The final reckoning of the 2007/8 crash will be played out in the realm of politics not economics, argues Chris Bambery
It is easy to forget but we still own the Royal Bank of Scotland (RBS). The Gordon Brown Labour government having nationalised it – or more accurately, its debts - back in 2008 following the financial crash, and the present government doesn’t look like it’s going to be able to sell it off anytime soon.
RBS is stuck with a very nasty hangover from the excesses prior to that crash. For instance, in the USA it faces a fine of up to $12 billion because it is alleged to have concealed potential risks when it sold a bundle of mortgage-backed securities in the run up to the financial crash. These were the infamous subprime mortgages which, when the US property bubble popped, investors suddenly grasped weren’t worth a dime.
Remember that the troubled German investment bank, Deutsche Bank, is also facing a $12 billion fine for something similar. Hedge Funds and other sharks were speculating as to whether Angela Merkel’s government would bail out the bank. Deutsche Bank is still seen as highly vulnerable.
Meanwhile in the UK High Court RBS faces another big fine over allegations that it "ignored warnings" that estimated losses were presented in a "misleading" way in a prospectus used to raise £12bn from private investors.
This follows RBS having to set aside £300 million in compensation to small businesses unfairly treated at the time of the 2008 crash. The allegations centred on the way small businesses with loans from RBS were put in the hands of the bank’s Global Restructuring Group which - ignoring the financial state of these companies - effectively bankrupted them by demanding immediate repayments in full.
It subsequently gained control of those companies’ assets (buildings, machinery etc.) which it sold to RBS for a pittance and who then sold them on at market value. This at time when the bank was trying to find any penny it could to avoid going under.
RBS strenuously denies this but its Chief Executive admitted it "did not always meet the standards it set itself in dealing with customers who were having difficulty with their loans".
Why shed any tears over all this? Well, for one, all this money RBS is paying out, or will pay out, is our money. Secondly, the banks are still not out of the woods post-2008. Aside from the highly publicised problems facing Deutsche Bank, RBS and their Italian counterparts, zero or negative interest rates mean they aren’t making much money from traditional banking pursuits, so once again they are concentrating on earning money from fees and other services - takeovers, for example - which are massively exposed if anything goes wrong in the market.
But what the 2007 financial crash did finish off were hopes that European banks, like Deutsche, RBS and Barclays, could compete with the giant American investment banks: Goldman Sachs, Morgan Stanley, J.P. Morgan, Citigroup, Bank of America, and Merrill Lynch.
In the USA the Federal Reserve and the federal authorities forced a restructuring of US investment banks post-2008, ensuring troubled banks were forced into mergers and providing funds to the buyers.
The consequence is that European banks have been forced to retreat from hopes they could be global players, to the chagrin of Barclays who had such lofty ambitions pre-2008. They are having to watch both US and Chinese investment banks take business from them in areas they regarded as their own, like the Middle East and Africa.
All of this helps increase US financial power. European banks had no option, for instance, but to go along with a sanctions programme against Iran, or have to face huge fines inflicted on them by American courts. British banks are still hesitant about doing business there because they fear US reprisals.
Across the world states have built up financial reserves in case a 2007 crisis recurs, but these are held in US dollars, buttressing the power of the US and its allies in the International Monetary Fund and the World Bank.
Much of the focus on Brexit has been on its impact on the City of London, which has lobbied effectively to ensure Philip Hammond will champion its interests. The concern is that banks will leave London to maintain access to European financial markets. This ignores there are all sorts of way round this. Barclays owns a French bank for instance, so it can maintain access to the EU.
Since the 1960s at the creation of a Eurodollar market US banks have had their European headquarters in London. Back then London became the trading hub for dollars earned by companies exporting to the US and by American money spent overseas by their military.
US banks will quit the City with the greatest reluctance. The UK is seen as business friendly, and that’s only to get more so post-Brexit. Witness May and Hammond flagging up cuts to Corporation Tax. That is not quite how France and Germany are viewed in the US, where there is suspicion they are over-regulatory concerning banks.
The banking crisis of 2007/8 triggered the recession that followed, but it was the trigger not the fundamental cause. It wasn’t just banks who were involved in subprime or its variants.
With living standards for the bulk of Americans stagnating easy credit rather than wage rises became a way to increase demand in the USA. In the car industry, Fords, Chrysler and General Motors all had financially wings but these had been utilised to help their dealers. Now they began to be used to loan new buyers of cars. They began to amass a stock of loans that could not be repaid plus they started dealing in bonds and equity.
By 2007/8 the car market’s limit had been reached, but faced with growing European and Japanese competition all the car corporations were fighting to retain or extend their share of that market and that meant investing, even if profits were not growing. The hope was that their rivals would fail not them, and then they could gobble up their market share and buy up their machinery at rock bottom prices. In 2008, amidst the financial crash, the panic easily spread to the big three American carmakers and the US state had to intervene to stop them going to the wall.
History will not necessarily repeat itself but a banking collapse like that of Deutsche would have major implications for the German and European economies, and thus the global economy. But overall the economic recovery since 2008 is anaemic with low growth levels and global trade not recovering to the level of pre-2007. Of course we have seen real growth in the economies of China and other Asian countries and for giant corporations like Apple. There are always areas of growth and profitability in capitalism, even during the Great Depression of the 1930s.
But it is a system where competition means things play out like Blind Man’s Bluff. Corporations invest because they are fighting for market share, and when sales slow in the blind hope they will survive at their rival’s expense. Currently all the big auto corporations are investing in producing driverless cars, with very mixed results. Investment costs increase, and while sales in the US are good few think that can hold.
Today I was asked I if I was optimistic or pessimistic post-Trump and Brexit. My answer is that I am fearful for another economic crisis because all the indicators point that way. . And while the Trumps and Le Pens believe they have the wind in their sails, what Bernie Sanders and Jeremy Corbyn show is that if the left takes up the fight for direct state investment while challenging the financial sector we can carry the day.
For our side the answer in 2008 would have been to take over the banks and create one savings bank and one state investment bank. That response remains
Chris Bambery is an author, political activist and commentator, and a supporter of Rise, the radical left wing coalition in Scotland. His books include A People's History of Scotland and The Second World War: A Marxist Analysis.
More articles from this author
- Scotland: it's time to break from a broken UK
- Scotland's election
- Huge numbers join Catalonia's general strike for freedom
- Civil liberties in Spain? The clampdown against the Catalan independence movement
- What’s changing in Scotland?
- Flawed transition: why the Spanish state is repressing the Catalan independence movement
- Sails and Winds: A Cultural History of Valencia - book review