As share values tumbled in the most dramatic falls since 9/11, the talk was not so much of whether there will be a recession, but of how deep and long it will be.
There is panic at the top of the world’s largest banks. Citigroup, Merrill Lynch, Morgan Stanley and UBS have had to beg for over $40 billion, mostly from funds in the Middle East and Asia, to cover losses on their subprime-related speculations. Merrill Lynch had an outright loss in 2007 of £3.9 billion.
In Britain, Barclays, HSBC and RBS all announced substantial asset reductions. Fund manager Scottish Equitable has said its investors may have to wait a year to withdraw their money, Friends Provident has also restricted withdrawals and other major property-based funds like Norwich Union are facing similar problems.
Fund manager New Star is said to be in a healthier state than other investment funds, but its shares fell by a third when it recently announced that £500 million was withdrawn by its investors in the second half of 2007.
Other sectors of the economy are faring little better, with Christmas shopping figures having been their worst for 13 years, fuel prices increasing and sterling falling against the euro. The IMF estimated that houses in the UK are overvalued by 40%, indicating that large price falls are around the corner.
The US economy also continues to head into recession and some sections of it are already there. US house prices are falling, spending is slowing and unemployment is rising. The White House is planning an emergency $140 billion fiscal stimulus, mainly in the form of tax rebates for people and companies, to try to stem the tide of job losses and boost people’s spending power.
It is said that US workers might each receive a tax rebate of $800, but it will probably end up being less than this, and in any case debt-ridden households are likely to use such limited rebates to help service their debts rather than to increase their spending. And companies receiving tax relief are not going to use it as a reason to invest if they do not think they can sell more goods or services.
Interest rates have already been cut three times in the US by the Federal Reserve, another cut is expected soon, and more are likely to follow. UK rates may also be cut during coming months. But cuts in central bank interest rates do not mean that the financial markets respond similarly – long term interest rates in particular could remain at a higher level. And where they do filter down to ordinary people, they can serve to maintain or increase debt levels and will not necessarily reduce them.
All the factors point, not to a repeat of the short 2001 US recession, but to a more profound, longer lasting one. And there is increasing realisation that China, India and other ‘emerging markets’ will not be able to bail out the rest of world, but instead will themselves be brought down by the US’s problems, as the socialist has consistently said.
Britain could be especially hard hit because of its own particular build-up of contributory factors, including high house prices, huge personal debt and a massive current account deficit. According to credit assessor Standard and Poor’s, UK banks have some of the lowest capital reserves in the developed world in relation to their lending. Mortgage lenders say their ability to lend will plummet if the Treasury does not bail them out as it has done with Northern Rock bank.
Meanwhile the government is still deeply mired in the Rock crisis, with its latest plan being to convert the £25 billion loaned to the bank into guaranteed bonds. This makes a takeover of the bank by a consortium such as Virgin virtually risk-free and the buyer would no longer have to raise billions of pounds to repay some of the government loan.
Gordon Brown is desperate to avoid the ‘N’ word: nationalisation, because of the link that would be made in the capitalist media with past Labour governments that were less business-friendly. Nevertheless, his government is already effectively partly nationalising the bank through funding it and taking some control over its future. But it is nationalisation of the losses while privatising the assets and profits, as LibDem shadow chancellor Vince Cable pointed out.
It is still possible, however, that the government might have to resort to a full and undisguised nationalisation. Such is the forced departure from the application of neo-liberal ideology of recent decades (privatisation, casualisation, low pay etc) that economists are turning to history books to work out how nationalisation can be carried out!
The overall crisis is not just in the banking sector, but is rooted in all parts of the economy. It is not a simple problem of liquidity; credit would be easily available if fund holders thought it would be profitable to give it. The main drivers of recent growth – house prices and credit-fuelled spending – are starting to fall, making recession virtually inevitable. The falling pound boosts manufacturing exports, but manufacturing is only a small part of the economy.
Usually in recessions, governments try to increase public spending to boost the economy and ease some of the worst effects on the poorest in society. But with government debt already high, Gordon Brown wants to keep the strait-jacket on public services and public-sector pay. Even some right-wing capitalist analysts now say in light of the economic situation that he should stop squeezing public spending so vigorously, despite the increase this would cause in the government’s deficit and the possible consequences on the value of the pound and inflation.
A severe recession would have brutal effects in the language of job losses, home evictions and increased poverty. Recession could even be combined with a continuation of rising prices. Those at the top of society have insulated themselves to a large extent by taking obscene salaries and bonuses, even while their stewardship of production and the economy has proven to be so rotten.
Many working-class and middle class people on the other hand are already regarding the financial outlook for themselves this year as grim. But rather than drawing back and taking what is dished out, any fear and insecurity needs to be turned to anger, positive action and determination to fight back. The campaign for a new workers’ party was initiated by the Socialist Party as a first step towards such a fight. Now is the time to make the case for such a party widely heard among rank and file trade union members, in local communities and among young people who have no choice but to help build a new party if the future is to be different.