Events have been moving fast since the credit crunch overspilled into the stock markets at the beginning September - hitting the banks first and then most of the major companies - until eventually both in the US and in Britain, governments formally admitted that the economy was now in recession. Over these two months, it has become increasingly obvious that the scale of this crisis could only be compared to that of the crisis of the 1930s.
The mega-losses suffered by the banks as a result of their past speculative lending spree, finally produced a full-scale banking crisis. Scores of financial institutions went to the wall or were on the brink of doing so, thereby threatening the financial sphere with complete meltdown. In the richest countries, the banking crisis prompted the largest government bail-out of the financial system in history. Meanwhile, dozens of smaller or poorer countries, which did not have the resources to try to contain such huge financial turmoil, were brought to their knees and are now facing partial or total bankruptcy and, in any case, the prospect of prolonged difficulties.
However, these bail-outs do not mean that the credit or banking crisis are over, not even in the richest countries. On November 6th, the US Franklin bank was closed down by regulators - making it the 18th bank failure in the US this year, as well as the 3rd largest. Meanwhile big British banks embarked on yet another round of write-offs, signalling that more losses are in the pipeline. First, RBS wrote off £3bn worth of now worthless loans, then it was the turn of HBOS, with £2.5bn losses and then HSBC with £2.7bn. In fact, there is still a colossal mountain of "toxic" credit-related paper still unaccounted for, because it is hidden away in the vaults of the world financial system. The IMF currently works on the basis of a rough estimate that up to £6,000 billion worth of this now worthless paper will have to be written off before the end of next year. In and of itself, this mind-boggling figure means absolutely nothing, except that there is still a lot more trouble to come in the banking system, and probably a lot more casualties of the crisis to be expected. And as the developments of the past weeks have shown, the economy is bound to be affected.
At the time of writing, the stock markets of the rich countries seem to have returned to some sort of uneasy normality - so far, at least, because no-one knows how long this will last. Even then, the shares quoted on these markets have lost over one fifth of their total value as a result of the past month's chaos alone - and over a third compared to the peak they had reached over the previous 12 months. This means that several thousand billion pounds have disappeared into thin air worldwide, with £450bn melting away in Britain alone, or the equivalent of more than 3/4 of the government's annual budget!
Recession was lurking behind the credit bubble
Of course, a large part of the astronomical amount which has disappeared from the stock markets was speculative fancy money, in the first place. Just as a large part of the mega-losses incurred by the banks can be described as paper losses of loans, which had been grossly overvalued in the previous period due to an on-going speculative lending bubble - not just in housing, but in every sphere of the economy.
For years, all this fancy money was the source of a large and easy income for the capitalist classes. They made a luxurious living out of it. Instead of being committed to long-term investment in the real economy, their capital was entrusted to speculative funds which lent it on a short-term basis to companies and to other speculators. Big companies also indulged in that sort of financial alchemy which boosted their profits and more than made up for their lack of productive investment. The financial system was awash with money - profits were so easy! In Britain, for instance, while GDP increased by 50% between 1999 and 2007, financial profits more than trebled over the same period and this, despite the financial crash of 2001!
Whole sections of the economy thrived on borrowed money. Rather than investing in new productive facilities, companies borrowed massively to increase their market share by buying their lesser rivals at grossly inflated prices. Rather than issuing new shares, they increased their borrowing yet again, so as to pay larger dividends and boost the price of their shares. Private equity firms made huge profits by buying companies, cutting their workforce to the bare bone, increasing their debt far beyond what their profitability allowed and then, selling them on once their capacity to borrow had been exhausted. As a result, the total outstanding debt of British companies reached the unprecedented level of 180% of GDP in 2007!
An enormous amount of borrowed money roamed the planet in search of a quick buck. In some cases, it speculated on the existence of a potential demand and created an artificial market - the explosion of office building and real estate speculation in the far-East was a typical example. Elsewhere, on the contrary, it speculated on scarcity causing prices to go through the roof - as was the case with the British housing market, for instance. All over the world economy, speculative bubbles were thus created, whose common denominator was their dependence on extensive borrowing and their flimsy relationship with the real world.
Meanwhile, similar methods were used to keep consumption going in the rich countries. Working class families were made to mortgage their inadequate incomes for decades to come, not only to ensure that they would have a roof over their heads and a car to take them to work, but to be able to buy the necessities of life in supermarkets, to pay their energy bills and even to pay the bills of their previous loans. With the astronomic increase of house prices, lenders offered so-called "cheap mortgage deals" to entice families into borrowing sums which were way above their income, especially against the backdrop of a precarious labour market. Mortgages worth up to 125% of a house's value became commonplace on the grounds that, since house prices were increasing by 15% a year on average, the loans could always be recouped against the price of the house, whatever happened to borrowers. Whether repayments were affordable or not for borrowers, especially after the initial period when their "cheap" deal expired, was no concern to lenders. Households' indebtedness reached unprecedented levels. Britain topped the rich countries' league in this respect, compared both to disposable income and to GDP, with a total outstanding debt worth £1,457bn by mid-2008, equivalent to 2.7 times the government's annual budget or 105% the country's annual GDP!
However, this enormous credit bubble only concealed what was really going on behind it, in the real economy. It concealed the companies' real situation. The Bank of England's latest "Stability Report", published in October, reveals, for instance, that already in 2007, more than a quarter of company debt was owed by firms which had to borrow in order to meet their interest payments! The credit bubble also concealed the increasing gap between the goods and services sold on the market and the purchasing power of the populations. That is, until, eventually, the full extent of this gap was brutally revealed when the chickens came home to roost, causing the speculative bubble to burst, first in the US housing market and then in the housing markets of the other rich countries, and finally at the scale of the entire financial system. Then and only then, was the full extent of this gap exposed in its crudest nudity.
When the first signs of the crisis appeared, by the middle of last year, the experts of the capitalist class described them as a "correction", in other words the reflection of the capitalist market's unconscious "regulation" of itself, which would eventually "correct" the hypertrophy of the previous period and bring things back to "normal".
However, once a crisis breaks out in the capitalist economy, the system's pendulum has a nasty habit of swinging back brutally in the other direction, wiping out far more "dead bodies" than would be required for a simple "correction", to use the experts' language. Not only does the system reveal suddenly, in the crudest fashion, what really lay underneath the apparent "affluence" of the previous period ("affluence" from the point of view of capitalist profits, that is), thereby exposing its own permanently crippled state, but it proceeds to rid the economy of all the uncompetitive remnants left over from the previous period and... a lot more.
This is what we are beginning to see today, with the announced slide of the capitalist economy into recession on a world scale. As to what was concealed by the financial bubble, it had already been partly visible for a long time - for instance through the large reduction in British manufacturing jobs over the past decade and the regular shrinkage of the value of manufacturing assets every year since 2001. More recently, even before it was announced officially that Britain's GDP had shrunk by 0.5% over the third quarter of this year, the turnover of production industries had been going down for six consecutive months, while that of service industries had been shrinking for seven months.
The successive waves of the crisis
The summer of 2007 may be remembered by historians as the point when what had appeared to be a simple crisis in the US housing market turned into a full-blown international financial crisis. The US housing speculative bubble burst and the huge amount of debt papers which had been produced to fund it, suddenly lost their value, causing massive losses to the banks, insurance companies, investment funds and non-financial businesses which had bought them for speculative purposes. The meltdown of US housing-related debt was followed by similar meltdowns, affecting anything from corporate bonds to credit card debt and commercial real estate, not to mention the even larger market of debt-related so-called "derivatives". Soon the growing mass of unsaleable debt paper poisoned the world's entire financial system.
After the massive losses they had suffered, the banks reduced their lending and increased their interest rates, in order to factor in the increased risk of lending against the backdrop of this new situation. Speculative funds, which provide much of the funding used by the banks, reacted in much the same way, by being more cautious in their operations. These combined processes were mechanically amplified by the way in which money markets operate - operators make tens of thousands of lending and borrowing operations, in which the collateral provided by borrowers is made precisely of the same kind of debt papers which could potentially become worthless. This led to the aberration of having a liquidity crisis in a system which was awash with money. Only the injection of money by the central banks kept the money market and banking system going.
Right from this starting point, the crisis spread to other spheres - to oil and then to commodities in general, including food, and finally to the productive sphere, in the form of the present recession. These crises were all one and the same crisis, spreading through different channels, sometimes separate, sometimes combined, but always fuelling one another.
Thus, for example, it was the original US housing crisis which fed back into the oil crisis, the commodity crisis and even the food crisis. As investment in US housing was no longer profitable, capital sought other playgrounds and flooded the commodity markets, thus brutally pushing their prices up. Likewise, the subsequent ups and downs in the price of oil either reflected other jolts of the crisis, or anticipation of speculators in front of these jolts.
By now, it seems obvious that what we are facing is a general crisis of the capitalist economy. But unlike what happened in 1929, the states of the rich countries have immediately jumped to the rescue of their bankers and more generally of their capitalist classes - without much success, so far.
The first stage in the deepening of the crisis involved the US government's seizure of two major lenders, Fannie Mae and Freddie Mac, on September 7th. This was followed by the bankruptcy of one of the biggest investment banks on Wall Street, Lehman Brothers, on September 15th. Then the US government rescued the insurance giant AIG, at the last minute. From this point onwards, governments throughout the world started to pour colossal amounts of funds into the financial sphere.
The US interventions cost the American Treasury over £600 billion, including the £435 billion spent more recently on the Paulson plan - this, when the Federal Reserve had only £500 billion at its disposal. The central banks of the other imperialist powers followed suit. The Euro-zone and Japanese central banks thrashed out programmes costing the equivalent of £150 billion each, while Brown turned the already huge aid package offered for months by the Bank of England, into a British version of the Paulson plan, bringing the total cost of the banking bailout to £400 billion.
This is a brutal and cynical class policy. The only "way out" of the crisis proposed by the capitalist class will cost the working population as much as the crisis itself. Because it is the working population which will be expected to foot the bill for the states' handouts to those who are responsible for this.
To stop the vicious cycle of a crisis in which the financial turmoil is spreading to the production sphere, only to feed back into the financial sphere, thereby creating more turmoil, governments are trying to convince the capitalists that they have nothing to fear for their capital since the states will substitute themselves for any defaulting bank. But this is not enough to bring the money market back to its normal operation.
Up to now, nothing has worked. But things can still get a lot worse than they are. So far, the panic has been limited to bankers, fund managers and other financial market operators. But what would happen if this panic spread to millions of savers and there was general run on all banks? All the reassurances given by political leaders, claiming to stand behind savers and small businesses, are cynical lies. What they are really out to do is to protect the capitalist classes against such a panic!
The expression of an irrational system
The basic cause of the financial crisis is no mystery. Financial instruments - shares, bonds, securities, derivatives, etc.. - are commodities like any other, with their own markets where they are sold and bought, if possible at a profit. The more "sophisticated" these products, the more remote from the real economy these products are. Nevertheless, they are subject to the same kind of regulation as any commodity in the capitalist economy, according to the changes in the balance between supply and demand on their respective markets. But just as for any other commodity, this regulation takes place "after the event", through crises.
These crises are not some kind of "aberration" in the operation of the capitalist economy, but its "normal" way of regulating itself and restoring some sort of order in the chaos created by the capitalists in their individual pursuit of private profit. To put it another way crises are not what is irrational in the capitalist system. It is the permanent operation of the system which is irrational, since it takes no account of the real needs, resources, or potential of society.
Competition, the drive for profit and speculation are built-in characteristics of the form of economic organisation which is specific to the capitalist system. Capitalism had its period of glory two centuries ago, when it allowed humanity to make enormous progress. But since then, it has become a permanent source of waste and a cause of periodic social disintegration.
If today's crisis is developing on such a scale, it is due to the fact that the domination of the financial sphere over the rest of the economy has become overwhelming and also to the colossal volume of roaming capital. This domination is not new - already, over a century ago, Lenin considered it as one of the main features of imperialism. But the financial bubble of the past period and the way the financial sphere drives the economy are inseparable from the economic history of the decades of slow economic growth which followed the so-called post-WW2 "boom".
In the late 1960s and 1970s, the development of the financial sphere took the form of an explosion of so-called "euro-dollars" and "petro-dollars". These were loans in dollars issued by non-US banks, thanks to deposits in dollars made by US investors seeking to escape US taxes, companies trading in dollars, oil companies, the rulers of oil-producing countries, etc.. In both cases, these dollar loans escaped the control of the US authorities and were the cause of a speculative bubble.
The coincidence between the end of the relative post-war "boom" and the beginning of this new rise of financial instruments over the economy was not an accident. Because markets were becoming saturated and the rate of profit was falling, big business launched a multi-pronged offensive to boost its rate of profit at the expense of the working class.
Over roughly the last three decades, the financial sector never stopped growing in relation to productive activity. Local crises or industry-based crises followed one after the other, more and more frequently, each time disrupting the ongoing financial boom. As soon as a crisis ended, this financial boom started up all over again.
The rapid expansion of finance picked up speed once again in 2000-2001. Today the business press accuses the lax policy of easy credit initiated by Alan Greenspan, the head of the US Federal Reserve at the time, for being responsible for the financial explosion which took place at the time. Of course, Greenspan's policy of easy credit allowed banks and financial institutions to lend money even more easily, since the Federal Reserve's low interest rate helped the banks to borrow on the cheap. But Greenspan does not deserve all the blame. His policy only reflected the wishes of the US capitalist class.
The "dotcom" crash, which took place in 2001, coincided with the 9/11 terrorist attacks. Either event could have pushed the US economy into recession. Faced with this threat, the Federal Reserve rushed to rescue the economy. This was the origin of the easy credit policy. But while easy credit allowed a relative recovery, it also fuelled a much greater development of finance and speculation. Like so many times in the past of capitalism, the medicine used to cure one disease eventually produced an even more serious disease. Indeed, in some way, the "dotcom" crash was the first phase of today's financial crisis, or in any case its dress rehearsal. The financial sphere then stepped up the creation and accumulation of financial instruments by taking advantage of the central bank's policy.
By now, the IMF has forgotten about its earlier optimistic forecasts. Now it talks about a recession affecting all the rich countries, with Britain being the worst hit among the European countries. But it still claims that a crisis as deep as that of the 1930s is out of the question.
Even if the IMF turns out to be right this time, the waste created by the present crisis is already enormous. Construction has stopped, plants have slowed production or shut down entirely and workers have lost their jobs. Add to that everything that has already happened. Profits have gone up in smoke. But these profits were the product of real exploitation - wage freezes, speed-ups, job cuts, etc.., to get the same production with fewer workers, flexibility and outsourcing to cut wages. This turn of the screw on the working class was carried out in the name of "competitiveness", merely to accumulate more profit. And, today, what has the working class gained for all these sacrifices and hardship? Humanity is once again paying a huge price because an economic system based on the market and the drive for profit continues to survive.
The states and the crisis
It is impossible to predict how the crisis will develop. One can only note how fast the capitalist class and its representatives at the head of governments have dispensed with all those old speeches about "laissez faire". The most reactionary governments have been using public money left, right and centre. They are buying stock of banks and financial institutions, when they do not resort to full nationalisation. This is certainly not new in the history of the capitalist economy. When confronted by the chaos produced by their own management of the economy, the capitalists generally expect their states to protect them against the storm.
This is how the US government and Nazi Germany tried to overcome the Great Depression which followed the 1929 crisis. Governments played the same role after World War 2
Even if nationalisation of the entire banking sector is not on the agenda - except in tiny Iceland - government interventions are already extremely costly. So, even if Brown does not overshoot his £400bn bail-out budget, it is already almost equivalent to the state's total debt! The huge expenditure by the central banks and the governments will increase their debt and push them to print money in one form or another.
In the US, the bail-out will inevitably lead to a depreciation of the dollar. Nonetheless, the dollar, without a competitor, will continue to keep its place as the favoured reserve currency. This will allow the US to generously share its inflation with all those who keep their reserves in dollars! Each country's bail-out will also generate its own inflation. All this will combine in inflation rates varying from one country to another, thus leading to turbulence in currency exchange rates and perhaps monetary crises, with all the consequences this can have on international trade.
There seems to have been a consensus in all the big imperialist countries that there must be state intervention in the banking system. In the US, the Democratic Party as well as the Republican Party aligned themselves behind Bush on this issue. In Britain, even the Tories gave their full support to Brown's bail-out, confining their usual political posturing to side issues.
The different forms of state intervention, up to and including full nationalisations, are just a way to hand public money over to private capitalists. Not only will the capitalist class get the money of the bail-out, but it will not even be required to rescue the banking system from the chaos that it caused. Of course, once the crisis is resolved, once the banks become profitable again, they will be handed back with no questions asked!
Brown's handling of the bailout of Northern Rock, Bradford & Bingley, RBS and HBOS is typical of the different states' policies. Although Northern Rock has been fully nationalised, at least technically, it tops the banking league both in terms of job cuts and in terms of repossessions - thereby showing that if this was a nationalisation, it was carried out deliberately against the interests of the bank's workforce and against the interests of the banks' borrowers. RBS and HBOS, whether it is absorbed by Lloyd-TSB as Brown wishes or not, both stand to come under the control of the government, which will be by far their largest shareholder.
Yet Brown has gone out of his way to emphasise that there was no question of the government trying to influence the policy decisions of these banks. Of course, in theory, they are supposed to resume "normal" lending to house-buyers and small businesses and to abstain from paying dividends until they have reimbursed the government's preference shares. But there is no mechanism to enforce this "moral commitment" and Darling has stressed that he does not have the powers to do it (meaning that the government will not even use the powers that are associated with its shareholding!).
And if Brown wanted to dispel any lingering doubts about his determination to give a free hand to the banking sharks, the new body which will take care of Northern Rock, the rump of Bradford & Bingley and the government's shareholding in RBS and HBOS, will be set up as a private company called "UK Financial Investments Limited". Its head will be a former finance director of Lloyds TSB, who is currently chairman of the supermarket group Sainsbury. In other words, the man in charge of disciplining bankers, since this is the way Darling presented this body, will be one of them! This probably says it all!
The only demand for nationalisation that the working class could put forward as its own would be that of a nationalisation without compensation. Such a nationalisation could be carried out only under the powerful pressure of the mobilisation of the working class. Even the most zealous servants of capitalism now talk about "control" and "regulation". But from the point of view of the interests of working population, the only valid objective is the expropriation of all banks and their consolidation into a single bank, under the control of its workforce and the entire community.
There is nothing one need change in what Trotsky proposed to the working class in his "Transitional Program", written in 1938, at a time when capitalism was plunging headlong into war, in order to pull out of the long depression of the 1930s:
"Imperialism means the domination of finance capital. Side by side with the trusts and monopolies, and very frequently rising above them, the banks concentrate in their hands the actual command over the economy. In their structure, the banks express in a concentrated form the entire structure of modern capital: they combine tendencies of monopoly with tendencies of anarchy. They organise the miracles of technology, giant enterprises, mighty trusts; and they also organise high prices, crises and unemployment. It is impossible to take a single serious step in the struggle against monopolistic despotism and capitalistic anarchy - which supplement one another in their work of destruction - if the commanding posts of banks are left in the hands of predatory capitalists. In order to create a unified system of investments and credits, along a rational plan corresponding to the interests of the entire people, it is necessary to merge all the banks into a single national institution. Only the expropriation of the private banks and the concentration of the entire credit system in the hands of the state will provide the latter with the necessary actual, i.e., material resources - and not merely paper and bureaucratic resources - for economic planning.
"The expropriation of the banks in no case implies the expropriation of bank deposits. On the contrary, the single state bank will be able to create much more favourable conditions for the small depositors than could the private banks. In the same way, only the state bank can establish for farmers, tradesmen and small merchants conditions of favourable, that is, cheap credit. Even more important, however, is the fact that the entire economy - first and foremost large-scale industry and transport directed by a single financial staff - will serve the vital interests of the workers and all other toilers.
However, the state-isation of the banks will produce these favourable results only if the state power itself passes completely from the hands of the exploiters into the hands of the toilers."