The global and multi-faceted crisis of capitalism has entered a new phase with the turmoil in the financial markets and the collapse of banks in the US and Credit Suisse in Switzerland.
It is likely that many features present in the current systemic crisis will now be accelerated. The possibility of a global economic recession in 2023/24 is now a very strong possibility, although not a certainty at this stage. The working class and Marxists need to be prepared for dramatic economic, social, and political consequences which flow from this. In particular, an even sharper form of class and political polarization, and more social upheavals, than already exist, are serious prospects in the short term.
The ruling classes are terrified of the prospect of the banking crisis in the US and Switzerland spreading and triggering a major global financial meltdown, such as unfolded in 2007/8 and which led to the ‘Great Recession’. It is not certain that the current crisis will immediately spread in the short term or be a more protracted drawn-out series of crises in the financial system. Yet, as the bourgeois political economist Nouriel Roubini argued, the current banking crisis is the “beginning of the blood bath”.
If it is more of a train crash in slow motion, the ruling classes will be like hunters clubbing down moles in the garden – when one is knocked down yet another pops up! The crisis in 2007/8, like many other financial and economic crises, developed not as a single act. The recession in 2008 was preceded by a series of crises and financial implosions in February, September, and October 2007. What is certain, however, is that the global financial system, like capitalism, as a whole, is in a systemic crisis. What has occurred in the last couple of weeks “should not be happening,” according to some bourgeois commenters, who hoped that the measures taken after 2007/8 would prevent such events from occurring.
Each crisis of capitalism has its own particular features and this one is no different. The underlying problems faced by capitalism following 2007/8 have not been resolved and are now exploding in turmoil and upheavals. The trigger of the current financial turmoil is not the same as in 2007/8. That was primarily caused by massive dodgy loans and speculative bubbles reflected in the subprime mortgage catastrophe. Behind that was a systemic crisis that was developing. The recent events were triggered by different factors and in an entirely different world situation, with increased geo-political conflict, the rise of inflation and hiking of interest rates, the ending of the era of “cheap money”, and other factors. The lack of confidence in the overall economic situation, lack of investment, uncertainty about the geo-political situation, supply chain problems, and other factors, are all exacerbating this crisis.
The collapse of Silicon Valley Bank (SVB), Signature, and Silvergate banks in the US, followed by the crisis at First Republic and the collapse of Credit Suisse, occurred as the banks, in essence, were faced with a run, as investors withdrew funds and their share prices fell. Although this run on the banks was via computer screens, it was a classic run on the banks. According to some commentators, this run on the banks has been the biggest and most rapid ever. Credit Suisse saw 10 billion euros per day withdrawn in the run-up to its collapse. On 7 March, a few days before SVB collapsed and US$42 billion was withdrawn by depositors. This also flowed from the impact of the change in policy from the Federal Reserve, European Central Bank (ECB), and other central banks, when they began to increase interest charges 12 months ago. The consequences of this change of policy – an attempt to deal with inflation – are now being felt throughout the banking system.
Collapse of SVB
The collapse of SVB and other banks was largely triggered by the ending of the era of cheap money. In the cheap money–era, the banks, including SVB, invested vast assets in long-term government bonds – which were seen as a safe bet when interest rates are low. Once interest rates were raised the bonds lost value, exposing the banks to insufficient liquidity. While each bank has its specific issues, this exposure against the background of higher interest rates now threatens other banks. Signature Bank was also hit by its investment in ill-fated cryptocurrencies, reflecting the destabilizing impact of the “shadow” financial system (which is more than just the cryptocurrencies).
SVB saw its deposits grow from US$62 billion in 2019 to US$189 billion at the end of 2021. Their investment in government bonds was essentially a US$100 billion one-way bet on low-interest rates, which was lost once interest rates rose. When interest rates rose these bonds fell in value. The current financial system has been operating on low-interest rates for a long time. SVB had specific problems yet the problem they faced is generalized across the finance system. Following the interest rate hikes, depositors withdrew cash and the bonds were sold, which resulted in heavy losses and a lack of liquidity.
The ruling classes, partly learning from the crisis in 2007, responded rapidly, and stepped in to try and prevent contagion from spreading and triggering a collapse of the banking system. The US Federal Reserve and President Biden reverted to a form of quantitative easing (QE) by the back door, to guarantee and bail out the banks in the US. The banking crisis in the US has, thus far, only affected smaller or medium-sized banks. Smaller and medium-sized banks in the US are generally far more numerous and significant than in Europe. An added factor with SVB was its importance to the tech sector. According to SVB’s own figures, 25% of tech startups are linked to it. This is a critical sector of the US economy, not least because of competition with China.
Yet the initial loan – or bailout – was not enough, as has been repeated throughout the unfolding crisis. The initial injection of cash in SVB, Signature, First Republic, and Credit Suisse, was not enough. In each case, more and more have been poured into the system. US banks, in panic, borrowed US$164.8 billion from the Federal Reserve backstop. It was US$4.58 billion the previous week. The ruling classes have been prepared to throw massive resources to bail out these banks. Morgan Stanley estimated that in the US approximately 50% of what was injected into propping up the banks in 2007 has been drawn on in mid-March 2023. The capitalist classes are desperate to prevent a meltdown. In reality, they have, at best, bought time, and further bank collapses are a near certainty in the coming period.
The collapse of Credit Suisse is a major international development. This was not a minor bank. The 167-year-old institution was one of the ‘US$1 trillion banks’, and a major pillar of the global financial system. It had been involved in scandal after scandal, from Mozambique to Russia, chasing higher and higher returns. SVB evidently forgot the Duke of Wellington’s maxim; “High-interest rates are another name for bad security”. Withdrawals by depositors turned from a trickle to a flood, as SVB imploded.
A striking feature of the banking crisis was the brutality of the Swiss government in imposing the takeover of Credit Suisse by UBS – even to the extent of tearing up the government’s own previous regulations. The initial US$54 billion bailout, in the form of an emergency loan, was not enough to stop the rot. Commentators’ references to the “merger” of the two banks are farcical. Credit Suisse collapsed and is no more! This points to another tendency that may develop further with more banks collapsing – an even greater monopolization of the banking system in some countries. The massive conglomerate that exists from the take-over of Credit Suisse by UBS is equal to 220% of the GDP of Switzerland. Another bailout should that fail will be somewhat problematical!
The coyness of representatives of the bourgeoisie to state what is reflects their fear of the consequences of doing so. A total takeover becomes a ‘merger’ in the banking and governments’ language! In the US, Biden and commentators search for any adjective but “bailout” because of its association with the money poured into the failing banking system in 2007/8 and the deeply unpopular austerity policies. This, and what followed, gave rise to Donald Trump and Bernie Sanders.
Banking system “sound”?
The protestation of US Treasury Secretary, Janet Yellen, that the US banking system is “sound” belies the reality of the situation and the vulnerability which exists. The US banking system has US$620 billion in unrealized losses – accounting for 28% of bank equity. In smaller banks, it is closer to 50%. Overall the US banking system’s market value of assets is US$2 trillion lower than suggested by their book value of assets. Should half of the uninsured depositors decide to withdraw funds almost 200 banks are at risk.
In Europe, it should be noted that Credit Suisse had capital and liquidity ratios only slightly less than the European average in 2022. Once confidence evaporated it meant little. Eurozone bank is not earning enough profit to cover the cost of capital. Shareholder value is effectively being destroyed. Moreover, rising interest rates, which the ECB has now increased at an unprecedented pace due to inflation, are certain to hit the vast holdings the banks have in government bonds, mortgages, and other debt.
US imperialism has vast resources to step in and prop up the banks should the crisis extend to other banks. The EU, should it be confronted with a bigger banking crisis, will struggle further to be able to contain the crisis. This is partly because of the resources of the ECB and also the prospect of national divisions and conflict arising between the governments of the Eurozone, all of which have differing economies and banking systems. While this crisis began in the US, it is possible it could pass to Europe, which could be hit even harder should the contagion spread.
Capitalism is now faced with an irreconcilable dilemma. Do the capitalist central banks lower interest rates to stave off and try and contain the developing financial crisis or do they maintain higher interest rates to combat inflation? They cannot do both. They are damned if they do and damned if they don’t! Whatever they do will not resolve the underlying problems in the economy, including the inflationary features. The idea that the adjustment of interest rates alone will somehow magically resolve the inflationary and other problems is false. Should they attempt to squeeze inflation out of the system, it will need a brutal recession; a course of action that some of the capitalist class are prepared to resort to. The rise in interest rates can also wipe out many of the so-called “zombie companies”.
None of the measures taken have helped lift the confidence of the bourgeoisie, as they hoped. Massive hoarding, rather than an investment, that started to take place before the run on the banks, continues. The current crisis in the banking sector will further tend to strengthen this trend. The squeeze on loans and liquidity arising from the banking crisis can also add to recessionary pressures.
The ECB, faced with an inflationary spike, opted to increase interest rates by 0.5%. However, this was before the banking crisis had fully developed. Jay Powell, chair of the Federal Reserve since 2018, prior to the onset of the banking turmoil, was robustly supporting raising interest rates. These decisions would drive the economy towards recession and possibly a deep recession or depression (a course the Fed was conscious of could happen but which decided was necessary to tame the hydra of inflation). Now Powell and the Fed have raised interest rates by 0.25%. Both Powell and Christine Lagarde, President of the European Central Bank since 2019, have now made clear they will raise rates further should inflation not be tamed, despite the consequences that this may have. The rise in interest rates is crucial given the explosion of global debt, both public and private. Defaults by countries, institutions or individuals, will impact on the financial crisis. This applies to the industrialised West, and especially to Asia, Africa, and Latin America.
Now a furious struggle is taking place between different wings of the ruling class over what they should do. It is possible that they will pause interest rate rises for a period in the future. Yet what is highly unlikely is that a cut in interest rates will immediately take place. Within days, ‘QE by the back door’ has been stepped up, and the higher interest rate rises discussed by the Fed scaled down, for now. Events have forced them to change policy. The turmoil unfolding is likely to see the ruling class oscillating and floundering around from policy to policy in the coming period. Pausing interest rate increases, then raising them, possibly later cutting rates, etc., is a desperate attempt to control the multiple crises that are unfolding.
Apart from the massive increase in state intervention that has already taken place, often hidden under “false flags”, to try and stave off the banking crisis, further measures are also possible. Attempts to regulate the banks are possible, especially in the US, following former president Trump’s weakening of the measures introduced after 2007/8. However, the systemic crisis facing the financial system cannot be reduced merely to the question of regulation, albeit it can have a temporary effect. The switch from ‘cheap money’ to higher interest rates is a crucial ingredient that cannot be simply overcome in an era of rising inflation.
The prospect of more state regulation will not be uniform however given the different conditions which exist in each country. The UK, for example, prior to the current crisis, was looking for less regulation. This arises from the changed situation that the financial sector in the UK now finds itself in, particularly within the European context. The balance has shifted away from London to the Netherlands, Frankfurt, and elsewhere. In an attempt to attract back financial capital, the British Tory government, and prime minister, Sunak, who represents and is directly linked to finance capital, may still drive for even less state regulation, but this is not certain.
Global capitalism is facing a series of interconnected crises, economically and politically. These developments cannot be separated from the geo-political conflicts that are taking place, which can and will impact on the immediate economic prospects for capitalism. The threat of a rapidly developing banking crisis in the US drove US imperialism, Japan, Canada, Britain and the ECB to coordinate measures. These were aimed at ensuring daily currency swaps take place to ensure banks have the necessary dollars to operate. An important trend in the coming period could be a weakening of the US dollar. This is already beginning to develop, as investors switch to “safer havens” such as gold and other precious metals. Gold is heading towards US$3,000 an ounce, according to some estimates. There is a movement away from the dollar, spearheaded by China and Russia but also reflected in Latin America, Asia, and Africa.
Following 2007/8, world capitalism was able to benefit from the growth and developments of the Chinese economy, underwritten by relations with the US. This “escape route” is not present today. China faces a domestic economic and social crisis, which means it cannot play the same role as it did in the post-2007/8 period and previously. The reduced 5% target growth rate announced by the regime illustrates this. China is also being hit by the ban on important microchips from the US, which is crucial for the development of the economy. Taiwan’s domination of the production of advanced micro-chip is crucial for future developments in the world economy and also geo-political relations.
Chinese banks, largely directed by the state and to an extent insulated from the western financial markets, may not be hit directly or dramatically by the current banking crisis. However, the vast debt owed to them in Asia, Africa, and Latin America means that it will be hit, at a certain stage, by the impact of other global developments. Reflecting the crisis faced in China, the international mega projects of the “belt and road” project have largely been placed on hold.
Capitalism also faces a series of other interconnected problems in the economy. There is a major problem with the supply chains. These and other factors fuel the inflationary pressures in a way they did not do in the 1970s. The problem of the supply chains is likely to intensify as the trend towards regional blocks increases, along with an end to the hyper-globalization – factors that were dominant in the 1990s. The “nearshoring” reorganization of the supply chains taking place reflects this.
Along with all of these developments, the consequences of the war in Ukraine and other possible military clashes, such as is possible in the Middle East, will impact on the world economic situation, and threaten to add to the prospect of a recession in 2023 or 2024. The ruling classes may be able to take some empirical measures to ‘kick the can’ down the road, for a time. Yet they are running out of road. A recession or deep depression, at some stage, is unavoidable, given the contradictions present in the system.
The working class and Marxists need to be prepared for dramatic changes that can arise from these processes. It will result in massive polarization and heightened conflict. Bitter class battles are already breaking out, reflected in the heightened class struggle in Britain, France, Germany and elsewhere. The recession in 2008 eventually gave rise to the mass movements around Bernie Sanders in the US, Jeremy Corbyn in the UK, and saw mass revolts and upheavals in Asia, Africa and Latin America. It also led to the election of Trump in the US, Bolsonaro in Brazil, and other reactionary regimes.
The far-right populists will attempt to capitalize on the current banking crisis and attack the “bailouts” of the bankers. Already sections of the Republican Party in the US have railed against the bailout of the “rich techies”, with funds poured into SVB. The fear of further banking collapses can be very powerful, especially in countries where the trauma of what this meant historically is part of mass consciousness. The right-wing populists can play on this, as we have begun to see in Switzerland. The onset of recession will pose the threat of the far right using the financial crisis, immigration, and other issues to try and strengthen their support. A deep recession can also “stun” sections of the working class, should unemployment rocket, along with other attacks on living standards. It can also lead to crucial political radicalization and polarization.
It is this scenario of deepening capitalist crisis, that socialists and the working class must prepare for. As the CWI has explained, the weakness and ideological collapse of the Left in the recent period, and its failure to put forward an alternative to capitalism, has left a political vacuum. The building of mass workers’ parties with a socialist alternative programme to capitalism, to offer a way out of the contradictions and dilemmas of the profit system, is posed even more urgently as this crisis is unfolding. The demand for nationalization of the banking system, under democratic workers’ control and management, as an alternative to capitalist bailouts, is a central demand. A struggle to help fight the ravages of inflation through the establishment of a living wage, adjusted to match inflation and price increases, is essential. For committees of workers, consumers and trade unionists to determine in each country the real rate of inflation is a demand that is necessary to struggle for. We cannot trust the fixed inflation figures of capitalist economists and politicians. These policies, together with an emergency socialist programme to break with capitalism and introduce a democratic socialist plan, is the only road out of the impasse that capitalism finds itself in.