The significance of the bank bail out
7 October 2008
The decision of the government to guarantee the liabilities, the debt and deposits, of the Irish banks has been described by the Labour Party leader Eamon Gilmore as the ‘biggest blank cheque in history’. The guarantee amounts to around €400bn and will be nearer €500bn if non-Irish owned banks such as the Ulster Bank are included.
Beyond the nature of the decision and its suddenness, the sheer scale of this guarantee has been staggering. The US bail-out plan which was initially rejected by Congress was claimed to cost $700bn. In other words the Irish guarantee could grow almost to the size of the US bail out while the US economy is almost seventy times larger!
What we have seen is a financial shock and awe which most ordinary people have struggled to comprehend. Watching television, listening to radio or reading the papers they have learned that the guarantee is well over twice the size of the whole economy, over ten times the existing national debt, thirty seven years tax returns or over €100,000 for every citizen in the State – man, woman and child. How on earth could this be afforded?
On top of this they have heard a few absurd claims that the taxpayer could actually turn a profit, while the government claims that they are just using ordinary people’s taxes to save their own money. The extreme complexity of the financial system has frustrated many attempting to understand just exactly what is going on or efforts to orient themselves in the midst of a massive propaganda campaign which has hailed the bold and decisive leadership of the government.
It must also be stated that decisive in this confusion has been the role of the opposition, or rather the fact that the vote in the Dail to approve the plan revealed, not for the first time, that there is no opposition. Backed by a media increasingly controlled by a few extremely wealthy individuals there has been no room for a coherent alternative to be presented. At most we have heard doubts and criticisms of the precise way in which the bail out has been fashioned.
The claims of the government are lies. Last Tuesday’s front page of ‘The Irish Times’ reported a speech by Brian Cowan in which he said that the Irish economy was strong and that what we were witnessing was ‘part of the economic cycle.’ On Monday night, while that newspaper was being printed, the banks turned up and asked for the biggest bail out in history because one bank was about to go bust, another was likely to follow shortly thereafter, and the whole system would then collapse. A normal part of the economic cycle?
For weeks and months the government and the financial regulator have been saying that the banks are fundamentally sound. In fact they are still saying it! Yet the investors who actually own the banks were selling their shareholdings because they believed that they were becoming increasingly worthless. Last Monday shares had their greatest fall in 25 years, yet the government is still saying it’s all really ok!
We should also be clear - workers are not being bailed out by this guarantee. The government is not using taxpayer’s money to guarantee their own savings. The State had already guaranteed €100,000 of savings – covering 97% of savers. This new guarantee is designed (in part) to protect the 3% who have more than this.
The government case is this. The problem is not one of solvency – whether the banks are about to go bust or not – but of liquidity. This means that the normal functioning of the money market in which banks lend to each other, allowing them to lend to others, has become gummed up. The government guarantee simply frees this market up, allowing the banks to resume functioning more or less normally. The government is not guaranteeing the banks’ assets – the money owned by the banks and the money owed to them by those who have received a bank loan – like property developers. Instead they are only guaranteeing the banks liabilities, i.e. the money owed by the banks in loans from others and to ordinary savers with deposits, who can ask for their money back.
An obvious question is whether such a nice distinction really means anything in current circumstances.
There is one immediate reason to be suspicious. Despite there (allegedly) not being a problem the government have already blamed us for it. Brian Lenihan said that “you know, we’ve got to be honest about this as a people. We decided, as a people collectively, to have this housing boom. We decided not to have property taxes, to demand reductions in stamp duties, to demand interest for those who bought to-let properties, and there was no questioning in any part of the political system about that.”
Of course it was the banks pursuit of profit, as mandated by its economic system, aided and abetted by the government and regulator, who sought to defend and promote the property boom and who now want us to pay for the mess. It is they who decided not to tax capital, to their own benefit and that of US multinationals, and it is they who rejected every criticism of this policy - sometimes claiming we were crazy - just as they are still denying any criticism now.
The problem with this explanation, as we have noted, is that the owners of the banks were selling their shares like there was no tomorrow and increasingly valuing them as worth next to nothing. This vote of no confidence cannot be an issue simply of liquidity. The government, regulator, and banks themselves have asked for trust and the taxpayer’s money when they won’t trust themselves and won’t lend to each other.
It would in fact be absolutely extraordinary if the banks weren’t in serious trouble given that they have enormous loans to property developers while property prices are plummeting. Just where are the developers’ profits to come from to pay back the bank loans when no one is buying property at the prices being asked for? Yet the banks continue with the fiction that their bad debts have hardly increased, and the regulator has gone along with the deceit.
The Lex Column in the ‘Financial Times’ on 1st October reported the magnitude of Irish banks exposure to this falling property market: ‘at Anglo-Irish Bank, 80 per cent of the loans book is secured against fast-falling UK and Irish property; Bank of Irelands (71 per cent) and Allied Irish (60 per cent) are not a whole lot more diversified.’
The government has reassured the public
that bank assets are around €500bn so that the guarantee of €400bn
is easily covered by the banks themselves, which kind of begs the question
why there is a problem in the first place. But the problem is that
if this €500bn is made up (by 80 per cent, 71 per cent or 60 per cent)
of loans to property developers then the figure of €500bn is a joke,
one which only the public is expected to believe.
The ‘Financial Times’ had an interesting article the day after this piece of information looking at the various options that governments, in this case that of Gordon Brown, had in dealing with their banking crises. It listed six options for the British government to consider, one of which is the Irish one. It noted the pros, cons and likelihood of adoption of each option. Of the Irish option it said this:
For ‘pros’ it said “the Irish solution
has stabilised its banks – an approach to be reserved for a time when the
whole banking system is going down.” Oh dear.
The question now arises – what happens next?
This has been partially explained by one
economist. Morgan Kelly, in ‘The Irish Times’, “The reason that foreign
banks started to shun Irish banks is that international investors have
gradually become aware of the scale and recklessness of Irish bank lending
to builders and property speculators. Irish banks are currently owed €110
billion by builders and developers. Of every €100 that Irish residents
have deposited in banks, €60 has been lent for property speculation.”
So one thing that will definitely happen is that workers will pay for the bankers’ losses. Just to make their intentions clear to the terminally stupid the Dáil voted against any restriction on bankers’ pay. The workers’ money will help the banks and the bankers will get bonuses for keeping their banks a going concern. This is class warfare in its purest form.
An immediate effect is that bank shares went up so that the promise of workers’ taxes has helped boost the wealth of rich investors. Notable however was the fact that after the announcement they did not go past the level they were at before the calamitous fall on Monday 29th. In other words still no one believes the banks are safe and secure.
Another intended effect is that banks should find it easier and cheaper to borrow money. As a consequence of guaranteeing their debts however the government will find it harder and more expensive to borrow. Workers will, as a result, have to shell out on increased interest payments on the State’s debt through their taxes. When the State’s budget is increasingly going into deficit this is a problem that will get worse. Once again it is workers only who will pay for capitalism’s mess since corporate profit is hardly taxed at all.
Workers will also have to pick up the tab when the banks now attempt to get rid of the assets, the bad debts, which the government said they were definitely not guaranteeing. These bad debts of the developers can be securitized, turned into giant IOUs, and sold on to investors who know that the banks liabilities are guaranteed by the State and that if, and when, the underlying assets – the developer loans – don’t pay back the State will. Or rather the working class taxpayer will.
Another easily forecast event was that
money would move from other countries into the Irish banks, particularly
from the UK. This weakens other countries banking systems and spreads
the contagion. It also helps the Irish banks, although in the longer
term, since they will still be reluctant to lend to each other, they will
have to find profitable outlets to invest into. Now that the economy
is in recession this will not be easy. Where are they going to find
a replacement for the 60 -80 per cent of their business that they had previously
invested in the property market?
Fundamentally what the Irish State is trying to do, and every other State in this mess, is to maintain the fiction that the mountain of debt on which capitalism has floated for well over a decade can be saved. This will prove impossible. Even were it possible the day of reckoning would simply be postponed, and it is because of its repeated postponement that we are now seeing such a huge crisis come home to roost. The normal capitalist means of dealing with such crisis – bankruptcies and the devaluing of capital in other ways - will have to find expression. The task world capitalism faces is to handle this without a Great Depression like the 1930s. Despite repeated erosion of the welfare state in many countries, such a depression would mean its more or less complete removal, and the misery this would inflict would raise the real possibility of working class revolt in many countries. The question then is one of management. The guarantee is not therefore, by itself, a solution. The problem will not go away, it is not over.
In the Irish State, already in recession, in the midst of a property crash, and with a ballooning budget deficit which has grown from €5bn to €9.4bn in just a few months, the cost of the bail out will necessitate enormous attacks on the living standards of the working class.
The government has three ways of doing this, of paying for the bail out and the growing budget deficit – put up taxes, cut public services or borrow more money.
As we have said, the last will now be more expensive – workers taxes will pay for increased interest payments. The government has already signaled an austerity budget by bringing it forward to October 14th and it will now be much worse, again refuting claims we won’t have to pay for the bail out. Public services will suffer painful cuts.
Since taxes will also go up workers will again pay. If anyone was naive enough to believe that the bankers would shoulder some of the blame for the whole debacle, or at least keep their heads down and their mouths shut, the statement of the Chairman of Anglo-Irish bank, the one about to go belly-up before the State intervened, has called for corporation tax cuts from 12.5 per cent to 10 per cent, and the abolition of universal child benefit, State pensions and medical cards for the over 70s! This apparently is what he calls a ‘brave budget.’
It is not possible to accurately estimate the overall cost of the bail out but as we have seen, according to a relatively conservative estimate, it will be at least double the budget deficit that currently exists. In return it is rumoured the banks will pay back €2bn, but we will not hold our breath. When Allied Irish Bank was saved from bankruptcy in 1984 it subsequently paid nothing except dividends to its shareholders.
So the reaction of the public has been one of shock and confusion with many of those disliking the bail out at a loss for lack of an alternative. As we have noted, this is partly due to the complex nature of the financial system and the sheer magnitude of the sums involved. Decisive however in dispelling the confusion and providing an alternative is an opposition. In such a crisis there is no room for half measures, unless you put forward a socialist solution you really have no alternative.
The government’s action was supported by Fine Gael and by erstwhile ‘radicals’ in the Greens. Sinn Fein demonstrated its responsibility and fitness for future junior governmental office by also supporting the scheme. Only the Labour Party opposed it and they made it clear their opposition was not one of principle. As their leader put it: “The Labour Party stood alone in the Dáil last night in opposing this Bill. Not because we oppose the principle of action being taken, but because we refuse to sign a blank cheque. Somebody had to stand up for the interests of the taxpayer.” At the end of the debate in the Dáil, after many fine words, he admitted that ‘if that’s the way it is; that’s the way it is.’ The excuse of the coward and reformist down the ages.
The trade union movement has huffed and puffed. In one interview with Jack O’Connor of SIPTU on Today FM the interviewer got weary of his professed indignation and finally asked him if all this bluster had any implications for the vote on the new pay deal. O’Connor made clear it would not.
In an interview in the ‘Sunday Tribune'
newspaper David Begg, General Secretary of ICTU, said:
So Begg admits not only that he has no alternative, that the bail out is rotten and that he will not oppose it, but that he also made a demand that it be fair and now that it isn’t he will do nothing. This of course is no surprise, especially from Begg. In so far as this has been a problem facilitated by the financial regulator and financial system Begg shoulders personal responsibility. He is, after all, on the Board of Directors of the Central Bank and Financial Services Authority.
It is therefore an absolute requirement of socialists, that when big events like this blow up, they not only voice indignation but that they put forward a convincing analysis, a coherent perspective and, above all, an alternative.
One economist actually put these tasks
quite well, although he was not referring to the tasks of socialists.
Professor Ray Kinsella of UCD said in ‘The Irish Times’ “people cannot
internalise the magnitude of this crisis, which will metastasise into the
mother of all recessions. We are headed for a place we don’t want
to go and what people want is some kind of direction. They are fearful,
they are seriously ticked-off. They need information and they need
reassurance. . .”
First we must reject false solutions such as greater bank regulation: this had already increased under the Basel II requirements but did not prevent the disaster. The crisis is in many ways a symptom of an irrational and exploitative system and no amount of regulation will change this, or the potential for disaster, so long as the banks and the wider financial and economic system is geared to meeting the need for bigger and bigger profits against any consideration of financing people’s needs. Putting government officials on bank boards is not a solution since the regulator and government conspired with the banks to cover up the impending crisis and then to shovel the cost of clearing it up onto the working population. As we have seen, putting trade union bureaucrats on boards is equally useless – witness Aer Lingus, if one example is not proof enough. No amount of legislation will put workers’ interests above those of the banks under the current economic system.
The second thing we must do is clearly and absolutely oppose the guarantee scheme – no hand-wringing complaining followed by ‘reluctant’ acceptance.
If we are told – but banks will collapse! We will say - so what? Isn’t it this that is supposed to justify the big salaries which are the reward for risk taking? Where’s the risk when we bail them out?
Failed banks should be nationalised under democratic management and with workers’ control of each bank to ensure workers’ interests are not sacrificed. The Central Bank should come under the same control. The books of all the banks should be opened so we can see the truth and also see by just how much the bankers have been enriching themselves. The policy of the banking system should be the subject of democratic debate, democratic management, and workers’ control to ensure democratic mandates are implemented.
Financial Regulation should come under the same system with open accountability of the regulator for her or his decisions and for the decisions of the banking system. This is all decisions over who, what, how and when banks finance economic actions. The regulator too should come under workers’ control. By workers’ control we mean the supervision, inspection and authorisation of all decisions in an organisation by the workers who work in it.
Are workers qualified to do this? Well they can hardly make a bigger mess than the current ‘experts’, the self-proclaimed ‘masters of the universe’. In any case many workers are experts themselves and have every incentive to get things right, because they know that it is they who pay for any failure. On the other hand leaving it in current hands is to give huge incentives to continue making a mess. As for shareholders, they should be compensated on the basis of proven need. In other words the rich should face the same means testing which is now inflicted on the old, disabled and poor when they seek welfare payments.
Workers should reject any attempt to get them to pay for either the bank bail out or the recession. They should reject all redundancies and demand their firm be kept open with the help of the banks, who before proved only too willing to fund reckless property developers. It is jobs which should be guaranteed not fat cat profits.
This alternative requires some immediate practical steps to signal rejection of the bail out and organise opposition.
The first is for workers to reject the new pay deal which will see them pay for the recession.
They must reject budget cuts that will become an avalanche on October 14th.
They must again reject the Lisbon Treaty which is the free market agenda writ large over the whole of Europe. If the Irish State can break Brussels’ rules we certainly can.
Steps to do this can be made by the left uniting to campaign on this socialist agenda.
Such left unity will be radically different from past appeals.
First it will have a political basis.
It will be explicitly socialist unity and not any ‘popular front’ type unity which silences workers’ interests or actually sacrifices them.
It will be based not on future electoralism, which is often not even unity but agreement to non-aggression. The elections are months away. What good are they now? What difference would one or two TDs in the Dail have made in the last week? Would they have stopped the bail out? Would they be able now to stop the budget? Of course not. Their role would be to rally and unite workers opposition. But this is what we need and are calling for now and this is the purpose of socialist unity – to promote workers unity. Socialists who seek electoral victories first are openly betraying their opportunism and electoralism.
Such unity means breaking with the capitalist class, which includes the bankers. It means breaking with the government and all parties which supported them, including the Greens and Sinn Fein. If individuals from these parties want to join a workers campaign that is great – but they will not be representing their party and they will be asked to break their party’s policies. They must accept unrelenting criticism of their party from the campaign.
We must also break from the partners of the capitalist class, who have participated in the cover up and now go along with and support the attempts to make workers pay. This is the leadership of the trade union movement. We must oppose them and their policies and especially social partnership. It is not possible to respond to the current crisis by ignoring or failing to oppose this policy. When the ‘partners’ are stuffing you it makes no sense to fight back while pretending their politics is irrelevant.
The mass media has desperately sought for scapegoats and, such is the crisis, they have been forced dangerously close to the real guilty party. This however is not ‘short sellers’, not speculators and not even the bankers. The fault lies with the capitalist system. It is irrational, chaotic and dangerous to the health of the vast majority of the world’s population. It must be replaced. It must be replaced by a rational, planned and democratic system dedicated to humane goals that benefit the world’s majority. This system is called socialism.
The message to the working class must be clear:
No bail out for the banks!
Yes to democratic take over of the banks!