Nationalize banks, employ unemployed

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Last week the major economies of the world, including the United States, European Union, United Kingdom, China, Russia and Brazil carried out an unprecedented and coordinated reduction of interest rates. The effort itself was not immediately successful.

How financial stabilization is carried out, and which costs and which benefits are directed toward working people or toward financial titans, will remain an area of fierce struggle, often hidden in arcane financial language, well into the next administration.

While many details remain to be seen, it appears that the UK’s decisive lead in moving to partial bank nationalization as the key step in stabilizing financial markets has won the day, both in the U.S., much of the EU and Russia. The U.S. announced $250 billion of the bailout would go to buy shares in nine banks: Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo. The investment will be made in the form of preferred stock equal to between 1 percent and 3 percent of the bank’s assets, the Washington Post reported.

China, of course, does not need to take this step since most of its finance and banking industries are already nationalized.

Many reports suggest that the UK’s Gordon Brown and Fed Chairman Ben Bernanke advocated this step from the beginning, but the “markets good, government bad” ideology of Treasury Secretary Henry Paulson (and President George Bush) wasted precious weeks and inflicted even more damage on the U.S. economy.

(As a side note, those feisty Europeans delivered a stinging rebuke to everything-Bush by awarding the Nobel Prize in economics to Paul Krugman — perhaps the most consistent and effective critic of Bush economic and political policies in the establishment press. In the early 2000s, he was receiving hundreds of death threats for challenging Bush’s veracity on a wide range of issues.)

Clearly, coordinated bank nationalization on an international scale is an immediate move to halt the collapse of world financial systems. The interconnectedness of world economies reduces the effectiveness of any single nation’s actions in the absence of coordination.

As many economists have said, it is a collapse of bank capital, not just liquidity, that is at the root of the problem. And it is clear that halting this collapse must take place before any other reforms, stimulus, etc., can have any effect.

Despite the disarray and fragmentation of world financial regulations and interests, and the absence of any central regulating effort or institutions, this partial bank “nationalization” seems to have been the right initial step. It must be followed, however, by additional measures.

For example, how much nationalization? How much public direction of bank, credit or investment policy? These will no doubt be subjects of hot and necessary debate.

The devil will be in the details.

The existing instruments of international coordination have serious defects. Neither the IMF nor the World Bank currently have the resources or influence, nor are they properly constituted with democratic representation, nor are their operations sufficiently transparent to inspire confidence. Russia, China, India, Brazil and South Africa — just to name a few of the vital economies — are not even represented. The G7 group of “leading” economies also excludes these wealth-producing countries.

The coming recession is likely to result in over 10 percent official unemployment, and likely 20 percent or more if you count discouraged workers. (Those figures reach 50 percent in some communities.) No one knows the true figure, but the damage to the “real” economy on Main Street, both nationally and globally — even if the financial collapse ends today — has already been severe. Franklin D. Roosevelt’s bank reforms halted the 1930 financial collapse by 1933, but it took a world war and public stimulus equal to over 100 percent of GNP to recover from the Depression.

An Obama victory assumes ever greater significance, as a broad-based, aggressive program of pro-worker, pro-people public interventions becomes each day a more urgent necessity. The crisis is quickly spreading to kitchen tables, with the prospect of heatless homes and jobless communities. Obama’s even temperament seems well-suited to the turbulent waters he will be called to navigate. Yet he will be challenged to be bolder, more prepared to make fundamental structural changes in the operation of the U.S. economy, than was Roosevelt. So he will need help. A filibuster-proof majority in both houses of Congress is now a necessity for sound, coordinated government action along with an energized and educated labor and people’s grassroots coalition to provide a mass political base for pro-people policies.

It’s time for the government to supplement its policy of unemployment benefits or welfare for economic victims, by becoming the employer of last resort. There are zillions of public infrastructure tasks desperately in need of workers, there are millions of youth desperately in need of jobs, and the crisis can best be addressed, with the least debt or inflation, by putting people directly to work producing real values.

There are other steps of course: health care, energy, environmental protection all demand our attention. A full, stable recovery cannot ignore any of them. But halting the panic, and keeping people from starving, comes first.

jcase@commonhumanity.info