Many of these trading transactions are structured by buying one asset and selling another asset. This means that the amount of capital (cash) that a bank has to put up to cover losses in the transaction is much smaller. These large nominal positions have smaller returns but on very small amounts of capital. An upfront tax on these transactions will make many of them unprofitable or have to a low return for a bank to enter into them. Brown knows this but needed to be seen to be making a stand against the greedy bankers. He knew he would get no support for his proposal. It is nothing but a cynical public relations exercise.

It is ironic that Brown has come up with this proposal in a week that the government gave away another £56 billion pounds of our money to the banks through a further £31 billion bailout for RBS and Lloyds and another £25 billion on Quantitative easing (QE).  QE gives money to the banks and financial institutions for unwanted government and corporate debt. Little of this money is flowing into the real economy – the banks are hoarding it to cover losses and future losses and the financial institutions are using it to buy other assets helping to create the new financial bubble.

A real reforming move would be to tax these banks profits at much higher levels and have a progressive tax on high earners to cut out their bonuses. Both would create huge revenues to spend on public services. A 100% tax on all earnings over £50,000 would mean the public sector budget could be increased by 33%. Brown, the person who over saw the deregulation of the financial markets and creation of the easy money environment that helped lead to this crisis, is clearly not up to any such radical proposals.

The real priority for Brown is to implement public sector cuts to make us pay for the bailouts and stimulus programmes. The latest leak that the government is going to cut youth training programmes at a time of massive youth unemployment is a case in point.

The G20 offered nothing new but a continuation of their stimulus programmes. They fear if these are withdrawn the world economy will slump into a depression. This is because there is no real consumer demand due to rising unemployment and no fresh credit available from the damaged banking system. They were of course unable to resolve the dispute over exchange rates where the United States and China have kept their currencies artificially weak to make their exports cheaper against their main competitors in Europe and Japan.

The G20 continues to subsidise the private car industry and private housing market with our money. These two industries are major contributors to the climate change crisis and the financial bubble respectively. But they would rather support them than use the money to create a lower polluting public transport system and sustainable social housing for whole of society.

These stimulus programmes and the bailout will have to be paid for by us. The International Monetary Fund in a report issued this week estimates that the major developed economies will face ten years of public sector cuts and tax rises to pay for it all.

It’s up us to not let them get away with it.

This was undermined by the fact that the Royal Bank of Scotland (RBS) has agreed to enter an insurance scheme where we will guarantee up to £282 billion of losses on its “toxic assets” – anything from derivatives to personal loans.

£25.6 billion was given to RBS with the other £5.7 billion going to Lloyds TSB/HBOS. Lloyds hopes to raise another £21 billion from it’s’ shareholders – read our pension funds here. But this is highly unlikely as Lloyds is haemorrhaging money from the takeover of HBOS and its speculative loan business. Lloyds has no investment banking business of note to rescue it. It is almost wholly dependent on the UK economy and that as we have seen with last week’s release of gross domestic data is in its longest and deepest slump since the great depression of the 1930s.

Shares in Lloyds and RBS fell by over 10% after the announcement was full digested by the market. Both banks need the funds (capital) to cover future likely losses. The outcome is that Lloyds will have to come cap in hand to us via the government for more money to shore up their capital.

As part of the bail out the government announced the selling off of parts of both banks. Buyers will again be difficult to find as the outlook for high street banking looks bleak given the depth of the UK slump. The sell off was in part an attempt, under the cover of meeting European monopolies legislation, to hive off the non-toxic parts of the banks and leave us saddled with the loss making parts. Hidden away was a modernisation programme which was just further mass redundancies with RBS announcing 3,700 people will loose their jobs by May 2010 from their high street branches.

The global economic crisis and UK slump will lead to further losses and bailouts and more cuts for us.

The only answer is for all the banks to be taken under full ownership and control, and to socialise their loans into rents and cancel all derivatives contracts.

The announcement that £31.3 billion more was to be given to the banks means more cuts in jobs and public services for us. It also, points to the weakness of the banking system once the super investment banking profits, made from a huge rally in financial assets since March of this year, have been stripped out.

This was undermined by the fact that the Royal Bank of Scotland (RBS) has agreed to enter an insurance scheme where we will guarantee up to £282 billion of losses on its “toxic assets” – anything from derivatives to personal loans.

£25.6 billion was given to RBS with the other £5.7 billion going to Lloyds TSB/HBOS. Lloyds hopes to raise another £21 billion from it’s’ shareholders – read our pension funds here. But this is highly unlikely as Lloyds is haemorrhaging money from the takeover of HBOS and its speculative loan business. Lloyds has no investment banking business of note to rescue it. It is almost wholly dependent on the UK economy and that as we have seen with last week’s release of gross domestic data is in its longest and deepest slump since the great depression of the 1930s.

Shares in Lloyds and RBS fell by over 10% after the announcement was full digested by the market. Both banks need the funds (capital) to cover future likely losses. The outcome is that Lloyds will have to come cap in hand to us via the government for more money to shore up their capital.

As part of the bail out the government announced the selling off of parts of both banks. Buyers will again be difficult to find as the outlook for high street banking looks bleak given the depth of the UK slump. The sell off was in part an attempt, under the cover of meeting European monopolies legislation, to hive off the non-toxic parts of the banks and leave us saddled with the loss making parts. Hidden away was a modernisation programme which was just further mass redundancies with RBS announcing 3,700 people will loose their jobs by May 2010 from their high street branches.

The global economic crisis and UK slump will lead to further losses and bailouts and more cuts for us.

The only answer is for all the banks to be taken under full ownership and control, and to socialise their loans into rents and cancel all derivatives contracts.

he announcement that £31.3 billion more was to be given to the banks means more cuts in jobs and public services for us. It also, points to the weakness of the banking system once the super investment banking profits, made from a huge rally in financial assets since March of this year, have been stripped out.

This was undermined by the fact that the Royal Bank of Scotland (RBS) has agreed to enter an insurance scheme where we will guarantee up to £282 billion of losses on its “toxic assets” – anything from derivatives to personal loans.

£25.6 billion was given to RBS with the other £5.7 billion going to Lloyds TSB/HBOS. Lloyds hopes to raise another £21 billion from it’s’ shareholders – read our pension funds here. But this is highly unlikely as Lloyds is haemorrhaging money from the takeover of HBOS and its speculative loan business. Lloyds has no investment banking business of note to rescue it. It is almost wholly dependent on the UK economy and that as we have seen with last week’s release of gross domestic data is in its longest and deepest slump since the great depression of the 1930s.

Shares in Lloyds and RBS fell by over 10% after the announcement was full digested by the market. Both banks need the funds (capital) to cover future likely losses. The outcome is that Lloyds will have to come cap in hand to us via the government for more money to shore up their capital.

As part of the bail out the government announced the selling off of parts of both banks. Buyers will again be difficult to find as the outlook for high street banking looks bleak given the depth of the UK slump. The sell off was in part an attempt, under the cover of meeting European monopolies legislation, to hive off the non-toxic parts of the banks and leave us saddled with the loss making parts. Hidden away was a modernisation programme which was just further mass redundancies with RBS announcing 3,700 people will loose their jobs by May 2010 from their high street branches.

The global economic crisis and UK slump will lead to further losses and bailouts and more cuts for us.

The only answer is for all the banks to be taken under full ownership and control, and to socialise their loans into rents and cancel all derivatives contracts.

In addition the government through the Bank of England has printed £150 bn (quantitative easing) and bought government and other bonds back from the banks. Of this £150bn only about £2bn has found its way back into the financial system – through mortgages. The rest has been retained by the banks to cover losses – £36bn was written off against “toxic loans” in the first half of 2009 by UK banks. A further £25bn is ear marked for the rest of the year.

In addition the government is looking to underwrite up to £700bn of further losses from RBS and Lloyds/HBOS. The future losses and costs are unknown as then must be the size of the cuts.

This means massive cuts to pay for this deficit as well as issuing debt. Over the last 5 years the government has raised about £47bn per year. In 2009 this has risen to £146bn and 2010 the estimate is £180bn. This has to be repaid at some time and there is no guarantee that there will be enough buyers of the government debt. The UK is seen as potential defaulter on debt and the weak economy means low interest rates and a weak pound. This means overseas investors will not want to hold UK assets such as UK government bonds.

UK Government Bond Issuance
2010: £180.0 bn
2009: £146 bn
2008: £47 bn
2007:  £47 bn
2006: £47 bn
2005: £47 bn
2004: £47 bn

The government is in the dark as to much they will have to cut as they do not know how much more the banks can loose, how many Government bonds they can sell and how weak and how long the weakness in the economy will be.

In August they had to borrow £17bn as receipts from taxes was lower and payment on benefits higher.

Cuts in public sector will be the major battle ground around where the financial and economic crisis will be fought because of the scale and the moving goal posts.

Only taking the banks under common ownership and control and neutralizing these losses by turning mortgages into rents and loans into social projects and canceling all the banks derivative contracts.

Over the last two weeks there has been lots of telling economic and financial data from which some commentators have drawn the conclusion that the worst of the economic and financial crisis is over.  We set out here to examine this data and determine if these commentators are right by looking at the banks, stock markets, the Bank of England and global economies.

The Banks

The four major banks and the wholly state owned Northern Rock reported their results, which were described as mixed, during the business week ending the 7 August 2009. We show these in the table below – all the figures are in billions of pounds sterling.

*RBS Suffered a post-tax loss of £1bn

The points of interest are:  only Barclays made a profit when investment banking revenues are excluded; and the revenues from investment banking are a one off. Stock markets have rallied by nearly 50% from their March 2009 lows and the price fluctuations – called volatility – of financial assets have fallen making derivatives easier to trade and reducing daily profit and loss moves. In the credit markets the cost of buying insurance against bankruptcy has also fallen. All these factors have combined to create bumper investment banking profits. Normally stock markets would move no more than 10% over such a time span. But as we show later the sharp rally we have just seen is common in stock market crashes. In the past these have proved to be false dawns – often called sucker rallies – with the market falling again to levels below the previous lows.

The write downs in six months are nearly £36 billion. This money was lost as the value of assets the banks hold and loans to individuals and companies were written off. These losses are not paper losses but have to be matched from the banks capital. These are the losses from the banks exposure to the recession. They will continue dripping losses of this magnitude while the recession lasts and house prices continue to drop. If you add a major market fall and an increase in asset volatility, then on top of these losses will be potentially huge daily losses from derivatives – banks globally have a $700 trillion exposure to these assets. Such a scenario would lead to a similar financial meltdown as we experienced September 2008.

Even without a market correction the banks are likely to all return losses in the second half of 2009. The write-downs are probably underestimated as new rules give the banks leeway in accounting for “difficult to value assets”.

The Stock Markets

Stock markets around the world have risen by over 50% (to week ending 7/8/2009) from their low point in March 2009. Stock markets are where companies’ ordinary share capital (shares) is traded. They are usually seen as a leading indicator of what is happing in the economy. So does this rally mean that the worst is over for the economy and the banks in particular?

If one looks at the history of severe economic recessions a pattern emerges: after a sharp fall in share values over several months, shares make a partial recovery in the hope that the worst is over only to be disappointed and fall again to reach new lows.

In the 1930s depression shares fell from a high of 380 on the US Dow Jones Average (DJA) to a first low of  199 over two and a half months only to rise 48% to 294 five months later. This proved to be a false dawn as US credit dried up on the back of its banking crisis driving the world into a deep depression. The DJA then fell 89% from its all time high to a low of 41 two and a quarter years later.

Sounds familiar? This time the DJA took one and a half years from the credit crunch breaking to fall 54% from its pre-crash high. It has since rallied 44% to its close on 7/14/2009 of  9435. In the UK the initial fall was of the same magnitude but the rally less pronounced to 34%.

The rally – known as a sucker bear rally – in shares is as we write (17/8/2009) is running out of steam. We are likely to see a sharp fall in shares as the markets wake up to the effect of the “end of credit”. This will lead to an increase in the price movements of all financial assets and a big rise in financial volatility. The banks who therefore made gains in the first half of 2009 will suffer steep declines in profits as their exposure to $700 trillion worth of derivatives will create huge losses similar to those they experienced in the autumn of 2008.

Governments would then have to again step into bail out the banks but this time their scope for action is limited by the amount they have spent already and the steps they have to take to find the money to pay for it.

The Bank of England

The Bank of England (BOE) has made two important statements over the last two weeks (3/8/2009 to 16/8/2009). The first was on quantitative easing and 2009’s second quarterly report on inflation. These statements revealed more about the state of the economy and the financial system and its future than any vague optimistic comments that have come from government and City’ analysts.

On quantitative easing the announced that they would raise the total pot to £175 billion – an increase of £25 billion of which £125 billion of the original £150 billion has been used already.  The new unused total of £50 billion would be put to use over the next few months. The £175billion represents 12% of our economy (gross domestic product – GDP) and together with other bailouts will take the total of our money spent by the government and the BOE on saving the banks to £350 billion or nearly 25% of our GDP.

Quantitative easing is a tool where the BOE of England prints money and buys back with this money government and other debt from Banks, Financial and other institutions. The idea is this will give the financial system money that they will then pump into the economy in the form of mortgages and loans to consumers and buinesses. All the evidence points to this not happening and instead the financial sector is hoarding the money as a buffer against further looses on mortgages, loans and derivatives.

The table below bears this out. It shows, in billions of pounds, the average monthly personal debt for 2006 – the last full year before the credit bubble burst, the average for 2009 and the figures for the latest month where data is available – June 2009.

One can see the massive fall off in credit from 2006 that has driven the UK economy into recession.  In June 2009 only mortgages – which account for bottoming out of houses prices – are significantly above the average for 2009 which is way below 2006’s average. Of the £125bn of quantitative easing only £1.7 bn has found its way into additional credit!

Why then spend another £50 billion on quantitative easing? The answer can be found in quote from BOE governor Mervyn King in an interview on the recent BOE inflation report. He said that the banking sector was still “in a very bad way” and predicted it would take years to “repair balance sheets” and wean the banks off public support.

In other words quantitative easing is nothing but another bank bail out that we will have to pay for through cuts in public services, wages and jobs and higher taxes. As well as quantitative easing  the Royal Bank of Scotland and Lloyds TSB/HBOS have insured over £700 billion of their toxic assets – loans and derivatives – with the UK government, This means we will be liable for further losses which are likely to mount in the second half of the year as we pointed above on the section in banks. The future maximum bill we will be presented with and paid for by us through cuts and higher taxes is unknown.

The Economy

The UK economy and is still in decline only the rate of decline has slowed. Unemploymnet contuses to rise with nearly 20% of 16-24 year olds unemployed. In the US official unemployment has fallen slightly although nearly 250,000 lost their jobs in July. This is mainly because millions have given up looking for work. Those claiming unemployment benefit are 9.4 % of the total US workforce. But the national labour office estimates that nearly 30 million are out of work which is nearly 20% of the national workforce. Consumer confidence continues to fall in the US and inventories of goods are also falling at a rapid rate. This shows that US corporations are unwilling to produce more goods as they no faith that they can be sold. Only government subsidies for the car industry have boosted production slightly.

US corporations’ economic results are only being held up by huge cost cutting programmes. Underlying sales are poor and once the one off effect of cost cutting passes their results will start to deteriorate

Outside of China only France and Germany, in Europe, and Japan have managed to stop the decline in their economies. This is mainly because the French and German governments had to spend less on bank bailouts and were able to put funds into stimulating consumer spending and the infrastructure. These economies had also much smaller level of consumer debt and a smaller housing bubble. But the stimulus is likely to be a one off as European banks losses will increase in the second half of the year as exposure to eastern European and emerging market property loans hit their balance sheets. They also have exposure to derivatives and there are likely to be losses in this area in the second half of 2009 and not the windfall profits that accompanied the stock market rally since March of this year. Outside of Germany and France, economies with a large housing bubble have been hit hard – Spain and Ireland primarily.

The Japanese economy grew 0.9% in the second quarter of 2009 below the median forecast of 1.0%. This ended 15 months of successive contractions with the sharpest in the previous quarter when the economy shrunk nearly 3%. The growth in quarter two was driven by a $2 trillion government stimulus programme and exports. But the financial markets believe the effect of this will be short lived as the stimulus wears off and the global economy continues to shrink in the third quarter of 2009 leading to a decline in exports. On day the figures were announced (17/8/2009) the Japanese stock market dropped 3%.

China though technically not in recession has seen tens of millions of people made unemployed over the last two years. Only a massive stimulus programme driven by the central government has kept its economy afloat. Nearly $3 trillion of new consumer debt has been created in the first half of 2009. But the government are turning this tap off as they see the first signs of a speculative bubble in property and the stock market. Of course this internal stimulus programme does not help the rest of the world’s economy apart for the commodity industries as China is a huge net exporter. And these exports continue to decline as the world’s overall economy continues to shrink.

The Future

The global finance system is so contaminated with bad debt and derivatives that we are likely to see years of declining and stagnant economies. Unlike the 1930s the crisis of credit is not a US one but a global one with the banks also geared up to derivatives which can bring the financial system to the point of collapse when the financial markets decline and volatility in financial assets increases as we saw in the Autumn of 2008.

This means governments will have to continue to use our money to bail the system out rather than create jobs and services. The majority of us will pay for these bailouts through public service cuts and tax rises and unemployment.

But there is an alternative which means taking the banks under our control and neutralising their rotting loans and cancelling their destructive derivative contracts. It means a society where resources and wealth are shared to meet human needs. It is the only rationale alternative to the harsh future that capitalism offers us.

The old mutual business of deposits with mortgages backed by these deposits has been bought by Nationwide – although even these prime mortgages are likely to become toxic as housing prices continue to decline.

We get the so called “toxic assets” which has become a euphemism for any financial asset that is loosing money. The billion pounds of loans to commercial property developers and UK sub-prime loans is where the Dunfermline was haemorrhaging money. It’s microcosm of the larger financial crisis: where speculative loans that took advantage of very low short-term borrowing rates are declining in value as the recession drives down the underlying value of assets that the loan is based on.

Commercial property is set to continue its fall as the demand for business and retail property declines at the demand for the economy carries on shrinking on the back of the most severe recession since the 1930s – ask the companies behind the Cannongate project about that!

The UK sub-prime loans are based on:
Self-certification is where people could declare their own income and have it ratified by themselves and have a loan based on this!
And the buy to let market where people bought homes on an interest only basis, rented it out and hoped to cover the repayments from rental income while making a profit from the increase capital value of the property.

Both types of loans have turned sour as the values of the properties the loans were secured have fallen below the value of loan and as people lose their jobs and have difficulty making the loan repayments.

The Dunfermline Building Society although not a quoted company was under pressure to generate better returns for its depositors as other banks and de-mutualised former building societies could offer higher rates of return to their depositors, ironically through similar such speculative financial investments.

The assets underlying the toxic loans had declined by about 10% or £100m which the Dunfermline Building Society had to write down with no capitals to do that. With property, commercial and residential, set to decline by about another 20% the Dunfermline would have been sitting on about £300m of losses with no capital to cover those losses. Now we own the further downside as well as the £100m lost so far and will face higher taxes and cuts in public spending to pay for these losses.

The Dunfermline Building Society was not essential to the functioning if the financial system so the government decided to break it up to try minimising the losses and getting some money back from the sale of the “good parts”.

The alternative was to take over the sub-prime loans and turn them into social housing with a stream of rental income for up to 150 years in the future. This would have transformed these liabilities into assets at a stroke and meant that any tenants would not end up on the street homeless.

A similar plan could have solved the commercial property problems with the property being used for housing or incorporated into a social plan to meet the real needs of society.

But that would be finding solutions in the interest of the majority of the population rather than as the government is doing solving the crisis for the bankers and the rich.

Yes you have got it in return for owning their losses we hold a bigger share in bank which is worth less and less each day. They are promising to lend more for mortgages over each of the next two years but for an an amount only equal to half of the total amount that was lent out in January 2009.

Hidden behind this was future job losses in Scotland. HBOS corporate lending arm – the source of much of the recent losses – based in Edinburgh will be run down. Branch rationalisation will focus on Scotland where there is a big overlap between Lloyd’s TSB and Bank of Scotland. Finally, they plan to close the investment arm of Scottish Widows, which Lloyds own,  and have their fund management operation in London, Insight, run all funds with the loss of 500 jobs in Scotland.

RBS reported a statutory loss of £40bn which falls to £24bn if technical issues relating to the acquisition of Dutch bank ABN Amro are ignored! The losses came from £16.8bn in write-downs on loans and assets – primarily complex products based on sub-prime mortgages – and £7.8bn on trading which was mainly derivatives trading and credit default swaps (CDS) where losses are marked daily.

RBS is going to insure £325bn of so called “toxic” assets with us (UK government). For “toxic” assets read failed investment decisions and loans. These decaying toxic assets include:

•   loans to individuals , small businesses, corporations and private equity schemes;
•   credit card loans;
•   mortgages;
•   mortgage backed securities including collateralised debt obligations (CDOs).

These CDOs are complex packaged securities based on sub-prime mortgages. These were incorrectly priced because of wrong assumptions on default rates and the relationship between sub-prime borrowers. These assets are falling rapidly as the US housing bubble continues to deflate. The US housing market is down 27% from its peak. Also, the US economy continues to weaken as the revised numbers on fourth quarter show the economy (GDP down by an annualised 6.2% for the quarter against an original 3.4% down) to be much weaker than was thought when the original number came out.

It is not clear if CDS’s are to be included in the “toxic” assets. These CDS leak money every day as the value of insuring against bankruptcy increases as the recession deepens and lengthens. But when a company goes bankrupt they (CDSs) are like a switch and a massive payout is made from the bank who has sold them to the investor who has bought the insurance. We expect to see more and more of these CDS’s switched on as we go further into the recession. CDS will really kick in during the last three quarters of this year.

How is RBS gong to pay us for this insurance? Wait for it… they are going to issue £13bn of non-voting shares which they will sell to us at 50p a share – RBS is trading at 29p a share – the premium is for us getting first go at any dividend as if there is likely to be one in the near future! RBS has the option to sell a further £6bn worth of shares. Finally RBS paying £6.5 bn for participating in the scheme by issuing new shares to us!

RBS are simply printing shares, selling them to us and giving us the money back to us so that any further losses on £325bn on “toxic” assets are born by us!

The scale of their losses and the exposure they have to the US housing market, corporate bankruptcies and the global recession means they desperately need capital (our cash) to cover past and potential future losses.

The UK government have exposed us through RBS to the global recession in a highly leveraged way. It’s highly irresponsible and pushes the UK closer to bankruptcy.

In the US the government has had to take a further bailout on Citicorp as they announced a further £10bn of losses for 2008, taking its stake to 37% of the company.

With the German government passing a law to allow nationalisation of the banking industry we are edging towards a global banking system bailed out by ordinary people but with ordinary people bearing all the risks of the banks greedy irrational investment decisions.

The bank essentially took a huge bet on the housing and property bubble through the money markets and corporate lending. These are the so called “toxic” loans that Lloyds are trying to insure with government. In fact these are declining assets in any recession and the British people will under the scheme pick up any further losses on these assets.  And there will be further losses as this recession is set to last for some time – most mainstream economists now think at least another year. So as house prices continue to fall and companies take in lower revenues or fail on the back of reduced consumer demand and the lack of credit so these loans will decline in value.

In exchange for owning any further losses on these loans we, through the government, get more shares in Lloyds!
In effect Lloyds do not have to pay us any money but just have to print new shares which dilute the already low value of the existing shares driving the share price lower. This share price will also continue to fall as the outlook for banking continues to deteriorate on the back of a prolonged recession.
A falling economy will further cause a fall in the value of private equity schemes (PES) as the revenue they will get from running the companies declines. And the likelihood of them selling the company they have taken over falls as stock market prices fall. PES work on the principal of: taking over a company – delisting it from the stock exchange; creating efficiencies through increased productivity and redundancies and selling off part of the assets. They do this through a loan which they service the repayments through the business’s income stream. They then hope to pay off the principal of the loan by selling the pruned down company back to investors through a stock exchange listing.

This type of HSBOS PES business and the corporate loan business is run out of Edinburgh. This is further bad news for the city as Lloyds will look to prune this business through the toxic asset scheme and redundancies. This comes on top of yesterday’s news that RBS are set to make 20,000 redundant with up to half going in Edinburgh.

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.