As governments in the major economies spend trillions of dollars to rescue capitalism from, as even most mainstream economists are now saying, its most severe recession since the 1930s we take a look at these bailouts. Are the bailouts some form of Keynesian solution similar to what was applied in the 1930s depression? What is a Keynesian solution in the first place and how does it compare to what governments are doing now? Were Keynesian policies successful in ending the great 1930s slump? Should the banks be nationalised or have they been already? Finally, what would socialists do with the banks and do you need them under a socialist economy? These are questions that we will try and answer in this article.

Keynesian Solutions and its Operation in Practice
The fundamental idea of Keynesianism is that state spending, a national budget deficit, can be used to combat economic crisis and recession.
From a theoretical point of view, raising overall demand in a given country will facilitate a recovery insofar as there is disposable productive capacity (unemployed workers, stocks of raw materials, machines and technology working below capacity).  These unused resources are mobilized by the additional purchasing power created by the budget deficit.  Only when these reserves are exhausted do you get the fatal onset of inflation.
But there is a snag.  In order for the budget deficit not to fuel inflation before full employment is reached, direct taxes must increase in the same proportion as income.
Given that the rich (finance capitalists) prefers to buy state bonds rather than pay taxes, and that tax evasion by the rich is endemic, the higher tax burden implied by Keynesian policies falls on the working people.
As the public debt grows, servicing this debt eats up a growing part of public spending, so there is a tendency for the budget deficit to grow without any corresponding beneficial effects on employment.
So in the end Keynesian expansion tends to undermine itself through growing inflation and diminishing returns from the initial budget deficit-driven “push;” a new recession is the result.  And the growing tax burden tends to redistribute income towards the rich.
The historical balance sheet of Keynesian policy is clear.  The most extensive experiment, Roosevelt’s New Deal in the United States during the 1930s, ended in failure.
Despite the rise in public spending, it ended in the crisis of 1938 when unemployment reached 10 million.  It was the massive rearmament thanks to the war which reduced mass unemployment.

State Salvage Capitalism
Even if Keynesian solutions have not worked in the past is this what governments are trying to implement now – spending money to create jobs? The answer is clearly no. The overwhelming majority of the money is being spent by governments to stop capitalism and in particular the banks from going bust. The billions and now trillions is being given to banks because their cash (called capital) is running out as they cover the losses from their banking operations on the assets and exposures they have on their books.
Similarly, the money that has started to being given to the non-banking industry – the car industry in particular – is not to create jobs through government spending projects such as an integrated public service network, It is being given to stop these companies going bankrupt because they cannot pay suppliers, workers or the pensions of retired workers. Ultimately, this money has to come from somewhere and as we showed above it in the end comes from us through higher taxation.
However, it great reduces the scope for Keynesian solutions of state spending as the government has to spend such large sums to salvage capitalism leaving a much smaller potential pot to use for large public spending projects.
But the problem for governments is that this state salvage capitalist spending is far from over, particularly in the banking sector.

The Dynamics of the Banks Losses
The banks around the world to varying extents have exposure to loans ands assets that are decling in value because of the economic recession. But the banks themselves are a major cause of the recession because their financial position means they are unwilling or unable to lend money. This is the so called “credit crunch” element of the crisis of capitalism.  Unlike the 1930s where the banking and credit crisis was limited to the US, the current crisis is a global one. It also, of much greater depth, scope and complexity than it was in 1930s. That is why this crisis of capitalism has the potential to eclipse the 1930’s depression.
The banks around the world are suffering losses on their home loans, corporate loans, commercial property loans, private equity loans, developing country loans, assets created from home property and derivatives. They are all falling in value because of their exposure to the economic recession. This is not a one-off loss but the losses will carry on growing as long as the recession lasts.

The losses are not just paper losses but must be matched with the banks own cash – called capital. It is this capital that is running down as the losses have to be covered on a daily, monthly, quarterly and annual basis.

That is why the £37 billion October 2009 bailout from the UK government was not enough and why the January 2009 bailout would not be the last. So when Alistar Darling says that there will be no nationalisations of the banks he either is lying or does not understand the dynamics of the banks’ losses. This is what Gordon Brown admitted when announcing the January 2009 bailout about the money they had spent the previous October.

The latest Lloyds TSB/HBOS crisis back that up. The latest losses are on covering losses on loans made to corporate finance by HBOS which have occurred as the recession sets in and these businesses either go bust or produce reduced income. It says a lot about Brown and Darlings, and indeed the bosses of Lloyds, about their lack of understanding of the effect of the economic crisis on the banking system. This lack of understanding scares the financial markets and we will see more falls in stock markets.

As the recession continues, most economists are now saying it will last well into 2010, the losses to banks will also continue to mount. That means that governments will continue to have to pour money into the banks to salvage them. That is what is unnerving the financial markets about the latest Obama plan in the US. Nearly a further two trillion dollars have been allocated to salvaging the banking system in the US. But the plans are vague and size of the potential bailout shows the scale of the problem and the uncertainty as to what it will finally cost.

Despite what Daring is saying the banks are already partly nationalised and will be almost fully nationalised by the end of 2009. But they are nationalised under bankers’ control. There may be some modifications to the way their businesses are run and how they pay themselves, removing the worst excesses of the last decade, but they will essentially be the same beast operating the same business model which has contributed to the crisis. Socialists have an alternative model for the banks and that is what we will look at next.

Banks Owned by the People Run by the People For the PeopleThere is an alternative to the current banking system. In the transition from a capitalist economy to a socialist economy there would still be a need for banks. But the banks would be owned by the people, run by all the people who work in them for the benefit of the whole of society.

All the banks would be taken under common ownership and be run by democratically elected, accountable and recallable management committees. As well as handing the general circulation of money that would be necessary for personal economic transactions in an economy in transition from capitalism to socialism, banks would finance (and administer this finance) the democratic economic plans decided upon by the whole of society. Examples of such projects would be an integrated public transport system, social housing, schools and hospitals and leisure and cultural facilities. They would also offer social loans for personal use.

But as we made the transition to a full socialist economy the role of money would gradually diminish. The rate of transformation is dependent on the number of advanced mature countries also making at the same time this transition to socialism.

People would be paid a social wage that would incorporate all the social needs that they require that has been decided by the whole of society to be provided by the whole of society. On top of this social wage there would be a money component that would be used to pay for the exchange of other goods of services. But more and more of these goods services would be provided by society as a whole or the demand for them diminished as peoples’ needs were met in another way. Then the use for money would wither away leading eventually to the disappearance of money and need for banks.

Another World is Necessary
This alternative world is not only possible but is now necessary. Capitalism has long served its usefulness but now the system is threatening the very existence of humanity and our fragile planet. The most obscene amounts of money are being thrown about to save the banks and pay the bankers fat bonuses. Money that would be enough to end world hunger, provide clean drinking water, health and education and culture leisure,and housing for all of the world’s six billion plus population as well providing work for everyone who wanted it.