New Labour’s plans for the Banking Crisis – How should Socialists Respond?

Socialist Resistance statement on the banking crisis.

The banking crisis which became apparent in August 2007 has got dramatically worse in the last two weeks. This is for three reasons. Firstly, the slump in the housing market – not just in the USA but also in a number of European countries, including Britain – has turned out to be worse than expected, leaving the banks with more bad debts than originally thought. Secondly, there has been a crisis of confidence amongst the banks themselves so that they have stopped lending to one another. Thirdly, the stock market has also panicked so that bank shares have slumped drastically.

The banks need to raise cash to cover their loan losses but they cannot do so by borrowing because no-one will lend to them. Neither can they raise funds by issuing shares because the market will not subscribe to new issues. If unchecked this situation will mean that at best they will have to cut back their lending drastically. Bank regulation is based on so-called `capital adequacy rules’ which state that a certain percentage of loans have to be covered by paid up equity capital. If that capital shrinks in value loans have to decline as well. At worst, if a major bank cannot cover its own loan repayments it could go bankrupt.

The crisis of confidence has worsened sharply since the US government decided to allow Lehman Brothers to fold. While the rescue of Bear Sterns earlier this year briefly seemed to stabilise the crisis the failure of Lehmans has had the opposite effect.

The response of the British government, following the US, has been to propose a massive injection of capital into the banks. This is planned in two ways. First, a direct injection of cash by buying shares. Second, a government guarantee on all inter-bank lending. The aim is both to strengthen the capital base of the banks and to restore enough confidence to allow them to start borrowing again.

How should socialists respond? First of all it is important to note that the shares which the government intends to buy in the banks were originally planned as `preference’ shares rather than `ordinary’ shares. While preference shares give a formal title of ownership they do not carry voting rights and are normally seen as a form of debt rather than equity (they receive a fixed interest payment rather than a variable dividend). In other words New Labour’s first plan was not to take control of the banks but to lend them taxpayers money and guarantee their loans. Over the last few days there has been talk of moving towards taking ordinary shares, exerting more control and possibly putting government representatives on bank boards. But the government has edged towards this reluctantly and it is still not certain whether they are even going to ensure the minimal control needed to stop the fat cat culture of bank bonuses.

Socialists should call for a completely different response to the crisis. The banks need to be taken into full public ownership under democratic control. But that is only the start of what is needed. A new kind of financial system is required which serves the needs of people rather than profit. That means changing the way banks and other institutions decide on lending and the terms of their loans. But it also means attacking the neo-liberal economic model based on inequality and insecurity which led to the risky loans in the first place.

The following resolution from supporters of Socialist Resistance is being submitted to Respect’s conference.

Conference notes:

  1. That we are now in the grip of the biggest economic crisis since the 1930s. That this is the direct result of many years of neoliberalism, market deregulation, wild speculation and corporate and individual greed – as reflected in the obscene city bonuses. Government intervention into such a situation is absolutely essential. But the handing over vast unprotected sums of money to the very people who have caused the problem in the first place, as in the Brown/Darling proposals makes no sense. It was right to nationalise debt ridden and bankrupt financial institutions such as Northern Rock and Bradford and Bingly but it is not the answer the crisis. But control comes with ownership and the precondition for stabilising the financial sector is to bring it into public ownership and under public control – including the Bank of England which was given the right to set interest rates by Gordon Brown in his first days as Chancellor. Democratic control over the economy through Parliament is essential if a further plunge into crisis is to be avoided.
  2. That it will be the working class and the poorest in society who will be made to pay the price for this situation though mass unemployment, continued wage freeze, cuts in the standard of living, attacks on the public services, loss of pension rights and house repossessions.

Conference therefore resolves:

  1. To campaign for the public ownership of the financial institutions.
  2. To support campaigns launched in defence of wages, pensions and jobs. To support the campaign against fuel poverty. To call for a halt repossessions on mortgage defaults and for the requisition of empty housing. To call for a halt to all further privatisations.
  3. To call for an immediate programme of house building, free home insulation, and investment in renewable energy to preserve jobs. We call for new and extensive investment in public transport.
  4. To organise a series of public rallies around the country to present this alternative.
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