Is nationalization of the banks good for us? Is it socialism?

By Yen Chu

The financial crisis has prompted the nationalization of major banks in the United States and in several European countries. The move to nationalize has sent journalists proclaiming the arrival of socialism. “We Are All Socialists Now” was the cover story in the February 16th issue of Newsweek. The story claims that the nationalization of the banks by the Bush administration back in September is a strong sign of socialism.

Unfortunately, socialism is not just around the corner. While nationalization can be an aspect of socialism, it has also occurred under capitalism. As George Bush said when he moved to nationalize, “These measures are not intended to take over the free market, but to preserve it.” But while the government works to preserve the free market, the working class is left to suffer the effects of the crisis. Although no Canadian banks are facing nationalization, the nationalizations in the US and Europe raise the issue of what consequences these measures have on capitalism and what potential it has for the left.

Nationalization occurs when private firms are taken into state ownership. Traditionally, nationalization meant that an enterprise simply became state-owned and operated. The implication is that private interests lose out on the profits. Profitable nationalized industries can generate a lot of revenue for government coffers and some on the Left believe this can benefit the working class if the government distributes that wealth. However, the working class doesn’t always benefit; the political and economic reality of nationalization is far more complex.

Capitalist Nationalization

Under capitalism, nationalization sometimes occurs when the private sector is unable to operate an industry, service or enterprise profitably. But because some enterprises are considered an economic priority, the government runs and operates them, such as VIA Rail. The working class does not have direct input into how these enterprises are operated and as such do not directly benefit from them.
Today, the term nationalization is often used loosely – the current “nationalization” of banks means that the government owns shares in these firms, but the capitalist owners still run them and receive the profits.

In the mainstream press and among capitalist economists, reaction to the recent “nationalization” in the financial sector has been mixed. There is an ideological debate over the role of government in the capitalist system. There are those free market purists who believe that any tiny speck of government interference is a whiff of socialism. They believe that everything from social services to public infrastructure must be left to the free market and that the system will sort itself out on its own without any government intervention. But most feel that the government needs to do whatever is necessary to save capitalism.

President Barack Obama is caught in the middle of this ideological debate. His administration has so far resisted calls for further nationalization and control of the banks. But there is pressure for further nationalization from members of the Democratic Party, some in the Republican Party and finance capitalists, including Alan Greenspan. They see nationalization as a temporary measure to overturn the crisis. Some point to bank nationalization in Japan and Sweden as examples of how bank nationalization can help overcome the crisis in capitalism. Once things stabilized in those countries, the banks went back to private ownership.

The Obama administration has not ruled out more nationalization, but it recognizes some of its dangerous implications for the capitalist marketplace. A New York Times article on January 26, 2009, quotes a political adviser saying that if the government is seen as owning the banks “the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies.”

The key word here is political pressure. The government does not act in the interests of working people without significant pressure. With trillions of dollars going to the banks and financial sector, the US government can not avoid the issue of foreclosures without significant political backlash. It has implemented a foreclosure rescue plan that mostly subsidizes the bank into renegotiating mortgages. The plan, however, does not halt all foreclosures and does not address the issue of affordable housing.

Political pressure was used last December by workers in Chicago who occupied Republic Windows and Doors. Bank of America pulled the company’s credit even though the bank was partially nationalized through a $25 billion injection of capital by the government to encourage lending. This partial nationalization of the bank by the government did not automatically mean that the workers would be given what was owed to them. Instead, it was only through the workers taking direct action in occupying the company that Bank of America agreed to restore the credit in order for the company to issue the severance and vacation pay owing to them. The workers’ victory was bittersweet as they have been left unemployed. The trillions of dollars given to the banks is not trickling down to workers and the poor.

The current “nationalization” of the banks is not even a moderate social reform where there is the potential to improve the living conditions of the working class. It is the nationalization of the banks’ losses and not the banks themselves. Working people in the US are paying for the losses but receive no benefits.

Banks’ decrees affect our lives, but we have no control over these decisions. We deposit our money in banks and get very low rates of return. We have no say in how they use our deposits. They charge us inexplicable user fees for every transaction. We borrow money from them at very high interest rates and can become homeless when the banks refuse to renegotiate our loans when we become unemployed. We can become unemployed when the bank refuses credit to the company we work for. If we are workers in a company that goes bankrupt, we lose out to the banks, who get first claims on the company. We’re left without severance and vacation pay. Furthermore the banks refuse to set up branches in lower-income neighbourhoods, where residents end up relying on services such as Money Mart, which charges exorbitant fees to cash cheques and ridiculously high interest on pay day loans.

Democratic nationalization

Credit unions exist as an alternative to banking and offer some ideas and possibilities of what a democratic nationalization of banks could look like if financial institutions were nationalized and turned into public utilities. Credit unions are owned by the members who use the service. Members elect the board of directors who act on their behalf to oversee the operations of the credit union. Profits are used to ensure members get a higher rate of return on their deposits and are used to keep interest rates low.

Another alternative to the current banking system is participatory budgeting, which was first implemented in Porto Alegre, Brazil. There, the public was directly involved through public forums in the decision-making process of how public spending would be allocated and what projects to implement. In banking, the model of participatory budgeting would allow the public to actively participate in the decision making process of allocating credit, setting interest rates and determining the supply of money in the economy.

However, both credit unions and participatory budgeting have their limitations. Neither model address the issue of workers’ control and both highlight the limitations of a democratic nationalization of banks within a capitalist system, as they must operate within the framework of capitalism. Credit unions, for instance, were hurt along with the commercial banks when the value of hedge funds plunged. In Porto Alegre, participants had to make decisions on where to make cuts to social programs. Furthermore, if other industries are still privately owned, workers’
exploitation still remains.

Democratic nationalization does not automatically lead to socialism. Socialism is not simply the redistribution of wealth; it is about building the capacity for workers to run the political and economic life of society. It is only through strong social movements that democratic nationalization and the move toward socialism is possible. The current way in which banks are being rescued through “nationalization” should not be endorsed by people opposed to neoliberalism. But these new circumstances offer an opportunity to challenge the neo-liberal orthodoxy of the free market – and the capitalist system that gave rise to it.

Yen Chu is a member of No One is Illegal-Toronto.