Understanding the partial nationalization of the banks

Mar 13, 2009

Federal Reserve Chairman Ben Bernanke with Timothy Geithner, then president of the New York Fed, at the Economic Club of New York in October 15, 2008.

As the economic crisis deepened over the past year, it became clear that some of the biggest banks were, very likely, bankrupt.

As a result of the bursting of the speculative bubbles in housing and in industrial commodities such as oil, copper and aluminum, the assets on the books of the banks plunged in value. This was especially the case with the mountains of mortgage-backed securities created during the real-estate boom and the huge loans the banks had extended to hedge funds and other large speculators.

The market for these and other “toxic assets” almost completely dried up, making it next to impossible to even attribute value to them. At a certain point, investors began to suspect that the value of the liabilities of giant mega-banks such as Citigroup and Bank of America exceeded the value of their assets, wiping out the banks’ capital and stockholder’s equity.

As this reality sunk in, the share prices of the banks nosedived, in some cases from high double digits to less than the price of a cup of coffee. This is what is behind the bank bailouts that have enraged millions of working people facing loss of jobs, homes and medical coverage.

Fed and Treasury take action

Initially, the monetary authorities hoped that massive loans by the Federal Reserve, the U.S. central bank, to the banks in trouble would save them from bankruptcy and “get them lending again.” The same authorities extended loans and loan guarantees to facilitate the arranged takeovers of Bear Stearns, Wachovia and other big banks by supposedly stronger banks.

As the economic crisis deepened and bank share prices, along with the rest of the stock market, continued to plunge, it became clear that loans and arranged mergers would not save the banks. One of the biggest investment banks, Lehman Brothers, was allowed to go under, which raised the specter of a general banking collapse.

Finance capital took advantage of the panic that ensued to force Congress and the Bush administration within the space of about a week to approve, despite a firestorm of popular opposition, an unprecedented bailout of the banks amounting to hundreds of billions of taxpayer dollars.

At first, the plan was to buy up the toxic assets of the banks. But the impossibility of valuing those assets and other complications of the plan caused it to be shelved in favor of directly injecting hundreds of billions in taxpayers’ money into the banks in return for ownership stakes mostly in the form of preferred stock.

Insurance giant AIG and government-sponsored lenders Fannie Mae and Freddie Mac were also rescued by such moves toward partial or full nationalization of major financial institutions on the brink of bankruptcy.

Steps toward socialism?

Most bourgeois policy makers, including such free-market true believers as ex-Federal Reserve Chairman Alan Greenspan, agree that nationalization of the biggest banks is necessary now to save capitalism. Editorial writers for authoritative publications like the New York Times and Newsweek have also lent their support.

At the same time, various commentators ranging from libertarians such as Ron Paul on the political right to reformist socialists on the left view such nationalizations as socialist in character, or at least significant steps toward socialism. The free-market fanatics on the right, of course, abhor such nationalizations, while some reformists on the left critically applaud them.

Socialists of every stripe, of course, agree that modern collective—that is, socialized—production stands in sharp contradiction to the private appropriation of the wealth workers produce under capitalism. Socialists call for overcoming this contradiction by socializing ownership of the means of production and distribution—converting private property into public property owned collectively by the producers—the workers—themselves.

But do takeovers of banks and other financial institutions by a capitalist government such as currently exists in the United States really represent moves towards fulfilling this fundamental task?

Class character of government and state determines the outcome

The class character of the government and state carrying it out determines the ultimate outcome of nationalization of banking and even industry.

Capitalist governments have, from their inception, used public ownership to carry out economic activities serving the collective interest of the capitalist class but too big or too unprofitable for private capital to tackle. These have ranged from building port facilities and canals for transport of goods to postal services and electric utilities that benefit industry and commerce.

Bourgeois nationalist governments in formerly colonized countries have gone much further using wide-ranging state ownership to advance economic development in the interest of a nascent bourgeoisie and provide social services required to gain political support from their own workers and peasants in the struggle with imperialism. The Baathist government in Iraq under Saddam Hussein was an example.

Governments in imperialist countries during deep economic and social crises, such as the Mussolini government in Italy, also nationalized banks and employed other forms of heavy government intervention in the economy to contain the crisis and preserve capitalist rule.

None of these examples, however, represented steps toward genuine socialism—except in the case of economically backward countries where rapid development on a capitalist basis does lay the material foundation for an eventual socialist transformation.

Capitalism ripe for socialism

The capitalist system, based on private ownership of the means of production, has evolved from one consisting mainly of individual, small-scale capitalists and independent producers to one dominated by huge monopolies controlling both industry and banking, and much of agriculture.

Production and finance are increasingly concentrated in a relatively small number of global monopolies. Gigantic corporations, which operate on the basis of maximizing profit and enriching their already super-wealthy major shareholders and top executives, mostly own the means of production, distribution and finance.

The evolution from individual to corporate—”collective capitalist”—ownership represents partial socialization of ownership. Private property, however, and its associated evils of periodic economic crises, social inequalities, cut-throat competition, wars and, above all, the brutal class rule of the capitalists continue to dominate.

Nevertheless, the clear trend toward increasing concentration and centralization of production and finance, and the evident increasing need for government intervention to “regulate” the inherently anarchic system, proves that capitalism today is ripe, objectively, for a revolutionary socialist transformation.

Obama not a socialist

Contrary to the claims of many right-wing commentators and politicians, the nationalization and other bailout measures of the Obama administration, like those of his predecessor, are not aimed at bringing about socialism in the United States. On the contrary, they are strictly temporary measures to salvage capitalism and preserve the rule of the capitalist class at a time of unprecedented crisis.

Bringing about socialism in the United States, as in other countries, requires the taking of political power by the organized working class. An initial step in socialist construction would then be to permanently nationalize the banking system in the interest of the working-class majority. The individual banks, along with their powerful computers and computer networks, could then be amalgamated into the bookkeeping system required for socialist planning and coordination of production and distribution to meet human needs.

That’s genuine socialism.

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