Joseph Choonara looks at a new phase of the economic crisis that could see whole countries go bankrupt.
The global economic crisis is entering a new phase. The first phase came as concerns over subprime mortgages and the "toxic" assets derived from them spread, leading to repeated attempts by central banks to "inject liquidity" into the financial system to prevent it seizing up.
The second phase began in autumn 2008. The decision to allow the US investment bank Lehman Brothers to go bust caused panic. As markets fell governments responded with spectacular bailouts. The logic of this phase was to push states towards ever more drastic methods, including nationalisations, to absorb some of the risk that banks and other corporations had exposed themselves to. It was accompanied by a growing crisis in non-financial sectors, including the near-collapse of the biggest American motor manufacturers.
The new phase will see renewed efforts by states to stabilise the system, including further bailout plans and stimulus packages in the US and Britain. More extreme methods will bring other risks. The danger of banks going under may be replaced by that of whole states going under. At the same time the crisis in the real economy will deepen.
Indeed the three aspects of the crises - the problems afflicting the financial system, the non-financial economy and the state - are now tightly bound together and mutually reinforcing. States attempt to encourage banks to lend; banks are reluctant to do so because the recession increases the risk that corporate loans and mortgages will default; states are forced to step up their intervention, even as their tax revenues fall and spending on unemployment rises; governments are forced to borrow more or to print money; this undermines their currencies and further sharpens the financial crisis.
A survey of the system
The economy was key to Barack Obama's election as US president. His poll rating went up each time the Dow Jones fell. He now has at his disposal the second of two $325 billion packages designed to try to rescue the US banks. A further $800 billion package is before Congress. Relative to the size of the economy, this already exceeds the level of intervention during the New Deal of the mid-1930s. But even the drastic measures being discussed are unlikely to match up to the scale of the crisis.
The disclosure of the subprime losses by two major banks in January showed that the first banking bailout had not addressed even the most basic problems. Bank of America announced losses of $15.3 billion and Citigroup $18.7 billion. According to the Financial Times, the announcements "confirmed what many experts have long suspected: the subprime losses of 2007 were a bullet that fatally wounded the banks. Many lost so much money on toxic subprime mortgage-related derivatives that they have been essentially insolvent for more than a year." New York economist Nouriel Roubini now estimates total US financial losses at $3,600 billion - a hole that is not even close to being filled.
Elsewhere the five biggest European economies - Britain, France, Italy, Germany and Spain - are all expected to shrink this year. According to the Financial Times, "European industrial production collapsed in November...business confidence surveys suggest the bottom of the recession - set to be among the worst since the Second World War - has not yet been reached."
European states are also bearing the burden of collapsing financial systems. For instance, Ireland was forced to nationalise its third largest bank, Anglo Irish, in January and may be forced to do the same to the two biggest. Such measures are driving up government debts across Europe. Total public debt in the Eurozone was expected to reach 75 percent of total gross domestic product. Credit ratings agencies, responsible for assessing the risk attached to debt, downgraded Greece, Spain and Portugal's credit rating in January. This vote of no confidence will make it harder for them to fund their spending. It is likely to lead to sharp cutbacks that will be particularly perilous for the Greek state where a powerful workers' and students' movement has emerged.
The crisis is spreading from the periphery of Europe to its core - just as talk of governments defaulting is spreading from the pages of Socialist Review to those of the Financial Times: a "default by a small country could wreak havoc on the markets for credit default swaps and might even destroy financial institutions in other Eurozone countries".
But the real basket case is Britain. Jim Rogers, who once worked alongside famed investor George Soros, claimed in a recent interview, "The UK has had two things to sell to the world over the last 25 years: the North Sea [oil] and that's drying up...and the city of London...the UK's financial asset is a disaster and it's not going to revive." His conclusion: "I would urge you to sell any sterling you might have. It's finished...I would not put any money in the UK." His advice was heeded. Last month the pound collapsed to its lowest level against the dollar in 23 years.
Last autumn Gordon Brown boasted that he had saved world capitalism. Now it is clear that he has not even rescued British banks.
Royal Bank of Scotland (RBS) was set to announce losses of up to £28 billion, the worst in British corporate history, as Socialist Review went to press. The profits made by the Lloyds part of the new Lloyds Banking Group (LBG), about £1.2 billion, will be wiped out by the £4.8 billion losses made by HBOS, which it absorbed last year. The government is the majority stakeholder in both RBS and LBG.
Brown has announced a new lifeline for the banks - involving the government insuring risky loans. But many commentators realise that the logic of the situation is to push the government towards the nationalisation of the entire banking system, which would make such insurance irrelevant. A new package of tax and spending measures is also expected this spring. This comes in the wake of official confirmation that Britain is in recession. The final three months of 2008 saw the worse contraction since the depths of the crisis of the early 1980s. The decline was not led by the financial sector but by manufacturing - in other words the real economy is also in meltdown.
No area of the globe is immune from the crisis. The economies of East Asia, heavily dependent on exports, have begun to feel the pain. The Chinese economy contracted in the final months of 2008, a development that is likely to cause growing social unrest as job growth grinds to a halt. The Japanese and South Korean economies are also expected to shrink. These developments, and the fall in revenues for oil producing countries, will have an impact on economies such as the US that depend on external sources of finance.
The roots of the crisis
What we are witnessing is not simply a financial or banking crisis. It is a systemic crisis of capitalism. This is rooted in something Karl Marx identified 150 years ago - a long-term tendency for the rate of profit (the return capitalists receive on their investment) to decline. The decline in this rate of return appears as a crisis for the whole system because it governs how fast capitalists can invest - the impetus driving capitalism's expansion. The post-war period was characterised by a long-term decline.
From the 1980s the decline was arrested by attacks on workers' pay and conditions, accompanied by a growth in personal debt that supported their ability to spend despite restricted wages. In addition, rises in asset prices - including, the financial assets derived from mortgage lending and other credit - created the illusion of profitability. Now these illusions are being stripped away.
This analysis has important implications. If this were merely a banking crisis or a momentary loss of business confidence, it could be solved by the methods advocated by Brown. If it is a systemic crisis, then what we are seeing is far more profound. It is a crisis that would have broken far earlier had it not been for the bubbles of credit and inflated asset prices. Either a new bubble is required to keep the system ticking over or a fundamental process of restructuring through crisis is needed to clear out the system and allow expansion.
But the changes to capitalism since the last major crisis of the 1930s make such restructuring more difficult. In particular the growth in the size of corporations and the way in which they are bound together through finance makes it a painful process. Allowing an unprofitable multinational to go under can risk bringing down a whole chunk of the system. The expanded role of the state within capitalism means that the stakes are higher - bailing out a company is one thing, bailing out a country quite another.
The impact of the crisis
Crisis intensifies the tensions that run through capitalism. It sharpens the conflicts between states. Increasingly governments have focused on defending their markets from competitors and boosting their exports. This has been accompanied by a growing war of words. Obama went further than his predecessors when he claimed that China was "manipulating" its currency to boost its exports and pledged "aggressive moves". Expect more political clashes and, potentially, even military conflict.
Tensions are also growing between those at the top of the system and those at the bottom. In Britain an offensive on workers is already under way. Many companies have used the recession to attack pay and to sack workers. The numbers claiming dole increased by 34.4 percent in the 12 months to November 2008. Young people have been hit particularly hard - the number of those aged 18 to 24 without work rose to its highest level since 1995.
Two thirds of companies with more than 500 employees have already cut jobs. More attacks are on the way. The Financial Times's special supplement, "Managing in a Downturn", advised managers that in a recession "employees recognise that a firm cannot continue to do what it did in the past. The downturn lowers their resistance to change" it is a "ready-made external rationale to justify painful decisions that would appear extreme in better times".
In the poorest countries the impact will be even greater - the agony of starvation, disease and mass unemployment. Such devastation may even engulf some more developed countries. One recent survey of states that could see a complete meltdown included Hungary, Bulgaria, Romania, Argentina, Venezuela, Ecuador, Mexico, Russia, Ukraine, the Baltic States, Pakistan, Indonesia and South Korea.
But this is not the end of the story. Recent struggles, for example those in Egypt, Greece and much of Latin America, show that the capacity of workers to resist remains intact.
So far the crisis has not stimulated an upsurge in workers' struggle in Britain. Economic crisis always leads to a combination of fear and anger among workers - fear that they will lose their jobs, but also anger that they are expected to pay for the failings of a system they do not control. So far union leaders have related to the fear and sought to contain the anger, calling off strikes and arguing that workers cannot fight during a recession - an idea that can become a self-fulfilling prophecy. They have, for the most part, strengthened their support for Gordon Brown and struck deals with bosses to try to protect jobs.
The danger of such a strategy was seen recently at JCB. Workers were pressed to accept a 34-hour week to save jobs. Managers welcomed the reduction in the wage bill and then axed 1,000 jobs anyway. Then, in January this year, they announced plans to cut 684 more. The unions should have demanded that a tiny fraction of the money handed to the banks was used to nationalise JCB and save jobs with no loss in pay.
But Britain is not immune to struggle. In a recession groups of workers can suddenly decide they have no option but to fight to save jobs and defend their pay. Such a fight can come from groups with few traditions of struggle or from more established groups where socialists and other militants are able to gain a hearing. And there is the possibility of a sudden escalation of the crisis - like that in Argentina in 2001-2 when the shutdown of the banking system sparked the emergence of a mass movement.
In this context the role of groups of socialists, rooted in workplaces and localities, capable of giving political direction to the anger and generalising struggles, is vital.
Joseph Choonara is the deputy editor of International Socialism.