Current Crisis of Overproduction
Paper presented by Harpal Brar, Chairman of the Communist Party of Great Britain (Marxist-Leninist), to the International Communist Seminar held in Brussels 15-17 May 2009, entitled ‘ Current Crisis of Overproduction’. In the last issue of Lalkar we dealt with the worst crisis of overproduction since 1929. In this, the concluding part, we deal with the near-meltdown of the world imperialist financial system.
Just as an opera is not over till the fat lady sings, likewise a capitalist recession does not end before a big banking failure. The present crisis is remarkable for the fact that it is accompanied by the near collapse of the entire banking system in the US, Britain, and a number of other countries. In the words of Chrystia Freeland, “The global economic crisis has bankrupted centuries-old institutions, brought down once-mighty industrial brands and shattered a generation’s worth of assumptions about how capitalism ought to operate. Now is the time to declare another casualty of the crash – the imperial style of leadership” (‘Calmer Obama ushers out the age of the imperial chief’, Financial Times, 11 April 2009),
Not only have the financial giants in the US and elsewhere bitten the dust, so has US hegemony of the world capitalist economy and politics.
When back in the summer of 2007 it became clear that the imperialist financial system was in trouble, the authoritative representatives of finance capital, as well as economic commentators, believed that the losses of the big banks from bad loans would total about $100bn – at the time considered a huge sum. However, the bad loan total has been a moving target. As the economy has continued to weaken, and confidence in the banks to crumble, more bad loans have been the result. In its latest Global Financial Stability Report (GFSR) released on 21 April 2009, the IMF says that financial institutions across the world face losses of $4,400bn as the world recession erodes the value of their loans and other assets. For over a year, the IMF’s estimates of losses facing the financial sector have swollen with each update. Total writedowns on US assets will reach $2,700bn (€2,082bn, £1,837bn) estimates the IMF report, up from $2,200bn it forecast in January, almost double its forecast of last October ($1,405bn) and three times the mere $945bn it forecast last April.
Including loans originating in Japan and Europe, the writedowns will reach $4,054bn. Of the $1,342bn losses facing European and Japanese institutions, $1,193bn will fall to the former and $149bn to the latter, while the writedowns on emerging market assets held by banks in the imperialist countries are forecast at $340bn – bringing the grand total to $4,394bn. Estimated writedowns on US and European assets, mainly held by financial institutions in these regions, account for 13% of their aggregate GDP.
Banks will bear two-thirds of these losses, while the remaining one-third will fall on insurance companies, pension funds, hedge funds and others.
Even with the IMF’s latest forecast of mind-boggling losses facing the financial sector, there is no certainty whatsoever as to the eventual extent of the losses – except that they keep getting worse, with the past year’s gloomy forecasts turning out to have been overly optimistic. The crisis of overproduction, and the resultant financial crisis, are mutually reinforcing, with the losses and bankruptcies in the non-financial sector compounding the losses of the financial sector and vice versa. Conventional loans, not just toxic subprime securities (now rechristened ‘legacy assets’) account for half of the estimated writedowns. The IMF’s report is likely to cause further disarray among investors even if its estimates are smaller than those of some private economists.
The IMF expects US institutions to write down $550bn in 2009-10, in addition to the $510bn they had already written down by the end of 2008, while the euro area and the UK stand to lose about $750bn and $200bn respectively in addition to the $154bn and $110bn respectively written down by them up to the end of 2008. The US has thus far taken approximately half of the writedowns facing them, while European banks have taken merely a fifth. Since the banks in the US and Europe have hitherto recognised less than half their losses, they will collectively have to write off $1,500bn this year and next. If the US and European banks took immediately all the writedowns facing them, the result, says the IMF, would be a complete wipeout of their equity. Hence the importance of injecting more capital into the banks and other institutions. To restore their balance sheets to the level at which they were before the present crisis (defined by the IMF as a tangible common equity to tangible asset ratio of 4%), US banks require $275bn in capital infusion, euro area banks $375bn and UK banks $125bn. And bringing the banking system back to the leverage ratios of the mid-1990s (equity to assets ratio of 6%) would need huge recapitalisation: $500bn in the US, $725bn in the euro area and $250bn in the UK, says the IMF. To achieve this level of recapitalisation, emphasises the IMF, the governments would need to take bolder steps, such as converting preference stock into common equity and enforcing debt-to-equity swap – that is, nationalisation of the banks. “The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions”, says the IMF.
As far as Europe is concerned, it would appear that the worst is still to come. In this regard, the large external financing requirements of the central and east European countries, and the exposure of the west European banks to these countries, are of particular concern.
By the end of December 2008, global banks had written off about $1,000bn (€752bn, £699bn) in bad assets, half those written off in the US. The problem, however, is that since the onset of the crises the provision of new capital has failed to keep up with the writedown of assets. The US government has already put in place a stimulus package of $787bn (£527bn), the $700bn bank recapitalisation plan, $70bn housing scheme and additional federal aid to car manufacturers, but, contrary to president Obama’s claims, none of these measures is showing any sign of being effective. Much larger sums than those already earmarked are needed to keep the banks from going under, let alone enabling them to start lending. According to Michael Pomerleano of the World Bank, if the rates of default in this crisis are similar to those of the 1982 recession, US banks will require more than $1,500bn of capital to stay afloat. New lending will require additional capital. These sums are far in excess of those the Treasury is presently authorised to spend on bank rescues. With only $32bn left from the $700bn Trouble Assets Relief Program (TARP) funds, the Obama administration is bereft of funds to recapitalise bank balance sheets. It will have no option but to return to Congress with a request for yet further funds, with no guarantee that Congress would be prepared to grant such a request, as most American taxpayers detest bailing out Wall Street. Reflecting this sentiment, Mr Obama is reported to have warned senior bankers at a private meeting that he was the only thing standing between them and the pitchforks. This being the case, his administration may be forced by politics, as much as by economics, to conclude that nationalisation of the banks is the best of all options.
Since in the present desperate conditions the chances of raising the vast sums needed for bank capitalisation are close to zero, it is the governments that are being forced to step in. However, the governments are struggling to keep pace with the daily deterioration in the banks’ balance sheets. So far the governments have provided up to $8,900bn in financing for the banks, through lending facilities, asset purchase schemes and guarantees. All this represents merely a third of their needs, for the IMF estimates that the “refinancing gap of the banks – the rollover of short-term wholesale funding, plus the maturing long-term debt – will rise from $20,700bn in late 2008 to $25,600bn in late 2011, or just over 60% of their total assets”. This will call for a huge shrinkage of balance sheets. The balance sheets of the banks are still far too large. According to estimates by analysts of Morgan Stanley, the 15 largest banks, which have shrunk their balance sheets by a combined $3,600bn since the beginning of the crisis, will shed an additional $2,000bn in assets this year alone. And this does not even take account of the disappearance of securitised lending by the so-called ‘shadow banking system’, which played such an important role in the US.
Market capitalisation of the banks
Not surprisingly, the meltdown of the financial system is reflected in the precipitous fall in the market capitalisation of the giants of finance capital in the centres of imperialism during the period between 1 March 2007 and 21 January 2009. Citigroup, once the largest banking group valued at $225bn at the beginning of March 2007, saw its market capitalisation dwindle to $17.2bn by the end of January this year, and presently it stands at a derisory $13.7bn. During the same period the market capitalisation of Bank of America dropped from £225.3bn to $36.7bn; JP Morgan Chase from $170.9bn to $74.8bn; Goldman Sachs from $82.1bn to $25.4bn; HSBC from $200.5bn to $86bn (presently it stands at $78.3bn); Barclays from $91bn to $14.4bn; RBS from $120bn to $7.5bn; Lloyds TSB from $246bn to $14bn; Deutsche Bank from $67.8bn to $13.1bn; UBS from $123bn to $32.8bn; BNP Paribas from $96.3bn to $28.2bn.
A decade ago, Banc One, Chase Manhattan, JP Morgan and Washington Mutual had a combined value of around $175bn. Today JP Morgan Chase, which has absorbed all these banks (as well as many others, such as Bear Stearns) is worth only $94.5bn.
AIG, at one time the world’s largest insurance company, now 80% government-owned after suffering the largest-ever loss ($617bn) in corporate history, is worth only $1.2bn (42 cents a share) as against $131bn a year ago when its shares sold at $46 each. AIG has operations in 130 countries and a customer base of 74 million, insuring financial products to the tune of $2 trillion, half of these for 12 imperialist banks. Doubtless it was considered too big to fail.
No recovery in sight
According to the latest IMF estimates, the fiscal costs of the government’s rescue efforts will, at the high end, amount to 13% of US GDP over the next 5 years, while the cost to the UK will be 9% of GDP over the same period. The efforts to stabilise the financial system could end up costing us taxpayers $6,200 (€4,650, £4,200) per head of population.
Most of the giant financial institutions in the centres of imperialism, especially in the US and Britain, are bankrupt and entirely reliant on the direct or indirect, explicit or implicit, support of governments and central banks, for securing financing hitherto provided by institutional investors. A major financial crisis or a deep economic recession on their own would be bad news for capitalism, but the present crisis, characterised as it is by the potent mix of an unprecedented global economic slump with a financial meltdown emanating from the major imperialist countries which constitute the core of the world capitalist economy, is nothing short of catastrophic. It is the harbinger of a recession lasting many years followed by a mild recovery some time in the future.
For the moment, the governments in the imperialist countries have stepped in to bail out the bankers with taxpayers’ money in an effort to restore the financial system, gasping for breath, to health (to resuscitate back to life would be a more apposite expression), but this will by no means prove sufficient for a return to sturdy economic health. Those who, like Chancellor Alistair Darling, are predicting a return to robust growth in the near future are deluding themselves.
In the US, with the deepening of the crisis of overproduction, $50,000bn of perceived wealth in the US (stocks and real estate) has declined to below $30,000bn, leaving the original $25,000bn of private debt stranded. With brutal speed, the Americans have been forced to learn that they are not so rich after all. Although the Japanese had to adjust to a loss in perceived wealth of 3 times Japan’s GDP, all the same the US adjustment, amounting to 1.5 times US GDP, is still by far greater than any in US history. Even the crash of 1929 forced the US to write down only 75% of a year’s GDP (see Jeremy Grantham, ‘Rebalancing the books’, Financial Times, 11 March 2009).
On 11 March this year in the Financial Times, in an article entitled ‘If this is the Great Depression we are now in 1938’, John Kay says that by 1933 US equities had lost three-quarters of their 1929 value and the US monetary system reached the point of collapse – a trend only ameliorated by the onset of the war. “Perhaps the clearest lesson,” remarks Mr Kay ominously, “is that war is good for output, employment and corporate profits”. Yes indeed! For imperialism war, far from being an aberration, is normal business.
Drawing historical parallels with the 1929 Crash, Mr Kay says that presently the world economy is not at the beginning of the crisis but several years into it; the “…analogue of the 1929 Wall Street Crash is not the 2007 credit crunch but the busting of the New Economy bubble in 2000 … The follies of the 1990s resembled those of the 1920s… The underlying structural weaknesses of the world economy – the US budget deficits and trade deficits financed by Asian surplus – re-emerged in 2000 after being disguised by the imaginary wealth of the New Economy.”
All that the expansionary measures taken by the Federal Reserve and other central banks had produced was a wide boom in asset prices, extended credit to ever more unsustainable levels and helped further growth of the basically flawed financial infrastructure on which the 1990s boom had rested.
The last short-lived period of recovery (2003 to June 2007) did nothing, and could do nothing, to solve the fundamental problem of overproduction inherent to capitalism. It merely managed to prepare the ground for a far worse, far more powerful and enduring crisis than the last one. The US economy shrank in the fourth quarter of last year at its fastest rate since 1982, with GDP contracting at an annualised rate of 6.3%. In the first quarter of 2009, it shrank at an annualised rate of 6.1%. In the same quarter, corporate profits were down by 15.6% or $250bn from the third quarter. According to the IMF, the US economy is forecast to decline by 4% during 2009.
US house prices have declined by more than 25% (in California by 40%) from their peak, with huge numbers of people, saddled with mortgages worth more than their houses, facing foreclosures which appear in self-reinforcing spirals – re-possessed homes sold on the cheap further push down the value of other properties. The US scenario finds its equivalent in Britain and a number of other countries. In Britain, house prices have declined by 18%.
Risk dispersion or disaster in waiting
As a result of the tumbling assets prices, millions of households are groaning under the burden of unbearable and unpayable debt, while the financial system, the brain of imperialist economy, encumbered with losses of colossal proportions, is in a state of meltdown and has ceased to function. What is more, the pillars of faith on which the new financial capitalism was built have crumbled like a house of cards, revealing it to have been nothing but a bubble emanating from the speculative frenzy that arose from the lack of profitable opportunities for investment in the productive sphere. All those new devices, invented by statistical geeks for the high rollers of finance capital to make a fast buck, which were supposed, and believed until the summer of 2007 by the bankers, investors and regulators alike, to disperse credit risk, make the world safer and the financial system more robust and resilient, have turned out to be so many toxicants that have contributed to the near-collapse of the financial architecture of monopoly capitalism.
Gillian Tett, writing in the Financial Times of 10 March 2009, describes this allegedly risk-free process thus: “Bankers … repackaged loans for sale to outside investors”, garnering fees “at almost every stage of the ‘slicing and dicing’ chain.” As banks shed credit risk, “regulators permitted them to make more loans – enabling more credit to be pumped into the economy, creating even more fees”. By turning their mortgages into bonds, banks were able to meet regulatory guidelines in a more ‘efficient’ way.
This was portrayed by the financiers as a step towards “a superior form of free-market capitalism”. These obscure instruments, with their “alphabet soup of abbreviations”, which were as baffling as the products the acronyms represented, produced “in 2006 and early 2007 no less than $450bn worth of ‘CDOs of ABS’ securities”. 
Ms Tett adds: “Instead of being traded, most were sold to the banks’ off-balance-sheet entities such as SIVs - or simply left on the books”, thus “making a mockery of the idea that innovation helped to disperse credit risk”, and creating “… an opaque world in which risk was being concentrated” in ways hardly anybody understood. (‘Lost through destructive creation’).
The narrative that the new-fangled financial innovations, with their slicing and dicing, served to spread risk around the world to those best able to bear it, was promoted by the banks with great assiduity and eagerly accepted by the governments, central banks, regulators and rating agencies. In its (April) 2006 annual report, the IMF made the bold assertion that: “the dispersion of credit risk by banks to a broader and more diverse set of investors… has helped to make the banking and overall financial system more resilient … improved resilience may be seen in fewer bank failures.”
This foolish assertion has come to haunt the IMF as it bears witness to the catastrophic collapse of the entire financial system of imperialism.
Far from being instruments of risk dispersion, these abstruse devices proved to be lethal explosives. Sliced and diced, insured by monolines, highly marked by rating agencies, hidden away in SIVs, they were presented as being as safe as houses. “As indeed they were”, to quote the words of Howard Davies, director of the London School of Economics, “except that the houses concerned were falling sharply in value, and their over-geared occupants were non-status borrowers. Many of the investors, including titans such as Merrill, Citi and UBS, had not understood the risks and lost their shirts (and red braces too)” (‘The architects of financial crisis, a review of Gillian Tett’s book Fool’s gold’, Financial Times, 25 April 2009).
By July 2007, as defaults on US subprime mortgages began to pile up, blind faith in the latest products of speculative capitalism began to unravel. Being forced to admit that their models were seriously flawed, rating agencies such as S&P downgraded ratings for mortgage-linked financial instruments, causing shockwaves that caused investors (such as money market funds) to stop buying notes issued by shady entities such as SIVs. As the realisation dawned that the banks were heavily exposed to these shadowy vehicles, panic gripped the robber barons of finance capital. With the rise in subprime defaults, the banks were obliged by their accountants to revalue their instruments. By the spring of 2008, Citi, Merrill and UBS had collectively written down $53bn, a horrifying two-thirds of which came from allegedly triple A CDOs, which were by early 2008, deemed to be worth no more than half of their face value.
Banks attempted to fill the gap by raising new capital in excess of $200bn, but the hole kept getting deeper – and with it trust in the ability of regulating authorities to monitor the banks, as well as faith in the banks themselves, collapsed. With the supposedly risk-free new models having been exposed as chimerical, investors walked away from every type of complex financial instrument. On top of all this came the mother of all shocks last September – the bankruptcy of Lehman Brothers. Hitherto it had been an article of faith with the investors that the US would never allow a large financial institution go to the wall. But when the US government did nothing to prevent Lehman going bankrupt, it caused distrust, disorientation and terror. Funding markets seized up. Banks and fund managers found to their horror that all their trading and hedging models had crumbled. The capital markets stopped functioning. “Money, the means of circulation” had become, just as Engels had explained, “a hindrance to circulation” and all “the laws of production and circulation… turned upside down” in a dramatic demonstration of the rebellion of the mode of production against the mode of exchange. No wonder, then, that Mervyn King, governor of the Bank of England, was forced to say that the system was “on the precipice”.
By the beginning of this year, the writedowns of the big western banks were running at $1,000bn (€795bn, £725bn), according to the Institute for International Finance. On 9 March the Asian Development Bank estimated that global financial assets could by now have lost more than $50,000bn – the equivalent of a year’s global output.
Part-nationalisation of banks
The present crisis, unprecedented in its depth, scale and devastating effects, has delivered shattering blows to the economic orthodoxies practised during the last three decades in all the imperialist countries and, through the IMF, the World Bank and the WTO, forced on practically all the rest of the world. Governments have been forced to step in to replace many market functions. Long-held beliefs in such things as prudence and balanced budgets have made way for huge deficits and pumping of colossal amounts of money into the terminally-ill financial system through quantitative easing (a modern buzz word for printing money) which might even have horrified Keynes. Gone too is Europe’s stability and growth pact, which prohibited members of the eurozone from incurring deficits in excess of 3% of the national income and national debt above 60% of GDP. Huge amounts of public funds are being deployed to purchase and insure billions of dollars’ worth of toxic assets held by major imperialist banks.
Governments, in particular the US and British, have been compelled to acquire huge stakes in some of the largest banks. The US government, just like the British government, has been transformed into a huge investment bank robbing the state treasury and the taxpayers to transfer huge funds into private banks. The US government has injected $52bn into the Citigroup, $45bn into Bank of America, $25bn into JP Morgan Chase, and $10bn into Goldman Sachs. On top of this, it has taken over the world’s largest insurance company, the AIG.
The French government has a stake of $3.9bn in BNP Paribas, while the Swiss government’s stake in UBS is to the tune of $5.3bn.
On 10 February, the US Senate passed a $838bn stimulus package, accounting for 5.9% of GDP. Action taken by the German government so far to boost demand is the equivalent of 4.7% of German GDP over 2 years ($130.4bn); Japan has put in place a stimulus package of $104.4bn (2.2% of GDP); the UK $40.8bn (1.5%); and France $20.5bn (0.7%). Germany has a €500bn ($660bn) bank reserve fund, known as Soffin, to support banks with a mix of guarantees and fresh capital. Of this sum, €210bn has already been tapped by banks. Another scheme, agreed on 21 April 2009, at a meeting between Angela Merkel (the German Chancellor), her Finance Minister, Frank-Walter Steinmeier, and the President of the Bundesbank, Axel Weber, is in the offing to enable German banks to offload toxic assets, which could leave German taxpayers with a bill of up to €1,000bn. German banks have already written down $72bn on their balance sheets.
Monetary loosening and fiscal expansion
All the imperialist countries, and some others, have undertaken monetary loosening and record-breaking fiscal expansions. A year ago the Federal Reserve started to prime the monetary pump, which is now in full swing. Within a year it has moved from 3% interest rates to quantitative easing. The Bank of England has pushed through interest-rate cuts of 450 basis points in the last 6 months and the interest rate stands at an unprecedented 0.5% today. The European Central Bank’s interest rate has been brought down to 1%.
The Bank of England’s quantitative easing exercise (commenced on 5 March 2009) involves initially the creation of £75bn of new money in an effort to get the economy moving. The idea is to use this amount (representing 5% of Britain’s GDP) to purchase assets, especially government bonds, from banks and other financial institutions, in the hope that the sellers of these assets might use the funds thus made available to invest or lend to households and businesses. If this initial sum proves insufficient, a further £75bn will be provided. This measure is a last desperate throw of the dice by the authorities and is fraught with dire consequences – not least on the inflation front. All in all, things are not looking too good in the centre of British usury – the City of London – and for the British ruling class with its heavy reliance on banking and financial services for its profitability.
The resort to this unconventional measure, quantitative easing, came in the aftermath of the near-collapse of several of Britain’s banks in 2008, the exhaustion of monetary policy as a tool of economic management, and the part-nationalisation of the Royal Bank of Scotland and Lloyds TSB Banking Group, whose toxic assets, to the tune of £585bn, have been insured by the government.
Budget deficits and national debts
Consequent upon the recession and thousands of billions of dollars spent by the governments in the centres of imperialism to douse the financial conflagration that threatened to bring the leading capitalist economies, especially the US and British, to their knees, all these countries are headed for huge rises in budget deficits and national debt.
The US budget deficit for 2009 stands and the frighteningly high figure of $1,750bn – a staggering 12% of GDP, while its national debt is forecast to rise from 66% at present ($10bn) to 97% of GDP in 2012.
The combined budget deficit of the eurozone’s four biggest countries – Germany, France, Italy and Spain – will reach 6.4% of their GDP in 2010. Their public debt is forecast to reach 83% of GDP from 79% this year – all this beyond the limits agreed in the 1990s to guarantee eurozone stability. Greece, Portugal and Ireland are in an even worse condition than that. The eurozone’s collective budget deficit will rise to 5.7% of GDP this year and 7.1% in 2010. Its collective public debt is expected to reach 75.7% of GDP this year and 81.4% in 2010.
Japan’s national debt, already very high, will this year be 224% of Japanese national output.
Britain’s position is worse than that of all the other imperialist countries with the exception perhaps of the US. The British government is set to borrow as much in the next two years as the total borrowing Labour inherited on coming to office in 1997, that is, £348bn – dating back to 1691 (£41bn from 1691 to 1974 and £307bn from 1975 to 1997). Presenting his budget to the House of Commons on Wednesday 22 April, Chancellor Alistair Darling said that net public borrowing this year will rise to a postwar high of £175bn – 12.4% of GDP – before dropping to £173bn next year (11.9% of GDP) and £140bn the year after that. The government will contract £700bn of new debt over the coming five years.
As a result, Britain’s debt is on course to smash the £1 trillion barrier for the first time. Presently, the national debt stands at £717bn (49% of GDP). It is set to rise to 59% this year, 68% next year and 74% of GDP the year after (last year Britain’s GDP was £1.4 trillion). Although by no means a record, as Britain’s debt was more than 200% after the Napoleonic wars and hit 250% of income during the Second World War and still stood at 100% as late as 1963, it will still be the highest peacetime debt level. The fiscal gap will be larger still if the recession is deeper and longer than envisaged by the present forecasts of the Bank of England and the Chancellor, both of which are optimistic to the point of fantasy.
At the present level of low interest rates, the Treasury can continue to service the huge sums it has borrowed. The risk, however, is that if interest rates move upwards, the government will have to make drastic cuts in its spending or raise taxes, or both. Failing that, the moneylenders will vote with their feet and refuse to buy government securities.
In its editorial of 18 April entitled ‘Labour pains’, the Financial Times gave this warning: “The UK is not as rich as it thought it was just a few months ago. It needs to change course. Its golden goose – the financial sector – has been plucked. Public services must be pruned while the tax burden will certainly rise. This will entail painful trade-offs.”
Two days later, the Financial Times stated that this crisis would “cost as much as a big war” and that “while not unprecedented, such debt would leave the country dangerously vulnerable to a loss of confidence [i.e., no one will lend it money]” (Editorial, ‘The folly of hoping for the fiscal best’, 20 April 2009).
It added that “… Fiscal austerities will be the dominant feature of UK politics for a decade”.
In view of the underlying weakness of the UK’s public finances, consequent upon the costs of the recession and the billions doled out in bank rescue packages, economic experts are all agreed that it will take two full parliaments of increasing austerity to get borrowing back under control. The Treasury’s own assessment is that four-fifths of the borrowing this year and next will be ‘structural’ – that is, impervious to economic recovery.
The Chancellor has already announced cuts in capital spending, cuts in other government spending and tax increases to the tune of 1.6% of GDP. Whichever government is in office after the coming election next year will need to find an addition £45bn a year at today’s money by the end of its parliament to get rid of this deficit.
Even if the authorities somehow manage to avoid a sterling collapse and complete meltdown, the end of the recession will bring in no new dawn, for the overhang of debt is only too likely to result in lower growth, unremittingly higher unemployment, lower house prices and stock-market valuations, savage cuts in public expenditure, higher taxes, higher costs of borrowing and declining living standards, and destruction of the prosperity of the middle class and better-off sections of the working class. Fewer and fewer resources will be available for education and health, while child poverty, homelessness and destitution spread their tentacles further into the lives of working people.
What is true of Britain is equally true of the US and other leading capitalist countries.
The current slump has dealt a devastating blow to market fundamentalism and brought into the open the reason for the political acquiescence of the stagnant middle class. Cheap credit allowed families to consume in excess of their income, as home equity loans, vendor-financed car deals and credit car purchases served to hide the reality of falling real incomes. Now, the meltdown of the imperialist financial system, the deepening recession, collapsing equity and house prices, falling employment, have combined to rudely awaken middle America from the dream that “… it too was partaking in the prosperity of the Second Gilded Age.” As a result, “… class and redistribution issues are no longer dirty words in American politics” (Chrystia Freeland, ‘The audacity of help’, Financial Times, 12 March 2009). Ms Freeland goes on to record the visible and rising public anger towards Wall Street as the recession bites deeper, with “late night comedians … calling for public executions” of bankers. This public anger has overnight, as it were, “transformed the Masters of the Universe from heroes to villains” (ibid.). In the US it was an article of faith that people were free to succeed or fail, without any assistance. Now, however, in the name of preventing a systemic failure, hundreds of billions of dollars have been injected into failed institutions that made gargantuan profits while the going was good and that exacerbated the crisis of overproduction with their speculative frenzy.
Since its eruption in the summer of 2007, the crisis has spread from the US suburbs to Europe and beyond, presaging a turbulent period of instability, which could pose a serious threat to the very existence of the EU as its member countries resort to nationalism and protectionism in an effort to ward off the devastating effects of the crisis at the cost of fellow members. Rising unemployment, falls in house prices and in the value of pensions, pay curbs on the workers, combined with bailouts for the banks costing taxpayers trillions of dollars, are causing seething anger among the masses – who are told that there is no money left to keep them in their jobs and houses. This anger was clearly evident in France where in March a million workers staged western Europe’s biggest protests since the start of the crisis.
Governments have fallen in Iceland and Latvia. Greece, Ireland, France, Germany, Britain, Ukraine, Bulgaria and Lithuania have witnessed strikes and protests. The effects of the crisis have been felt in even far-flung outposts of the continent: the French Caribbean island of Guadeloupe saw violent strikes, while Russia flew riot police into ice-bound Vladivostock to suppress street protests.
Respectable bourgeois economists and commentators are openly critical of the US Treasury’s bail-outs, which amount to a huge transfer of wealth from US taxpayers to the Wall Street bankers. Jeffrey Sachs calls them “a thinly-veiled attempt to transfer hundreds of billions of dollars to the commercial banks”. The Obama plan to bail out banks “amounts to robbery of the American people”, says Joseph Stilgitz. Robert Reich, Labour Secretary in the Clinton administration, says that Tim Geithner, the US Treasury Secretary, is “a prisoner of Wall Street”, while Paul Krugman complains that the US government is giving “cash for trash”.
Martin Wolf, writing two days after the US Treasury Secretary came up with his latest racket – the so-called Public-Private Investment Program (PPIP) – to enable banks to rid themselves of their toxic assets, correctly calls it the ‘Vulture fund relief scheme’. He says that the scheme is unlikely to work. If, however, it were to work, “a number of fund managers are going to make vast returns”, convincing “ordinary Americans that their government is a racket run for the benefit of Wall Street”. This, he says, will make it difficult to get US Congress to sanction additional funds for the badly needed recapitalisation of the banks because the provision of public money to the banks “is unacceptable to an increasingly outraged public”. “The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster”, he says, adding: “On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government’s ability to pour public funds into undercapitalised institutions, the US is at an impasse”. He concludes that if the US’s ability to find its way through this crisis “…is not frightening, I do not know what it is.” (‘Why a successful US bank rescue is still far away’, Financial Times, 25 March 2009).
Effect on eastern Europe and on Africa
The Washington-based Institute for International Finance forecasts a steep decline in net private capital flows to emerging countries – from $929bn in 2007 and $466bn in 2008 to a mere $165bn this year, equal to 6% of these countries’ GDP – and much worse than the decrease of 3.5% that took place during the Asian crisis of 1997-98, with its horrendous social and economic consequences in that region.
$1,440bn worth of debts of the less developed countries become due in 2009. Central and eastern Europe, owing $1,656bn, principally to west European banks, will experience a GDP decline for the first time in 10 years. Without injection of international funds, several of these countries could be heading for sovereign defaults.
According to the IMF, central and east European countries (excluding Russia but including Turkey) must roll over $413bn (€311bn, £281bn) in maturing external debt this year and finance $85bn in current account deficits. In the best possible scenario, the region’s financing gap – the money that cannot be accessed through the market – could be $123bn in 2009 and $63bn in 2010 – altogether $186bn.
In addition, the region’s banks, largely owned by west European banks, could be sitting on non-performing loans to the tune of 20% of total loans. West European parent banks, with a regional exposure totalling $1,600bn, could face losses of $160bn. They might be in need of $100bn in new capital – even $300bn if the crisis deepens further, as is only too likely. Austria, having lent a total of $300bn (£210bn, €235bn) to clients in the region, has an exposure equal to 68% of GDP. If Bank Austria, owned by Italy’s Unicredit, is included, Austria’s exposure would rise to 100% – the highest of any western European country.
An economic collapse in eastern Europe, which is not that far-fetched a possibility, could bankrupt Austria’s banks and oblige the government to undertake a prohibitively costly bail-out. On top of badly mauling hundreds of industrial groups, retail businesses and service companies, i.e., those that rely on investment in, and trade with, the region, such a collapse could conceivably bankrupt Austria in the same way as Iceland has been bankrupted. As one bourgeois commentator put it, the governments in eastern Europe at least got one thing right, namely, they made sure their banks were owned by foreigners. If Hungarian households default, it is not Hungary that will go down, but Austria.
What is more, to the horror of imperialism, which not so long ago celebrated the triumph of counter-revolution in central and eastern Europe and the absorption of many of these countries into the warmongering neo-Nazi NATO or the imperialist EU bloc, the stability of this entire region hangs in the balance. Consequent upon the present economic crash, with the resultant rise in unemployment, poverty and debt, there is mounting anger, which is fuelling popular movements with unpredictable consequences. Counter-revolutionary semi-fascistic regimes in the region are increasingly becoming targets of the wrath of the popular masses, who feel duped and betrayed. At the end of January, Latvia’s government collapsed over its IMF-mandated austerity programme, after pitched battles in the streets of Riga between angry demonstrators and the police. The fear of imperialism and its ideological representatives is that a prolonged crisis could end up totally undermining support for capitalism, the EU and NATO in these countries. Martin Wolf rightly fears that the crisis will “undermine confidence in local and global élites, in the market, and even in the possibility of material progress … with potentially devastating social and political consequences.” (‘Seeds of its own destruction, Financial Times, 9 March 2007).
According to UNESCO forecasts, 390 million of the poorest people in Africa are likely to experience a 20% decline in their existing meagre incomes. Declining commodity prices and reduced flow of investments will see to it that sub-Saharan Africa loses $18bn ($46 per person), causing starvation on a large scale.
On 6 May, FAO revealed that the present crisis would add an additional 100 million to the existing 900 million people suffering from hunger, adding that there never have been so many hungry people around the world – and this despite the fact that over the past year food prices have come down considerably. With so much surplus food lying in warehouses around the world, there could be no greater indictment of this criminal system, which we are repeatedly told by the defenders of capitalism is the final destination of humanity.
In the run up to the G-20 summit of 2 April this year, the World Bank issued a warning that an avalanche of social and political unrest could be unleashed in the poorest regions of the globe if the leaders at the summit failed to come up with a plan to aid them. There was not much chance of that happening as the major powers were more concerned with protecting their respective national interests at the expense of everyone else. The summit merely managed to expose the divide between the US and Europe. While the former advocated yet another large co-ordinated stimulus package to boost demand as a way out of the recession, France and Germany, fearing potentially damaging budget deficits with inflationary effects, called for greater regulation of banks, restrictions on executive bonuses and banning of tax havens. While talking of free trade and open markets, the principal imperialist powers are resorting to measures of protectionism at an increasing tempo, especially since October 2008.
No wonder then that Mr Wolf, drawing parallels with the Great Depression of the 20s and 30s of the last century, should be worried about this crisis undermining free trade, reversing the whole process of globalisation, strengthening the role of government and the credibility of socialism and communism. No wonder, then, that he should make veiled references to the crisis unleashing civil wars and wars between countries. (“Frightened people”, he says, “become tribal: dividing lines open within and between societies” – ibid).
As for Britain, its banks have written off only a third of the losses they will eventually face and will be compelled to raise at least $125bn (£85bn) in extra capital to rebuild their balance sheets. Although the UK banks have already written off $110bn on complex debt securities and other assets on their balance sheets, the IMF estimates that they have another $200bn in losses over the next two years as more loans to companies and consumers go sour. The government faces the long-term task of clawing back the scores of billions of pounds that the exchequer has been compelled to dole out to save the rickety banking system from complete collapse – either through spending cuts, or increased taxes, or both.
By 2017-18, the fiscal impact of the crisis will have cost each UK family approximately £2,840, mostly through lost public services and tax increases. Not just the poorest sections of the population, but also the middle class and the better-off sections of the working class are bound to be badly hit. While bringing misery to vast numbers, the crisis presents an opportunity for forging an alliance between the poor and sections of the petty bourgeoisie facing, for them, the dreadful prospect of being thrust into the ranks of the proletariat. The authorities are deeply worried about people, rendered homeless and jobless by the crisis, turning to violent protest.
Not for decades has there been such an opportunity to build a truly proletarian, anti-imperialist, revolutionary movement to give direction to the all-too-likely spontaneous movement of the masses against the ravages of capitalism. The time is ripe, for the combination of an unprecedented crisis of overproduction and a near-collapse of the financial system of imperialism have weakened the legitimacy of the market – especially of the Anglo-Saxon variety, with its emphasis on shareholder value. By contrast, the credibility of Marxism – of socialism and communism – is on the rise.
Bourgeois commentators, such as Martin Wolf of the Financial Times, take comfort in the fact that “unlike in the 1930s, no credible alternative to the market economy exists” (‘Seeds of its own destruction’, 9 March 2009). Of course, it is too much to expect that people of Mr Wolf’s ilk would understand the movement of history dialectically and grasp that “…in developments of such magnitude twenty years are no more than a day – though later on days may come again in which twenty years are comprised” (Marx, letter to Engels of 9 April 1863).
Yes, the loss of the Soviet Union and east European socialist countries was a tremendous blow to the proletarian and national liberation movements. Yes, the two decades since then have been a period of unprecedented reaction and stagnation in the working-class movement. But it requires an incurable reactionary to take this period of reaction and stagnation as a guide to the future. We are once again on the threshold of a period in which 20 years may well be embodied in days – provided the revolutionary parties get their act together and work systematically to prepare the working class for the coming conflicts.
Political and ideological representatives of imperialism blame the present crisis on naked greed, excessively lax regulation, loose monetary policy, fraudulent borrowing, high levels of leverage, animal spirits, and managerial failures, the implication being that with better regulation, etc., there would be no capitalist crisis. Nothing could be further from the truth.
The truth is that these crises are systemic to capitalism – they recur because of the contradiction inherent in capitalism, namely, the contradiction “between socialised production and capitalist appropriation”. It is this contradiction which, during the crises, “ends in a violent explosion”. These are, in other words, crises of overproduction, which capitalism is powerless to prevent.
There is but one cure for these crises – by society taking over the productive forces and using them to organise production on a definite plan to serve the needs of the community. In the words of Engels: the “solution [to the constant recurrence of economic crises] can only consist in the practical recognition of the social nature of the modern forces of production, and therefore in the harmonising of the modes of production, appropriation, and exchange with the socialised character of the means of production. And this can only come about by society openly and directly taking possession of the productive forces which have outgrown all control except that of society as a whole. The social character of the means of production and of the products today reacts against the producers, periodically disrupts all production and exchange, acts only like a law of nature working blindly, forcibly, destructively. But with the taking over by society of the productive forces, the social character of the means of production and of the products will be utilised by the producers with a perfect understanding of its nature, and instead of being a source of disturbance and periodical collapse, will become the most powerful lever of production itself” (ibid).
In other words, the crises of capitalism can only be got rid of through the proletariat seizing state power, transforming the socialised means of production into public property, and organising production “upon a predetermined plan” for the benefit of society as a whole. “To accomplish this act of universal emancipation is the historical mission of the proletariat”, says Engels, adding: “To thoroughly comprehend the historical conditions and thus the very nature of this act, to impart to the now oppressed proletarian class a full knowledge of the conditions and meaning of the momentous act it is called upon to accomplish – this is the task of the theoretical expression of the proletarian movement, scientific socialism” (Anti-Dühring, p.395).
In the light of the above, the tasks of any party claiming to represent the interests of the proletariat are as follows:
If it is going to succeed at the appropriate time in fighting for the interests of the working class, the following basic understandings must be made to permeate the working-class movement:
1. that capitalism is a transitional stage in the long march of humanity from primitive communism to the higher stage of socialism – communism;
2. that capitalism long ago became a historically outmoded system, owing to the conflict between the productive forces, which are social, and relations of production (private appropriation); this basic conflict lies at the heart of recurrent crises of overproduction and the resultant misery of the working class;
3. that under the conditions of monopoly capitalism, capitalism has grown into a monstrous system of domination and exploitation by a handful of monopolist concerns within each of the imperialist countries and on a world scale by a tiny group of imperialist countries, which exploit, dominate and oppress the overwhelming majority of humanity inhabiting the vast continents of Asia, Africa and Latin America;
4. that, for reasons of the conditions peculiar to this stage of capitalism, imperialism cannot but result in incessant warfare waged by imperialist countries against the oppressed peoples (for instance, the current predatory war of Anglo-American imperialism against the people of Iraq) and inter-imperialist wars, which have claimed the lives of 100 million people during the 20th century;
5. that socialism alone offers the way out of the contradictions of capitalism; it alone is able to offer humanity a world without the crises of overproduction, without unemployment, poverty and wars; socialism alone is able to provide the conditions for a limitless increase in production, unending prosperity, fraternal co-operation and peace among peoples and nations;
6. that capitalism itself creates the power, namely, the proletariat, which alone is capable of putting an end to the anarchy of production and all other horrors of the capitalist system of production, for “of all classes that stand face to face with the bourgeoisie today, the proletariat alone is a really revolutionary class. The other classes decay and finally disappear in the face of modern industry, the proletariat is its special and essential product”.
7. that the struggle of the proletariat for the overthrow of capitalism must be led by a vanguard revolutionary party of the proletariat;
8. that the state is nothing but an instrument in the hands of one class for the suppression of another class; that the proletariat too needs a state of its own; that the struggle of the proletariat for socialism must lead to the establishment of the dictatorship of the proletariat, which lasts for a whole historical period, and is the instrument of the proletariat for suppressing any attempts of the bourgeoisie at the restoration of capitalism, on the one hand, and for creating the material and social conditions for the transition to the next, the higher, stage of communism, in which the state withers away and society is able to move from the formula “From each according to his ability, to each according to his work” to “From each according to his ability, to each according to his needs”;
9. In the words of Lenin, “If we translate the Latin, scientific historical-philosophical term ‘dictatorship of the proletariat’ into more simple language, it means the following: only a definite class, namely that of the urban workers and industrial workers in general, is able to lead the whole mass of the toilers and exploited in the struggle for the overthrow, in the struggle to maintain and consolidate the victory, in the work of creating the new socialist system, in the whole struggle for the complete abolition of classes.” (Lenin, ‘A Great Beginning’, June 1919);
10. that commodity production and socialism are incompatible and it is the function of socialism to eliminate commodity production and the market and make way for planned production, which instead of being regulated by profit is guided by the principle of the maximum satisfaction of the constantly rising material and spiritual needs of the people.
11. that all bourgeois prejudices against the Soviet Union of the period of JV Stalin’s leadership must be dropped. During that the Soviet Union made earthshaking achievements in every field – from socialist construction, through collectivisation, to victory in the anti-fascist war – of which the proletarians and oppressed peoples of the world have every right and duty to be proud. Negating that important period in the history of the international working-class movement has only served to negate the most glorious achievements of the working class to date, to defame the dictatorship of the proletariat and the international communist movement and to sully the banner of Marxism-Leninism. Our movement must understand that anti-Stalinism always was, and is now, a cover for attacking Marxism-Leninism and especially the dictatorship of the proletariat, the purpose being “… to kill in the working class the faith in its own strength, faith in the possibility and inevitability of its victory, and thus to perpetuate capitalist slavery” (Stalin, Report to the 18th Congress of the Communist Party of the Soviet Union, 1938).
12. that the guard and fight against all forms of opportunism – social-democracy, Trotskyism and revisionism – must never lessen, for “… the fight against imperialism is a sham and humbug unless it is inseparably bound up with the fight against opportunism” (Lenin, Imperialism – the Highest Stage of Capitalism).
13. that in its struggle for power, the proletariat in the centres of imperialism must wholeheartedly support the national liberation struggles of the oppressed peoples against imperialism, for the “…revolutionary movement in the advanced countries would actually be a sheer fraud if, in their struggle against capital, the workers of Europe and America were not closely and completely united with hundreds upon hundreds of millions of ‘colonial’ slaves who are oppressed by capital” (V I Lenin, The Second Congress of the Communist International, 1920).
1. In the last few weeks there has been an upward movement in the price of shares of some of these banks. However, in view of their continuing volatility, we have decided not to change these figures.
2. Collateral Debt Obligations (CDOs) of Asset Based Securities (ABS).
3. Structured Investment Vehicles (SIVs)
4. In fact, on 7 May 2009 the Bank of England announced that it was pumping an additional £50bn into the economy through quantitative easing.
5. Toxic assets are now rechristened ‘legacy assets’ – a polite expression for a “pile of poop” of around $1,000bn sitting on the banks’ balance sheets masquerading as an ‘asset’, as Steve Palmer writing in FRFI April/May 2009 wittily and correctly characterised them.