[OPE] Critique of Ismael Hossein-Zadeh

From: Jurriaan Bendien <adsl675281@tiscali.nl>
Date: Sun Feb 08 2009 - 09:32:47 EST

Ismael-Hossein Zadeh argues in "Too big to Fail" (Counterpunch, 30 January 2009) that:

"In reality, however, it is not a problem of illiquidity or lack of cash, but of insolvency or lack of trust and, therefore, of hoarding cash. (...) the pinnacle of the US financial system is broke-with perhaps $2 trillion in rotten financial assets on the books. Nobody knows, exactly. The bankers won't say, and regulators won't ask, or at least don't dare tell the public". (...) nobody really knows the amount of the worthless assets that are hidden in the books of major Wall Street banks and brokerage houses. One thing is certain, however: the amount of these toxic assets is in terms of trillions or (as some experts point out) tens of trillions of dollars. There is simply not enough money-in the United States or in the entire world-to bailout these toxic assets. Although not many people know of this fraudulently kept secret, the banks of course know it. And that's why inter-bank lending has come to a standstill, as the banks do not trust each other or, for that matter, businesses and consumers." http://www.counterpunch.org/zadeh01302009.html

But although there is obviously some truth to this argument, I don't think he is quite correct, because it's a matter of quantities: the data show that the banks do continue to lend, but not in the same amounts or for the same range of uses. To a considerable extent, the financial crisis has become the perfect excuse for a war against workers.

For the financial institutions at least, unlike some Marxist ideologists, the credit crisis is not an "all or nothing" argument - if you are going to lose money, it matters very much exactly how much you lose, on what terms, over what time interval, and how current losses can balance against future gains. That is what this controversy is about.

Maybe it is not possible to repay the whole total debt burden outstanding, but that is always the case, even in boom times, insofar as liabilities held are typically a multiple of equity. The issue is exactly how much must be written-off, and how much can be repaid or repossessed or reclaimed, and who is going to pay what over what time interval - so that the system can be kept going anyway.

If somebody owes you $100, and the choice is between getting nothing back or getting $50, most likely you will grab the $50 insofar as you have bills to pay yourself. Your borrower may however well think along the lines of: "can I get away with $60 ? or can I get away with $50 or $40 ?". So then, much depends on the perception of the ability to pay, and the ability to make somebody pay. If you're too inflexible, you might get nothing. But if you're too flexible, you may get much less than if you had haggled better.

My argument (contrary to the Left) would be, as I said before, that a global positioning and power struggle has emerged within the financial world which will determine which finance houses will outcompete the others, improve market share, and survive the crisis.

How many worthless assets are "hidden in the books" is something which is never known exactly anyway, even in boom times, among other things because the value of current assets depends on expectations of future yields and future income flows, and because bank deals depend on secrecy, to be clinched at all. However, in fact the unknown quantities really refer much more to "faulty risk-pricing" or investments based on fiduciary capital, i.e. the capital that would exist if a certain transaction volume occurs in the future, or continues to occur.

As I have pointed out on OPE-L before, Bernanke knew very well for example that there is a volume of subprime defaults occurring all the time, it is just that at a certain point the defaults rose to a level which became unmanageable, and caused a confidence crisis. There is no real limit to credit extension, until that crisis happens. As soon as you can make somebody pay again, however, the asset is no longer worthless, and that is the real challenge in this era: extracting more absolute surplus value, effectively squeezing out more labourtime for less money, while productivity stays fairly constant.

Theoretically speaking, even if the total excess debt is $10 trillion, there exists in principle enough capital and future income in the world to pay it off. That is not really the issue, the issue is rather who is going to pay it, and how they're going to pay it, on what terms, and by how much you can reduce the losses, if there are threats of default.

The bail-outs were much less an absolute technical necessity (because there are other options, such as mergers) than a necessary "political sweetener", i.e. the politicians almost literally have to "pay off their financial friends" so that they stay friends, and so that market confidence does not go down the gurgler altogether (obviously, businessmen don't buy toxic debts if they can avoid it, precisely because they are not a viable business proposition).

According to some Marxists, "confidence" is just a bourgeois ideology, but for serious people, it has a real influence on what happens, since it directly and immediately affects trading volume and credit extension. The complaint of some US Republicans is thus, really, that high officials (such as Paulson) effectively "lost their nerve" in the financial poker game, and, therefore, paid out more public funds than they really needed to. This is a matter of how well you can stand up to the "money-wolves" - who search for any vulnerable or weak spots to make people pay.

Much more serious than the technicalities of bad debt is the "legitimation crisis" of the financial system, because the public perception directly affects who is prepared to pay, whether they will pay, and how much they are prepared to pay over a certain interval. At the moment, about half, or somewhat more than half, of all Americans in fact believe that "toxic" businesses do not deserve to be bailed out by government at all.

Along these lines, John Kemp (Reuters, January 20 2009) argues: "The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist. Bankruptcy would ensure the cost of resolving the debt crisis falls where it belongs. Investor portfolios and pension funds would take a severe but one-time hit. Healthy businesses would survive, minus the encumbrance of debt. But widespread bankruptcies are probably socially and politically unacceptable." http://www.globalpolicy.org/socecon/crisis/tradedeficit/2009/0120brink.htm

This shows little understanding of the financial system, and Mr Obama would probably reply that if businesses go bankrupt, this does not, legally, necessarily mean at all that "the debt crisis falls where it belongs", while obviously the economic effect is that otherwise healthy businesses at home and abroad then also go bankrupt, increasing unemployment and socio-political instability.

Therefore, the official economists are now searching for a new "grand narrative" (a new method of financial storytelling and moral justification) which can plausibly explain why people ought to pay, and keep paying, why this is in their best interests, even although their wallet gets thinner all the time, and more and more workers are unemployed. Some of them, like Mr Kaletsky, hope for a new financial "Copernicus" who can explain convincingly why, in pursuing the purpose of life, everybody should pay a permanent tribute to the wealthy. But a more likely outcome is an increase of irrationalist ideology - after all, nobody can make sense out of it all.

Obviously, if you pay tax, you normally do not know exactly what your tax money will be used for, or what you will get back for your money, you have to pay that tax by law, regardless of how it will be used.

Although Marxists (insofar as they are an aspiring "new exploiting class") almost never analyse public finance in any depth, in truth, this makes tax in some respects an enormously superior source of capitalist income and surplus value. Why? A claim to some of the taxpayers' money, via subsidy payouts, can be guaranteed for many years into the future, while simultaneously it incurs technically speaking no specific counterobligation at all to the taxpayers who paid for them - it is technically quite independent of any other particular obligation to the taxpayer. What is paid in, is completely "delinked" from what is paid out so that there can be an "ethics of revenue" quite separated from an "ethics of expenditure".

In the case of the US, we are talking an amount of tax money which is just over 28% of GDP (circa $3.6 trillion a year) and total government spending at 36% of GDP (circa $4.9 trillion a year), it's the single largest business in the world qua assets, income and expenditure (US GDP is now circa $13.8 trillion a year) although operating at a loss. It's a $4-5 trillion business in that sense - but keep this in perspective however, since if you add up the revenues and assets of the largest US corporations, you get a turnover and asset base far in excess of the US government (only just the global top 10 corporations have a combined annual revenue of about $2.2 trillion).

Nationalizing the banks and placing their debt burden on taxpayers (a leftist favorite) is, however, not necessarily going to make a big difference (other in the sense that better financial guarantees become possible with a larger capital base), because:

- one set of crooks substitutes for another (the rich state bureaucrats are quite simply "a law unto themselves" even if they are not technically corrupt).
- a large part of the debt business is in reality a "non-bank" business carried out by non-bank issuers of debt.
- capital just shifts to facilities in other countries which offer more competitive deals.

Thus, even if all banks were nationalized, this would still not provide full financial control over the economy. The government would just be competing more directly and clearly with non-bank financial business and with other countries, in a situation where government has the power to enforce laws, and privately owned business has the power to divest. But whether government wins or private business wins, workers are the losers in this game. In the calendar year 2008, a net 2.9 million US jobs were lost, and the net losses are now growing by an amount in excess of half a million net jobs lost per month.

Jack Rasmus projects that "by the end of 2009 there will be effectively 25 million unemployed in the U.S. workforce: 15 million [i.e. 10%] officially classified as unemployed, plus five million more discouraged or wanting to work if offered, and 10 million involuntarily working as part-time because they can't find a fulltime job (equal to five million fulltime jobless)." http://www.solidarity-us.org/node/2029 This would mean about one in six workers unemployed or under-employed. It would take half a decade or more to reduce this amount back to its former level, but I predict the unemployment rate will eventually "stabilize" at a higher level.


Into the great wide open,
Under them skies of blue
Out in the great wide open,
A rebel without a clue

- Tom Petty

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