Banking Crisis Set To Spread

Last night the US Federal Reserve raised interest rates to 5%. This will put pressure on the European Central Bank to follow, and even more rises are in the offing.

The first victims will be mortgage holders. If interest rates rise to 6% and you are on a €300,000 mortgage you will be paying an additional €500 a month or €6,000 a year. It is unsustainable.

So why is it happening? The simple reason is that central banks are not answerable to the mass of people but care only about the health of a capitalist economy. Our rulers are terrified about rising inflation and fear that workers will respond by seeking higher wages. They think the new interest rates will trigger a rise in unemployment and that, they think, will curb worker militancy.

But they are also setting off a new banking crisis.

Capitalist banking is inherently unstable. They hold liquid deposits which can be withdrawn at any time but invest in longer-term assets such as mortgages. This is why commentators talk repeatedly about ‘confidence’. Normally, banks hold about 10% of their money on reserve in case there is a rush in withdrawals. But if this becomes a flood, they can easily be overwhelmed.

There is now a familiar pattern of bank collapses. The World Bank has estimated that there have been 112 systemic banking crises in 93 countries between the late 1970s and 2000.  But here is the rub – the bankers can hold society to ransom and demand that we, the people, bail them out. Banks privatise gains and socialise losses. In 27 out of the 93 banking crises, countries paid 10 percent of their GDP to ‘re-capitalise’ the banks. Or more simply stuff them with money.

The Irish people had to give banks a financial package of €85 billion –  or just about half of everything we produced in 2010.

This is starting all over again as rising interest rates put bankers under pressure. The reason is that banks often fund themselves with longer-term bonds, effectively IOU debt notes. Bondholders are speculators who can sell on their IOUs to others who will get regular payments from the banks. But when interest rates rise, the value of these bonds declines because capitalists can make more money by charging higher levels of interest.

This is what happened to the Silicon Valley Bank. The bank took in deposits from start-up companies and then invested in long-term bonds. When these declined, the companies rushed to withdraw their money but 97% of them were not insured. So, guess what? The US government stepped in to guarantee them their money back.

The next big bank to collapse was Credit Suisse which had been in existence for 167 years. Here the government forced bondholders who held  ATI bonds – more risky ones – to write down 16 billion worth of Swiss Francs to zero. They then pumped €100 million into the bank and handed it over to its rival UBS. But this leaves other capitalists screaming and so the ‘contagion’ spreads.

Since the last major collapse in 2008, we were told that bank regulation would lead to stability and further crises could be avoided. But the huge financial power of banks means they can pressurise and bribe politicians to loosen regulations. The Dodd-Frank regulations on US banks were loosened just as restrictions on bankers’ pay in Ireland were also reduced. Bankers can also hide vast amounts of money from the prying eyes of regulators. Or claim that government interference makes them ‘uncompetitive’.

There is one solution that right-wing parties dismiss, and it is so obvious. If banks are so unstable and yet a key influencer of people’s lives, they should be in public ownership. Why are we allowing gamblers to engage in all types of risky behaviour, knowing that the public must pick up the tab if they fail?

A publicly owned bank could put a cap on mortgage payments. It could invest in socially useful projects, such as house building. It could offer stability by relying on taxpayer funding rather than speculators who rush about for ever higher rates of return.

In brief, nationalisation and public banking make perfect sense.