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Who is the State working for: the banks or the public?
by Eric Toussaint , Damien Millet
26 March 2008

In many respects, the ongoing international financial crisis throws into sharp relief the deceit and denials of those who promote financial globalisation, whether they sit on the board of the big private banks or move in the higher spheres of the State. Over recent years, the dominant discourse was that all was fine on the debt front: with the introduction of new products, such as the securitisation of debts, the risk had been spread among a number of players. No crisis could be expected, profits were astronomical and growth was sustained.

Today, the edifice is crumbling. How could it be otherwise, when big banks conduct huge operations off the books, erect a house of cards with dubious credit and contribute to the creation of a speculative real estate bubble that eventually bursts? Far from spreading the risk, the system achieved the contrary, with the big banks having accumulated its weaknesses. Each of them then tried to pass the hot potato to its already troubled neighbour.

Instead of acknowledging their mistakes and assuming the consequences, the big banks sought help from the State – whose actions they are normally quick to disparage. They did not hesitate to seek strong public intervention from the same State they usually consider as too interventionist. In fact, the big banking lobbies have always insisted that the public authorities must respect market forces - the sole mechanism able to efficiently distribute resources and fix prices at their real values.

Like obedient underlings, the US and European authorities did as they were asked: you do not refuse a favour to the directors of the big banks that support the main presidential candidates and who move in the same close-knit circles… Thus, the rulers quickly came to the rescue of private interests. On the menu: nationalisation of the troubled banks, exchange of devalued and distressed debt securities for fresh cash (to the tune of 200 billion dollars in the US), cash injection, rescue plans, decreased interest rates…

In Britain, one of the spearheads of neoliberal globalisation, the crisis floored the bank Northern Rock in September 2007, leading to its nationalisation in February 2008. Once the ship has been steadied at public expense, it will pass back into private hands. Similarly, in the United States, when Bear Stearns, the country’s fifth most important investment bank, found itself short of credit on 13 March, the financial authorities organised a rescue with the help of JP Morgan Chase, which subsequently bought Bear Stearns at a bargain price.

This crisis clearly proves that when management of the world economy is ruled by the logic of maximum profit, society pays an enormous price. The banks have gambled with the savings and cash deposits of hundreds of millions of individuals. Their mistakes have led to huge losses and human tragedy, as was the case with the bankruptcy of the Enron multinational in 2001. Around 25,000 Enron employees found themselves with a paltry pension because the company’s pension fund had been diluted by the directors, who had quietly sold their shares for nearly a billion dollars [1] .

In terms of North and South, the similarities are striking. In the South, the debt crisis of the early 1980s was caused by the unilateral increase of interest rates by the United States, leading to a massive hike in the repayments of Third World countries that the banks had encouraged to take out loans at variable interest rates. Simultaneously, the plummeting prices of raw materials and oil prevented them from coping, forcing them ever deeper into a crisis. The International Monetary Fund (IMF), remote-controlled by the United States and the other great powers, then imposed drastic structural adjustment programmes on developing countries. The recipe, as in countries of the North, was as follows: a decrease in social spending, complete and immediate economic liberalisation, an end to control over the flow of capital, complete opening of the market, massive privatisations. However, contrary to what is taking place in the North, the states of the South have been prevented from reducing interest rates and giving credit to banks, causing serial bankruptcies and severe recessions. Finally, just like today, the State was forced to bail out the troubled banks before privatising them, usually to the benefit of the major North American and European banking multinationals. In Mexico, the cost of rescuing the banks, in the second half of the 1990s, represented 15% of the Gross Domestic Product (GDP). In Ecuador, a similar manœuvre in 2000 cost the country 25% of its GDP. Everywhere, the internal public debt rose massively because the cost of the rescue plan for the banks was borne by the State.

The economic deregulation of the last decades has been a fiasco. The only constructive solution would be a complete reversal of priorities: strict constraints on private companies, massive public investments in sectors that can ensure fundamental human rights and protection of the environment, the recovery by public powers of the decision-making levers to favour the general interest.

If the neoliberal train pursues its wild journey, a crash is guaranteed. Those who have set it in motion would like to see it go even faster. The most recent proof: after the last elections in France, the government of Nicolas Sarkozy announced its intention to accelerate the reforms, while the electorate had clearly rejected the current choices. Undoubtedly, a major international economic turnaround is impossible without a massive popular mobilization. Forty years after May 68, such a move is increasingly urgent if capitalism as such is finally to be challenged.

Translated by Diren Valayden with the collaboration of Judith Harris and Christine Pagnoulle

Footnotes :

[1In the United States, more than 40 million employees rely on plan 401K, created during the Reagan administration, for their pension. They are directly at the mercy of the vagaries of the stockmarket. In the case of Enron, the directors of the pension fund had invested 62% of the capital in company shares. The fund followed the plunge of the Enron shares. See Eric Toussaint, Your Money or Your life. The Tyranny of Global Finance, Chicago, Haymarket Books, 2005, Chapter 5.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

Damien Millet

professeur de mathématiques en classes préparatoires scientifiques à Orléans, porte-parole du CADTM France (Comité pour l’Annulation de la Dette du Tiers Monde), auteur de L’Afrique sans dette (CADTM-Syllepse, 2005), co-auteur avec Frédéric Chauvreau des bandes dessinées Dette odieuse (CADTM-Syllepse, 2006) et Le système Dette (CADTM-Syllepse, 2009), co-auteur avec Eric Toussaint du livre Les tsunamis de la dette (CADTM-Syllepse, 2005), co-auteur avec François Mauger de La Jamaïque dans l’étau du FMI (L’esprit frappeur, 2004).