economic reliance of those countries on financial services. If so, the connection between those decisions and our current situation is striking.

The recovery from the recent deep recession is distinctly fragile, whatever governments may tell us, and this morning’s announcement that Lloyds is shedding 10% of its workforce in the UK, for example, is hardly likely to inspire new confidence. Little has, however, been done by governments to prevent a reoccurrence of the Crash, and possibly little can be done without much more co-operation between said governments, since the Big Banks, like other multinationals, can threaten to move their operations from one country to another if things do not go their way. In these circumstances regulation would need to come from a higher authority that does not yet exist, since the IMF and the World Bank are essentially lending and monitoring organisations, not regulatory bodies. Other multinational companies, however (with the possible exception of that pariah Tesco, whose financial shenanigans are as yet shrouded in mystery), seem still to be making a profit.

They are doing it, however, by driving down the wages and restricting the representation of those who work for them. In the global South this is done by employing a non-union and casual workforce and often by backing up sanctions against dissent with serious force and brutality, sometimes with the collusion or aid of the national governments concerned. In the North it is done by undercutting union-agreed wages, and by emascalating the unions (a process mostly already accomplished, a legacy of the 1980s under Mrs Thatcher and her ilk). It is largely a win-win situation for the companies, and a lose-lose one for the rest of us. However, the driver for this situation is not so much economic as financial. The owners of capital (mainly the banks and other financial institutions such as pension providers, insurance companies and the like) have to find somewhere to put their funds where these will make a profit. Once they could lend money at a reasonable rate of interest to small and medium-sized businesses and there was no need for finance to be internationalised in quite the way that it is now – although that trajectory was already in place as a result of deregulation. But with interest rates low, and a residual fear of bad loans crippling the relationships between financial institutions, banks and other financial institutions are looking for new investments, and this is where multinational involvement in poorer countries comes in. Foreign Direct Investment, or FDI, is now a big player in Third World industrial development. Low-wage and casual labour, high profits, and a ready market for goods in the global North where such commodities are no longer manufactured, make this an attractive option for those with money to invest.

Thus even industrial development is now finance-driven, rather than demand- or enterprise-driven. Money earns little if anything kept in the bank, since low interest rates originally arising from the recession have become entrenched as a bulwark against the bad debts that would arise if they were raised. There is still too much debt, generally in the form of mortgages and other secured loans, in the North, and central banks fear that raising interest rates to the level that they should be in the economic climate would ruin or seriously embarrass many borrowers. Since what recovery there is has come not from export-led growth, but on the back of consumer-led retailing, much of it funded by credit card, higher interest rates would risk snuffing it out. Capital investment has little option but to fuel industrialisation (and consequently urbanisation and frequently ecological degradation) in countries where hard-pressed governments see FDI as a way to increase prosperity. The prosperity that is created, however, benefits only a few in those countries, sometimes as a result of corruption, sometimes because of the way the industries are set up. Because the multinational companies ensure, as a condition of their involvement in industrial development, that their profits pay minimal or no taxes to the host country, and that dissent or unrest among the workforce will be dealt with in a draconian fashion that precludes negotiation for better pay and conditions, they are the ones who benefit – and of course the financial institutions that funded them.

So we are back to bankers again, and their colleagues in the pension and insurance companies. Money has always talked, as the proverb has it. Now it talks globally.

And what is the answer? What can we do, apart from deploring the situation? Part of the answer is that working people need to see each other as connected with each other, as brothers and sisters under the skin, as it were. What affects migrant workers brought in to countries of the global North to harvest crops or rural inhabitants forced to move into cities to work in low-paid and insecure factory jobs affects us too. If we allow corporations to squeeze their conditions, they will be able to undercut ours, and in the end we will be working for the same peanuts in the same poor conditions – or not working at all. The other is that our governments and central banks need to rebalance the system. Interest rates need to rise so that banks, private investors such as senior citizens with a pension pot to place, and ordinary savers, can invest in businesses locally as well as far afield or keep their money in savings accounts and still get a reasonable return for their money. Low interest rates only encourage people to borrow and/or spend rather than save, and at some point this has to come home to roost. You cannot build a successful economy long-term on borrowing, as I have pointed out in an earlier blog. Both the Chinese and the Americans have experienced this, from opposite points of view, though I am not sure that either of them have learnt much from it.

It is ironic that it was at least partly Chinese money, saved rather than spent by both private individuals and institutions as the Chinese economy boomed in the early 2000s, that flooded the United States and exacerbated the very situation of over-lending and unwise borrowing that led directly to the financial crisis of the late 2000s. We’re back to bankers again, and of course, in the end, to money itself. Marx had some hard words to say about Capital and its propensity to exploit those whom it employed. St Paul had some even harder words to say when warning St Timothy about the Love of Money, which he considered the root of all evil.

Maybe they were right, after all.