Alex Mashilo and Ian Beddowes
Red Alert: Transform the Financial Sector to Serve the People!
Chapter 2
The downgrade of South African banks: Neoliberalism and State Intervention
On 14 August 2014 we released a piece through Umsebenzi Online, titled 'African Bank and Credit for Consumerism: The Collapse of a Model'. That may be considered as Chapter 1 of our continuing work Transform the Financial Sector to Serve the People! In Chapter 2 we now look at the collapse of African Bank, its bail-out, and the downgrading of four major South African banks, which, together with a fifth bank have been placed on further review for downgrading.
We debunk the neoliberal myth that the state must not be involved in the economy. Despite what they always tell us, as we will show, neoliberals want an activist state that not only intervenes in the interest of, but is driven by the rich - the capitalist class who make up a tiny minority and not the workers and the poor who make up the immense majority of society.
By neoliberalism we are referring to more than just a policy regime founded on a structure of right-wing ideology and beliefs based on the re-enactment of the 19th century "laissez-faire" liberalism. Neoliberals have been pressing for a complete restructuring of the economy in each and every country and the world as a whole but this is NOT FUNDAMENTAL change - it is change to intensify capitalism, and not to do away with it.
This includes: a "self-regulating free market"; unregulated private enterprise WITHOUT ANY STATE INTERVENTION, and therefore the removal of regulations, tariffs and import duties - liberalisation and deregulation of all sorts - most dangerously including financial markets and banks; privatisation of State Owned Enterprises including provincial and local authority owned entities; outsourcing of all those functions from the state seen to be "business" - which we are told is the "business of business"; a so-called flexible labour market, which means the removal of labour protection and the erosion of hard-won gains by the working class - most importantly the reduction of permanent jobs and their increasing replacement by temporary and outsourced employment; and the rise and dominance of finance capital.
In chapter 19 of Capital (Vol. III), Karl Marx analyses the emergence of money-dealing capital from the purely technical movements performed by money in the circulation process of industrial capital and commercial capital. The latter, according to Marx, 'takes over a part of the circulation movement of industrial capital as its own, peculiar movement'.
Marx shows that money-dealing capital emerges when the movements performed by money are 'individualised as a function of some particular capital performing just' those 'operations as its specific operations'. Related to this, in chapter 23, he goes further to analyse the emergence and role played by money as 'interest-bearing capital', building on his work in Volume II of Capital where is reflects in detail on the circulation of capital and the various branches of capital that this creates.
In our epoch, the epoch of neoliberal capitalism, finance capital has gained dominance over productive capital, the State and society. While the capitalist class in general is the ruling class, it is the financial stratum within this class that has assumed dominance. Through this, financial monopoly capital (which is mainly imperialist capital) has restructured the capitalist system as a whole through the measures identified above and, in addition war and sanctions, among others. By neoliberalism, we are therefore also referring to the new capitalist structure (i.e. neoliberal capitalism) itself in addition to the set of ideological and political ideas related to it.
In our epoch, as former Harvard Business School professor and author of When Corporations Rule the World (1995) David C Korten put it in his lecture 'Life after the dominance of Capital':
'The world's most powerful institution is the global financial system, which functions as a global financial casino staffed by faceless bankers, portfolio managers, and hedge fund speculators who operate with a herd mentality. Lacking accountability for the consequences of their actions, they send exchange rates and stock prices into wild gyrations unrelated to any underlying economic reality as they each day move more than two trillion dollars around the world in search of quick profits and safe havens. With reckless abandon they make and break national economies, buy and sell corporations, and hire and fire corporate CEOs - holding the most powerful politicians and corporate managers hostage to their interests. When their bets pay off they claim the winnings as their own. When they lose they run to governments and public institutions to protect them against loss with pious pronouncements about how the poor must tighten their belts and become more fiscally prudent' [All Italicised reflect our emphasis].
The dominance of finance capital over productive capital leads to the former assuming proxy ownership of the latter, especially by using as leverage its strategic position as interest-bearing capital. In general, financial dealings become more and more lucrative than, and gain primacy over productive activity. With this occur shifts in investment patterns from productive to financial activities. Productive enterprises come under financial pressure to restructure through neoliberal conformity. This competitive struggle incorporates new characteristics, or sharpens the old ones. The struggle to attract favourable credit ratings intensify to reduce "the cost of capital" (interest rates on borrowings) and the conditions of the struggle for survival increasingly become turbulent and harsh. In the midst of the heat, non-financial enterprises and institutions either jump ship or increasingly join financial activities. Short-termism and impatience on returns become entrenched.
As Korten further says, financial institutions expect those 'responsible for corporate management to take a similarly narrow view of their responsibilities and send them a powerful message. A fair profit is not enough. Annual profits and share prices must constantly increase. The CEO who fails is likely to face a takeover bid or be fired by large shareholders. How the corporation increases its profits isn't the market's concern'. The entire economic structure that emerges becomes more than just what others have referred to as financialisation.
In dealing with the collapse of African Bank, which was modelled to finance consumerism and not production or development, in Chapter 1 we have shown how interest rates - the source of money accumulation from loans - are irrational with no underlying connection to production.
African Bank is the only bank that was fined for reckless lending practices, it is however not the only bank operating in the unsecured lending market. All the major banks in South Africa are involved in this space, and are vulnerable to interruptions in the income conditions of the customers. For example, tens of thousands of mineworkers embarked on a five-month strike from January 2014, followed by a month-long strike by thousands of workers in the metals and engineering sector. There can be no doubt there were many defaults on loan repayments by these heavily indebted workers.
When it was announced that the major banks have underwritten the bail-out of African bank by the South African Reserve Bank we asked what they stand to benefit (there is no free lunch in business). We highlighted that there was no transparency on this question, and that more information was needed. We then said if there was nothing for them to benefit they were clearly acting in self-interest and thus they were likely facing an exposure which they sought to cover up. Hours after we released Chapter 1, Capitec Bank was downgraded by a global ratings agency, Moody's. Capitec Bank, supported by the Reserve Bank, questioned the downgrading. The Reserve Bank stated that everything was fine in the South African banking system. Bourgeois economists and commentators seconded the statement: "Capitec Bank has a different model compared to African Bank", it was loudly proclaimed.
During the Great Depression of the 1930s Henry Ford is reported to have said 'It's a good thing that most Americans don't know how banking really works, because if they did, there'd be a revolution before tomorrow morning'.
In defence of Capitec, it was pointed out that the main difference between African Bank and Capitec Bank, is that unlike Capitec Bank (and this goes for the other major banks too), African Bank is not a deposit-taker - it is a micro-lender. Well for those who did not know what this implies: all the other banks are backed up by our deposits and savings (of course there are industrial and commercial capitals' too) from which we are lent our own money and charged interest.
As we put it in Chapter 1, banks even lend money above and beyond what we have deposited, in fact money which did not exist before they lent it to us - and still charge interest. Moody's are of course fully aware of how the banking system operates. All they want is more state intervention to bail-out private financial interests when the mechanism fails.
As a follow up to the explanation given why it should not have downgraded Capitec Bank, based on its own concerns about banking operating conditions, on 19 August 2014 the rating agency, to add salt to the wound, downgraded four major South African banks, Standard Bank, ABSA, FirstRand Bank (incorporating FNB) and Nedbank. Further, Moody's placed these four and another bank, Investec Bank, on review for further downgrade.
Neoliberal commentators are saying that the bail-out of the African Bank by the Reserve Bank (a state institution which plays the role of the lender of last resort) was in the interest of all. In Chapter 1 we described this to be a fallacy, as all those who are indebted or over-indebted as a result of reckless and unsecured lending practices are NOT being bailed out (it is African Bank and its institutional investors who are being bailed-out). The downgrade of these banks by Moody's, a hard-core neoliberal institution, is based on a "concern" that the bail-out by the Reserve Bank is insufficient.
The neoliberals have forgotten that since the 1970s they have been telling us that it is wrong for the state to intervene or play any role in the economy.
'Moody's considers that the likelihood of systemic support being provided in the event of need for these banks, to fully protect senior creditors and depositors is now materially lower than previously thought, as implied by the Reserve Bank's recent approach in resolving ABL [African Bank Limited]', they said in their statement downgrading the four major banks.
By 'senior creditors and depositors' it is meant those who must be prioritised and paid first in the event of problems, such as those experienced by African Bank leading to even more serious institutional crisis or collapse. In this context, the senior creditors are those from whom the banks receive money-dealing and interest-bearing capital used for the issuing of loans, bonds, and so on.
The senior depositors are almost exclusively the rich who deposit large sums of money. Mainly they are institutional investors and big industrial and commercial enterprises and not the workers and the poor who in such cases are likely to lose the little money that they have. In its bail-out of African Bank, the Reserve Bank imposed a 10% "haircut" (defined as loss from the market value of an "asset") on investors.
'SARB's [Reserve Bank's] willingness to proceed with a burden sharing restructuring plan for ABL, involving debt holders and wholesale depositors, is a clear indication of a reduction in the likelihood of systemic support being provided in the event of need, in a manner that would fully protect creditors. In this recent case [African Bank's bail-out by the Reserve Bank], senior bondholders and wholesale depositors took a 10% haircut on their original investment/deposit', Moody's complained.
Some of the concerns highlighted by Moody's for the downgrades have been raised long time ago by the South African Communist Party (SACP) and the Financial Sector Campaign Coalition (FSCC) but the banks, bourgeois economists and commentators, backed by Reserve Bank have ignored or simplistically dismissed those concerns.
In its statement, Moody's points to high levels of household indebtedness (74.5% household-debt-to-disposable-income ratio). In Chapter 1, we point out that people were driven to take loans used to support consumerism instead of for productive activity to generate additional income to pay back those loans and their interest and to improve their lives. Loans heaped up on top of loans encouraged by the banks through extensive advertising and "ambush marketing" obviously pushed the victims to sink deeper into debt.
Moody's also complained about 'reduced consumer affordability' and 'increasing [high] interest rates'. But unlike the SACP and the FSCC which are concerned about the social consequences, Moody's, as a true representative of the financial stratum of the capitalist class, is only concerned about the 'pressure' these will have on 'borrowers loan repayment capabilities' which can lead to 'increased loan loss provisions for retail and corporate lending'. By loan loss provision it is meant the amount set aside should people default (i.e. fail to pay their loans).
The collapse of African Bank exposed the hypocrisy of the "Democratic Alliance" (DA) and all of those who support neoliberalism (the latest manifestation of imperialism) in South Africa and its mainstream media. If it was Transnet, SAA, Post Office, Telkom, Eskom or any State Owned Enterprise that failed, they would have jumped up like popcorn and point to such as the failure of public ownership. They would have called for privatisation.
What have the DA and their ilk to say about the use of public money for the bail-out of private enterprise?
They often tell us about the (unelected) rating agencies which they believe should determine our policy. Moody's spoke on their behalf: more money for the bail-out of private enterprise.
Alex Mashilo is SACP Spokesperson and Ian Beddowes is General Secretary of ZCL.
This article first appearedin Umsebenzi Online, the online journal of the SACP.
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