The Banks & the Stock Market/WW:Marcy'87 Via NY Transfer News Collective * All the News that Doesn't Fit ------------------------- Via Workers World News Service Reprinted from the November 6, 1997 issue of Workers World newspaper ------------------------- LESSONS OF 1987: THE BANKS & THE STOCK MARKET [After the stock market crash 10 years ago, Workers World Party leader Sam Marcy wrote in this newspaper about developments in the capitalist economy that brought on the crisis. We publish below excerpts from an article written Nov. 2, 1987. Marcy explained the intimate relationship between the banks and the stock market, and showed how changes in the banking system had made it more vulnerable to collapse. Since this was written, the tendency to deregulate the banks and make them into instruments for direct capital investment has only increased.] The deep-going causes of capitalist crises arise from the contradictory nature of the capitalist system, which enshrines private ownership of the means of production and yet has developed these same productive forces to the point where they have far outgrown private ownership and are really social in character. Bourgeois economists try to explain away this contradiction by resorting to mystical expositions on the monetary phase of the capitalist crisis or on interest rate swings. Some blame it all on unscrupulous speculators, high rollers, common thieves in high places and, more recently, on the existence of the "yuppies." But they shy away entirely from the deep causes, concentrating on the symptoms of the malady rather than explaining the nature of the disease. As for these symptoms, it is necessary to explain the significance of hyper-speculation, which enthralled the ruling class and brought them to dizzying heights of optimism in their system, only to dump them in the doldrums. No really large-scale speculation in stocks, bonds and commodities can take place without the banks. They are key and central to all of it. It's the banks that supply the loans for the speculation, that take all kinds of stock, mortgages, or whatever as collateral for their loans. BANKS AS FUNDAMENTAL AGENT OF SPECULATION The banks are the fundamental agent of the speculation, if we understand that we are talking today about a broader concept of banking than what prevailed early in this century. Even then, the banks as the depositories for cash were not immune to loaning it out for speculation, although their opportunities--and losses--were somewhat restricted under pain of criminal prosecution. The high speculation before the 1929 stock market crash and the devastation of the economic collapse that followed caused the Roosevelt administration to promote massive legislation of two types. One included the well-known social reforms of the New Deal, like unemployment insurance and social security, which were calculated to create a cushion, or as it is now called a safety net, to soften the effects of the economic debacle. The other type of legislation enacted was meant to prevent such a collapse from occurring again. Such, for instance, was the law that set up the Securities and Exchange Commission as well as the statutory provisions that regulated banking, strengthened anti-trust laws and so on. All this was received by many in the ruling class with extreme bitterness. They regarded it as against the free enterprise system, as being anti-capitalist in nature, but in reality it was devised to defend the system against excesses, to curb not only speculation but fraud so as to dampen any crash that might take place in the future. With the impact of the high-tech revolution, banking itself has changed. "The economic currents that began in the 1970s," says the authoritative Money Encyclopedia, "permanently altered our money practices and ushered in a financial service industry which continues to evolve on an almost daily basis. Today banking is no longer a matter of depositing savings in a regular passbook account for safekeeping and a small yield, and keeping a no-interest checking account to pay bills. In the 1980s it is the investment in instruments giving the highest possible return ... that more closely defines banking." A REVOLUTION IN WORLD BANKING In fact, there has been a revolution in world banking. Banks are no longer confined to a single state. They've stretched their offices across the nation. Banks are no longer limited to collecting deposits and making loans. Today they act as discount stockbrokers, suppliers of credit cards, and as paid consultants in areas ranging from estate and tax planning to investing. They no longer conduct business according to banking hours, 10 a.m. to 3 p.m. Instead, they provide access around the clock through automated teller machines. Citibank, for instance, began to diversify early in the 1980s. The purpose was to lessen its heavy dependence on international activities for its earnings, which at one point accounted for more than 80 percent of the company's net income. Over the years they have tried to dump these loans on other, weaker shoulders. It is truly a giant transnational corporation on which the sun never sets and, precisely because of that, it absorbs all the contradictions and weaknesses of the capitalist system. The banks have become very high-risk adventurers. The retirement of Walter Wriston, the former head of Citicorp, was undoubtedly hastened because of his reputation as "an ultimate risk taker." On June 21, 1984, the New York Times wrote: "Over the long term, the question remains whether Wriston's new world of banking will prove to be healthy, flexible and sinewy or whether it will repeat the experience of the 1920s, when extraordinary risk taking by banks and exotic financial techniques turned into the disaster of the Great Depression." The bankers are no longer satisfied to keep idle funds in checking accounts that by law pay no interest. In the seventies, banks couldn't pay interest on deposits that matured in less than 30 days. But not now. Banks are engaged in the sale of CDs--certificates of deposit. The companies that buy them have the option of selling them at any time to other investors. For the purposes of the companies, these are similar to short-term deposits on which interest would be earned. The virtual revolution in banking did not automatically grow out of the economic and technological developments of the earlier epoch. Much of it has been helped, either by new legislation, administrative decisions or the Reagan administration. For instance, one of the ways the New Deal legislation hoped to limit the excesses of capitalist speculation was to separate the underwriters from the banks, so that only underwriters would distribute and sell securities and act as advisers to corporations. Today, however, they work as part and parcel of the banks. DEREGULATION UNDER REAGAN A great deal was made of the fact that the Roosevelt administration broke up the securities industries by narrowing the field for underwriters, insurance companies and commercial banks. The law compelled them to make financial disclosures, to make their balance sheets more detailed so as to reveal more of their real situation. Also enacted were various bank regulations that gave more power to the regulators and inspectors. Brokerage houses were restricted from letting their customers play the market on a minimal amount of margin. Most of this massive legislation calculated to restrict speculation, to force disclosure and to curb the excesses resulting from capitalist financial dealings has in one way or another under the Reagan administration been either abolished by statute or invalidated by administrative decisions of the agencies concerned. Particularly weakened are those divisions under the regulation of the Federal Trade Commission, the Securities and Exchange Commission, and other agencies which are the very ones supposed to act as guardians against speculation and fraud. Moreover, the banks themselves have been given free rein to virtually disregard the previous protective legislation. While once banks could only operate in the states of their origin, they now have been given the green light to expand interstate and to lend to excess. By enlarging their field of operations, they have enlarged their risks as the lenders of capital. While the banks themselves have been generating the hyper- speculation, we must repeat that speculation is not the cause of the crisis itself. It is the effect, in the first place, of the enormous accumulation of capital that has been extracted from the workers, especially during the period of the capitalist recession of 1979-81. It was then driven even higher by the high-tech restructuring of industry at the expense of the workers. - END - (Copyright Workers World Service: Permission to reprint granted if source is cited. For more information contact Workers World, 55 W. 17 St., NY, NY 10011; via e-mail: ww@workers.org. 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