The Credit Crunch: housing bubbles, globalisation and the worldwide economic crisis by Graham Turner (Pluto 2008) £14.99

Piers Mostyn’s review will appear in issue 4 of Socialist Resistance magazine.

At any time there would be a crying need for a detailed but accessible debunking of the capitalist economy. But never more pressingly than today, with mass misery looming as it crash lands.

This book doesn’t set out to do that. But it does analyse how the market economy has failed on its own terms.

The basic thesis is that the roots of the present recession lie in companies relocating production in search of cheaper labour costs abroad. Central banks had to keep interest rates low to stimulate growth as a result and the flipside of this was rising debt. In particular rising house prices were relied upon as a reflationary measure – referred to as the “money illusion”. Eventually the credit bubble burst. “A pronounced swing in the relative strength of capital versus labour”, he argues, “lies at the heart of today’s financial turbulence.”

He recommends a rebalancing of worker and environmental rights against the pervading dominance of corporations. At heart this will involve a fight for workers rights in the developing world, particularly China and the economies of South Asia.

His critique is based on Keynsian economics, arguing that there has been a failure to learn lessons from the 1930s and the 17 year recession in Japan engendered by a similar financial crisis in 1990.

I found parts difficult to follow, re-reading passages repeatedly in an occasionally vain bid to grasp what they were on about. I am still wrestling with the “Keynsian liquidity trap”.

Although written in Spring 2008, at first it seemed dated, with references to the credit crunch of late 2007 and early 2008 already bypassed by last Autumn’s bank crashes. But its strength lies in the fact that its focus is not on contemporary twists and turns and what lies round the next corner.

Instead it traces the deep historical roots of the crisis. Looking back to the collapse of the post-World War II international monetary system - with US indebtedness and trade deficit arising out of the Vietnam war - he traces the growth of Reaganomics, Thatcherism and the rise of monetarism. A centrepiece of the book is a detailed analysis of the Japanese financial collapse in the 1990s, something he has particular personal knowledge of, having worked there in financial services.

He also nails responsibility, showing that it lies not so much with the greed of financiers and bankers or the incompetence of regulators – describing them as “mere actors” - but with governments and policy makers.

In particular he exposes Gordon Brown’s boasts of “10 years of GDP growth, the longest in 300 years” and “an end to boom and bust”. He shows how the British economy, far from being well placed to weather the storm, had personal and private sector debt soaring at a higher rate than any other industrialised economy over the past decade. These statistics dwarf the run up of debt in the late 1980s “Lawson boom” under the Tories.

For me an inevitable conclusion to Turner’s analysis, is the functional inability of the global market economy to efficiently match the world’s resources to the needs of its population in the long-term. Neo-liberalism, particularly, relies on totally flawed presumptions about the behavioural response of millions of atomised individuals to crude economic levers. However Turner never takes a step back to consider this type of overview. A systemic alternative, planning based on social ownership and democratic control, is not raised.

Scandalously, 18 months into this crisis there is yet to be any real political accountability. There has been a virtual conspiracy of silence as to the historical roots and political responsibility. This book provides a useful starting point for turning that around.

Posted by Admin as Economics at 4:24 PM MST

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Raphie de Santos used to be head of Equity Derivatives and Strategy at Goldman Sachs and is now a member of the Scottish Socialist Party. He is speaking at a meeting organised by Birmingham Socialist Resistance  on Tuesday 16th December at 7.30pm Bennetts Bar, Bennetts Hill, Birmingham City Centre. Below is the text of the flyer advertising the event.

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. Come and hear that alternative and discus how to fight back against the offensive  that capitalism will launch against working people and the poor of world as they try  and save their system . . . . . . .

Posted by Admin as Birmingham, Economics at 8:21 PM MST

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Socialist Resistance statement on the banking crisis.

The banking crisis which became apparent in August 2007 has got dramatically worse in the last two weeks. This is for three reasons. Firstly, the slump in the housing market – not just in the USA but also in a number of European countries, including Britain – has turned out to be worse than expected, leaving the banks with more bad debts than originally thought. Secondly, there has been a crisis of confidence amongst the banks themselves so that they have stopped lending to one another. Thirdly, the stock market has also panicked so that bank shares have slumped drastically.

The banks need to raise cash to cover their loan losses but they cannot do so by borrowing because no-one will lend to them. Neither can they raise funds by issuing shares because the market will not subscribe to new issues. If unchecked this situation will mean that at best they will have to cut back their lending drastically. Bank regulation is based on so-called `capital adequacy rules’ which state that a certain percentage of loans have to be covered by paid up equity capital. If that capital shrinks in value loans have to decline as well. At worst, if a major bank cannot cover its own loan repayments it could go bankrupt.

The crisis of confidence has worsened sharply since the US government decided to allow Lehman Brothers to fold. While the rescue of Bear Sterns earlier this year briefly seemed to stabilise the crisis the failure of Lehmans has had the opposite effect.

The response of the British government, following the US, has been to propose a massive injection of capital into the banks. This is planned in two ways. First, a direct injection of cash by buying shares. Second, a government guarantee on all inter-bank lending. The aim is both to strengthen the capital base of the banks and to restore enough confidence to allow them to start borrowing again.

How should socialists respond? First of all it is important to note that the shares which the government intends to buy in the banks were originally planned as `preference’ shares rather than `ordinary’ shares. While preference shares give a formal title of ownership they do not carry voting rights and are normally seen as a form of debt rather than equity (they receive a fixed interest payment rather than a variable dividend). In other words New Labour’s first plan was not to take control of the banks but to lend them taxpayers money and guarantee their loans. Over the last few days there has been talk of moving towards taking ordinary shares, exerting more control and possibly putting government representatives on bank boards. But the government has edged towards this reluctantly and it is still not certain whether they are even going to ensure the minimal control needed to stop the fat cat culture of bank bonuses.

Socialists should call for a completely different response to the crisis. The banks need to be taken into full public ownership under democratic control. But that is only the start of what is needed. A new kind of financial system is required which serves the needs of people rather than profit. That means changing the way banks and other institutions decide on lending and the terms of their loans. But it also means attacking the neo-liberal economic model based on inequality and insecurity which led to the risky loans in the first place.

The following resolution from supporters of Socialist Resistance is being submitted to Respect’s conference.

Conference notes:

1. That we are now in the grip of the biggest economic crisis since the 1930s. That this is the direct result of many years of neoliberalism, market deregulation, wild speculation and corporate and individual greed – as reflected in the obscene city bonuses. Government intervention into such a situation is absolutely essential. But the handing over vast unprotected sums of money to the very people who have caused the problem in the first place, as in the Brown/Darling proposals makes no sense. It was right to nationalise debt ridden and bankrupt financial institutions such as Northern Rock and Bradford and Bingly but it is not the answer the crisis. But control comes with ownership and the precondition for stabilising the financial sector is to bring it into public ownership and under public control – including the Bank of England which was given the right to set interest rates by Gordon Brown in his first days as Chancellor. Democratic control over the economy through Parliament is essential if a further plunge into crisis is to be avoided.
2. That it will be the working class and the poorest in society who will be made to pay the price for this situation though mass unemployment, continued wage freeze, cuts in the standard of living, attacks on the public services, loss of pension rights and house repossessions.

Conference therefore resolves:

1. To campaign for the public ownership of the financial institutions.
2. To support campaigns launched in defence of wages, pensions and jobs. To support the campaign against fuel poverty. To call for a halt repossessions on mortgage defaults and for the requisition of empty housing. To call for a halt to all further privatisations.
3. To call for an immediate programme of house building, free home insulation, and investment in renewable energy to preserve jobs. We call for new and extensive investment in public transport.
4. To organise a series of public rallies around the country to present this alternative.

Posted by admin as Britain, Economics at 8:19 PM MDT

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The World Economy and the Credit Crisis

Andy Kilmister

1. Introduction

The significance of the current turmoil in global financial markets can be seen sharply in the following quote from the article `The rescue of Bear Sterns marks liberalisation’s limit’ by the chief economic commentator of the Financial Times, Martin Wolf, in the March 26 issue of that paper. Wolf, who is no radical, writes

Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Sterns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits…..even the recent past is a foreign country.

One of the most important parts of this statement is the reference to `three decades’. The current crisis has been compared to 1929. This is not really helpful as a guide to its significance. Much more useful in my view is to see what is happening as the unravelling of the set of institutional arrangements which have governed global capitalism since around the mid-1980s, which in turn emerged as a response to the breakdown of the long post-war boom a decade earlier. To understand what is happening now we need to go back to this period and to the emergence of this framework.

2. The Crisis of the 1970s and 1980s

Stable capitalist accumulation depends on two crucial conditions. Firstly, it requires the extraction of sufficient profits in the process of production. Secondly, it requires the realisation of those profits through sales on the market. This gives rise to a key contradiction – these two conditions are in conflict with one another. The successful extraction of profits depends on keeping wages down while the realisation of those profits depends on sufficient demand being available which in turn limits the ability of capital to lower wages. This conflict is a central reason for the periodic crises which characterise capitalist growth. It is worth noting here that two of the main Marxist theories of crisis result from adopting a partial view which focuses on just one side of this conflict; under-consumptionism (for example the work of the Monthly Review school in the USA) concentrates on the lack of demand which prevents realisation of profits while the profit-squeeze theory of writers like Andrew Glyn and Bob Sutcliffe focuses on rising labour costs which prevent the generation of profits in production. An adequate theory of crisis has to encompass both perspectives and to take account of the way in which capital can achieve a temporary resolution of the contradiction, which however inevitably stores up new problems for future accumulation.

The temporary resolution underlying the boom of the 1950s and 1960s depended on three main factors. First, state expenditure as a key source of additional demand. Second, the stable international economic environment provided by the `Bretton Woods’ system of fixed exchange rates which allowed for rapid growth of world trade. Third, the development of new consumer goods technologies and markets, notably in areas like the motor industry and consumer electronics (so-called `white’ goods).

For reasons which are still controversial amongst Marxists this boom broke down in the mid 1970s leading to a decade of economic turbulence and two major international recessions, in 1974-75 and 1979-82. However, from the mid-1980s onwards a new framework for accumulation began to take shape, in an unplanned and chaotic way, but embodying a measure of coherence.

3. The Temporary Resolution of this Crisis

This framework had three main components:

· The first was a massive explosion of debt – both household and (to a lesser extent) corporate debt. Debt has played a key role in mitigating the contradiction between the generation and realisation of profits, allowing for expanded demand even though wages have been kept down and a frontal assault on trade unions and organised labour has kept the working class on the defensive. However, there is an obvious contradiction here in that debt has to be repaid eventually and so the conflict between low wages and increased demand is likely to reassert itself with renewed ferocity at that point. Consequently, debt has only been able to play the role which it has because of the other two components listed below.

· The second component of accumulation has been a renewed stability in the international financial system, following on from the wild exchange rate swings of the 1970s and the first half of the 1980s which resulted from the end of the Bretton Woods arrangements. This stability has allowed for strong growth in international trade but, more importantly, has underpinned dramatic financial deregulation and increased international investment. The key factor leading to this stability has been the informal but durable relationship between the USA and China (and to a lesser extent other Asian countries) whereby the US deficit has been funded by surplus countries, who have purchased US treasury bills, allowing those surplus countries to maintain the value of the dollar and keep their own currencies low in value, which in turn has underpinned their export drive. Linked with this, and important for both the US and UK, has been a rise in the returns earned by these countries on their investments abroad, which has helped them run large balance of payments deficits without their foreign liabilities escaping out of control.

· The third factor has been two decades of exceptionally low commodity prices. This has been a key factor in allowing central banks in the industrialised world, especially in the UK and USA, to let debt increase and to lower interest rates to boost demand, without worrying too much about inflation. A number of orthodox economists (most recently Brian Henry from the National Institute of Economic and Social Research) have argued that low commodity prices have been more significant in keeping inflation down since the 1980s than either central bank economic management or labour market developments.

It is important to recognise that, owing to the unplanned and chaotic nature of capitalism, this framework did not take root globally at a single point in time, but arose in a more spontaneous way. Notably, the second most important capitalist economy, Japan, followed a trajectory of its own, as a result of the specific characteristics of Japanese capitalism in the 1970s and 1980s, and has stagnated throughout most of the last two decades (though the Japanese trade surplus and Japanese purchases of American assets have been important for the second factor listed above). Western Europe remained unstable for longer than the USA, with a sharp recession in the UK in the late 1980s and 1990s (resulting from the especially sharp crisis of capitalism in the early 1980s in this country associated with the Thatcher government’s economic policies and the consequent weakness of the British economy in the years following) and exchange rate turbulence in the early 1990s across the region (resulting from the strains caused by German unification and the effect of this on German interest rates and on the value of the Deutsche mark). However, from the mid 1990s onwards Europe participated in the general framework outlined above and this provided an important basis for two key successes for the European capitalist class during this period – the absorption of Central and Eastern Europe into the capitalist world economy and the institution of a common currency, the euro. Particular regions continued to experience crises during this period, notably Latin America, South East Asia and Russia but these were successfully localised by capital and did not bring overall global expansion to an end, although the instability of 1997-98 briefly opened up such a possibility.

It is also important to realise that each of the three factors outlined above is integrally linked with the other two in a mutually reinforcing system. The growth of debt requires a low inflation environment and international financial deregulation, which in turn requires exchange rate stability. The export boom in China and elsewhere has depended on debt fuelled demand in the US and other countries. Low commodity prices have resulted in large measure from the process of `globalisation’ and imperialist expansion which has required deregulated debt finance and stable exchange rates.

4. The Current Crisis

The depth of the current crisis for capital arises because all three of the factors listed above have been thrown into question. The build-up of debt is extremely serious in itself, partly because of the size of the debt, partly because of the way in which `securitisation’ has spread it around the system so widely and partly because the amount of bad debt is so uncertain owing to that very securitisation. However, despite the over-valuation of the housing market in the US and other countries, problems in that market on their own would not threaten the system globally were it not for the role of debt in the current pattern of capitalist accumulation more generally. What is dangerous for capital is the conjunction of major problems in the credit markets with renewed exchange rate uncertainty, especially the fall in the value of the dollar (and also a steep decline for both the US and UK in returns on foreign investments) and with what appears to be the end of the era of low commodity prices – shown most clearly by increasing prices for oil and other fuels and for food. The difficulties are shown up most clearly in the key policy weapon which capital has depended on over the last three decades, control over interest rates. The US has cut interest rates sharply to deal with the build-up of bad debt, but such cuts run the risk both of speeding up the decline of the dollar and of raising inflation (which in turn will go up in the US if the dollar falls). In the Financial Times article referred to above Martin Wolf mentions a speech by the former chief IMF economist, Kenneth Rogoff (now at Harvard). Rogoff quoted the poet Robert Frost: `Some say the world will end in fire. Some say in ice’. For Rogoff, fire here is financial ruin, ice is inflation.

5. Can Capital Resolve the Crisis?

Discussion of the possible outcomes of the crisis runs the risk of being very speculative. However, it is important for socialists to consider some of the arguments now being used by capital which indicate possible resolutions of the crisis which might be attempted. Any attempt at such a resolution will involve some kind of distribution of the costs of the crisis. Clearly capital will try to shift as many of these costs as possible on to labour and its success or failure in doing so will depend on working class resistance both nationally and internationally. Within that general framework, however, there are also likely to be divisions between different fractions of capital (financial and industrial; importers, exporters and foreign investors etc) and also potentially differences between different kinds of workers (for example between homeowners and others).

Some of the key issues that have been raised are the following:

· Demand from China and elsewhere may substitute for US demand: One possible resolution of the crisis might be a slowdown in the US and similar countries and a shift towards internal growth in China and other surplus economies, based on domestic consumption and investment rather than exports. This would clearly be possible in principle in a globally planned economy. It is much harder to achieve in the unplanned, spontaneous world of contemporary capitalism. The attempt to carry out just this kind of shift in Japan from the mid 1980s onwards was a spectacular failure. Important problems here include internal inequalities and class tensions in the Asian economies and, perhaps most importantly, the ecological constraints which are already expressing themselves in higher food and fuel prices.

· The crisis may be just a crisis of liquidity not of solvency: A number of observers argue that the credit crisis results mainly from liquidity problems and panics in the financial markets and that the amount of `genuinely’ bad debt is still quite limited. In addition corporate profits in the non-financial sector remain high. This latter point is probably the most optimistic element for capital in the current situation. However, this argument neglects the extent to which non-financial profits have been dependent on a degree of debt-based consumption which now looks unsustainable. It also neglects the fact that if inflation does become more of a problem the low interest rates of recent years may not persist much longer.

· Commodity price rises may mainly be caused by speculation: There does seem to be a strong element of speculation in recent oil and raw materials price rises (with speculators fleeing from the dollar). To the extent that such speculation unwinds capital will have more room for manoeuvre. But the seriousness of the ecological crisis and the relatively long-term nature of recent price rises seem to indicate that speculation is only playing a minor role here. Also, any attempt to base future world economic growth on increased domestic growth in China and other Asian countries is likely to cause even larger commodity price increases.

· A fall in the dollar and sterling will raise US and British exports: It has been argued that exchange rate changes will restore balance to the world economy and that already US exports are rising as the dollar falls. Again, there is some truth to this. But reliance on this mechanism is very risky for capital because of (a) the substantial losses it would involve for countries like China which have purchased US dollar assets in recent years (b) the inflationary impact of such falls on the British and American economies (c) the possibility of renewed exchange rate turbulence of the kind seen in the 1970s and 1980s and (d) the fact that even balanced growth resulting from such exchange rate changes is likely to be at a much lower level than what we have seen in recent years.

· New surplus economies may emerge as saviours of the international financial system: This relates to the growth of so-called `sovereign wealth funds’, such as those run by China, Russia and other oil and natural resource exporters. But such funds are not immune to capitalist crisis in general – many of them have already lost significant amounts of money propping up US banks in recent weeks. There are also some important political tensions involved in their investment activities abroad.

· A better structure of regulation can solve the problem: One strand of thought in recent discussions sees an improvement in the regulatory structures of capitalism as key to solving the crisis. Martin Wolf in the article quoted above is an example of this. However, this is controversial; other analysts have strongly opposed responding to the crisis through increased regulation (see for example the article in the Financial Times by John Gapper the day after Wolf’s piece). There are a number of problems. Technological change and internationalisation have made financial regulations increasingly easy for banks and other institutions to bypass. Even if effective, such regulation really only deals with the financial aspects of the crisis, not with the problems of global payments imbalances or rising inflation. In addition, the ideological difficulties of reversing, even if only partially, two decades of neo-liberal attacks on any attempts to limit market imperatives, cannot be underestimated.

All of the above means that any attempt to resolve this crisis, at least in the short-run is fraught with dangers for capital – and consequently, the crisis opens up significant opportunities for socialists.

Posted by admin as Economics at 10:16 AM MDT

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