Capital’s dirty tricks
Claims for an end of the financial crisis
have been thrown into sharp relief by the announcement of losses at US
banking giant JP Morgan.
In early May J P Morgan, the biggest US
bank in terms of assets, made the surprise announcement that it had suffered
a trading loss of at least $2.3 billion. This announcement was all
the more surprising as the bank was viewed as the institution that had
most successfully navigated the financial crisis and promoted as the model
for how the banking sector could recover.
The bank’s CEO Jamie Dimon said that it
had made a significant loss on its “synthetic credit portfolio” – a financial
vehicle that is typically made up of derivatives that track the movement
of shares. He also admitted that the total loss could be beyond
the $2 billion estimated so far. While the details of what happened
are not clear it is thought that one of its top traders, known as the “London
Whale” because of the size of his trading positions, made an enormous speculative
bet that the creditworthiness of major corporations would get better on
the back of an improving economy. With the release of data
indicating a weakening economy the market moved in the wrong direction
for JP Morgan. The movement of the market may have been marginal but because
of the nature of derivatives, which are many multiples of the values of
the companies and commodities they track, it translated into a huge loss.
It is significant that this loss came
in the derivatives market – the complex and high risk investment products
– that were at the heart of the 2008 financial meltdown and the onset of
the long period of economic recession. The reality is that
“casino capitalism”, which had come in for so much criticism from politicians
and commentators, never went away. The promises to reform the financial
system never materialised. In the US derivatives’ trading was supposed
to come under greater regulation as a result of the Dodd-Frank financial
reform law. One of its main provisions was the so called “Volcker
rule” which would bar banks from "proprietary trading"- i.e. acting for
their own profit rather than for customers. Though the bill was passed
by Congress in 2010, large parts of the legislation, including the “Volcker
rule”, haven’t yet come into effect. The bill that was passed was
a greatly watered down version of that originally proposed
and federal officials who are still finalising its provisions are under
pressure from banking lobbyists to create has many loopholes as possible.
In Britain the Government commissioned
the Vickers report which recommended the separation of the retail and investment
arms of banks. The idea behind this was that if high risk investments
went wrong the broader economy would be shielded and state funded bailouts
avoided. However, any action on implementing the recommendations
of the report was put off until the distant future.
The justification for putting off reform
of the financial sector was that any further regulation could hamper the
recovery. Given that a lack regulation is cited as a major cause
of the crisis this seems perverse, but it is consistent with a political
class in North America and the EU which completely identifies with the
interests of financial capitalism. This was summed up in a comment
by one US senator on the relationship between the banks and
Congress that “they frankly own the place." In the wake of
the latest financial debacle President Obama rushed to the defence of the
bank and its chief executive, declaring on that JPMorgan was “one
of the best managed banks there is” and Dimon was “one of the smartest
bankers we got.”
It is doubtful if the various reform proposals
were anything more than an empty gesture towards public discontent.
The reality is that throughout this crisis politicians have acted to shore
up the financial class, to preserve the value of its assets and ensure
that it does not suffer a loss. This has been the imperative underpinning
measures such as nationalisation, re-capitalisation, ultra-low interest
rates, quantitative easing and bailouts.
Of course someone has to pay for this
and the corollary of these measures is an assault upon the living standards
of the mass of the population. This has taken the obvious form
of austerity measures such as public spending cuts and higher taxes.
But it has also taken the more insidious form of “financial repression”
as inflation eats away at value of wages while savings and pension funds
are diminished through almost zero interest
rates. This has resulted in the transfer of even more wealth towards
the banks and into speculative activity.
The persistence and dominance of speculative
activity and the inability of the ruling class to resolve the debt crisis
points to deep seated problems within the capitalist economy. While
the financial crisis prompted calls for a rebalancing of the economy, much
like financial reform, this has come to nothing. In North America
and Europe the productive sector remains relatively small. Even in
China, which is seen as the centre of manufacturing, there are signs that
speculative bubbles are building up. While many of the big corporations
are cash rich they are not investing in new productive capacity but rather
in unproductive sectors such as government debt. The recent flotation
of Facebook, a company whose initial share value was sixty times its annual
income, is a good example of this type of unproductive investment.
An economy in which so much financial
capital rests upon such relatively little productive output (for example,
it is estimated that the derivatives market at its height was ten times
the size of the global economy) is inherently unstable. The capitalist
response is meant to ensure that workers will pay in blood.