Britain

Economy hits a rock

www.socialistworld.net, 21/09/2007
website of the committee for a workers' international, CWI

The Northern Rock crisis, the first full scale bank run in Britain for over a century

Editorial, The Socialist newspaper, Socialist Party (England and Wales)

For ten years Gordon Brown has claimed that New Labour have created economic stability, overcoming capitalism’s "cycle of boom and bust". In the last week this claim has been shattered.

The Northern Rock crisis, the first full-scale bank run in Britain for over a century, has laid bare the reality of Brown and Blair’s Britain. In reality Britain has become a giant hedge fund, a casino, with an economy dominated by the City of London’s endless drive to make a quick buck by any possible means. Under New Labour the number of workers employed in manufacturing has fallen to the lowest level since 1841

British capitalism has continued to grow only as a result of a series of huge credit (otherwise known as debt) bubbles. Personal debt has trebled under New Labour to £1.3 trillion. Our collective personal debts are now greater than Britain’s Gross Domestic Product.

As The Socialist has repeatedly warned this situation cannot last forever. Capitalism remains a cyclical system, and at a certain stage economic crisis is inevitable; and the unprecedented use of credit to prolong the boom will only make the crisis worse when it comes.

The events of the last week mark a turning point - Britain is on the road to recession with all the horrific consequences which will result for working and middle-class people. However, even if this does not develop immediately, New Labour will no longer be trusted on the economy. Just as the ERM crisis of 1992 wrecked the Tories reputation for economic stability, this will fundamentally damage New Labour’s. David Cameron is hoping that the Tories can use the crisis to finally restore their own economic credibility and has suddenly discovered the levels of debt in Britain. However, the ultra-free market, city-friendly, policies of New Labour and the Tories are virtually interchangeable. While Labour will undoubtedly be wounded it is unlikely that the Tories will gain much ground, at least in the short term.

Northern Rock has been first to hit serious crisis because it is exceptionally dependent on the money markets - relying on them for 70% of its funds - but the other high street banks and building societies are not in a fundamentally different position. Barclays has had to take emergency assistance from the Bank of England. The widespread nature of the crisis was also shown by the dramatic fall, by around a third, in the share values of two other building societies - Alliance and Leicester, and Bradford and Bingley.

Responding to this mounting catastrophe the government has been forced to try and stem the crisis by promising to underwrite all deposits with Northern Rock and any other institutions in a similar position. As the Financial Times points out, they have effectively been forced partway down the road towards nationalisation. They have moved in this direction purely to try and stem the crisis, before selling Northern Rock on to any bank that is prepared to take it. Sections of the capitalist class have criticised this move, fearing that it sends a signal that any financial institution will be bailed out, but in reality the government had no choice but to act to try and stop the crisis spreading through the whole banking system.

The starting point for the crisis was the ’slow motion car crash’ which is taking place in the US economy - with the housing market as the catalyst. One fifth of US mortgages are in the ’sub-prime sector’ -mortgages given to those who have great difficulty paying back the debt. More than 20% have already defaulted and one million Americans have lost their homes.

These sub-prime debts have been ’securitised’. This means that assets are ’cut up’ into small pieces and then bundled together with other assets into packages that are bought and sold on the world’s stock markets. This is meant to ’spread the risk’ in a positive sense, but now crisis has hit, it has had exactly the opposite effect - it is spreading the panic.

Globally, no-one knows who owns pieces of the US sub-prime market, and as a result, no-one wants to loan money to any company that might be affected. The credit crunch which this has set off is what triggered the Northern Rock crisis.

As we have already seen, the growing crisis in the world’s biggest economy will inevitably affect the rest of the world. In addition Britain also has all of the same problems. Northern Rock, like many British mortgage lenders, had elements of ’sub-prime’ lending - routinely giving workers mortgages at six times their salary and ’hard-selling’ mortgages to workers who clearly couldn’t afford them.

As in the US, while big business has raked in huge profits, workers are struggling to get buy. Last year wages increased by an average of just 3.6%; the lowest in five years. At the same time increased housing, fuel and food costs means that many workers living standards are dropping.

It is only the unprecedented level of indebtedness that has allowed most workers to keep their heads above water. As a result when recession hits the effects for many workers - suddenly unable to meet their monthly mortgage and credit card payments - will be horrendous, not least because of the inevitable intensification of the housing crisis. The Socialist’s demands for high-quality, affordable public housing, and secure, affordable mortgages, will be of increasing importance. Already house price growth has slowed and Alan Greenspan, ex-head of the US Federal Reserve, has predicted that Britain will suffer a housing catastrophe similar to that in the US.

Greenspan, along with many capitalist commentators, is criticising the huge bubbles which he helped to create in the world economy, and is effectively arguing that they should be allowed to deflate in a controlled way, even if some companies go to the wall, so that the economy can grow on a healthier basis.

The capitalists as a whole would prefer this, but as the events around the sub-prime crisis and now Northern Rock have shown, world capitalism has absolutely zero control over its utterly blind financial system. Once a crisis has been triggered it could escalate enormously; leading not to a controlled deflation but a panic stricken rout; which in turn would lead to a sharp recession. It was fear of this which has forced national governments and banks to intervene to try and ameliorate the crisis - just as Greenspan was forced to do in the past.

No-one, including the capitalists themselves, can judge for how long their attempts to stave off recession will last. However, what is clear is that when recession comes it will be working and middle class people, not the City financiers, who will be expected to pay the price.

One saver, queuing to withdraw their worldly goods from Northern Rock, commented that "this is capitalism gone mad". In reality capitalism is an irrational, "mad", system. This is truer than ever of the globalised, finance-driven, capitalism of the twenty first century. The need to build a mass party which fights for a socialist alternative to the unplanned chaos of capitalism has been driven home by the last week’s events.