What the Collapse of the Financial System Teaches about the Wealth of Capitalistic Nations
[translated from junge Welt 29.09.2008]
Now that the world’s biggest banks are collapsing and assets valued at many billions are vanishing into thin air, politicians, economic experts, and journalists worry about the effects of these collapses on such a thing as the “real economy.” This is noteworthy, for until just recently a difference between stock market prices and bank yields on the one hand, and the wealth that comes out of production and sale of useful things on the other hand, was entirely unknown. Even ordinary people who own no shares are acquainted in the evening news with the level of stock prices, which are supposed to be directly understood as information about how “the economy” stands. If the mood of speculators has been fine and the market capitalization of listed companies has once again grown, then — somehow or other — the wealth on which “we all live” has increased. But because banks are crashing now and financial accumulation no longer functions — and presumably as long as it doesn’t get off the ground again — the experts know the difference between speculative assets and real wealth produced by work in the “real economy.”
Nonetheless, none of the experts pleads for concentrating on the production of real wealth and without hesitation letting the financial institutions with their speculative money accumulation go to the dogs. This is unthinkable in a capitalistic nation. At the very moment when the financial spell is breaking, those in charge worry the most about the services that the financial sector is supposed to accomplish for the real economy. In the name of this service, they accuse financial market actors of having done everything wrong. It is simply ridiculous how enthusiasts of a powerful financial sector are all of a sudden discovering greed in banks hyped up for years, how those who otherwise praise risk and the readiness to take risks as virtues of the capitalist economic system are now criticizing the excessive risks that investment banks, admired for their gigantic profits, have taken on and perhaps no longer comprehend themselves.
And yet investors and managers of the large financial assets have really done nothing wrong, and nothing crucially different than always. They have driven the growth of their sector and thus their enrichment to ever greater heights with a sort of business that is speculative from its very respectable point of departure.
Business with the lending of money
Banks do the same thing as all capitalists do: they make more money out of money — albeit without the roundabout involving production and sale of goods that the others have to take for the same aim. Financial institutions contribute nothing to the creation of material wealth. They lend money — and accumulate it by arrangement with their borrowers: these have to pay back the money with interest after an arranged period of time. A bank does not even care whether its clients invest the loaned money as capital, making a return, or whether they spend it for consumption. Their contractual repayment obligation is absolute; their actual ability to that effect, however, depends on whether they can obtain the required money on maturity. The loan agreement ignores this circumstance: it proceeds as if the money would automatically grow to the extent of the elapsed time. And if it works out, it even does proceed this way for the bank: in its hands, money is directly capital — but only by speculating on an accumulation of money that others carry on and that is not in its hand.
The universality and spreading of credit is therefore really based on its employment for capitalistic accumulation. A bank appropriates part of the surplus made in production and trade by charging interest. Its power to demand more money back from borrowers than it lends is based on the fact that it enables them to make profit with capital that doesn’t belong to them. They pay tribute because they can make more profit with borrowed capital than with their own alone.
The amount of disposable capital is the crucial condition for profit making in a world in which the real source of material wealth does not count at all because it functions so reliably. In a well-regulated capitalism, nothing depends on the willingness and readiness of workers to produce the useful things that are then sold with profit: there is manpower in every occupation at all levels of education and training in abundance and even superabundance, and cheap, and so available as a matter of course that no capitalist feels dependent on them anymore; he calculates with them just like that along with raw materials and operating supplies as factors of production.
Under such circumstances, the ability to make profits depends in fact only on the power of money. Those who can procure the necessary means of production, come up with the required capital advance, who can also advance funds for phases of research and development, and pay for technical innovations that surpass and devalue the investments of competitors will make it. Whether and to what extent a firm or a nation, on its territory, can get profit making going, which weapons it can deploy in competition, all that is contingent on having disposal over the necessary amount of capital. This is how money absurdly appears, in itself inexplicably, as if it were the source of its accumulation, as if it were without further ado and all by itself capital.
The command over capital is granted by the banks — thus freeing the private and national growth of capital from the limits set by already accumulated investable profit. The power of banks to share in the growth that others achieve from their workforce is based on this service to the maximization of industrial and mercantile profit.
The accumulation of financial capital
Of course, it is not the purpose of a bank to serve the profitable use of wage labor. It doesn’t serve the real economy but takes advantage — like every capitalist business — of others’ needs to make a profit for itself. The real, capitalist economy and the entire social production and consumption that depends on it is the means for the self-expansion of financial capital — and not by any means only from the narrow perspective of the finance magnates themselves, but objectively. Banks decide which firm gets credit and therefore has the necessary weapons of competition at hand, which one doesn’t, whose debts are extended, which defaulting debtor by contrast has to declare bankruptcy — they are the centers of economic power that determine the course of capitalism.
Banks use their privilege to turn money into capital without detour — i.e., just by accumulating it through lending and demanding it back — as well as they can. They wouldn’t get far with this if they lent (only) the money that their owners brought in from their private assets, and then waited until it flowed back to them with interest. Just as their borrowers do, a bank “works” with money that doesn’t belong to it. It borrows money from the public by attracting deposits and promising interest for savings books, time deposits, sometimes even for checking accounts. It purchases disposal over someone else’s money in order on its part to grant others disposal over someone else’s money for higher interest.
In this way, a bank separates property in money from disposal over it, making a double use of money. It takes money from the creditor who holds an account at the bank and lends it further on. The property right remains with the creditor, while the money itself ends up with the borrower, who handles it just as he handles his own money. Nevertheless, the bank promises the investor disposal over the invested money at any time or after a stipulated period of time, money that it no longer has — and that it hopes to get back again some time in the future and dependent on the business success and solvency of its debtor. This is the second stage of speculation.
Irrespective of how it will manage this feat in its particulars — a bank not only practices this in relation to its investors but also to itself: it regards money given away, that it does not have until it is paid back, which is uncertain, as valuable property that it has, and posts it as an “asset” in its books. Once again, it would regard it as a criminal idling of property to let the claims it possesses on future repayment lie around on its books, waiting for the repayment. It treats its customers’ debts as “assets,” as interest-bearing capital, which it resells with profit to other investors or makes the basis of its own new borrowing. Without having to have increased its own capital, it can thus initiate the same circular process of doubling monetary assets once again, and on an ever larger scale.
Of course, banks and financial institutions use the ability to pay that they create through the use of someone else’s debts as saleable or loanable assets not only, or even mainly, for crediting the growth and competitive needs of their clients from the “real economy,” but rather invest in everything that promises some gain: stock shares, raw materials, precious metals, and also interest-bearing securities that other banks throw on the market. This is how financial capital frees its growth and return on capital from the limited needs and opportunities for growth that industry and trade offer it. In this, there is no longer any service of the financial sector to the real economy to be seen: this branch of capital, which matters so crucially to the rest of the capitalist economy, simply uses its special position to accumulate off itself. Once again, it radicalizes its capacity to use money as capital without detour and uses, not money, but money that it doesn’t have, promised, expected money — credit, to be precise — as self-expanding capital. One bank procures the ability to pay by taking credit at other banks; namely, by selling them securities, interest-bearing promises to repay that it issues on the expected success of its business. And it gives credit to other banks by purchasing securities they issue. In this circular manner, financial institutions create ever new investment opportunities and at the same time the investment funds they need to avail themselves of these opportunities. They give and take credit to and from each other, thereby crediting themselves ever greater assets and from these paying and taking in ever more interest or similar proceeds. What would be fraud for one bank alone is an honorable business with the mountains of credit erected by the banking sector; the credit system credits itself by itself.
That works out — just as long as investors, i.e., mainly the banks themselves together with their investment and hedge funds, do not want to do anything with the financial assets they credit themselves and continually turn over on the financial markets other than to straight away profitably invest them again. However, as soon as doubts arise, for whatever reason, as to whether this spiral can be continued endlessly, and not just some but many want to see, not new securities, but the money these papers promise, it quickly becomes obvious that no bank has or can pay back the money that it owes and promises its creditors. The chain reaction that threatens when a big bank crashes is a fine test of the rule: why can the bankruptcy of the German bank IKB rock the entire national financial center? Why does the collapse of an institution like Lehman Brothers have the potential to destroy the global financial system? Just because the assets of banks consist in nothing other than the debts of other banks. When one of them can no longer service its debts, then this reveals that the assets of others are no longer worth anything. That proves at least one thing: in a developed financial system, banks do not really do business with money they have or lend each other but with the credit they enjoy as large centers of financial power. Their means of business is the confidence of their competitors, and beyond them the wider public, that they can always pay when they have to. They do not enjoy the confidence because they can pay, but they can pay because and as long as they enjoy this confidence.
So it is only too warranted that mistrust sets in periodically. After all, the assets being created and accumulated to a gigantic extent do not consist in money, the universal means of getting control over produced wealth, but in promises to pay money in the future. As long as confidence in future payments remains intact, debt obligations can be turned into money on request, and are thus securities equivalent to money. But since the investors’ own confidence is the only reason that they can have confidence, this circular thinking always topples into its opposite; there are more than enough grounds; it doesn’t have to be failed business activities in the real economy, though it also can be. The plummeting of confidence and the desperate attempt to turn debt certificates — even at a loss — into money is again a test of the rule: in a collapse, it becomes apparent that financial assets are not the real capitalist monetary wealth they purport to be, and as which they are treated and paid for on the stock exchanges, but are nothing other than speculative anticipation, claims on future wealth that — as one then notices — doesn’t exist. As soon as the question arises of whether the money the securities promise is really at hand, the money, created and accumulated through labor and exploitation, always proves to be much too little. Collapses of speculatively created wealth are not new. If they currently turn out to be more severe than most, if not only this or that sector of the financial market crashes and not only one country or another is bankrupt but the whole global financial system threatens to collapse or collapses, then it’s because the accumulation of financial capital that preceded this outcome was especially big and global.
The states are rescuing their financial system — a confession!
Now governments are jumping in and bailing out the bankrupt banks: as of the end of September, the German government has injected 10 billion euros into the insolvent IKB, and regional governments have gotten similar sums for various regional banks; the U.S. government is spending all together the inconceivable sum of 1 trillion dollars to stop the current collapse of its national credit system — meanwhile these sums are long since much bigger worldwide, and are still insufficient The bankruptcies of big speculators are obviously no private affair. With their enormous commitment, states acknowledge that a functioning branch of speculation is the elixir of life of their economy and their own finances. To be able to mobilize the ability to pay for the necessary investment of a national economy as well as for the needs of the national budget just by using the confidence in the crediting power of financial institutions — this is the crucial economic capacity of a nation in the capitalistic world. The degree to which states have this capacity at their disposal varies among them: those that cannot muster this crediting power for themselves, or lose it, remain forever poor and weak — or become so quickly.
The more finance capitalists are set free to accumulate their banking profits, their debt instruments, and assets in a speculative way and with no orientation whatsoever to any service, the better they can perform their outstandingly important service to their country. This is why the politicians’ accusations against the “gamblers and speculators” in the financial institutions are so dishonest: the governments of the day themselves have for decades allowed them ever greater freedom for increasing growth and returns on capital in the financial sector. When the speculation of the big money vultures bursts, then no sacrifice in national monetary means is too good for rescuing them: the state “insures” everything, throws its own creditworthiness into the fire, burdens the future national budget, and jeopardizes the currency. For that, the entire society is enlisted for rescuing the credit institutions. The service of money capitalists to society consists in their enriching themselves; for this to work out, an uncomplaining people not only has to serve the real economy with work cheaply performed; in times of crisis, it has to answer in addition for the rescue of the credit institutions that juggle billions.
That’s fine: even vis-à-vis the many capitals in trade and industry, financial capital once again embodies capital as such. Its business, to make property in money the source of more property without any intermediate stage, has to succeed for all other business to be able to succeed. The entire economic life of a country is made conditional on the speculative enrichment of financial magnates, even the work and wages of the propertyless masses. Anyone who doesn’t want to attack this lunacy should not grumble that the state pinches every penny for the needy, but has billions and trillions to spare for banks in need.
© GegenStandpunkt 2008