Economic crisis

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 mainstream media ran out of superlatives as they struggled to keep up with the events that threatened the whole basis of the capitalist system. All reflected shock and disbelief that everything that seemed so solid had melted into air.

Every economic crisis in history has been met with similar incredulity and copious explanations as to why very specific conditions caused the "never ending" boom to bust.

According to a recent set of figures, which seem almost impossible to take in, these losses are caused largely by falls in the value of houses and shares. They begin to highlight the scale of the economic crisis which is upon us and which shows every sign of getting much worse before it gets better.

Where did it all go wrong for Gordon Brown? Was it his failure to call a general election last October? Was it the attempt to impose a pay freeze? Was it the vote in parliament to extend detention without trial to 42 days? Just one year into Brown's premiership a recent Gallup poll showed Labour's popularity at its lowest ebb of support since Gallup first asked people to declare their voting intention in 1943. The government is in a crisis that appears out of control and the central issue that is derailing Brown is the economic crisis.

What a difference a year makes. The conventional wisdom at the beginning of last summer was that the economy was performing wonders. Graham Turner, Larry Elliott and Dan Atkinson were among a small minority of economists and commentators prepared to say the emperor had no clothes. Now everyone can see that they were right.

There is little doubt that the US economy is already contracting.

The immediate problem is a pool of bad debt, so-called "toxic waste", clogging up financial markets. The waste is a consequence of the scramble to lend money during the property boom of recent years. Arcane financial innovations, which saw debt parcelled out and gambled on by banks, hedge funds and corporations, ensured that the contagion from dodgy mortgages went global.

Many mainstream economic commentators are comparing the current economic crisis to the one that hit Japan in the late 1980s, which saw the country stagnate for 15 years. How strong are the similarities?

There are some clear similarities. First, the bubble that is now bursting in the US economy is in property. That was the same in Japan. Much of the speculation that led to the crisis of the late 1980s in Japan was related to housing and commercial property.

Next we saw the further collapse of the Bear Stearns bank, and even the Financial Times declared that "there is a whiff of 1929 about this".

As the crisis gathered, Peloton managers informed investors that its flagship fund, supposedly worth £1 billion, was worthless and it did not know how much its remaining £800 million fund would have left after banks seized and sold its assets.

"Investors are no longer worried whether certain banks have enough cash. They are worried about the risk of a US or even a global recession." So the Financial Times summed up the fear of those who live off capitalist profits on 18 January.

Mainstream economic commentators agree on one thing: the crisis that began in one section of the financial system last summer could be about to create chaos through much of the capitalist system which they support.

Some have hailed China's economic expansion and the development of computer technology as potential saviours of the world economy - Karl Marx would have disagreed.

The mainstream economic commentators have all been revising their calculations since the monetary crisis caused by lending to "subprime mortgages" broke in August. Alan Greenspan of the US Federal Reserve Bank thinks the odds on a recession next year have risen to about 50-50, and the International Monetary Fund seems to at least half agree.