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.
Editor
___________________________
PART 2
Financial meltdown
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.[1]
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”. [2]
Ms Tett adds: “Instead
of being traded, most were sold to the banks’ off-balance-sheet entities such
as SIVs[3] –
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.[4]
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.
Public anger
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,[5]
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).
Our tasks
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).
NOTES
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.