world economy: Market meltdown – capitalists in crisis

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Across the world stock markets are crashing as we publish. Thursday’s "Wall Street" collapse has reinforced the downward spiral. Shares are being sold off as investors desperately try to get out as the potentially catastrophic situation of world capitalism becomes more and more obvious. The spectre of the possibility of another Great Depression, like that of the 1930s, has spread its dark shadow.

This sell-off is not simply the result of financial panic or "short-trading". Nouriel Roubini, the capitalist economist who has consistently warned of this crisis, argues in the article we republish below, that now there is "a severe recession, a severe financial crisis and a severe banking crisis in advanced economies." IMF chief Dominique Strauss-Khan was a bit more diplomatic saying that the world was "on the cusp of recession." As the CWI has pointed out before world capitalism now faces "a chain of crises".

Now the markets are setting the pace and national governments are scrambling to find a response to the seemingly unrelenting news of financial crisis and recession in the economy. This weekend’s IMF/World Bank meeting in Washington will see attempts to at least put a brake on these developments, by a combination of state action to secure financial institutions and stimulate the economies, but this is by no means certain. But it is clear that even if the stock markets stabilise and further financial collapses avoided, the world is unlikely to escape a sharp protracted global recession.

The speed at which the international world capitalist financial crisis has, in the last few weeks, developed is startling. Almost every day, and currently even every hour there is a new twist or turn. Government after government is overturning its previous policies. The US and Britain, formerly the arch "pro-marketers", have suddenly nationalised or part-nationalised banks. In Germany the grand coalition has had to announce a last minute postponement of its railway part-privatisation. It’s a period which matches Leon Trotsky’s description of "an epoch of sudden shifts and sharp turns."

Last week’s US congress vote in favour of a $700 billion rescue package did not end the crisis. It seems like history that last weekend Germany’s second largest mortgage company had to be rescued for the second time in 8 days, ending a week that saw five other major financial institutions in the US, Britain, Iceland and the Benelux countries either nationalised or rescued. This week has seen a worsening of the situation and ends with growing reports that the US is preparing to give massive direct state support to its banks or even nationalise some of them.

Already at the start of this week almost the entire British banking system came close to the verge of collapse, prompting a £4/500 billion (about $690/860 billion) government rescue package. Then the British government used anti-terrorism laws to freeze the British assets of all Icelandic companies after the collapse of Icelandic banks led to the freezing of British public authorities’ and companies deposits’ in them.

But still the financial crisis deepened, symbolised in stock markets’ continued sharp falls, as fears of a world recession became more concrete. It was reported that the exports of Germany, the world’s largest exporter, were in August down 2.5% compared with 2007.

Increasingly around the whole world popular fears are mounting over what this crisis will mean. In the US there is also deep anger at those who are seen as being responsible for the crisis and bitter opposition to what is seen as the bailing out of Wall Street as opposed to Main Street. Similar feelings are beginning to develop in Britain over its banking lifeboat and in Germany over the Hypo Real Estate rescue. In some other countries there are still hopes that the worse will pass them by, but while each country is different, it is highly unlikely that any country can totally escape the impact of a world recession. The poorest parts of Africa, Asia and Latin America have already been hit by the rocketing of inflation, especially food and fuel prices, earlier this year, now a recession could mean a further fall in living standards as their export prices drop.

This week fears that the banks’ solvency crisis threatens to freeze the capitalist economy were enormously strengthened. An indication of this alarm was the US Federal Reserve’s October 7 decision to finance loans directly to ordinary US companies by buying their "commercial paper", effectively financing them as the credit crunch threatened to cut off a key source of their funding. As the British government acted to support, but not take control of, the entire British banking system by buying "preferential shares" and pouring in money, the US, EU, China and Britain all cut their interest rates by 0.5%.

However these measures did not immediately stabilise the financial crisis. US Treasury Secretary Henry Paulson has said that he expected more US financial firms to collapse despite the US’s $700bn bail-out programme. But even if most financial institutions are eventually stabilised, this crisis is already impacting on the wider, real economy. Almost simultaneously with the coordinated interest rate cuts came the IMF report warning that the "world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s."

The effects of this turmoil are being seen in the real economy. More countries, most recently France, are officially entering into recession, according to the capitalist economists’ definition of six months’ economic decline. In the US, a huge jump in unemployment was reported last week. Lay-offs and work suspensions are spreading, particularly in the auto industry, as the recent European examples of Ford, Opel and Volvo show.

This impact is not accidental and not simply because of the financial freeze which the banking crisis has produced. There are longer term factors at work which will severely limit recovery from the coming recession. Part of the reason for this emergency lies in the growing domination of finance capital within capitalism. As the CWI consistently argued this resulted in financial deals and speculation becoming more and more the main source of profit, not just for banks, but also for many nominally manufacturing or trading companies. In the drive for financial profit more and more exotic "financial instruments" were created. In Iceland, the capitalists took this to an extreme. However it is being openly revealed that many of these "investments" were intrinsically overvalued or even worthless despite the intricate mathematics that some of them were based upon.

Financial "creativity" is only one part of the capitalism’s current troubles. More fundamentally we have seen over the last two decades a growing reliance on debt and credit to fund the consumption that was the motive force for growth in the US, the world’s largest economy. Capitalism has frequency used credit to extend the market, however this has its limits as eventually it has to be repaid. But this time it was used on massive scale over the last two decades to get over crises, prolong growth and also overcome the effects of the almost universal neo-liberal assault on living standards. While in many countries real wages were still being squeezed during the boom, debt, credit and an increase in the number of women working, enabled families’ consumption to expand.

Whatever now happens to individual banks and financial institutions it is clear that the heady days of credit fuelled exuberant consumer demand are over, at least for a long time, and with it the relatively high world growth rates of the past few years. The illusion sold over the past few decades that debt can fund a good life is broken; future borrowing will be more limited. This is a reason why the hoped for "decoupling" of different parts of the world economy is not taking place. The debt and housing crisis and developing recession is already sapping the strength of US consumers who account for over 30% of the world’s private consumption. Western Europe, with just under a 30% share, is not in a position to take up the slack as its economy sharply slows with different countries facing individual mixtures of falling production and financial and housing crises.

The fact that these two regions that account for roughly two-thirds of the world’s consumer demand are already in recession or rapidly slowing down means that there is precious little scope for other countries, including the four BRIC countries, to provide the extra market demand to replace the US and Europe. Hence we are seeing a sharp fall in oil and raw material prices, as well as shipping rates, as demand slows. Even if a depression is avoided it is probable that, at best, after a recession the world economy will either stagnate or grow quite slowly, something that will feel to millions like being in a recession.

Significantly this crisis has opened up clear divisions between the main imperialist countries. On one hand there have been examples of governments trying to work together, e.g. the October 8 co-ordinated interest rate cut, but also simultaneously of each capitalist class acting to defend itself and its own interests. In Europe, especially Germany, there is already a campaign to blame "Anglo-Saxon" capitalism for this catastrophe, while in Britain blame is shifted to the US.

Within 24 hours the attempt last weekend of the EU’s "big four" to present a common front broke down when the German government said it would safeguard deposits in German banks, only days after denouncing the Irish government for doing a similar thing. But even this "assurance" by German chancellor Angela Merkel was rapidly watered down to a "political commitment", not a legal requirement.

In fact, so far, there has been no unified rescue policy in the euro-zone. This crisis has shown what the CWI has long argued is the fundamental weakness at the heart of the euro zone, namely the contradiction between one currency and 15 separate governments facing conflicting economic conditions. For a united currency to survive there has to be a unified policy, but this is not happening in the EU in this crisis. While it may not occur immediately, many commentators have come to the same position as the CWI, that there is the future prospect of the euro zone breaking up or, at least, some countries leaving. The way in which national governments can act to defend what they see as their own, national capitalist, interests was seen in the Dutch government’s unilateral move to nationalise those parts of the failed Benelux bank, Fortis, within the Netherlands, much to the anger of the Belgian and Luxembourg governments.

The urgent measures undertaken by governments demonstrate capitalism’s flexibly when faced with a threat. Increasingly governments have rapidly executed abrupt about turns in attempts to contain and then put out the financial firestorm, thus there have been formerly "free market" governments intervening and nationalising. Both this unfolding catastrophe and the state measures are a blow to the neo-liberal ideology so dominant over the past two decades. It is an ideological blow to both the ruling class and the former "reformist" workers’ leaders who so enthusiastically embraced the market over the past decades.

However these various state measures and nationalisations are not of socialist character. The idea of all the government’s taking this step is to not to start democratic planning the use of these economic resources, but to take measures of a "state capitalist" character to prop up the system. As Hilmar Kopper, the former head of Deutsche Bank, explained this week "troubled banks should not receive guarantees, they should be nationalised … For the government this can actually pay off: They buy during the crisis and sell when the situation has improved." Kopper is clearly looking to the Swedish example of the early 1990s, but today’s banking crisis is different and more difficult to solve, it is not in one small country during a period of worldwide economic growth.

The crisis, along with governments’ response to it, have fundamentally challenged and undermined the "TINA" argument that "there is no alternative" to the "market". The debate on both the economic role of the state and on capitalism itself has reopened. The US, European and other governments will not be simply able to turn back the clock and simply state that the market has to be left alone. When other companies are faced with crises inevitably the demand will arise for the state to take action to defend these jobs as well. The fact that this economic crisis cannot be "blamed" on the working class will leave to a questioning of capitalism and interest in the socialist alternative.

In the face of a deep recession there will be demands for government action. Already in some countries calls are being made for Keynesian style measures of using deficit financing to fund increased state spending and higher wages to boost economies. These calls will become much louder as the recession deepens. The multi-billions put into propping up the finance sector and trying to stop economic "meltdown" are already being cited as examples to be followed to safeguard jobs, housing, health, education, the environment and so on.

Faced with a combination of a serious crisis and pressure from below some governments may take measures to attempt to stimulate the economy or mitigate the effects of the recession. Such measures will probably be initially popular and greeted with relief given the severity of the crisis and the fact that this is what most trade union leaders are calling for. But such steps will only, at best, have a limited effect. Bush’s January 2008 $165 billions’ worth of tax rebates did not solve this US economic crisis. But there are limits as to how much "money" governments can "create" or print without risking the developing of inflation or stagflation. Further, while some symbolic action may be taken against a few of the super-rich or bankers, at the end of the day the ruling classes will strive to ensure that the working and middle classes pay the price for this crisis of their own making.

Already this crisis is having profound effects. A combined mood of fear and anger is emerging. Already millions have lost their jobs or homes around the world and most of the world’s population have suffered huge increases in food and fuel prices. There are widespread fears over jobs, housing, pensions and savings.

In trade unions fear of unemployment could contribute to a temporary stunning effect, at least in the workplaces. This may have been a factor in the limited response amongst some Flemish private sector workers to the 6 October Belgian general strike. But this does not mean there is no anger in the workplaces, anger which will increase as it becomes clear that capitalism will attempt to unload the costs of this crisis onto the working class, and sections of the middle class as well. Already some bosses have moved to ruthless attack on workers’ pay, conditions and jobs in attempts to survive in the recession, as has been seen in Aer Lingus, where workers were suddenly given three weeks notice of sacking a quarter of its workforce. If workers do not feel confident to resist in the workplaces then the anger will be seen in elections and other forms of protest.

Across the globe there will, naturally, be different situations in each country. Some will be affected, more or less, by the coming recession. But what has gone is the idea that the "market is best".

In the former Stalinist countries, this will be the first experience of a worldwide recession since capitalism was restored in the early 1990s. For some countries, like the Baltic States, they are facing a very hard landing. In Russia the recent high hopes of economic stability and growth have been undermined. Workers from the central and eastern European states, who moved west to find work, will find that more difficult and under pressure to accept even lower wages. These experiences will start to result in a questioning of the hopes and illusions in capitalism that developed during the boom.

The most significant development could be seen in China which has seen the creation of the world’s largest working class, a new working class that has until now generally seen only economic growth, albeit often on the basis of low wages and ruthless exploitation. Just a significant slowing down of the Chinese economy as the world goes into recession could produce explosive effects and the beginning of the creation of an independent workers’ movement.

Similarly huge upheavals could be seen in countries, like Brazil and India, that have seen recent economic growth as well as in the poorer countries of Africa, Asia and Latin America. The food riots earlier this year were just a foretaste of the protests that will erupt against the rising poverty and misery that a worldwide recession will bring.

But the situation in Europe, the US and other imperialist countries will not be quiet for long. Even if there is only limited trade union action in some countries the political effect will be massive. Workers, and sections of the middle class, instinctively blame the bankers, governments and the ruling class as a whole for this crisis. This financial meltdown and recession will produce an outpouring of resentment and anger, particularly because these events are coming after years of growing social polarisation, company super profits and super wages/bonuses for those at the top. There will be increasing demands for "bailouts" for working people and public services.

In this situation it is essential that the workers’ movement offers a way out for the working class, poor, youth and the middle class hit by the crisis. The whole system is being thrown into question by the traumatic nature of this crisis, no longer do economists speak of "black" days (there are too many), perhaps soon there will be talk of "black months" or even "black years".

But in most countries in the world there are, currently, no workers’ or left parties offering an alternative. Most of the former social democratic, socialist and many communist parties have become totally pro-capitalist parties that have also lost their working class roots, although some workers still vote for them. This means that the capitalists are not now being challenged for the crisis their system has created.

This crisis puts even more sharply on the agenda the need for the creation of new workers’ parties, something that the CWI has been generally advocating for some time.

Such parties, along with the trade unions, have to put forward an emergency programme to protect jobs, homes, living standards, pensions, working peoples’ savings and as well as explaining the socialist alternative to capitalism. The fact that, in the US, "socialism" is being used as a term of abuse against their own government’s rescue plan by right wing Republicans is only possible because there is no socialist party challenging capitalism. But even this stupid charge gives recognition that socialism is the fundamental alternative to capitalism.

But if the workers’ movement does not offer a fighting socialist alternative, there is the danger that right wing, chauvinist or religious populists could exploit the anger and divert it away from drawing socialist conclusions and challenging capitalism. In Europe there is warning in the contrast between Germany, where the anti-neo liberal Left Party is getting up to 15% in opinion polls, with Austria, where there is no left party, the extreme right won over 28% in September’s general election. But even developments like those in Austria will put more sharply on the agenda the building of a workers’ force against the right and for socialism.

The exact economic prospects are unclear. It is not certain how deep a recession will be, but it will be harsh and prolonged even if the worse is averted. The likelihood is that the "recovery" from this will be slow, almost stagnation, not a repeat of the boom of the last 15 or so years. Last week Gary Younge, in the London Guardian, wrote that "‘Capitalists can buy themselves out of any crisis, so long as they make the workers pay,’ said Lenin. It is rarely regarded as common sense to quote him in polite company. Yet as a description of what is taking place right now, it is the most sense I’ve heard in a long time." This will be the setting for new class struggles against a background of the market and capitalism will increasingly be brought into question.

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October 2008