One more week of capitalist economic squalor

March 28, 2009
Issue 

Last week one big economic news story and two small stories exposed the mad squalor of the profit system under which we live.

The big economic news was the US$1 trillion plan announced by US Treasury secretary Timothy Geithner to clear from bank balance sheets the toxic assets gumming up the US finance system.

Geithner wants to give Wall Street a massive taxpayer-funded bribe to bid for bank assets of dubious worth — paying cash for trash.

The US government will provide 86% of the cost of financing these purchases.

The other 14% will be supplied jointly by the government and the participating private funds. The funds get to fork out only 7% of the purchase price of the dodgy assets.

This means that if the assets become worthless, taxpayers are exposed to 93% of the loss. If the assets gain in price, then the government and the private funds share the spoils 50:50.

What a lurk! With the state providing squillions in debt financing, the private funds will be able to bid more and the banks receive more for the toxic assets than would otherwise have been the case.

The plan amounts to a public-private partnership whose terms have been dictated by Wall Street. And now, with yesterday's sinners becoming today's saviours, the stock market has gone crazy at the prospect of double-digit gains from the scam.

Yet the core problem of the Geithner plan isn't its squalor, it's that it almost certainly won't work.

Even if some toxic assets (like financial instruments based on mortgages) are presently undervalued, they won't re-acquire substantive value unless production, growth and profitability improve.

That requires a big lift in private and/or public investment. Yet private investment is in freefall as firms continue to repair their balance sheets. Meanwhile, Rudd and Obama-style stimulus packages, while sounding huge, are still far too small to offset this collapse, as the 600,000 jobs lost every month in the US attest.

In these conditions, unless the now risk-hating banks see secure and profitable investment opportunities, they won't lend, regardless of whether their balance sheets have been boosted by government-subsidised increases in toxic asset values. This means the share market rally taking place at the moment will quickly run out of steam.

From a strictly economic point of view, there was always a cheaper, more efficient policy available — to nationalise the banks without compensation to major shareholders, followed by the writing-off of worthless assets.

Economically more efficient, but politically much more risky, such an approach would be a declaration of war on the whole financial oligarchy. At the same time, it would be a stimulus package with a chance of working — and saving hundreds of thousands of jobs.

The first of the two small stories starts on the west coast. In the first season after the Australian Wheat Board's (AWB) export monopoly ended, chaos reigns in the wheat industry.

According to industry analysts, hundreds of millions of dollars in wheat export income will be lost because of delays in getting the harvest to port, onto ships and to Asian buyers.

The delays are being attributed to the poor state of the West Australian country rail network, but the main culprit is deregulation itself.

The AWB monopoly, bureaucratic and at times corrupt as it was, could still coordinate and plan the timing of wheat shipments to guarantee continuous delivery. This year 23, separate exporters are squabbling among themselves for access to trains and port time.

The lesson? The answer to dozy, bureaucratic and corrupt public monopoly and planning is not privatisation and deregulation but democratic, accountable and transparent administration by the workers, consumers and professionals involved.

Finally, in NSW, the "left" ALP government of Nathan Rees is facing a threat from even further to the left.

Two subversive organisations are involved, the NSW Civil Contractors Federation and the Property Council of Australia, both of which are calling on the Rees government to increase spending on public infrastructure.

They have dared to question the Rees government's obsession with maintaining its AAA rating (a favourite justification for the privatisation of everything from electricity to prisons).

According to the federation's executive director David Elliot in the March 23 Australian Financial Review: "The increased cost of borrowing from sacrificing the AAA rating for the duration of the recession is bugger all when you consider the jobs that are going to be saved and the multiplier effect of that economic activity."

Not too radical really, especially when we consider that agencies Standard and Poor's and Moody's rated the toxic debt that is now poisoning the US financial system at AAA — right up until the moment the whole house of cards collapsed.

[Dick Nichols is a national co-convener of the Socialist Alliance. Written in a personal capacity.]

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