The working practices of banks have come under close scrutiny recently. After Barclays' involvement in the LIBOR-rigging scandal (BBC, 17 July 2012), news broke on 17 July that HSBC, another prominent player in the global financial markets, provided ‘a conduit for "drug kingpins and rogue nations", according to a US Senate committee investigating money laundering claims at the bank’ (BBC News, 17 July 2012). This adds further to the general pressure on banks widely regarded as responsible for the global financial market crisis. In response, calls are issued to tighten the regulation of financial markets. In this post, I argue that scandals of this type are not the occasional result of criminal or reckless behaviour by individuals. Rather, they are a logical consequence of the systemic pressures within the capitalist mode of production, in which companies constantly have to achieve larger profits than their competitors in order to stay in business.
The current financial market crisis started when home owners defaulted on their mortgages and the US house market plummeted. Financial institutions, connected to these highly risky, hence subprime mortgages, which had been re-packaged into derivatives and sold on, got into difficulties. Many were bailed out with public money, some went bankrupt such as Lehman Brothers on 15 September 2008. As a result of the global financial markets being so closely integrated, the crisis spread quickly beyond the USA. Alan Greenspan, Chairman of the US Federal Reserve from 1987 to 2006, had been a strong supporter of the derivatives market, financial instruments which were supposed to hedge against the risks involved with subprime mortgages. When asked about the causes of the global financial market crisis in October 2008, he argued that it was individual, greedy bankers, who were to be blamed. He described ‘the financial turmoil as the failure of Wall Street to behave honorably’ (The New York Times, 8 October 2008).
This assessment overlooks, however, the wider systemic competitive pressures. In the capitalist mode of production, companies have to re-constitute themselves through the market. They have to be competitive vis-à-vis their rivals and, therefore, constantly a step ahead in reaping ever larger profits. If a financial institution notices that a competitor institution reaps above average profits through its involvement in subprime mortgages and related derivatives, it equally has to get involved in these markets to make the same level of profits. Otherwise, investors will move their money to the financial institution with the higher profit rates. In short, it is not only logical for an individual bank to get involved in these markets, it is even necessary as a result of systemic implications. However, what is necessary for an individual financial institution is disastrous for the overall financial system and, ultimately, the whole economy. If all institutions, responding to the same systemic pressures, pursue these risky strategies, an ever bigger financial bubble is created, which will eventually burst. The result is economic crisis, as we are currently witnessing. Ultimately, crisis is an inherent systemic condition of capitalism, not an unfortunate exception.
Equally, these systemic pressures push banks towards illegal practices. If super profits can be reaped as a result of dealing with drug related money, then profits come first. If Libor rigging increases profit margins, then why not try it and hope to get away with it? Current revelations about banking scandals are likely to be only the tip of the iceberg. Forced to continue making super profits despite the current economic crisis, banks are being pushed into this direction.
Can tighter regulation get this situation under control? Clearly not! What is required is a much more fundamental transformation of the capitalist mode of production as a whole.
Prof. Andreas Bieler
Professor of Political Economy
University of Nottingham/UK
Personal website: http://www.andreasbieler.net
19 July 2012