World economy: Bosses’ crisis, workers pay

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Bosses’ crisis, workers pay

The global economy is in deep trouble. When the subprime mortgage crisis hit financial markets in August, it was dismissed by city pundits as a mere hiccup that would be quickly overcome. But the long queues outside Northern Rock building society were a symptom of worse things to come.

The president of the speculative, private equity firm, Blackstone, recently said: “The subprime black hole is appearing deeper, darker and scarier than they thought.” The credit crunch is biting more and more on the wider economy, threatening the United States, Britain, Europe and elsewhere with economic recession.

Some of the world’s biggest banks and finance houses have been hit by massive losses, the result of their reckless speculation in the US high-risk mortgage market, the so-called subprime sector. Reported losses already total around $60 billion. But that is peanuts compared to the estimate of the Royal Bank of Scotland: “This credit crisis, when all is out, will see $250 billion to $500 billion of losses”.

‘So what?’ some may say. ‘Some of the super-rich speculators are getting their comeuppance. They deserve to have their fingers burned.’ And it’s true, the banks and hedge funds which speculated in risky mortgage bonds deserve all they get. But after all their losses, the bank chiefs and hedge fund managers are still going to be super-rich.

For instance, the mighty Citibank has recently announced subprime losses of $11 billion. Yet the chief executive, ‘Chuck’ Prince, has walked away with a $40 million (£19 million) pay-off, together with perks like a personal assistant, a chauffeur, etc, etc. Stan O’Neil, chief of investment bank Merrill Lynch, has just received a pay-off of $161 million after presiding over subprime losses of $8.4 billion!

The problem is that the banks’ huge losses will, as time goes on, impact on working people. Through the investment banks, many pension funds and insurance companies have invested in toxic subprime mortgages. When the losses work through, they will inevitably cut the value of workers’ pensions. Some funds could go bust.

The situation was summed up well in the London Evening Standard (9 November). Under the headline “Joe public will pick up tab for subprime”, Anthony Hilton wrote: “It is pretty much the golden rule of financial markets that when there are losses to be borne, they should fall on the public, not on the professionals”.

When Northern Rock began to sink, for instance, the Bank of England and the government stepped in with £35 billion of taxpayers’ money to rescue the directors from their greedy, short-sighted policies. But it is not only the risky, subprime loans that are causing problems.

Because of the house-price bubble and the huge burden of mortgage debt this has created, the number of repossessions in England and Wales is escalating. Around 14,000 homes were repossessed in the first half of 2007, compared with 10,800 in the first half of 2006.

Banks and other money lenders have pushed people to take on more and more debt to boost their spending power. This is becoming unsustainable for increasing numbers of people.

The president of the debt collectors’ association, currently pursuing over £21 billion of bad debt, recently said: “The debt collection industry has been growing rapidly in the past year. It is being driven by the underlying credit boom, but the crisis in financial markets has made the situation worse.” (Financial Times, 13 November)

As the warnings now in the financial pages of the main newspapers are borne out, the majority of people in society – rather than the super-rich minority – will increasingly be forced to bear the consequences. Working people must fight against this system, capitalism, that periodically off loads its crises onto their backs, and build a socialist alternative.

Shattering confidence in world economy

Editorial from 510 issue of The Socialist (newspaper of the Socialist Party England and Wales)

Earlier this year, capitalist leaders were boasting of record growth in the world economy, around 5% a year for over five years. But the mood has completely changed. The big financiers, the ‘masters of the universe’ who believed that derivatives and other exotic financial instruments could eliminate risk and produce infinite profits, have been shaken to their core.

More broadly, the financial crisis has shattered confidence in the workings of capitalism. Once again, the chaotic, helter-skelter nature of the system has been exposed.

The credit crisis has developed alongside several other factors which are pushing the world economy in the direction of downturn and crisis. The US housing bubble has burst, leading to a slowdown in consumer spending, the main driving force of US growth.

House prices are also beginning to fall in Britain and other European countries, with the European Central Bank now warning of an economic slowdown in Europe, with even worse risks on the horizon.

At the same time, inflation is beginning to rise, especially with fuel and food, cutting into consumer spending on other goods and services. Worldwide food price rises reflect increasing demand from fast-growing economies like China and India. The increasing switch from food crops to production of biofuels is also pushing up prices. The prices of iron ore, steel, aluminium and other industrial raw materials, are escalating. This has provoked an orgy of speculation in the metal markets, with vicious takeover battles between the giant corporations involved.

Oil prices

But it is especially the oil price that has hit the roof, nearly hitting $100 a barrel in the last week or so. Again, this reflects increased demand from China, India and other rapidly growing economies.

At the same time, it is becoming more difficult to find new reserves, and oil supplies have been disrupted by hurricanes and wars. The giant oil companies have made record profits in recent years, but they have preferred to hand out cash to their shareholders rather than plough investment into new developments, especially in the field of alternative energy production.

The price of oil is set in dollars, and the recent price rise partially reflects the fall of the dollar. But even in inflation-adjusted terms, the oil price has nearly reached its previous peak of $101.7. That was in April 1980 following the Iranian revolution, which cut off supplies to the west.

The US economy, which still dominates the world economy, has been slowing down, and the Federal Reserve warns of worse to come. The huge indebtedness of US capitalism, with its persistent balance of payments deficit, has now resulted in a sharp fall in the value of the dollar. Since its 2002 peak, the dollar has fallen 41.2% against the euro and 32.8% against the pound.

At some point, probably not so far away, the countries and big investors who have been pumping money into the US will turn from the dollar. For instance, China holds over $1,000 billion of US treasury bonds and other dollar assets, which it has bought in order to support the US economy, a vital market for Chinese goods. But China’s leaders have already warned that they will turn more to the euro and other currencies if the dollar is further devalued.

The fall of the dollar pushes up the value of the euro and the pound. This makes exports from Britain and the eurozone more expensive on world markets, and this too will undermine growth. Sooner or later, the relatively gradual fall of the dollar will turn into a precipitous fall. That would inevitably provoke turmoil in world financial markets, and a major convulsion in the world money system.

Can China save global capitalism? China has been growing consistently at over 10% a year, with massive investment in new productive capacity and infrastructure. Clearly, there is huge scope for the development of Chinese society. But the Chinese economy does not operate in isolation from the world economy. It is decisively dependent on export markets for its goods in the US and Europe.

However, China’s huge demand for raw materials has pushed up commodity prices, which has begun to undermine growth in the US and Europe. Scope for opening up a domestic market in China is currently limited by the glaring inequalities and the meagre living standards of large sections of workers and rural poor.

Instability built in

Key Chinese cities, moreover, like Shanghai, are experiencing a frenzied property boom, with prestige office buildings and luxury apartments. More recently, there has been an ever growing bubble on China’s stock exchange, with the frenzied buying of shares in Chinese companies. This is unsustainable and will lead to a financial crash.

A slowdown in the advanced capitalist economies, together with financial turmoil in China, is likely to produce a downturn in China.

Capitalism has never been able to guarantee continuous uninterrupted growth, let alone prosperity for the majority of society. The system inevitably means inequality, between rich and poor countries, and within both rich and poor countries. This has never been more glaring than it is today.

Capitalism has always been marked by booms followed by slumps. The ups and downs of recent years have refuted the absurd idea that the capitalist ‘business cycle’ had been abolished.

Financial crises and economic turmoil will inevitably be accompanied by deep political crises, with renewed movements by the working class and the rural poor to protect themselves against the ravages of capitalism. Conscious, organised sections of the working class, however, will see the need to go further and change society.

It is only the ideas and programme of socialism which offer a real alternative to capitalism: a planned economy to replace the anarchy and inequality of the market; workers’ democracy to run society in the interests of the vast majority; and an internationalist approach to overcome the limits and divisions of the capitalist nation state and organise global development in the interests of humankind.

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