On Capitalism, Banking and the Punjab National Bank scam

With 11000 crores (1.7 billion dollars) being swindled in the Punjab National Bank scam, I’ve been seeing a huge number of articles and news channels discussing the reason behind this. Some have blamed the bank’s carelessness in dealing the loans while others have flown straight into their solution which is for the government to disinvest in public sector banks and some news channels clearly inspired by Plato’s ideal Republic/Polis are busy trying to protect Modiji from criticism by pointing out that the scam dates from the UPA-1 era.

Meanwhile, all political parties from the centre and state have as usual taken the opportunity to sling some mud on one another. News channels abound with spokespersons from the Congress and BJP who by trying to shift responsibility have just about slung enough mud on each other to completely bury the real issue. Meanwhile the head of CPI-M (the final sliver of ideological difference in the parliament), Prakash Karat’s statements could not have been any more lacklustre. And maybe that’s not all too hard to expect given that if the CPI-M were an animal, it’d be classified as an invertebrate.

The effect of all these events has been a bewildered majority and a very happy Nirav Modi & Co. The crux of the issue is not that it’s a certain bank or a group of banks at fault; that goes without saying. The heart of the problem lies in the nature of the banking institution itself. And to understand why, it’s useful to revisit Marx in volume 3 of Capital. Marx’s analysis of capitalism didn’t revolve as intensely around the banking sector as it did the rest since it was just beginning to emerge as an institution more familiar to us today. But somewhere in the middle of volume 3, Marx critically focusses on the views of the Banking School which was championed by Thomas Tooke and John Fullarton and from there drifts into the nature of banking capital.

Here I’ll try to give a brief gist of it. An important distinction that Marx makes is that between real and fictitious capital. This form of capital is not really capital but are merely claims of debts or claims to a share in future surplus values. This is not real capital which in it’s simplest form is capital invested directly into production. A good way to imagine fictitious capital is rent, shares or perhaps even more commonly seen: interest bearing loans or credit. Like the ordinary circulation of capital or currency that we’re all familiar with, fictitious capital has its own laws of motion. This gives rise to more distinctions like those between the real economy (concerned with the production) and the financial economy (concerned with fictitious capital or moneyed capital). This distinction has never been more pronounced than today. And ever since the banking sector’s credit boom in the 70s paving the way for neoliberalism, the financial economy has been responsible for some of the worst economic crashes in history.

According to Marx, once moneyed capital becomes a serious part of economic life, then streams of future payments can be “capitalised”, i.e. the claim to those streams can be turned into bits of paper to be bought and sold with a definite price, a lot like IOUs. Every definite and regular money revenue appears as interest on some capital, whether it arises from some capital or not. And since the 70s, with the reshuffling of the capitalist order to accommodate for the rise of the banking industry, rent in its various forms has become the primary source of revenue generation. This is why speculation markets have grown. Rent has emerged in newer markets and in its traditional markets like housing, speculation has given rise to greater and greater prices resulting in bubbles all over the world just waiting to explode (like Mumbai). Global capital has shifted from production as the tool for extraction of surplus to using the legal system to extract revenue from “intellectual property”. Thus fictitious capital has seen an unprecedented boom. Even to Marx, this rise would seem surprising given that he denied the possibility of a pure paper-money system and insisted that the monetary system could never get off the gold base. This growing pervasive power of the banking sector and the shift of global capital to speculation combined with the rise of the rentier class meant that global capitalism was operating at such a vast abstraction from reality, that it became increasingly unstable. The crises in the past few decades have reflected this instability in the financial sector.

As a financial system develops, “gambling” takes the place of labour as the original method of acquiring capital wealth. This wealth also constitutes the banker’s capital. The development of capitalism necessitates the expansion of credit. As the markets expand and become more distant from the source of production (globalisation), credit must be prolonged. The prolonging of the credit results in greater and greater reliance on speculation which start to dominate transactions.The credit system efficiently ensures that global capital appears sound right until the eve of the crash. Crashes in the financial sector are caused due to fictitious capital and its sources being abstracted away from reality to such an extent that the entire system is hypersensitive to fluctuations in credit and speculation.

As the financial system develops, and becomes more convoluted, the accumulation of loanable money capital increases disproportionately. Capitalists store their vast amounts of wealth in banks to be used in the future to purchase fictitious capital. Even with the lack or shortage of resources, banks can artificially maintain their levels of reserves thanks to prolonged credits, appeals to central banks to print more money etc. and thus appear to function normally even in largely debt based economies - quite common in the world today. What keeps the system afloat therefore is faith. The bankers place huge quantities of the public’s money-capital at the disposal of the capitalists who use the loans for capitalisation i.e. to grow and in a lot of cases don’t pay back loans in the short run. The effect of this is a cycle of borrowing followed by investing into capital (real or fictitious) to extract surplus and then to pay back the loan using the surplus and finally borrow again ad infinitum.

This brings us to the PNB scam. The PNB in its own carelessness, characteristic of the financial sector and not a mere accident, issued Letters of Undertaking which enabled Nirav Modi to borrow overseas even though he didn’t have the resources to. Already we can see that a distortion has taken place. A party without the resources to invest, is relying on artificially created money (realised in the LoU) to buy something of real value (diamond roughs). Perhaps the carelessness of PNB can be excused as an accident but a transaction requires two parties. The counterpart bank to whom the LoU was issued accepted it and not once have any of the banks involved questioned the validity of these LoUs even after the amount extracted by Modi grew larger and larger with the increase in the number of loans. Most commentators have taken to assuming that this was because no one had any reason to question the authorisations. But in reality, the bank as an institution throws a blind eye to its own cash cow- loans unless its own transactions would result in a loss. This is why the lower you go on the economic ladder, the harder it is to obtain loans because the chances of the bank going in for a loss is higher. They like to call this risk and as a feature of the capitalist system it plays a huge role in ensuring that unimportant things like validity of loans, pollution and environmental degradation, laws and regulations etc do not supersede profit.

Thus had this scam not been unearthed, the loans would continue to be authorised until the originating bank (PNB) would have to resort to a bail-in or a bail-out, either way shifting liability onto the masses, all for one person. This is the irrationality of the system we live in. If there is one thing global capitalism is most efficient in, it is to create loopholes or use existing ones to the greatest efficiency. Introducing more secure technological systems, political dirt slinging etc. are only ways of distracting the masses from the real causes of the problem and at best will only create a ripple in the ocean but to crash the ship, a tempest is needed and that requires a complete overhaul of this irrational system.