"Come on! Let’s get together and screw the system"

"Regan and you will be flushed down that drain"

"I plan to bury Margaret and Ronald here"

The ‘global-state’ (G7 and some G20 governments, central banks, and the IMF and IBRD multilateral agencies) intervened in the international banking system during the second week of October, financially, on an unparalleled scale, and politically, with resolute and coordinated authority. This is not news anymore. One is left wondering what is left of international finance-capital that is distinctively capitalist anymore; the implications of intervention on such a scale are momentous; if the intrusion goes much further, British, French and German governments could become the primary owners of banks, in a watershed reversal of Regan-Thatcher neo-liberalism. When capitalism’s standard-bearer, The Economist, festoons "Saving the System" and "Capitalism at Bay" across the cover pages of its two most recent issues, then the fat is surely in the fire. What will be the shape of 21st Century global capitalism? That will be news!

The politics of intervention

There is a sea change in how decisions are being made in Washington, London, Paris and Berlin - a paradigm shift. This is borne out when in America the banks were given no choice. Whether they wanted government support or not, the heads of great banks were called in and told, whether they like it or not, the Treasury was injecting liquidity, that is, part nationalising them. The basic rules of market-capitalism, freedom of ownership and entrepreneurial investment, that is all the processes underlying the accumulation of surplus value, have been massively violated by governments frantic to save the system. What a paradox!

US Treasury Secretary Hank Paulson said on Monday (13) "this is not what we like to do but what we have to do". The government was buying shares in banks because the "alternative was totally unacceptable", he added. A frank admission that capitalism had busted in a catastrophic meltdown of the world’s greatest banking system. Make no mistake about the stark explicitness. Unmista-kably, 21st Century international finance-capital will have profound ‘global state-capitalist’ (forgive the oxymoron) features.

The size of intervention

Nationali-sation in the UK is voluntary, but its extent stunning. Britain’s second largest (Royal Bank of Scotland – RBS) and sixth largest (HBOS) banks are now government controlled; a third of all bank-branch outlets state enterprises. Market capitalisation of RBS was $76 billion in February 2008, but it has fallen since and a $35 billion investment in 5% preference shares is buying the government 60% ownership. The numbers for HBOS are still not known and Lloyds, the UK’s fifth largest bank, is also being part nationalised, but again numbers are not known. Smaller banks will also be affected – Northern Rock and Bradford & Bingley have already been 100% nationalised. The government is determined to make the banks liquid, and one need have no doubt that it will take nationalisation as far as necessary, and even all the way.

Ben Bernanke, the US Fed Chairman said "our strategy will evolve with the crisis; we will not stand down till we achieve our objective". The US has so far thrown only $250 billion of the $700 that Congress approved in early October, towards bank nationalisation (the Americans need a euphuism, so they call it "injecting liquidity"). However, eventually, a larger proportion will have to be thrown in this direction.

It is difficult to estimate what share of bank ownership will accrue to government – Washington is not even willing to name the nine banks earmarked for immediate medication but eight are known (Bank of America, CitiGroup, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of New York Mellon, and State Street – phew, a roll call of the Himalayan heights of banking!) Let me put ownership estimation in perspective. Market capitalisation of Wachovia was $76 billion in February 2008, but its banking operations were acquired by CitiGroup in September for $2.16 billion; Wachovia shares, trading at $38 in January, sank to $10 before the debacle and 97 cent junk on acquisition day.

Market capitalisation of Bank of America and CitiGroup were $200 billion and $140 billion, respectively, in February, but there is no certainty of today’s valuation; the numbers will be much lower. The government will buy 10% preference shares to the tune of $25 billion in each and the share of ownership will depend on valuation on the relevant date. JP Morgan Chase and Wells Faro will receive $20 billion injections each, and Goldman Sachs and Morgan Stanley, $10 billion each; BoNY-Mellon and State Street much less. Half of the earmarked $250 billion is for the nine big banks; the remainder for thousands of smaller banks and thrift societies that proliferate across the US. It is hard to imagine Uncle Sam wants a stake in these midgets. Some other arrangement will be worked out.

Developments may spiral further, RBS shares continued to dive after partial nationalisation and market capitalisation at close on Black Friday (10 October) was down to $21 billion. The British government’s share value declined by $1 billion and it faces criticism whenever its investments depreciate. The temptation is to nationalise RBS altogether and take it off the stock market. Could the same happen in other countries, will real-economy nationalisations follow? Is it going to be a full 180 degree reversal, a wholesale trouncing of Regan-Thatcher liberalism? I predict yes to all.

It is not possible within the confines of this article to explain developments in Europe, the Far East and Australia-NZ. Let me only mention that continental Europe is pouring $1.8 trillion into bank recapitalisations, mainly Germany $680 billion and France $490 billion; the Australian government has turned to full blown populism; and the Chinese government, at last, is paying lip service to the domestic market.

Long-term implications of

intervention

Paradoxically, this process is not being led by socialists and social-democrats. Gordon Brown hangs out at the rightwing boundary of social democracy and Nicolas Sarkozy came to power on a centre-right, anti-socialist, platform. Confounding matters, this has become an apt requiem for George W. Bush. At the October 13 press conferences Paulson and Bernanke spoke in the language quoted above, but Bush was at pains to lament "these measures are not intended to take over the free market". The tensions mounting in Washington will become acute after Obama’s likely victory on November 4th.

At the European leaders meeting on 16 October, Brown, backed by Sarkozy, called for the worlds 30 largest institutions to be brought under supervision and for the IMF to be rebuilt. Italy’s semi-fascist Berlusconi chipped in "no financial institution should escape supervision". I ask again, how much will be left of free-market finance-capitalism when the dust settles?

To unlock this paradox one has to realise that the contradictions of capitalism are driving its political captains to negate their very system - though it would be wrong to read too much into these early developments, apart from taking intellectual delight. An e-mail friend, Swaminathan Palendra, put it like this: "That is very interesting, Kumar. So, in other words, capitalism is trying to re-adjust to save itself and in that process giving birth to unforeseen global changes, which will probably be positive, but not necessarily abolish capitalism itself." Rather succinctly put, and to the point, I thought.

The big boys are coming out to bat

It is the real economy, not the stock market that accounts for production, jobs, trade and GDP. The market crashed in October 1929 but the Great Depression dragged on through 1930-33. Markets are partly psychologically driven - investors see opportunities or risks and invest or disinvest at the press of a button. The real economy, a nation’s genuine strength, declines over years and can be rebuilt only slowly. Now the real game is starting in earnest; America and Europe are in the throes of recession whose depth and breadth will be tested in the coming months. Recent statistics and the outlook for manufacturing, mining, commodities, demand, and consumption are all gloomy Will this turn into a depression? Will the rest of the world be dragged down? The immediate panic is about bank liquidity; but worry is turning to aggregate demand, aggregate supply, employment and prices, that is, the fundamentals of the productive macro-economy. Can even this colossal global-state intervention turn around the slump, or must the crisis of capitalism simply run its course in America and Europe? The outlook is on the downside, in market-speak.