A third slump? A second great depression?

Fifteen months after the credit crunch first broke, governments and stock markets around the world are finally facing up to what is likely to be the most serious economic recession since the 1930s depression.

The period of neo-liberal capitalism is over for the foreseeable future. A range of economic and social policies that were put in place by the Thatcher and Reagan governments of the early eighties, and later developed by and extended by Brown, Blair, Clinton and Bush, have come to the end of their shelf life. They have come round to bite the very capitalist beast that launched them. These policies sought to overcome capitalism’s structural impasse of declining profits, over production of goods and an over accumulation of profits, seeking new avenues of investment. The privatisation of housing, the easy availability of credit and the deregulation of the financial markets  and its institutions, together with an easy monetary policy followed by the US central  reserve and the Bank of England monetary committee, created a huge bubble in the housing market and the development of an unregulated derivatives market.

When the central banks burst the bubble they had created by raising interest rates in 2006  and 2007, it caused waves through an inter connected financial system . The barriers between  banking operations had come down and this allowed the banks to take massive  gambles on the poorest peoples’ debt, and bet against a recession by selling insurance on  bankruptcy – credit default swaps (CDS) and also be exposed to all sorts of loans to  speculators and corporations which hinged on never ending economic expansion.

A crisis that started amongst poor people in the United States quickly spread to the global  financial system, bringing down the value of all sorts of products linked to it. This froze  credit or lending between banks and to individuals, small businesses, corporations, local  states and countries. This then caused a collapse in house prices with the biggest effects  being in the UK, USA and Spain. The credit freeze or crunch has now fed into the economy
with a huge fall in consumer spending, leading to a recession that even the most optimistic  economists think will last the whole of 2009. Only China, of the world’s major economies,  will escape a recession, but it will suffer a huge slow down in growth, leading to factory  closures, unemployment and extreme hardship to the massive Chinese working class. 

The banking system is basically exposed to a recession and already over a trillion dollars  of its capital – cash in the till – has been wiped out. Many banks have already gone bankrupt
and governments’ latest bailouts are aimed at filling these tills to stop some of the top  tier of banks going under. Governments will have to return with more of our money to prop  up the system at the start of 2009. This will be required as more year end write-downs hit  banks’ capital reserves and they also start to suffer the losses from selling insurance  against bankruptcy, as the number of corporations who fail start to increase in number.  That is the problem for governments; they do not know how much these banks are exposed  to and what is the dynamic of the loans and derivatives the banks have. It is likely  that the banks in the major economies will be under full government control by the end of  2009.

Capitalism is on the edge of its second major depression and its greatest financial crisis  could push it over the edge. Unlike the 1929 crash, where bankruptcy was limited to US  banks, this is a global financial crisis and the banks exposure to risk and recession has  been multiplied several times by the use of complex financial instruments called derivatives.  Central banks abandoned taking out the toxic assets of the banks and switched their  strategy to propping them up. Governments themselves run the risk of becoming bankrupt  as they are unable to fund the losses of the banks world wide.  Socialists have the opportunity for the first time in decades to put a rational alternative to  capitalism, one that is based on meeting peoples’ needs; that is under their control and decision  making.

Ralph Blake

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