The way in which financial parasitism, fed by the ultra-cheap money
policies of the US Federal Reserve and other central banks, is creating
conditions for another crisis is revealed in figures on takeovers and
mergers in the first half of this year.
According to a report published in the Financial Times on
Tuesday, a “heady cocktail of ultra-low financing costs” lifted US
merger and acquisition activity to almost $1 billion in the first six
months of the year, an increase of 60 percent over the same period in
2014 and the highest level since records started to be kept in 1980. The
price paid to purchase companies has reached new highs, averaging 16
times earnings before interest, taxes, depreciation and amortisation.
This compares to 14.3 times in 2007. In one major takeover, the ratio
was 20.
The feeding frenzy is now greater than that which preceded the
financial crisis of 2008, and it is not confined to the US. Global
merger and acquisition activity has risen by 38 percent in the first
half of 2015 compared to a year ago, reaching $2.18 billion, its highest
level since 2007.
These figures are another expression of the fact that parasitic
activity—purchasing a company, often with borrowed money obtained at
very low rates, and carving up its assets—is increasingly replacing
productive investment as a source of profits.
But there is a sense, even among participants, that this orgy cannot continue indefinitely. One “senior banker” told the Financial Times that this year “feels like the last days of Pompeii: everyone is wondering when will the volcano erupt.”
Warnings of another financial explosion and the incapacity of central
banks and financial authorities to deal with it were at the centre of
the annual report of the Bank for International Settlements issued on
Sunday.
The BIS, which is sometimes called the central bankers’ bank, has
been severely critical of the low-interest regime established by the
pouring of money into financial markets by central banks. It was one of
the few official institutions to warn of the build-up of conditions for a
crisis in the years preceding 2008, and has been critical of the
policies pursued since then.
According to the BIS, “In some jurisdictions, monetary policy is
already testing its outer limits, to the point of stretching the
boundaries to the unthinkable.”
Its report points out that the roots of the crisis are to be found in
the steady decline in real interest rates starting in the 1980s. The
fall in interest rates gave rise to an increase in debt, meaning it was
increasingly difficult to increase rates lest this set off a crisis.
When a crisis did emerge, the response was to lower interest rates still
further.
In his comments on the report, the head of the BIS monetary and
economic department, Claudio Borio, said that real interest rates in the
major economies had never been so low for so long. “Rather than
reflecting the current weakness,” Borio said, “they [low interest rates]
may in part have contributed to it by fuelling costly financial booms
and busts and delaying adjustments. The result is too much debt, too
little growth and too low interest rates.”
Puncturing the myth that central bankers and monetary authorities are
somehow in control of the global financial system and have a clear idea
about what they are doing, the BIS report notes that “there is great
uncertainty about how the economy works.” It says “risk-taking in
financial markets has gone for too long,” and the “illusion that markets
will remain liquid when under stress has been too pervasive.”
Fear about the “illusion” of liquidity refers to a situation where
investors and speculators all want to sell and suddenly there are no
buyers to be found.
The BIS warned that the flooding of the markets, giving rise to
record low interest rates, is creating the conditions for a crisis which
central bankers may not be able to control because of their previous
policies. “The more one stretches an elastic band, the more violently it
snaps back,” the report said.
Therefore, there should be a move to normalise monetary policy to
meet the situation when the next recession comes, “which will no doubt
materialise at some point.” Central banks would not be able to meet that
situation by lowering rates because they are already at or near zero.
“Of what use is a gun with no bullets left?” the report asks.
The basic thrust of the BIS report is that while financial bubbles,
fuelling inflated share buybacks and merger and acquisition deals, may
provide solutions in the short term, in the long run they simply create
the conditions for another crisis.
While it is not spelt out directly, the BIS critique of the present
policies is an expression of the fact that, in the final analysis, the
source of all forms of profit is the surplus value extracted from the
working class. Therefore, the only way for capital to overcome its
crisis and restore stability is a massive increase in exploitation.
Thus, the central policy recommendation in the report is for a shift
away from reliance on monetary policy and the imposition of “initiatives
that are more structural in character.”
The bitter experiences of the past decade have already underscored
what this means—the destruction of working conditions and cuts to vital
social services and other government funding, coupled with “flexibility”
of labour markets. An environment conducive to “innovation and
entrepreneurship”—that is, a free rein for business—must be established,
according to the BIS.
It also calls for measures aimed at “boosting labour force
participation.” This means making available new sources of cheap labour
by forcing those on disability or other forms of pensions back into the
workforce as their entitlements are slashed.
The report does not spell out how such measures—which are already
being implemented in all the major economies—are to be intensified,
other than saying that it will be “politically difficult.” The
difficulties refer to the fact that their imposition is fundamentally
incompatible with the maintenance of any kind of democratic regime.
The BIS chose to keep silent on what its prescriptions meant
politically. But a report issued by the American banking and investment
giant JPMorgan Chase two years ago spoke out very clearly on what it saw
as the major problems in the political systems of a number of countries
in Europe, including Greece, Spain, Portugal and Italy.
The constitutions of those countries, it said, had been drawn up
after the defeat of fascism and incorporated features inimical to a
resolution of the problems for capital created by the financial crisis.
These included “weak executives, weak central states relative to
regions, constitutional protection of labour rights; consensus-building
systems which favour political clientalism, and the right to protest if
unwelcome changes are made to the status quo.”
In other words, the kind of political, economic and social conditions
that prevailed in fascist regimes, where capital had unrestricted
freedom of operation, should be restored.
Two years on, this agenda is being carried out in Greece through the
dictates of the European Union, the International Monetary Fund and the
European Central Bank, which insist that any expression of the interests
of the mass of the people, even within the limited framework of
bourgeois democracy, must be overridden and trampled on in the interests
of the profit system. But it is not confined to Greece.
The economic and social devastation in Greece does not arise from
conditions peculiar to that country, but from the breakdown of the
global capitalist system. Greece is the testing ground for the kind of
measures to be carried out in every country, which, as the BIS report
makes clear, are assuming ever-greater urgency for the financial and
corporate elites.
Nick Beams
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