Monthly Archives For June 2015

Irish Capital and the Banking Inquiry

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The Banking inquiry is now into its main investigation. It has been hearing evidence from senior bankers and department officials, and over the next couple of months we’ll finally get to hear from the politicians themselves. To date, the focus of the inquiry has been on the night of the guarantee and this is because it is still unclear as to what actually happened that night. Witness by witness, though, we are getting closer to finding out and coming to a conclusion regarding what was by far the biggest, and most disastrous, decision taken by any Southern Irish government since partition.

The guarantee of course is not the full story. National government policy from 1990 to 2007 regardless of the political makeup prioritized commercial and residential property speculation over genuine and cohesive social development. This was coupled with a loosening of financial regulation and the promotion of the south of Ireland as a de facto tax haven.

From 2002 to 2007, Irish banks started to compete with each other for the same small pool of developers. In order to grow quickly and leapfrog each other, Irish banks got involved in widely speculative land and commercial property ventures, using international wholesale funding to do so.

The shaky foundations of the growth was exposed by the 2007-2008 credit crunch. Irish banks couldn’t get access to international loans to pay off their earlier loans and this came to a head in September 2008.

Since then, the real struggle in the crisis has been not so much over its resolution – all crises come to an end sometime – but who pays for the resolution. And in the south of Ireland, those who paid were the ordinary citizens, while those who partied walked away from their obligations. And each day of the bank inquiry this becomes clearer – those who took out mortgages did not ‘party’, but the 29 developers with debts of €32 billion between them certainly did, before using the Government to dump those debts onto our shoulders.

The relationship between these developers and Irish finance is the essential dynamic of Irish capitalism, and the banking inquiry, almost in spite of itself, is looking at this institutional framework and the manner in which it operated.

The focus on individual developers and bankers, and, more recently, Denis O’Brien and Siteserv, has obscured somewhat this structural dynamic. Systems are of course operated by and developed through people, but in order for a system to reproduce itself it needs an institutional framework.

The inquiry allows us to peer under the bonnet of Irish capitalism and get a sense of how the machine works, its internal contradictions and outputs. We are beginning to see that the indigenous troika, the one that really matters, is the Central Bank, the Department of Finance and the Department of the Taoiseach.

The main clients of this apparatus are not the citizens of the State but the indigenous banks and the IFSC. The regulatory rules, tax laws and supposed strictures and censures – all are developed and written with the needs of finance in mind.

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Declining US Profits and Private Investment

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This article was originally published on Socialist Economic Bulletin on Tuesday, 2nd of June. 

US corporate profits fell in the first quarter of 2015. This is the second consecutive fall, technically causing a ‘profits recession’. The nominal level of profits of $2014.8bn in Q1 was lower than in Q2 2012. Profits have fallen to 11.4% of GDP, compared to 12.2% at their pre-crisis peak in Q3 2006. The trend in corporate profits is shown in Fig. 1 below. 

  Fig.1 US Corporate Profits Source: BEA
 
 
The motor force of capitalist economies is the accumulation of capital via profits, as the name suggests. ‘Demand-led’ or ‘wage-led’ economies are a logical impossibility for the simple reason the wages, or demand, or any other comparable variable follow the production process. There can be no wages or demand without prior production.

Falling profits in a recovery is extremely unusual. But this is the third time this has happened during this weak recovery. In effect, because the economy lacks any great momentum, it is easy for external effects to push profits lower. This could be poor weather, a stronger US Dollar, shipping strikes, weak overseas demand, and so on.

But the effect of a sustained fall in profits is simple. Companies exist to realise profits and will stop investing if profits fall. In Fig. 2 below US corporate profits and US private sector fixed investment are shown in nominal terms for the purposes of comparison.

The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon).  

 Fig.2 Profits & Private Fixed Investment. Source: BEA
 
 
However, until now private sector fixed investment has not suffered a fall in the current expansion despite the preceding short-lived declines in nominal profits. Since the low-point in private investment at the beginning of 2010 there has been an uninterrupted rise in private investment until the final quarter of 2014.

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