UPDATED ARTICLE
Alice is 31 years old. Her husband Mike was just laid off and she is worried about losing hers given the economic decline. They would like to buy a house but that’s out of the question now, and they want to start a family but worry about how they’ll manage. Why should Alice, Mike and the rest of us give a damn about failing banks? Does it really affect ordinary working families?
To try to make sense of all the talk about bank bailouts, nationalization and socialism, we put a few questions to our People Before Profits columnists John Case and Art Perlo.
1. What is the appropriate and necessary role of banks?
Case: Banking serves two important roles: a) to make loans sustained by collateral — loans of all types are a key mechanism of broad commercial activity, and of economic growth; and b) to serve as brokers for investment. These two services are in some conflict with each other, and should, like accounting and investment, be separated.
Banks play an important role as secure repositories of wealth (your savings) as low-risk, federally insured, institutions.
Investment banking firms, conversely, attract the interest of high-risk, high-return, activity. They are major funding sources for investment in innovation. Of course federal grants and many tax-protected foundations have significant impact on such investment as well.
The weakness of regulation of banking has been amply demonstrated in the current crisis. However the weakness of a fully nationalized bank system would likely be insensitivity or inflexibility with regard to investments that promote local and regional economic diversity. In addition, how to both encourage and test innovation —without bringing society to its knees — is a profound question to which there may be no easy answer.
Perlo: Even progressive economists often concentrate too much on getting the financial system working, whatever that means, instead of asking what parts of the financial system are necessary to get the economy working for working people.
Ordinary people and businesses use the financial system for legitimate purposes — to store money and hopefully maintain a small financial cushion, to build savings, and to have access to the funds through checking accounts and debit cards (ATMs). These functions are in no immediate danger. If a bank fails, these accounts are insured, the FDIC takes over and runs the bank until it can be sold to another bank, and customers don't see any interruption in service. In some countries, the post office provides some basic retail banking services.
The financial sector provides credit. To ordinary people for home mortgages, car loans and credit cards. To business for startup and expansion and as a bridge over slow periods. While these are necessary functions, they have been expanded beyond all reason. A record level of consumer income is now going to pay interest on these debts. Of the value created by workers, a larger share is appropriated not by their direct employers, but by the financial industry. The situation for business is similar, with massive indebtedness.
The problem right now is not primarily that banks are not making loans. It is that in previous years, they made too many loans, beyond the ability of consumers or businesses to repay.
Someone paying 60 percent of their paycheck in mortgage, car and credit card payments doesn't need more credit — they need more income and less debt. A business (whether General Motors or the car wash down the street) is in trouble because there are too many cars and too many car washes for any reasonable economic scenario, much less the diminished demand of today’s economic crisis. Many businesses cannot and should not be saved. Huge businesses like GM need to be restructured to produce stuff that is useful. Business needs customers. The best thing for that is more and more fiscal stimulus, spent on useful and necessary goods and services. This results in direct purchases from many businesses, and by boosting employment and wages enables workers to patronize business. Many businesses would benefit from higher general wage levels, although some would not. Access to credit is necessary for business, but is not the main problem.
2. What is the difference between nationalization and socialism?
Case: Nationalization is a public takeover solution to the collapse of a private, capitalist enterprise considered too big or systemic to fail. Socialism, historically, is a social system in which public interests and institutions override private ones in the "commanding heights" of the economy. Socialism is based on a working class ideology, in the main, and thus advances the broadest-based democratic principles and institutions that define and govern the public interest.
Thus nationalization is a step toward socialism to the extent that democracy, and working class empowerment, is expanding. However in the absence of expanding democracy — that is, in the hands of corrupt, compromised and unaccountable forces — nationalization can mean a harmful centralization of power.
The true socialist path is through successive waves of major social and industrial revolutions and reforms, expansion of democratic rights, and successful adaptation to technological changes that further empower communication and mobility and cooperation across the world.
The nationalization challenge before the United States now cannot succeed without greater democratic guidance.
Major banks and investment firms are outright insolvent, yet by virtue of their immense size and diversity of interests, their collapse would paralyze many large national and international markets. Attention is currently focused on the finance and banking industry, and auto. It is up to working people to make their mark upon this period. If we can insure that health care, retirement and education rights for all are measurably advanced, are made more secure, which can only happen through a real increase in the truly socialized portion of our mixed economy, then we shall have succeeded. If all unemployed are offered an opportunity to serve in building the new infrastructures and services that must sustain a recovered economy, we shall have succeeded — the nationalizations of 2009 will be true steps toward socialism.
Perlo: Socialism is working class power — working class control of the political and economic direction of the country. That includes various forms of public ownership (local, regional, national) of key economic resources, along with public regulation of important private-sector companies.
Socialism would eliminate the speculation from the financial industry, and would use finance to direct the country's resources toward investment in infrastructure, industry and services that advance the public good.
Nationalization can be part of, or move in the direction of, socialism. But what has been happening in this crisis could best be regarded as "lemon nationalization" and has nothing to do with socialism. The U.S. government steps in, cleans up the mess made by private banks, pays premium prices for worthless stock and pays salaries and bonuses to executives instead of throwing them in jail. If the government does take formal ownership, the plan is to clean them up financially, but not interfere in the way they are run, and turn them back to private investors (probably at a bargain price) as fast as possible.
We should fight not only to improve the financial terms of nationalization, but to dismantle the parasitic functions of nationalized banks and focus on providing economically useful services.
3. In the past, some developing countries, such as Nasser’s Egypt, nationalized various industries but the people remained in poverty, social problems persisted, democracy was not implemented, etc. Some call that "state capitalism." Is that pertinent to what is being discussed now?
Case: Yes, the failure of large scale nationalization — socialization — can have more than one cause. Socialization works better for large-scale production than small. And the ideals of socialism and communism can only arise out of a well-rounded development of an economy, reforms in services, taxation, law and regulation, expansion of democracy and, above all, a dramatic rise in the level of culture, education and skills of the working class.
Witness the tragic circumstances of many resource-rich nations where those with the most guns seize the national wealth for themselves, but are in turn corrupted by it, typically selling themselves to foreign oil and mining interests, on whom they become dependent. These circumstances often do not promote real economic growth, but instead a very distorted, cancerous growth in inequality or militarism, or both. Saudi Arabia, Iran, Iraq, the Horn of Africa, Nigeria, Malaysia and many other countries bear the scars of the "resource rich curse." This form of phony nationalizations, or degraded socialisms — it's possible one could put much of the post-90s Russian recovery under Putin in this category — is not the path to real socialism.
Perlo: Nationalization was often necessary for any progress in sectors where national or international capital would not invest. National steel, energy and other industries laid the basis for a better economy, less completely dependent on foreign capital. But benefits were unevenly distributed, and there was a tendency (as with the energy companies PEMEX in Mexico, PDVSA in Venezuela) for massive corruption and a self-perpetuating bureaucracy to develop. Thus, in Venezuela, it took a massive struggle including resisting a coup attempt and overcoming a bosses' strike for the popular government to actually gain control of the state-owned oil company.
In any capitalist society, it is an ongoing struggle to have popular control over government-owned or government-regulated companies and industries. But at least if it is government-owned, there is the possibility that we can exercise some level of control through the democratic process, however flawed.
4. What is "partial nationalization" as is currently being discussed?
Case: Partial nationalization means the government takes partial ownership of a corporation. The sharp struggle in Congress on what constitutes control in the public interest is reflected in the confusion of interpretations that now surround the term "nationalization."
The first version (Bush Treasury Secretary Paulson): the government takes preferred shares in exchange for its capital infusion. Preferred shares a) get bigger dividends than common shares; and b) in a bankruptcy, are paid off before common shares. But (c) they have no vote in electing the board of directors, or choosing management.
The second version (Obama Treasury Secretary Geithner): a) the government has the option to trade preferred for common (voting) shares; and b) the government will "stress test" the banks to determine their actual value. This sets the stage for seizing control to protect the public interest in exchange for absorbing all bad assets of insolvent institutions — effectively the same as nationalization.
Perlo: The government pays the freight, but existing stockholders and management keep control.
The bank bailouts have transferred massive wealth from the people to the finance capitalists. It's not only executive pay and bonuses — every dollar of dividends paid out is theft from the people.
Economist Dean Baker explains how this works with Citigroup:
"The government originally lent $25 billion to Citigroup at below-market interest rates in the first wave of TARP lending. In December, it lent another $20 billion and guaranteed $300 billion in bad assets. (The guarantee was almost certainly worth more than $30 billion annually, given the quality of the assets.) On that day, $20 billion would have been sufficient to buy Citi in its entirety on the stock market. So the question is, how can the taxpayers own anything less than 100 percent of Citi, if its preferred shares (the form of the loans) are converted to common shares? Why is this anything other than a huge gift to Citi's shareholders and top executives?"
5. Is the government in the current circumstances actually able to "run" banks and companies such as auto better than the private sector?
Case: The government can run basic commercial and personal loan operations, even the mortgage business, for awhile. The question is: what are the tasks that only government can perform? The whole groundwork of the recent government bailout and takeover activities was to restart lending. But it turned out that restarting lending can't be turned on by hooking up a cheap money spigot to pump cash in an insolvent structure. Substantial restructuring of finance capital must take place. But finance capital is incapable, it appears, of performing its own correction without bringing society to a standstill, or worse, instability.
Similarly in auto manufacturing, the restructuring necessary to engineer and produce the new "American green transportation system" must involve massive publicly coordinated management in order to succeed.
So, government must manage the restructurings, including evaluating the parts that should remain public indefinitely.
Perlo: Most of the necessary functions can be run perfectly well by civil servants. It is not rocket science to look at mortgage applications and apply well-known formulas to them. Lower-level and middle-level managers and professionals, as well as all the unemployed graduates of college business courses, would probably jump at a chance of a government job with steady pay and benefits, performing a real public service. The more exotic functions, like bundling mortgages, slicing them and selling them to investors, are largely parasitic, and should be eliminated. It is hard to imagine government technocrats doing a worse job than the management of the U.S. auto and financial industries.
6. What kind of nationalization or other measures should and realistically can be pursued by the Obama administration, given the current balance of forces, to further the answer to #4 and 5? Short and long term?
Case: Finance is the immediate target. For many reasons both national and international in scope, stability and consumer confidence in the commercial banking sector must be restored. Auto is not far behind, and a long train of hurting industrial manufacturing operations, on the border of bankruptcy or below, will also be seeking help on this. The key for us is: let’s not do "bailout", but takeover, where restructuring is what is required. Restructuring will mandate high-tech do-overs of as much manufacturing as possible. If so, the new jobs created will not be the old jobs. After restructuring is completed is the time to determine what must remain nationalized, and what parts can perform their function better in a competitive market environment.
The long term is determined by the technologies we deploy today, and the new ones we imagine and bring to life to relieve and enhance human labor tomorrow.
Perlo: Build up a public sector banking industry that does the most necessary banking functions for people and business. This is a formidable task, but should be doable. Don't even try to fix the whole banking system as it exists.
suewebb @ pww.org
UPDATED: March 2, 2009, with Art Perlo interview
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