The US government is frantically relieving banks of their "toxic assets". But even the huge amount of dollars used for the buyouts is unlikely to rescue a system which shows all the signs of further collapse
Last month the greatest financial crisis since 1929 swept through the system. As Socialist Review went to press, some commentators were assuring us that "the worst is now over". Those are words we have heard many times since the crisis began in autumn last year.
The "mother of all bailouts", announced on Friday 19 September, was met with the biggest ever one-day rise in share prices on the London stock exchange, although shares were still lower than at the start of the week. Under the plan the US government will buy up banks' "toxic assets" at an estimated price of $700 billion.
Following the initial jubilation, doubts about the plan rapidly set in.
The first problem is that it is not clear how the assets to be absorbed by the US government will be valued. Many of the toxic assets that triggered the financial crisis are derived from pools of mortgage debt that have been "sliced and diced" in ways so complex that nobody is clear what they are really worth.
If the price offered is too high, banks and other institutions will rush to dump "toxic waste" on US taxpayers. If it is too low, banks will be reluctant to come forward and sell at a huge loss. According to one estimate, if the dodgy assets were sold at their current market values, it would leave a $500 billion "capital hole" in the world financial system. Banks would struggle to cope with these losses and more would almost certainly go under.
The second problem is that the US government has already absorbed large chunks of the financial system. It carried through the biggest nationalisation in world history to rescue the two mortgage giants Fannie Mae and Freddie Mac. It also now owns 80 percent of AIG, the biggest insurance company in the world. The new bailout will mean a US budget deficit on a vast scale - over a trillion dollars according to the Financial Times. If the US defaults on its debt there is nobody big enough to bail it out!
So the plan is a very risky one. As one columnist in the Financial Times pointed out, "The unpalatable truth is that if this latest salvo does not calm the panic, then [US treasury secretary] Mr Paulson simply does not have many more bazookas left in his arsenal."
The third problem is that other markets may soon start to break down. Credit default swaps - an insurance market in which investors gamble on whether debts will be paid or not - is widely tipped as being the next part of the system to collapse. Some commentators are expecting hedge funds to close or go under. Others expect the "leveraged buy-outs" by private equity firms to unravel.
The final and most fundamental problem is that the "real" economy - the bit that produces goods and services - is in, or close to, recession in key areas of the globe, including Britain, the US, Japan and most of Europe. For many commentators this is a consequence of the financial meltdown. In fact we are seeing an economy that has been in a chronic state of ill health for some time, with the bubbles of credit and speculation that kept it going now stripped away.
A deep recession will feed into all the other problems. It will hit tax revenues, making it harder for governments to pay back huge deficits accumulated trying to bail out the financial sector; it will mean more corporate bankruptcies and therefore more problems for the credit default swap market; it will put more pressure on banks to call in debts, further undermining the real economy.
The nightmare for the ruling class is that even as they patch up the financial system, the real economy begins to fail. According to the Financial Times, retail sales and industrial production are already falling: "Automotive vehicle sales are far below their level in 2001. Unemployment is rising faster than at any time since the early 1980s."
We should expect more instability, more tensions among our rulers and more attempts to squeeze us harder to make us pay for the crisis.