THE world crisis of capitalism is being hit by a convergence of the crisis to which all the central banks, economists and politicians have absolutely no answer.
Last week, the European Central Bank revealed that under its own less than stringent ‘stress tests’ – designed to prove that Europe’s leading banks were solvent enough to withstand any more shocks – one in five failed miserably.
Yesterday the Bank of England announced its own measures to try and ensure that the country’s banks aren’t forced to close up the shutters when all the bad debts they have run up over decades become unsustainable.
To avoid this, the BofE is now insisting that the leverage ratio for banks (that is the level of financial reserves banks must hold as a ratio of its lending) must be increased to between 4 and 5%.
A 4% ratio means that for every £25 lent by the bank it must hold £1 in reserve.
At present the ratio is about 3% which equates to – for every £25 lent, the bank must hold 0.75p.
The difference is not exactly staggering and certainly not enough to prevent banks going completely bust when all their loans turn out to be unrepayable – exactly what happened in 2008.
Nevertheless, the effect of this comparatively minor increase will have a dramatic effect, primarily on mortgage repayments, which will be driven up as the banks ensure that borrowers pay for any increase in the amount they are forced to hold.
At the same time, the British Bankers Association has warned that this measure ‘could create perverse effects’ by driving up the cost of mortgages and incentivising banks ‘to engage in higher risk lending’ – the very thing the BofE is supposed to end.
The reason is not perverse at all, the banks will seek to make up their profits at all costs through higher mortgages and investing in any scheme, no matter how risky, that promises to keep the cash rolling in, secure in the knowledge that when it all goes belly-up they will be bailed out like the last time.
Meanwhile, anyone with a mortgage will face higher repayments that will push millions over the brink and into the situation of choosing between food and mortgage repayments.
As for the danger of pushing the banks to engage in high risk lending, this is a nonsense – they are already up to their necks in such lending, much of it concealed and totally beyond any regulator. This is the world of international ‘shadow banking’.
According to the Financial Stability Board, shadow banking now accounts for about a half of the global banking system and is the equivalent of 120% of global GDP – the amount produced by the entire world economy.
Through this shadow banking system, outside any control, risky investments can be made and the scale of this is quite staggering.
The FSB estimates that the shadow banking system accounted for $75 trillion risky investment products in 2013.
The asset bubble created by the banks through the sub-prime mortgages in the US, that burst so dramatically in 2008, is miniscule in comparison to the asset bubble that has been created internationally by the bankers speculating with all the free money created by Quantitative Easing.
Now that QE has been ended by the US, with the UK set to follow, expect a massive exodus by these banks and shadow lenders as they flee from the scene and seek safer investments like gold.
The resultant crash in assets will see governments throughout the capitalist world resorting to even greater attacks on the working class than experienced under previous austerity measures taken in the wake of 2008, accompanied by even more brutal wars by imperialism to re-conquer the markets and mineral wealth of the world.
The only answer to this historic crisis lies not in futile attempts to ‘regulate’ the banks as the reformists claim, but to abolish them completely through a socialist revolution that will nationalise the banking system as part of the basis for a planned socialist economy where production is for human need not for profit.