Marxist economists comment again on the crisis: 2. Fred Moseley - The bondholders and the taxpayers

Fred Moseley

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Fred Moseley

The world economic crisis took a sharp turn for the worse in September 2008. Some of the Marxist economists who had discussed the crisis in our first series of interviews, March-July 2008, have commented again. No.2: Fred Moseley.


1. Do you think that the recent extensive measures of nationalisation and bailing-out, and talk by governments of increased regulation of the financial sector, mark a serious change in the shape of capitalist development? What sort of new regimes might emerge from the crisis?

I think we should nationalise the banks, and really and truly nationalise them, not the pseudo-nationalisations that most governments have done so far, which are really not much more than bailouts of the stockholders and especially the bondholders of the banks. Most importantly, these government bailouts make it possible that the debt of the banks to their creditors will be paid in full; i.e. the creditors will be “made whole”. In the event of future losses, which are likely to be very significant, the government bailout money will be used to pay off the bondholders. So the government bailout of the banks is really a bailout of the banks’ bondholders, paid for by taxpayers.

Under current policies in the US, the total sum of money transferred from taxpayers to the banks’ bondholders could be as much as one trillion dollars (some estimates are higher than that), which is about $4,000 for each man, woman, and child in the United States. $16,000 for a family of four. From taxpayers to the bondholders. The financial elite wheeled and dealed and made lots of money during the recent boom, but their excessive wheeling and dealing caused the current crisis, and now taxpayers are supposed to bail them out and pay for their losses? What is wrong with this picture? ! “Socialism for the rich”, as some have described it. And economic injustice for the rest of us. This is truly outrageous and should be stopped immediately.

Once it has been recognised that that the government will always bail out large banks (“too big to fail”), then it follows as a matter of logic and economic justice that these financial institutions have to be nationalised. Otherwise, the implicit bailout promise is a license to take lots of risks and make lots of money in good times, and then let the taxpayers pay for the losses in the bad times. So the bailouts of the banks today sow the seeds for future crises, which will require more bailouts, again at the expense of taxpayers, etc.

The only way to avoid this legal robbery of taxpayers is to nationalise the banks. If taxpayers are going to pay for the losses, then they should also receive the profits. Ironically, the justification of private profit is that capitalists take risks and could suffer losses. But if the losses are not suffered by the capitalists, but instead by the taxpayers, then this justification for private profit is no longer valid.

Instead of bailouts, governments should fully nationalise any bank that needs to be rescued, i.e. fully take over and run the bank’s operations, and replace the current management and board of directors with government banking officials (with no “golden parachutes” for the displaced executives). And, most crucially, nationalisation should not guarantee the debt of the bank to its bondholders. The value of the banks’ debt must be written down to be commensurate with the current value of the banks’ assets, as in normal bankruptcy proceedings.

The extent of the writedown (or “haircut” as it is called) would vary from bank to bank, but in many cases would be very large. Bankruptcy judges would decide the size of the writedowns, as they normally do. Bondholders would also have the option to swap their debt for equity in the new government banks (as is often the case in bankruptcy proceedings).

The nationalisation of banks is not a “pie in the sky” demand that we have to struggle for 20 years to get on the national agenda. “What to do with the banks?” is already very much on the national agenda in the US and UK and probably elsewhere. It is immanently possible. It is the most reasonable and most equitable solution to the current financial crisis. Governments are being forced by the severity of the crisis, and contrary to their free-market ideology, to move in this direction. The government pseudo-nationalisation opens the door for real nationalisation.

I was in Argentina recently, just after the pension funds had been nationalised, and there was a cartoon in one of the daily newspapers, in which a government official says: “We are just following Yanqui imperialism!” Similarly, we should be following pseudo Yanqui nationalisation with real nationalisation for the people.

nationalised banks is not socialism, to be sure. But it could be an important step toward socialism. The goal of the banking system would be to serve the interests of the people, rather than to maximise profits for a few shareholders. That is a fundamental socialist principle that could eventually be applied more broadly to the economy as a whole.

2. The governments are trying to put into practice what their economists have learned, as regards stabilisation policies, from study of the 1930s and of the depression in Japan in the 1990s. What are the limits and defects of these stabilisation policies?

The most obvious and serious defect of the current bailout policies is that they are unjust and unfair – they are a massive transfer of income from the poor and middle classes to the rich, as discussed above.

Beyond that, these bailouts do not solve the fundamental problem in the economy right now, which is too much debt in relation to income, especially for households. To solve this problem the debt must be reduced to a more sustainable level. The government bailouts of the bondholders do the opposite – they pay off the too-big debt at the expense of taxpayers. So household debt would stay at their current unsustainable levels, and there would be more debt crises in the future. If instead the debt levels were written down to more sustainable levels, then there would be fewer debt crises in the years ahead.

Also, these bailouts have not been successful in achieving one of their main objectives –an increase of bank lending to businesses and households, which would help stabilise the economy and lessen the severity of the current recession. At the present time, banks do not want to increase their lending, in spite of the government bailout. They have suffered enormous losses over the last year, and they fear that more enormous losses are still to come in the months ahead. So banks prefer instead to hoard capital as a cushion against future losses.

As I am sure your readers know, Mervyn King of the Bank of England even threatened recently that, if UK banks did not increase their lending, they might be nationalised! I say, Mervyn, go ahead! Follow through on your threat! Nationalisation is clearly the better solution. Instead of giving money to the banks and begging them to lend, the government should nationalise the banks and lend directly to businesses and households, and in that way contribute more effectively to a general economic recovery.

3. The subprime mortgage crisis in the USA, though sizeable in its own terms, initially involved small sums compared to those in play now. Why has such a relatively small disturbance had such big repercussions?

Because debt levels in the US economy and around the world are at such high levels. High levels of debt make the economy more vulnerable to a downturn; the higher the debt, the bigger the eventual downturn will be. Debt has to be repaid out of income, so debt cannot continue to increase faster than income indefinitely.

In the US, the ratio of household debt to household disposable income increased from 40% in 1950, to 60% in 1980, and then accelerated to 100% in 2000, and to 140% in 2007. So debt has increased more than twice as fast as income since 1980. In the UK, the household debt to income ratio is even higher: 220%! Some of us have been saying for a long time that these unprecedented levels of household debt were not sustainable, and would eventually lead to a more serious crisis in the future, and that is exactly what is happening.

4. With the development of the crisis in recent months, now governments as well as banks or mortgage or insurance companies are in trouble. The IMF's resources are small compared to the sums involved. The bigger stashes are in the hands of the central banks, governments, and sovereign wealth funds of east Asia and the Gulf. Do you think that the unfolding of this crisis could mark a shift in the balance of financial and economic power on a world scale?

One possible consequence of the Fed’s wildly expansionary monetary policy in recent months could be fears of higher rates of inflation in the future and a flight from the dollar. If that happened, and the dollar lost its status as the world’s reserve currency, then the balance of international financial and economic power would change drastically, probably in the direction of Europe and China.

Actually, this flight from the dollar may have started in December 2008, triggered by the Fed lowering its target interest rate to 0% (!) and announcing that it would now purchase unlimited amounts of almost any kind of securities, including mortgage based securities and credit card backed securities. As a result, the dollar has fallen sharply.

Clearly, the dominance of the US free-market style of capitalism has taken a serious blow, and will no longer be regarded around the world as the ideal to which all other countries aspire or are pushed.

Emerging countries are also likely to demand and receive more participation in governing the world economy. We have already seen the beginning of this shift. When President Bush called the international meeting in November to deal with the global crisis, he invited the G-20, not the G-7.


19 December 2008. Fred Moseley is the author of a distinctive Marxist account of the decline in profit rates which brought crisis in the 1970s and 80s, one has spawned a whole series of further studies. He is professor of economics at Mount Holyoke College in Massachusetts, USA. His books include The Falling Rate of Profit in the Postwar United States Economy (1991), and he edited the English edition of Enrique Dussel's Towards an Unknown Marx: A Commentary on the Manuscripts of 1861-3.

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