Over the last week, billions of pounds have been wiped off share values worldwide as stock markets plunged.
The capitalists have watched, horror-struck, fearing that their finance system could face a drastic fall like a house of cards collapsing. The UK stock market dropped by around 10% – officially classified as a sharp correction. Twenty per cent or more is classified as a crash.
Two German banks have filed for bankruptcy, several hedge funds have imploded and Countrywide, the largest mortgage lender in the US is teetering on the edge of collapse.
Hedge fund managers have been splashed over the press during the last few months for their conspicuous consumption on an obscene scale. The top 25 took home $14 billion last year. These residents of Richistan routinely spend more than half a million dollars to join a golf club, or buy a watch, or a pen.
Now these masters of the universe, most of whom pay a lower rate of tax than their cleaners, are hitting the headlines for a different reason, as they demand state or bank intervention to rescue them as they hit financial crisis. Unfortunately, it will not be hedge fund managers but small investors and individuals with private pensions and mortgages who will pay the highest price for the crisis.
On the stock markets irrational exuberance has swung wildly to deep gloom. Jokes amongst hedge fund managers include the development of a new q.t.m (the mathematical models used to decide where hedge funds should invest) – a dartboard, and that the only certainty is that stocks in mattresses will rise as investors desperately search for somewhere safe to stash their cash.
Millions of people are following the gyrations of the world’s stock markets because they fear that they will tip the "real economy" into recession. The fear is well-founded; it is likely to happen. When, is a more difficult question to answer.
In an attempt to avert recession, the European Central Bank has injected $100 billion into the money markets. The US Federal Reserve, America’s central bank, also stepped in, cutting the cost of lending to commercial banks and hinting that it could cut overall interest rates in September. It had previously hesitated to do so, hoping that the developing crisis would lead to a correction and a gradual deflation of the bubbles in the US economy without it effecting the real economy. Now, however, in an indication of how serious the situation is, Fed chief Ben Bernanke, implicitly recognised that recession had become more likely and that he had no choice but to act, stating: "Financial market conditions have deteriorated, and tighter credit controls and increased uncertainty have the potential to restrain economic growth."
The utterly blind, short-term nature of the financial markets means that no-one knows whether the liquidity being pumped in will be sufficient to avoid recession in the short term. It is a method that the central banks have used repeatedly, to avoid, or lessen the effects of, financial crises over the last fifteen years.
However, at a certain point there will be a crisis that they can’t avert and, like a hangover after a party that went on too long, the accumulated problems of the last period will come home to roost.
What is more, there are factors that make this crisis likely to be more serious than those of the 1990s.
The ‘slow motion car crash’ in the US housing market seems to have reached the point of collision. 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.
Even if the central banks avert a credit crunch now, this will not alter the underlying processes being played out in the US, which is what, at base, the markets are reacting to. Most capitalist commentators keep insisting that the fundamentals are sound, but this is not true. In the second quarter of this year US consumption growth slowed to 1.3% and initial figures suggest it is falling further in the third quarter. US consumers have played Atlas for fifteen years, holding up the world economy by buying the world’s goods. They have only been able to do so because of unprecedented levels of government and personal debt. Now high oil and gas prices, falling home values and slackening labour markets have combined to force US consumers to tighten their belts. At a certain stage this will rebound against all countries dependent for growth on exports to the US, including China.
Whether a recession in the US economy comes now or a bit later, and whether it is sharp or more gradual, could however depend on events in the finance markets over coming weeks. Over the last week the financial consequences of the sub-prime crisis have spread like oil on a pond.
One of the features of the recent stock market frenzy has been the securitising of all kinds of assets. 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, if it is not reversed by the concerted efforts of the major capitalist powers, could ultimately trigger a sharp recession in the US, and as a result the world economy.
The current boom has relied on vast sums of money sloshing around the world’s stock markets. This has only been possible on the scale it has because of the role China, Japan and the South East Asian countries have played in using their trade surpluses to invest in US government bonds in order to sustain the US economy and its unprecedented trade deficit of over $800 billion dollars a year. They have done so in order to sustain a market for their goods. The capitalists worst fear is a rapid breakdown of this interdependent relationship, creating a massive world economic crisis.
Last week’s events have also led to disruption in the carry trade (where international speculators borrow in one currency – mainly the yen – and then change it into another) which has been another source of global liquidity. As a result the yen rose against the dollar, creating problems for Japanese exports to the US. If financial crisis causes the value of the dollar to drop dramatically, forcing the South East Asian countries to start to sell their dollar reserves, a sharp recession, even an absolute drop in world growth, would be posed.
There are many possible scenarios, as there are many fault lines in the world economy, not least the inability of US consumers to keep on buying.
Capitalism in the twenty first century is a more parasitic system than ever before. The capitalists are making mega-profits but they are not investing in production – capital expenditure is at an all time low in the US and Europe.
The current boom has been defined by the increasing chasm between the ultra-rich and the rest of the population. While a few roll in money, wages for the majority have stagnated, and public services have been cut. In the US, wages and salaries now make up the lowest share of gross domestic product since 1947. Ultimately the falling share of wages in national income is restricting the market for capitalism and increasing the tendency towards crisis.
Enormous anger has built up during the boom years at the unequal nature of society. A job (albeit often low paid and insecure) and the availability of relatively cheap credit, have softened the blows that have rained down on working-class people.
However the onset of world recession, when it comes, will profoundly alter that situation, as billions of working-class people will be expected to pay for the crisis. There is not a mechanical connection between economic developments and the consciousness and combativity of the working class, but whether sooner or later, the coming economic upheavals will lay the basis for a massive increase in radicalisation.