Volume 13, No. 33, 21 August 2014
In this Issue:
* <http://www.sacp.org.za/main.php?ID=4478#redpen> Transform the
Financial Sector to Serve the People!
* <http://www.sacp.org.za/main.php?ID=4478#one> Move to censure
Israel over Gaza: Compel the world to take action
Red Alert:
Transform the Financial Sector to Serve the People!
Chapter 2
The downgrade of South African banks:
Neoliberalism and State Intervention
By Alex Mashilo and Ian Beddowes
On 14 August 2014 we released a piece through Umsebenzi Online, titled
'African Bank and Credit for Consumerism: The Collapse of a Model'. That may
be considered as Chapter 1 of our continuing work Transform the Financial
Sector to Serve the People! In Chapter 2 we now look at the collapse of
African Bank, its bail-out, and the downgrading of four major South African
banks, which, together with a fifth bank have been placed on further review
for downgrading. We debunk the neoliberal myth that the state must not be
involved in the economy. Despite what they always tell us, as we will show,
neoliberals want an activist state that not only intervenes in the interest
of, but is driven by the rich - the capitalist class who make up a tiny
minority and not the workers and the poor who make up the immense majority
of society.
By neoliberalism we are referring to more than just a policy regime founded
on a structure of right-wing ideology and beliefs based on the re-enactment
of the 19th century "laissez-faire" liberalism. Neoliberals have been
pressing for a complete restructuring of the economy in each and every
country and the world as a whole but this is NOT FUNDAMENTAL change - it is
change to intensify capitalism - not to do away with it.
This includes: a "self-regulating free market"; unregulated private
enterprise WITHOUT ANY STATE INTERVENTION, and therefore the removal of
regulations, tariffs and import duties - liberalisation and deregulation of
all sorts - most dangerously including financial markets and banks;
privatisation of State Owned Enterprises including provincial and local
authority owned entities; outsourcing of all those functions from the state
seen to be "business" - which we are told is the "business of business"; a
so-called flexible labour market, which means the removal of labour
protection and the erosion of hard-won gains by the working class - most
importantly the reduction of permanent jobs and their increasing replacement
by temporary and outsourced employment; the rise and dominance of finance
capital; and so on.
In chapter 19 of Capital (Vol. III), Karl Marx analyses the emergence of
money-dealing capital from the purely technical movements performed by money
in the circulation process of industrial capital and commercial capital. The
latter, according to Marx, 'takes over a part of the circulation movement of
industrial capital as its own, peculiar movement'. Marx shows that
money-dealing capital emerges when the movements performed by money are
'individualised as a function of some particular capital performing just'
those 'operations as its specific operations'. Related to this, in chapter
23, he goes further to analyse the emergence and role played by money as
'interest-bearing capital', building on his work in Volume II of Capital
where he reflects in detail on the circulation of capital and the various
branches of capital that this creates.
In our epoch, the epoch of neoliberal capitalism, finance capital has gained
dominance over productive capital, the State and society. While the
capitalist class in general is the ruling class, it is the financial stratum
within this class that has assumed dominance. Through this, financial
monopoly capital (which is mainly imperialist capital) has restructured the
capitalist system as a whole through the measures identified above. In
addition, through war and sanctions, among others. By neoliberalism, we are
therefore also referring to the new capitalist structure, i.e. neoliberal
capitalism itself in addition to the set of ideological and political ideas
related to it.
In our epoch, as former Harvard Business School professor and author of When
Corporations Rule the World (1995) David C Korten put it in his lecture
'Life after the dominance of Capital':
'The world's most powerful institution is the global financial system, which
functions as a global financial casino staffed by faceless bankers,
portfolio managers, and hedge fund speculators who operate with a herd
mentality. Lacking accountability for the consequences of their actions,
they send exchange rates and stock prices into wild gyrations unrelated to
any underlying economic reality as they each day move more than two trillion
dollars around the world in search of quick profits and safe havens. With
reckless abandon they make and break national economies, buy and sell
corporations, and hire and fire corporate CEOs - holding the most powerful
politicians and corporate managers hostage to their interests. When their
bets pay off they claim the winnings as their own. When they lose they run
to governments and public institutions to protect them against loss with
pious pronouncements about how the poor must tighten their belts and become
more fiscally prudent' [All Italicised reflect our emphasis.].
The dominance of finance capital over productive capital leads to the former
assuming proxy ownership of the latter, especially by using as leverage its
strategic position as interest-bearing capital. In general, financial
dealings become more and more lucrative than, and gain primacy over
productive activity. With this occur shifts in investment patterns from
productive to financial activities. Productive enterprises come under
financial pressure to restructure through neoliberal conformity. This
competitive struggle incorporates new characteristics, or sharpens the old
ones. The struggle to attract favourable credit ratings intensify to reduce
"the cost of capital" (interest rates on borrowings) and the conditions of
the struggle for survival increasingly become turbulent and harsh. In the
midst of the heat, non-financial enterprises and institutions either jump
ship or increasingly join financial activities. Short-termism and impatience
on returns become entrenched.
As Korten further says, financial institutions expect those 'responsible for
corporate management to take a similarly narrow view of their
responsibilities and send them a powerful message. A fair profit is not
enough. Annual profits and share prices must constantly increase. The CEO
who fails is likely to face a takeover bid or be fired by large
shareholders. How the corporation increases its profits isn't the market's
concern'. The entire economic structure that emerges becomes more than just
what others refer to as financialisation.
In dealing with the collapse of African Bank, which was modelled to finance
consumerism and not production or development, in Chapter 1 we have shown
how interest rates - the source of money accumulation from loans - are
irrational with no underlying connection to production.
African Bank is the only bank that was fined for reckless lending practices
so far, it is however not the only bank operating in the unsecured lending
market. All the major banks in South Africa are involved in this space, and
are vulnerable to interruptions in the income conditions of the customers.
For example, tens of thousands of mineworkers embarked on a five-month
strike from January 2014, followed by a month-long strike by thousands of
workers in the metals and engineering sector. There can be no doubt there
were many defaults on loan repayments by these heavily indebted workers.
When it was announced that the major banks have underwritten the bail-out of
African bank by the South African Reserve Bank we asked what they stand to
benefit (there is no free lunch in business). We highlighted that there was
no transparency on this question, and that more information was needed. We
then said if there was nothing for them to benefit they were clearly acting
in self-interest and thus they were likely facing an exposure which they
sought to cover up. Hours after we released Chapter 1, Capitec Bank was
downgraded by a global ratings agency, Moody's. Capitec Bank, supported by
the Reserve Bank, questioned the downgrading. The Reserve Bank stated that
everything was fine in the South African banking system. Bourgeois
economists and commentators seconded the statement: "Capitec Bank has a
different model compared to African Bank", it was loudly proclaimed.
During the Great Depression of the 1930s Henry Ford is reported to have said
'It's a good thing that most Americans don't know how banking really works,
because if they did, there'd be a revolution before tomorrow morning'.
In defence of Capitec, it was pointed out that the main difference between
African Bank and Capitec Bank, is that unlike Capitec Bank (and this goes
for the other major banks too), African Bank is not a deposit-taker - it is
a micro-lender. Well for those who did not know what this implies: all the
other banks are backed up by our deposits and savings (of course there are
industrial and commercial capitals' too) from which we are lent our own
money and charged interest. As we put it in Chapter 1, banks even lend money
above and beyond what we have deposited, in fact money which did not exist
before they lent it to us - and still charge interest. Moody's are of course
fully aware of how the banking system operates. All they want is more state
intervention to bail-out private financial interests when the mechanism
fails.
As a follow up to the explanation given why it should not have downgraded
Capitec Bank, based on its own concerns about banking operating conditions
in South Africa, on 19 August 2014 the rating agency, to add salt to the
wound, downgraded four major South African banks: Standard Bank, ABSA,
FirstRand Bank (incorporating FNB) and Nedbank. Further, Moody's placed
these four and another bank, Investec Bank, on review for further downgrade.
Neoliberal commentators are saying that the bail-out of the African Bank by
the Reserve Bank (a state institution which plays the role of the lender of
last resort) was in the interest of all. In Chapter 1 we described this to
be a fallacy, as all those who are indebted or over-indebted as a result of
reckless and unsecured lending practices are NOT being bailed out (it is
African Bank and its institutional investors who are being bailed-out). The
downgrade of these banks by Moody's, a hard-core neoliberal institution, is
based on a "concern" that the bail-out by the Reserve Bank is insufficient.
The neoliberals have forgotten that since the 1970s they have been telling
us that it is wrong for the state to intervene or play any role in the
economy.
'Moody's considers that the likelihood of systemic support being provided in
the event of need for these banks, to fully protect senior creditors and
depositors is now materially lower than previously thought, as implied by
the SARB's [Reserve Bank's] recent approach in resolving ABL [African Bank
Limited]', they said in their statement downgrading the four major banks.
By 'senior creditors and depositors' it is meant those who must be
prioritised and paid first in the event of problems, such as those
experienced by African Bank leading to even more serious institutional
crisis or collapse. In this context, the senior creditors are those from
whom the banks receive money-dealing and interest-bearing capital used for
the issuing of loans, bonds, and so on. The senior depositors are almost
exclusively the rich who deposit large sums of money. Mainly they are
institutional investors and big industrial and commercial enterprises and
not the workers and the poor who in such cases are likely to lose the little
money that they have. In its bail-out of African Bank, the Reserve Bank
imposed a 10% "haircut" on investors (a "haircut" is defined as loss from
the market value of an "asset").
'SARB's [Reserve Bank's] willingness to proceed with a burden sharing
restructuring plan for ABL, involving debt holders and wholesale depositors,
is a clear indication of a reduction in the likelihood of systemic support
being provided in the event of need, in a manner that would fully protect
creditors. In this recent case [African Bank's bail-out by the Reserve
Bank], senior bondholders and wholesale depositors took a 10% haircut on
their original investment/deposit', Moody's complained.
Some of the concerns highlighted by Moody's for the downgrades have been
raised long time ago by the South African Communist Party (SACP) and the
Financial Sector Campaign Coalition (FSCC). But the banks, bourgeois
economists and commentators, backed by the Reserve Bank have ignored or
simplistically dismissed those concerns.
In its statement, Moody's points to high levels of household indebtedness
(74.5% household-debt-to-disposable-income ratio). In Chapter 1, we point
out that people were driven to take loans used to support consumerism
instead of for productive activity to generate additional income to pay back
those loans and their interest and to improve their lives. Loans heaped up
on top of loans encouraged by the banks through extensive advertising and
"ambush marketing" obviously pushed the victims to sink deeper into debt.
Moody's also complained about 'reduced consumer affordability' and
'increasing interest rates' (which therefore become high). But unlike the
SACP and the FSCC which are concerned about the social consequences,
Moody's, as a true representative of the financial stratum of the capitalist
class, is only concerned about the 'pressure' these will have on 'borrowers
loan repayment capabilities' which can lead to 'increased loan loss
provisions for retail and corporate lending'. By loan loss provision it is
meant the amount set aside should people default (i.e. fail to pay their
loans).
The collapse of African Bank exposed the hypocrisy of the "Democratic
Alliance" (DA) and all of those who support neoliberalism (the latest
manifestation of imperialism) in South Africa and its mainstream media. If
it was Transnet, SAA, Post Office, Telkom, Eskom or any State Owned
Enterprise that failed, they would have jumped up like popcorn and point to
such as the failure of public ownership. They would have called for
privatisation.
What have the DA and their ilk to say about the use of public money for the
bail-out of private enterprise?
They often tell us about the (unelected) rating agencies which they believe
should determine our policy. Moody's spoke on their behalf: more money for
the bail-out of private enterprise.
Alex Mashilo is SACP Spokesperson and Ian Beddowes is General Secretary of
ZCL.
- See more at: http://www.sacp.org.za/main.php?ID=4478#sthash.sFyyUprK.dpuf
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