One Rule for the Rich?

My suspicions were aroused when the credit-rating agencies started criticising the capital holdings of the Co-operative Bank. After all, any bank is effectively bankrupt at all times, so pointing the finger of accusation just becomes a self-fulfilling prophecy. I put my suspicions down to paranoia, but now that the BBC's Robert Peston is starting to make similar noises about the Nationwide I am beginning to wonder whether I wasn't suspicious enough.

As Peston notes, the response by many to the disasters and calumnies of the banking corporates has been to look in the direction of mutual ownership. I have called for the Royal Bank of Scotland, rather than being sold back to shareholders, to be broken up into a system of local community banks, owned by those in the local economy who would uses their services, and with boards made up of local businesspeople, councillors, and citizens. Green MP Caroline Lucas made a similar point during her intervention in the banking debate earlier this week.

The logic is clear: if we, the public, provide the guarantee that allows the banking system to have credibility while operating in a state of permanent insolvency then we should have control over how it directs credit and should also see the profits from banking invested for public benefit not private gain. The redistributive effects of such a shift would be massive, which may be why the commentators are now portraying mutual financial institutions as unreliable.

Yesterday's suggestion from credit-rating agency Moody's that the situation is improving for the commercial banks is the final piece in the puzzle. Since the problem for both the Co-operative Bank and the high street banks is that they are holding commercial property assets that have massively lost value since the crisis, it simply cannot be right to say that their credit ratings are moving in opposite directions, at least not if you take this as an independent indication of financial health, rather than a piece of political propaganda. The rules set by the Basel Committee as to what counts as a reliable form of capital are similarly prejudicial to the interests of building societies, whose assets really are safe as houses and far less subject to risk than the complex financial instruments counted as assets by the banks. Nationwide boss Graham Beale made a similar point in an interview with the FT recently.

The inconsistency with which mutual and shareholder-owned financial institutions are being treated by financial commentators leads to an unsavoury conclusion. Could it be that, having used austeria to attack public services and the working conditions of those employed throughout the economy, the defenders of capital are now using it to destroy the vestiges of the co-operative and mutual economy?
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Economic Mood Music Darkens

What are we to make of the downgrade of the opinion of UK debt by credit-rating agency Moody? The chat on the airwaves is all about the politics of the decision. As noted by the Guardian last night, 'The chancellor has used maintaining the top credit rating for government bonds as one of the key arguments for the austerity programme.' So are we likely to see the flags out to celebrate the end of austerity? I think not so long as we allow vulture financiers to suck the life out of our economy, the process for which credit rating is just a sideshow.

The credit-rating agencies invented a profitable business for themselves by taking the responsibility for assessing risk on behalf of investors. My own local council, for example, is advised by the local authority financial advisor Sector, to only place its reserves in funds with triple-A ratings. This avoids the need for us to employ our own financial experts and outsources the risk if we make bad investments. The credit-rating agencies were paid handsomely for carrying this responsibility, although at no real risk to themselves.

The fear that was engendered around the loss of the triple-A rating relates to how this measure of risk relates to the cost of national borrowing. If Moody and friends decide that we are at greater risk of defaulting on our debts then investors will expect to be paid more for lending to us to reflect this risk. The cost of our borrowing would rise, and given its vastness relative to our economic output we might teeter closer to being obviously and publicly bankrupt.

So why have the rates barely changed in the market this morning? The answer is that the credit-rating agencies never had the power they claimed for themselves. Investors have taken on the chin the downgrades of the US and France. They are not interested in some end-of-term report but make their own assessments of how they can make the greatest return. Investors believe that UK gilts are a good investment because they believe that UK citiens will make good on them through their work.

Taking a wider perspective we can see that what has happened has been a change of cast: the credit-rating agencies that were used to bully us into unprecedented cuts to pubic spending have lost favour, but the policy continues. The real question for us should be whether we are happy to continue with a  means of funding our national economic affairs that accepts that a proportion of our wealth will be constantly siphoned off to financiers. This is the reality of debt financing and the performance around triple-A rating is the show that conceals the very real decisions investors are making about which country's citizens and resources will yield them the greatest returns.
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Defaulty Logic

When is a default not a default? When to call it that might threaten the interests of significant financial players. Greece has arrived at the state of a default that may not speak its name. The announcement that it will add 'collective action clauses' to its sovereign debt removes any question-mark over whether a default is actually taking place. Voluntary agreement by lenders could be called by some other name, but when you explicitly refuse to pay back in full you are certainly in a state of default.

The danger in Greece's default is that it has automatic consequences. These arise as a result of a system of credit-default swaps (CDSs) which Greece's creditors took out to hedge their bets in a risky market. This piece of obfuscatory jargon hides the real nature of a CDS, which is an elaborate financial insurance scheme. Just as the creation of money through banking relies on the acceptance of non-existent money from one institution by the next, so the financial institutions insured each other against the absurd risks they were taking on in lending money to countries, and individuals, who could never afford to pay it back. In this way interconnections were built up that guaranteed that the failure of one would be the failure of all—and incidentally made it inevitable that if we are to solve the problem of any one country or bank we must radically redesign the whole system.

The Greek default has been more extreme than even the most pessimistic observers expected. Creditors are expected to face 65% to 70% losses on their loans, and the new conditions mean that the Greek government will not negotiate but will impose these terms. But the way that they have, without any system of accountability, sucked workers and savers into the web of greed and deceit means that it will be us, rather than bank shareholders, who will pay for the Greek default.
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Poor Standard of Credit Rating

The delight about the rapprochement between Merkel and Sarkozy was short-lived, being undermined almost immediately by a threat from the credit-rating agency Standard and Poors. How are we to interpret these events?

The estrangement in the Franco-German affair was the result of Merkel taking a hard line on monetary policy and refusing to sanction the direct creation of money by the European Central Bank to ease the debt problems of the 16 other Euro members. Apparently yesterday she relented on this, allowing a relaxation of monetary policy in return for a new treaty imposing debt restraint on the Eurozone members.

In response to this a downgrading of the quality of the debt of most Eurozone countries might seem reasonable. But why Germany, which is clearly capable of paying its debts? It appears that this may be more an act of revenge for Merkel's previous insistence that bond-holders must bear some of the cost of their risky investment decisions. The Greek hair-cut was the last stand of a politician who would not accept that the innocent would bear all the pain. Germany will now be punished for the losses this brought to financiers, its own national debt now attracting higher interest rates than the state of its economy demands.

More fundamentally we might question why the US and UK, who are far more debt-ridden and whose economies are struggling much more than that of Germany, are not being threatened in the same way by the markets. The huge money-printing operations of both the Fed and the Bank of England makes investment in these countries far more risky, as does their lack of real production and their low rates of growth, and yet they are not the target of the credit raters. The conclusion is clear: the credit-rating agencies are rating finance-friendly policies, not the strength of national economies and the debt they issue.

More fundamentally the explicit evidence of economic policy being negotiated between politicians and rating agencies makes more urgent the need for politicians to have the courage to articulate an alternative and to co-operate to reclaim the democratic power to determine the direction of their own economies. We need to find a way through this present crisis that is compatible with democracy, not just compatible with the wishes of market investors. If alternative views are not articulated then we will be heading for a political rupture rather than the evolution to a more stable and equitable economic model that our happiness and well-being requires.
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Cuts and the City

It must be because we are living right through the middle of one of capitalism’s periodic adaptations that it is so difficult for people to observe and interpret what is going on. The previous avatar of this oppressive economic beast was the greedy asset monster. The inflation of house prices and stock prices made us all feel like winners, but only some of us could ever afford a yacht and a trip to Dubai. For most the book price of the house we live in was always an irrelevance: what mattered was the fact that we had to work so many more hours to pay for the same house.

This financial bubble has burst and the market alchemists, having lost their power of turning debts into assets, are casting around for the next trick that enables them to extract an unfair share of the nation’s wealth. The massive transfer of value to the banks must be repaid by the sweat of the brows of the country’s workers, apparently. The pain will not be shared equally; those who control capital will still avoid work but have access to cheap finance.

In a democratic system we might expect to be able to vote about whether we consider this the best way forward. But no political party has the courage to suggest that a different financial settlement might be preferable – one that removes the mediating power of finance that comes between work and well-being. Lest we dare think of a fairer outcome, the voices from the City are quick to let us know that they will be downgrading our stock unless we rapidly increase the rates of tax we pay. Just as the IMF punishes the countries of the South that dare to put the interests of their people before those of global finance, so the banksters and their spin-doctors terrify politicians with talk of Moody's and Fitch's and the dreadful prospect of ending up like Argentina or Greece.

The media supported the asset phase, with its TV shows encouraging us all to morph into tatty interior designers or pocket-sized Rachmans—and our rag-rolled homes and steam-rollered private tenants bear the scars to this day. Now they have followed the financial creatives into the next phase, persuading us all of the need to live within our means (by which they mean take a smaller share of the pie, not take account of the environment) and willingly accept higher taxes and cuts to public services. Tweet

Establishing a Mood

Last week two of the credit rating agencies - Moody's and Fitches - downgraded the rating they award to a slew of mutual financial instutions in the UK - the old-style building societies which have survived the current turmoil well and are taking in massive levels of new lending from members.

The building societies are actually in a strong position, since they own real assets - houses - rather than the phoney assets owned by banks. The agencies explain this downgrading on the basis that these assets are less valuable because of falling house prices. Yet the stress-testing of the Britannia that preceded its recent merger with Co-operative Financial Services indicated that even a house-price fall of 60% would not threaten the solvency of the business.

So is this a genuine concern about the solvency and viability of these businesses or a political move by the capitalist businesses that are seeing their credibility shattered and money move into the co-operative financial sector?

The official version is that the credit rating agencies take an objective look at the market and then provide a neutral assessment of the financial health of various companies. The reality is that they are making the market. If they downgrade a company it finds it harder to borrow money and must pay a higher price. They are actually manipulating the value of companies - and even countries - and in a time of such uncertainty this gives them anti-democratic power. Questions are being raised about their role, which now appears more political than forensic.

We can begin to see how they are using this power. They downgrade the UK, which is creating money to pay back our national debt, but not the US, which is following the same policy. Back in January the French financial regulator called for political regulation of the activities of credit rating agencies. At that stage concern was that they were too optimistic about the money-generating activities of the companies that created the boom. Their attempt to undermine viable and democratic institutions and governments should raise even greater concern. Tweet