The hypothesis upon which Thomas Hobbes bases his theory of bourgeois civil society is entirely analogous with that upon which Adam Smith founded his theory of the capitalist market economy: this grim hypothesis is that ultimately both bourgeois society and capitalist market economy can be theorised only on the basis of the war of all against all. Only through this universal Eris - universal conflict - can the dire necessity of a political convention and an economic equilibrium be given. What this means for us, what brings us closer to the discovery of the Ultima Ratio - the ultimate rationality and Truth - of bourgeois political economy, is that the society of capital requires an Extrinsic Rule - an external Iron Law or Principle - a "hypothesis", upon which all of its political and economic institutions, its "conventions", can be founded. In this the second part of our Prolegomena, we take a step further toward the discovery of this capitalist-bourgeois Ultima Ratio or "Border Concept" in the fateful formulation advanced by Carl Schmitt (in The Concept of the Political).
The very notion
of “justice”, reasons Hobbes, entails the notion of “distribution” between
members of a human society. And a fortiori it implies that what “justly”
belongs to one member does not belong to another. The notions of justice and right,
therefore, whether they be of divine or of natural origin, must mean that
members of a society or community have moral or legal claims over some social resources
“to the exclusion” of other members. But the actual “right”, even if natural or
divine, would amount to a mere pious wish or velleity in the absence of a “social
power” that can enforce it, that can transform this “right” from a moral
aspiration to a positive social reality. And this “social power” must be
overwhelming and unopposed in the society: this social power must have a
monopoly of “force” over the members of society. It is sheer fantasy, then, it
is mere utopia, empty moralising to insist on the “natural or divine rights” of
human beings outside of a community or society ruled by an entity, an
institution with sufficient power, political or otherwise, to enforce such
rights. It makes no sense at all to speak of “rights” as applying to human beings
outside of a “society” organised in such a manner that these “rights” can be
enforced. Outside of such a society armed with such an “institution” able to
uphold such “rights”, it is not possible to identify, to name even, any
“rights” or “laws” on which human beings may claim to be entitled to anything
at all. In a “pre-social” state, in a state of human existence that precedes
that of civil society living in peaceful co-existence under a legal system, all
resources must be “in common” and there cannot be any question of “individual
claims or rights” to any of them. However much human beings may form the
belief, in foro interno, that they ought to be entitled to certain
resources, no actual positive “right” can materialise in foro externo in
the absence of laws and institutions capable of enforcing them and thus give
them social validity (Lev., c. p135). Not only is the concept of “property”
meaningless, not only are “rights” vacuous and velleitary except in the
feeblest moralistic sense, but also the concept of “individual labour” may well
be difficult to define given that even “individual labour” can only be applied
to other natural “resources” that must be “in common” and that therefore cannot
entitle those who utilise them to claim the pro-ducts of their work as their
The source and
origin and cause of “rights”, then, must arise from two opposing forces in
human nature, given that nothing outside human nature can influence the conduct
and association of human beings. On one side, there is the reality of “concupiscence”
whereby human beings are prone to have competing claims to the same resources
and that, as a result, there is bound to be conflict between them as to how to
utilise and distribute these resources. On the other side, the very fact that unrestrained
conflict in human society will lead to a widespread feeling of insecurity and fear
whereby each individual will act in self-defence and seek self-preservation
will mean that the members of the human group will be desirous of forming a “league
or contract” to ensure their own safety and survival. Two forces, again, both
attributable to human nature but tending in opposite directions: one is the
human tendency to appropriate social resources – a “community of goods” –
unreasonably and insatiably to the detriment of others; the other is the need
to ensure personal survival by avoiding the destructive “contention and
calamity” that will befall each individual at random. The “resultant” of these
forces will be a “league or contract” whereby the “concupiscence” of each member
will be kept in check by an overriding social power that will preserve social
peace and protect the lives of each and everyone.
It must be noted
that here Hobbes’s social theory quickly rejoins that of Adam Ferguson in a
devastating reproach to Adam Smith’s Panglossian optimism of the capitalist
market’s Invisible Hand. Both Hobbes and Ferguson realize that human beings are
equally prone to conflict and to co-operation. But in that case it is
undeniable that the possibility of all-out conflict obliterates the
sustainability of a “liberal State”, let alone its unproblematic emergence as a
“state of natural rights” theorized by Locke. Once we allow that it is “possible”
for human society to degenerate into all-out civil war, then the liberal State theorized
by Locke becomes theoretically unsustainable because there can be no historical
and theoretical recuperation for human society from universal conflict! Put
differently, whereas it is possible to conceive of a civil society degenerating
into civil war, it is theoretically impossible to see how a state of civil war
could ever progress to a civil state! It follows that Hobbes’s devastating critique
of liberalism is founded on both the theoretical impossibility and
the historical unviability of a liberal State of Right. For Hobbes, a
liberal state as that theorized by Locke is theoretically unstable and
historically doomed. Indeed, (as Cacciari notes in Dialettica) it is
arguable that Hobbes’s Sovereign state is one by acquisition and not by
institution, given that his state of nature of “war of all against all” could never
have existed historically! For there is simply no return from civil
war. Civil war is the Euclidean axiomatic hypothesis on which the
bourgeoisie builds its conventional parliamentary representative
politics. Thus, the avoidance of all-out civil war must set out the conditions
for a coercive hypothesis for a capitalist state of exception on which
and from which all consensual conventions – the free market, parliamentary democracy
– must later be founded and originate.
The principles of
political economy set out by Adam Smith in The Wealth of Nations, which
have since become the unassailable foundation of all “economic science”, are
based on strictly Hobbesian pessimistic assumptions. This may seem strange
in the author of The Theory of Moral Sentiment. For in this later work,
Smith finally welcomes the theses presented by his noble predecessor in the
Scottish Enlightenment, Adam Ferguson, who, in his path-breaking An Essay on
Civil Society, adroitly and perspicaciously demolishes the notion of an
elemental and invariant “human nature” – and most pointedly the presumption
that human beings are indivisible atoms, in-dividuals, whose only purpose
is to protect and enhance their self-interest. In a devastating tirade against
philosophical pessimism – and with Thomas Hobbes clearly in mind – Ferguson shows
irrefutably that human “moral sentiments” are just as likely to be altruistic
as they are to be selfish. And that not only have human beings established
historically their ability to live in civilised society, but also indeed such
communion or common-wealth is an ineluctable aspect of being human!
Yet, in laying
out the principles of political economy, Smith chose to ignore completely the irrefutable
arguments advanced by his illustrious predecessor. Surely enough, Smith
elaborates his scientific principles in such a manner that ultimately
individual self-interest turns out to be “enlightened”, to lead to economic
“equilibrium” and even to increase “national wealth”. But this Panglossian optimism
is reached through the stultifyingly unjustified intervention of an “Invisible
Hand” that – like the Deus absconditus of mediaeval theology – providentially
leads humanity to the best of all possible worlds. Given the axiomatic
assumptions laid out by Smith in Wealth of Nations, this optimal
end-result can only be the redistribution of existing wealth between freely-exchanging,
self-interested individuals. It stands to reason, of course, that if self-interested
individuals are allowed to exchange “freely”, then the “self-interest” hypothesised
by Smith can only be “enlightened” in that it will lead to an economic
equilibrium that maximises individual welfare! These assumptions are (a) that human
beings are entitled to their possessions, (b) that they agree on exchanging
them “freely”, and (c) that these “exchanges” do not include their living
political economy – the foundation of all future bourgeois economic theory – is
based then on the Hobbesian hypothesis of the unlimited selfishness of
humans, on one side, and on their simultaneous ability to agree to conventions
including rules of exchange and of ownership. It is this combination of pessimistic
hypothesis and optimistic convention in the founders of bourgeois capitalist
theories of economics (Smith) and politics (Hobbes) that is our central focus
Because he chooses
to begin with the atomised self-interested in-dividual, Smith wrongly assumes
that it is through the “exchange” of produced goods that human beings maximise
their individual welfare by choosing to engage in time-saving specialised
production. Thus, for Smith, it is exchange that leads to the division
of labour. Two erroneous conclusions follow from Smith’s assumptions: the
first is that exchange between individuals precede and engender the division of
social labour, when in reality the contrary is true. The second is that “labour”
is seen as a homogeneous quantity that can be dissected and divided, and
not as “social labour”, that is to say, as a totality of human living productive
activities that are ineluctably social and heterogeneous in nature. Had he
followed Ferguson instead, Smith would have seen and understood that it is the
human division of social labour that makes exchange possible –
and not the other way around! And that because, in John Donne’s fatidic words, “no
man is an island unto himself”.
believes that this occurs through a natural division of labour as “separation/appropriation”
- when in fact it occurs through a particular political form of social
co-ordination – a “division of social labour” that emanates from a “civil society”
that already contains a ‘State-form’,
a status politicus, in which social labour has been forcibly
homogenised into an abstractquantity called “labour” and in
which the “possessions” of individuals have been set as the ‘preservation’ of
“natural rights” presumably “acquired” in or “transferred” from the “state of
This leads us
neatly to the third false assumption made by Smith – that of possessiveindividualism
which Smith adopted from John Locke. Locke, the founder of liberalism, relies
on the social contract merely “preserving” pre-existing “natural rights” that
first arose in the status naturae. In Locke there is “the pre-supposition”
of the political State, the statuspoliticus, in the status
naturae. This is perhaps one of the most important and delicate passages in
the whole of political theory. It is here that Hobbes’s political theory poses
a fundamental challenge to the “ideology” of liberalism. That ideology, as we have
seen, was founded on two premises: first, the existence of “natural rights” in
the status naturae accruing to “self-interested individuals” which form
the basis of “civil society” in which these “natural rights” are guaranteed by
the State pursuant to “positive laws” under which the State is “constituted”. And
second, the reconciliation of these “self-interests” in the “self-regulated
market” through “the price mechanism” – the identity of supply and demand.
For years, China’s small banks had a field day. They lent to overstretched borrowers, disguised loans as investment products and fueled their business with short-term funds.
One chairman dined out on delicacies like sea cucumber while ramping up lending to politically connected borrowers. Some banks funneled money to their own shareholders, others hid debt with financial engineering and haven’t reported complete information for years.
In recent months, Beijing has come to the aid of at least six regional lenders, including one rescue that marked the first time national authorities publicly seized control of a bank since the 1990s. According to UBS research, at least two dozen banks need a total of $339 billion in fresh funding to raise the capital they use to offset risks to 12.5%, a level considered healthy by global norms.
The problems could reverberate in China’s already slowing economy, which grew 6.1% last year, down from a recent high of 14.2% in 2007. Smaller financial institutions and regional lenders powered the expansion in much of the country. China’s big banks are known for instead focusing lending on inefficient state enterprises.
The lack of transparency in China’s financial system makes it impossible to know how deep regional lenders’ problems run. More than a half-dozen Chinese lenders haven’t disclosed financial statements in recent years. While the official nonperforming loan ratio—outstanding bad loans to total credit—in China is less than 2%, analysts say it is likely much higher at smaller banks.
“Regulators are petrified of overplaying the situation for fear it’s going to start systemic panic,” said Fraser Howie, an independent analyst and author of books on China’s financial system.
China, with its enormous financial reserves, can afford a wave of bailouts. S&P Global analysts estimate that troubled banks account for only about 4% of total assets in China’s banking system. The country’s four biggest lenders, the world’s largest banks by assets, aren’t among the troubled banks.
Hengfeng Bank, in Shandong province southeast of Beijing, is one of the banks getting state help after nearly doubling its assets to a peak of $155 billion in three years. Its chairman during its period of fastest growth, a town doctor turned banking magnate, was known for dining luxuriously before drawing authorities’ ire for the way he took control of the bank and steered the bank into higher-risk businesses. A previous chairman had also drawn scrutiny, and was arrested for corruption.
Another problem lender, Bank of Jinzhou in northern China, saw its ratio of nonperforming loans suddenly jump to 6.9% in June from 1% two years earlier. It doled out loans to its own shareholders, who later ran into financial difficulties, and its auditors resigned, pointing to signs of fraud.
Rumors on social media that other small lenders could soon collapse have triggered unrest in recent months. Authorities sent more than 100 police officers to control crowds of depositors lining up to get money from Yingkou Coastal Bank east of Beijing.
In Yichuan, a spokesman at the bank declined to comment. He directed questions to the city government, which also declined to comment. Bank of Jinzhou didn’t respond to request for comment; Baoshang Bank and Yingkou Coastal Bank couldn’t be reached for comment.
China’s banking regulator has conceded there are problems among small- and midsize lenders after years of “blind development” but said “the risks are controllable.” Officials are encouraging healthy financial institutions to invest in weaker ones and stand ready to inject capital into underwater banks as a last resort, a spokesman for the China Banking and Insurance Regulatory Commission said.
James Stent, an expert on China’s banking sector and author of the book “China’s Banking Transformation,” said he thinks Beijing can resolve small banks’ troubles, but it will require taking over, merging and injecting money into as many as 100 of them, including small rural lenders.
As China’s economy took off, Beijing encouraged local banks to grow faster, allowing some to expand nationally. Regulators thought smaller lenders could help serve customers overlooked by big banks, and bring more competition and innovation to the financial sector.
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Small and medium lenders now account for nearly half of total bank loans in China, according to brokerage firm CLSA.
Troubles are emerging now for two reasons. China’s weakened economy is unmasking dud loans made when conditions were better. Beijing has also tightened regulations to rein in excess lending, forcing banks to recognize more nonperforming loans.
Hengfeng Bank was one of the biggest lenders to land in trouble.
Hengfeng’s financial statements have been incomplete since early 2017, when the bank showed a rapidly deteriorating balance sheet, with estimated losses from bad investments surging. The bank lacked sufficient capital to meet industry requirements.
Originally known as Evergrowing Bank, it launched in 1987 in the seaside city of Yantai to support housing with inexpensive mortgages. It grew slowly.
In 2003, the bank won a license to expand nationally and changed its name to Hengfeng. In 2013, the bank was taken over by Cai Guohua, who had entered local government and become a vice mayor.
Under the Hood
Souring loans at Hengfeng Bank made the bank's expansion unsustainable.
Nonperforming loans as a percentage
of total loans
Sources: Hengfeng Bank (loans); Wind (assets)
Mr. Cai had few checks on his power at the bank, according to two former employees. He arranged huge portraits of himself to hang inside branches, local media reported, and circulated his own “Chairman’s Philosophy” for staff to study, one of the former employees said.
Mr. Cai expanded Hengfeng’s number of branches to 328 in 2016 from 146 in 2013. Still, Hengfeng didn’t have the ability to attract deposits as easily as bigger national lenders, so it cranked up borrowing in the interbank market from other financial institutions to cover liabilities.
It also moved more aggressively into a business known as bankers’ acceptance notes, which let it boost profits with limited capital.
The notes are a kind of IOU, similar to postdated checks, issued and guaranteed by banks. Manufacturers use the paper slips to pay one another in lieu of cash. Some banks also trade the notes, the market values of which go up and down, before they come due.
Hengfeng earned a reputation as one of the most ambitious players. One banker who dealt with Hengfeng employees said they would sometimes buy bills in the morning and resell them the same day. Mr. Cai more than doubled the bank’s acceptance notes business in 2015, to $41 billion.
Nearly half of the 63 penalties Hengfeng has faced from regulators were related to its dealings in bankers’ acceptance notes, according to regulatory disclosures. The banking regulator’s statements describe the bank using acceptance notes to inflate assets and failing to check the authenticity of bills, some of which proved to be fraudulent.
Mr. Cai also oversaw ramped-up lending to politically connected and high-risk borrowers, according to court filings and people knowledgeable about the loans.
In one case in 2015, Hengfeng offered about $1.4 million in loans to a factory making solar-powered water heaters, along with a larger credit line as long as the borrower agreed a portion would go to paying off a previous loan Hengfeng made to a different borrower that went bad, people with knowledge of the transaction said.
The water-heater firm later suffered a liquidity crunch and defaulted.
Another flawed project Hengfeng supported was a pedestrian street with restaurants on the outskirts of Yantai. Local officials had championed the area in previous years to promote regional cuisine and attract business guests.
By the time of Mr. Cai’s involvement, the project’s feasibility was in question after an anticorruption campaign led by Chinese President Xi Jinping put a chill on entertainment expenditures.
Still, credit flowed to the project, with Hengfeng funneling 20 million yuan, or about $3 million, in a personal loan to a businessman who was working with the developer of the project, according to a person close to the deal. Beijing rules limited high-risk lending directly to property developers.
The project ultimately failed. Today, doors are chained up and signs indicate authorities have seized the project.
Hengfeng’s ratio of loans qualifying as bad debts, or close to going bad, was approaching 6% in 2016, the most recent period for which complete figures are available, from 2.5% in 2013.
Its investment receivables, a loosely regulated category of assets that many Chinese banks use to disguise risky loans as investments, reached $65 billion by September 2017. That was more than a third of the bank’s total assets, and nearing the size of its conventional loans on book at the time. The bank had set aside only $750 million in impairments, or the amount banks set aside to cover losses, for loans and investments and other assets, or roughly 1% of total loans.
Authorities detained Mr. Cai in 2017, according to Chinese state media, accusing him of serious disciplinary violations, a common code for corruption charges.
One lawyer representing Mr. Cai, whose whereabouts aren’t publicly known, declined to comment, while another didn’t respond to inquiries.
Hengfeng’s previous chairman, Jiang Xiyun, last month was convicted of corruption and sentenced to death with a two-year reprieve.
Authorities have fined Hengfeng $23 million for violations including providing false data in statements and investing in risky assets as a way of concealing bad loans.
A Hengfeng spokesman declined to give details about the bank’s restructuring.
Hengfeng faces challenges trying to remake itself as a retail lender focused on its home province of Shandong. The province’s manufacturing-heavy economy, which was growing at an annual pace of around 10% when Mr. Cai took over, slowed to 5.4% in the third quarter last year, the third slowest among 31 Chinese provinces and municipalities.
In February, Hengfeng issued a loan to Yihecheng Group, a maker of glass containers that needed to pay off earlier borrowings from Hengfeng, according to court documents.
The firm defaulted two months later. During a recent visit, staff members of the glass company worked quietly in a drab-looking building. They declined to comment.