Is there to be a run on the banks…..?

Sunday 5th October, 2008

The decision tonight by Germany to guarantee 100% of all savings in German banks first flagged up by the BBC earlier this Sunday evening, but modified later, is a clear signal that there is panic afoot.  A run on German banks must be imminent. Why? Because the only way to prevent a run on banks is to guarantee 100% of savings. The fact that Germany has done so, or hinted that she will do so,  means that her government is taking urgent, unprecedented and unco-ordinated action, to prevent such a financial catastrophe occurring tomorrow morning.  Others must now follow to prevent a systemic run on the global banking system. To avoid armageddon.

But this decision illustrates one more frightening fact: EU leaders do not appear able to act in a disciplined and co-ordinated way in addressing this crisis.  Remember they preside over a single market – in goods and money.   They created a single market.  Yet they cannot rule over that market. Their decision yesterday – to abandon the Maastricht (neo-liberal) criteria for keeping government spending below 3% of GDP – was itself a historic capitulation to the inevitable. But its clear there are divisions.  At the 2007 G8 Summit, Angela Merkel tried to persuade George Bush and Gordon Brown to include improved surveillance of the international financial system on the agenda. Both vetoed the the proposal from the German Chancellor – a conservative Christian Democrat.

EU leaders met yesterday, but failed to agree to act in a co-ordinated way.  Instead there were statements criticizing Ireland and Greece for acting to prevent a run on their banks. According to reuters, the new “Business Secretary Peter Mandelson criticised unilateral moves by individual countries to guarantee deposits….He said “The danger of this crisis is it may spark a new wave of economic nationalism, with each country looking for a ‘get out of jail free’ card.”

He is, as always, naively misguided. Economic nationalism was always going to be the ‘counter-movement’ – to quote Karl Polanyi – to the inevitable financial crises sparked by the recklessness of unfettered capital flows, unregulated credit creation, and then the hugely destructive de-leveraging of that debt. Economic nationalism is not the action of a selfish and greedy child. It is the rational reaction of a very frightened country, trying to protect itself from the forces of ‘globalisation’.  In just the same way the 1929 Credit Crunch sparked a counter-movement of economic nationalism. It was the natural reaction of people desperate to be protected from wildly gyrating and destructive economic forces. That is why capital and credit were so carefully regulated in OECD economies from 1947 to 1971.

The difference between the 1920s and today, is that then governments protected their markets in trade by e.g. the Smoot-Hawley Tariff Act. Today some governments are taking action to protect their financial markets: to act as ‘guardians of their nation’s finances’. The question is this: can the people of Britain rely on a confused Labour government – joined at the hip to the finance sector – to fulfil its duty as guardian of the nation’s finances?

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2 comments to Is there to be a run on the banks…..?

  • geoff tily

    Ann you are very right about ‘economic nationalism’.

    In the 1930s, those that opposed the substantial reform of the financial

    system that was taking place under Keynes and Roosevelt restorted to the same sort of rhetoric.

    Lionel Robbins of the LSE was at the front

    line of the attack:

    “… [I]t is clear … that control of local policy should be removed as far as possible from the influence of local

    governments; that, whatever their ultimate destiny, the different reserve systems should cease to be the instruments of monetary nationalism. The

    banking policy of the twenties, which sought to remove the central banks from the interferences of governments, was right. The banking policy of

    the thirties, which has been to bring them once more under government control, is wrong. The immediate objective of policy, therefore, must be to

    reverse this tendency. In a world free from monetary nationalism, the solution of the remaining problems of banking policy should not present

    insurmountable difficulties.”

    (Economic Planning and International Order, 1937, London: Macmillan, pp. 304-5)

    Fortunatley the

    authorities chose to ignore him. And, as you regularly remind us, finance was set as servant to the world from the 1930s to the early 1970s. A

    golden age of stability and prosperity followed. Tragically, his views – or those that followed in his theoretical tradition – were not denied

    forever.

    Richard Lambert of the CBI raised the same spectre of monetary nationalism on the BBC’s ‘Question Time’ last thursday (in

    response to a question about Irish deposit insurance). He also aired the fallacy that economic nationalism was responsible for the great

    depression. This is to stand the facts on their head, and make the cure the culprit. Financial liberalisation was responsible for the great

    depression. It was only when governments took their economies off the gold standard and started to take finance out of private hands that the world

    economy began to recover. If that is economic nationalism then so be it. But the phrase is not helpful and its use sinister, perhaps seeking an

    association with the actions of totalitatrian economies.

    We deserve a better level of argument than this.

  • Ken MacIntyre

    I came across this quote in Edward Chancellor’s 1999 book ‘Devil Take The Hindmost – a history of financial speculation’ which seems

    highly apposite to today’s crisis. Writing at the time of the collapse of the South Sea Company, James Milner MP said;

    I owne I thought

    they would carry on their cheat somewhat longer. I said indeed that ruin must soon come upon us, but I own it came two months sooner than I

    expected.

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