[OPE] Required reserve ratio

(forgot to post this bit the other day)

Most banks who do not have an official reserve ratio do have a voluntary reserve ratio, but admittedly it's declined over the years, e.g. the Bank of England had a reserve ratio of 20.5% in 1968 and about 3.1% thirty years later. The voluntary ratio relates to the probable limits of projected fluctuations in cash use.

In the case of the US, it's fairly meaningless to just focus just on the banks, since much lending is done by non-bank institutions.

I don't consider a real generalised run on the banks very likely, unless a lot of stupid propaganda hits the streets. Among other things, it's difficult to stuff a thousands of dollars just into an old sock, you don't get any interest and it could get stolen, and if perchance a run on the banks would occur in some country, the banks and governments would legislate pretty smartly to block it, that is what they've done in the past.

However, there are considerable international variations in the laws governing consumer deposit security. As I mentioned before on OPE-L, New Zealand has none. The Irish govt for example has just guaranteed the deposits and debts of the six largest financial institutions as a confidence-building measure.

The idea of an "economic meltdown" caused purely by credit defaults makes little sense to me. All that really happens financially is that the ownership of debt obligations shifts from A to B, and there's a big power struggle about that within the bourgeoisie, with rollovers, sell-offs, deals and rescheduling (the current US bail-out is referred to as a "deal").

This was also the experience of the so-called Third World Debt Crisis, which triggered the widespread use of securitization techniques in the first place. It was discovered that you could trade profitably in debt certificates around the world, on a very large scale.

The real problem I think is that of the devaluation of nominal capital - assets which represented savings, previously worth a lot because of projected future yields, are suddenly worth very little, and this directly impacts on the real economy, because a large chunk of buying power suddenly disappears into thin air - both for intermediate demand ("Department I") not visible in GDP and final demand ("Department II & III & IV") partly visible in GDP. Given an already stagnating or declining average industrial profit rate worldwide, even modest declines in demand growth have a strong negative effect on investment and employment levels. More capital shifts (internationally) into assets which will hold their value better, but they are in their majority not currently productive assets.

Once aggregate demand drops, this causes a fresh round of credit problems, and the effect of all that is, that more and more savings get eaten up, to cover the shortfall. In turn, the outcome of that is a fresh round of proletarianization: a larger bunch of people who have few savings or assets, and who are thus even more dependent on current labour-income for a living. This last effect is obviously strongest among poorer countries and poorer social classes with fewer savings, and weaker in rich countries and wealthier classes which have a lot of savings. Overall, the effect is that socio-economic inequality is strongly and rapidly exascerbated, meaning that increasingly rich and poor people each live in such different worlds, that they can hardly understand the mentality of the other anymore.

Marxists often think that capitalist crises are economic crises. As Gramsci understood, they are not (this is an "economism" fallacy). They are both economic, social, political and ideological-cultural crises, crises of bourgeois society as a whole, of living people and the totality of their lives.

The economic crisis which is the basis of it all implies a shrinking economic "cake". Previously everybody could make gains, be it in unequal amounts, now people can increasingly make gains only at the expense of others. This intensifies the competition for resources, the struggle between social classes and fractions thereof, and social discrimination. As a result, there is a social crisis: more competition means less social cooperation and less social solidarity/care, stronger class polarization and class differences, and the fracturing of previously existing social institutions/organisations conserving the social fabric (for example, when you need the welfare state institutions and subsidies the most, there are the least funds available to finance them). Somehow people have to be persuaded to make sacrifices, or do something that is not really in their interest.

In turn, this leads to a political crisis: a crisis of leadership with an increasingly rapid turnover of leaders, political disaffection and cynicism, strong shifts in power alignments, the inability to unify or organise people politically, and so on. Finally, there is an ideological-cultural crisis, reflecting a breakdown of consensual norms and values, the questioning the legitimacy of governmental power and the social system, the declining belief in the possibility of social progress, and a general public mood of cynicism, doom, anger and pessimism. These four broad aspects of the crisis phenomenon are correlated in an pattern of "differentiated but combined development": they are all interconnected, but even if a social order is, historically speaking, headed towards its downfall, they may advance at different speeds, or be temporarily counteracted/reversed by new events and policies.

Jurriaan

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Received on Fri Oct 3 21:12:16 2008