Collapse 2008

Western capitalism collapsed in 2008. It is still with us, a very lame duck, because governments, mainly in the USA and Europe, bailed it out – by pouring £ Billions into bankrupt banks.

Why did they do this? Their answer is that, without government support, banks and the economy would have collapsed.

But there is no evidence that anybody, except the bankers (who continue to pay £&$ Billions in bonuses), have benefited. Companies collapse, and people lose their homes – because they are refused the loans which the banks, when they received government funds, agreed (we are told) to arrange.

It is obvious that capitalism, which we are told, consistently, is a model for us all to follow, cannot “stand on its own two feet”. Despite the £&$ (and Euro) Billions already provided, the banking system is still extremely shaky.

Enormous Losses

Some banks made enormous losses in 2008: for example, over £10 Billion in the case of Halifax Bank of Scotland (HBOS). This bank has been taken over by Lloyds TSB, with government financial support to the extent that the taxpayer owns over 40% of the new bank.

It is expected that Royal Bank of Scotland (RBS), where the state has a majority shareholding, will announce losses approaching £30 Billion for 2008.

The policy of pouring money into the banks is clearly not working. Thousands of jobs continue to be lost and the number of property repossessions is still rising. An alternative strategy is necessary, and urgent.

An Alternative Strategy

Governments must stop providing money to privately owned banks and develop their own banking systems. For the UK, this means creating a People’s Bank by co-ordinating the institutions which are already state controlled – Northern Rock, Bradford and Bingley, Royal Bank of Scotland and the Post Office.

The existing mutual societies, mainly the building societies (such as Nationwide) which did not convert to banks, should be included in the strategic planning for the new People’s Bank.

If any other banks cannot survive without additional government funds, they should be nationalised; and then become part of the People’s Bank structure.

People’s Bank Priorities

The priority for the People’s Bank would be to provide services, especially mortgages, for people who are currently being ignored by the private banking system. At least 200 £ Billion should be made available by the government – for responsible, and sensible, lending to companies and individuals.

The cost to the taxpayer would be nil: even at a modest rate, the interest charged could easily cover any defaults. It would be extremely likely that, over a five-year period, there would be a surplus for the taxpayer.

Alistair Darling’s objection to this strategy is that he does not want to “run banks”. But we do not expect him to be behind the counter, or even on the boards of trustees. We would not expect ministers to be involved in day-to-day operations; any more than they are involved in the operation of existing government quangos.

Not that we would want the People’s Bank to operate like the quangos. It is not difficult to devise a structure which delegates management functions in a context where there is ultimate democratic accountability.

Free Market, or State, Capitalism?

The Western version of capitalism, concentrated in the USA and Europe, is usually regarded as “free market capitalism”. The markets have clearly been too free. Because they have not been properly regulated, many banks took ridiculous risks – especially in granting loans which the recipients had no chance of repaying.

Particularly in the context of globalisation, it is unlikely that sufficient regulation could be applied. The solution is nationalisation but with a structure that ensures ultimate democratic accountability.

A sensible approach would be a Board of Trustees with 15 members: 1/3 nominated by the government; 1/3 elected by management; 1/3 elected through the trade unions. Management would be required to provide the Boards with full information, which clearly did not occur with the banks now in trouble.

Whatever objections may be raised to this proposal, the outcome could not possibly result is a system worse than that which resulted in the 2008 collapse – of banks and, as a consequence, economies.

This element of democracy would be the distinguishing factor in comparison with the state capitalism as practised in, for example, China and Russia. The banking system would be publicly controlled, and accountable, through a democratically operating process.

Implications for Policy

It is clear that this kind of “democratic solution” must extend beyond the banks. It will need to be applied to the utilities – water, gas, electricity – and to what Aneurin Bevan (the founder of UK’s National Health Service) described as “the commanding heights of the economy”.

State control must be applied to the large oil companies and other companies which have an important part to play in the development of government strategy. Their freedom to act against the national interest must be removed.

Such measures amount, in effect, to a socialist solution. However, it does not follow that all companies should be nationalised. There is no objection to a “mixed” economy, providing the private sector is not allowed to undermine government policies – as currently happens with, for example, tax avoidance schemes.

The key factors, to be determined by legislation and regulation, are that:

1. companies do not have the freedom to act against the national interest;
2. all employees are properly represented (usually through trade unions) when decisions affecting the future of companies are under consideration

Although the focus here is on the United Kingdom, the kind of solution advocated in this article is relevant worldwide. Although it would be an exaggeration to describe him as a socialist, there are already signs that the new USA President, Barack Obama, recognises the necessity for much more extensive involvement of the state in the economy.