No sign of abatement in the crisis
6 months after the outbreak of the credit crunch
brought about by the sub-prime crisis, there is no end in sight for the misery
of this latest shudder of the capitalist system in its death throes. At no
time in its history is capitalism free from hideous and uncontrollable crises.
Living under capitalism is equivalent to living in an earthquake zone.
Everybody can predict that there will be disasters which adversely affect
millions of people, but nobody can tell when exactly they will be nor how much
damage they will cause, or exactly how long they will last.
Capitalist crises are caused by the fact social
production takes place within the confines of private appropriation and
therefore only takes place for the purpose of producing maximum profits.
However, maximum profit demands minimisation of payment to the mass of would-be
consumers of the products of capitalist production. The consumers as a whole
are too poor to purchase the ever increasing output of capitalist industry.
Inevitably there is overproduction leading to insolvencies, collapsing
businesses, unemployment, etc., etc. After a mass of productive forces is
destroyed, the production process begins to build up all over again until it
surpasses capacity yet again and once more plunges into crisis.
These crises take various forms, but at the end of
the day, they always originate in overproduction. The current crisis has
arisen because although credit was extended to millions of people so that they
would be able to continue to buy, too many borrowers have proved to be unable
to pay, resulting in the severe breakdown of the credit system.
Paralysis of banking
system
The first capitalist enterprises to be seriously
affected have been the lending institutions, i.e., the banks. Through systems
of syndicating the loans by issuing various sophisticated financial packages to
investors of various kinds they had hoped to protect themselves against default,
but in the event the defaults have been so massive that all that has been
achieved is to spread the damage across the financial institutions of the whole
world. What has happened is that all over the world banks are holding rights
to huge debts that will never been paid, yet have ongoing obligations to their
depositors and people to whom they have promised to lend, which obligations
they have either found themselves unable to meet or fear being in that position
in the future. As is well known, a major British bank, Northern Rock, was an
early victim because its whole business was based on borrowing cheap short term
and lending at a profit long-term. As soon as the credit crunch made cheap
borrowing impossible it collapsed straight away and has now been nationalised –
i.e., the British government has taken over responsibility for financing it to
the tune of some £100 bn – in the hope that this measure will be sufficient to
prevent a domino style collapse of much of the rest of the British banking system.
Nevertheless, Alliance & Leicester and Bradford & Bingley are also in
grave danger unless by June of this year, when they too need to refinance their
short-term loans, relatively cheap borrowing is once more available – and the
prospects of that from the way things look at the moment are far from bright.
Another British Bank in trouble is Royal Bank of Scotland which somewhat
overextended itself with its acquisition last year of ABN Amro against
competition from Barclays. It now has an estimated £12.5 shortfall in its
finances, i.e., just below a third of its current capitalisation. In order to
plug the gap, it will either have to sell assets, e.g., its rolling stock
company Angel Trains or its stake in the Bank of China, or its insurance
divisions, or it will have to cut its dividend, or it will have to raise money
from its existing shareholders. It is thought that the last of these will be
its preferred course.
However, the very fact that banks have lost so much
of their underlying wealth, in spite of continuing to secure record operating
profits, is drastically reducing the price of their shares on the stock
exchange. Bank shares have on average plunged 33% in the past 12 months. This
of course represents a blow to pension funds and other savings vehicles, and to
all people who have to rely on their savings/pensions to fund their daily
needs.
In the United States several banks damaged by
subprime lending have survived thanks only to bailouts from overseas sovereign
funds – at high rates of interest. Citigroup had to raise $22bn, UBS $12 bn,
Merrill Lynch $6.6 bn and Morgan Stanley $5bn. Merrill Lynch lost nearly $10
bn in the second half of last year alone, suffering its worst quarter in the
whole of its financial history since it was founded almost 100 years ago.
Whereas the saviours of Merrill Lynch were a consortium including Japanese,
Kuwaiti and Korean sovereign funds, it was the China Investment Corporation
which rescued Morgan Stanley – in return for what will ultimately be a 9.9%
holding in the company. Abu Dhabi Investment Authority invested $7.5 bn in
Citigroup in November 2007 in return for a 4.9% holding. Although the terms
negotiated by these various banks with the sovereign funds theoretically
prohibit the latter from interfering in the way the banks are run,
realistically everybody recognises that he who pays the piper calls the tune,
and certainly they have been able to demand very high returns (9% – a huge
amount for banks to pay) on their investment.
German, French and Japanese banks have also been
badly hit by the subprime crisis.
From banks to insurance
companies
Because lenders often insure themselves against
default by borrowers, it is not just banks but also insurance companies that
have been damaged as a result of the subprime crisis, especially those US
insurance companies which have specialised purely in insuring debt, the
so-called monoline insurers. The monoline insurers MBIA, Ambac Financial and
Financial Guaranty are in danger of forfeiting their AAA credit ratings because
they are, because of losses, now undercapitalised in relation to the risks of
default that they are facing. This could have disastrous effects for public
spending projects such as hospitals, roads, bridges, etc. which are normally
funded by cheap loans which are cheap only because they are guaranteed by an
AAA rated monoline guarantor. The minute there is no AAA guarantor, or maybe
no guarantor at all, the interest rates demanded by any lender escalate, and it
is thought that this would make many British PFI projects simply non-viable.
In turn, if the monoline insurers lose their AAA status, the debts that they
are currently guaranteeing themselves get demoted straight way, reducing their
value and forcing yet more losses on the beleaguered banks. It is,
incidentally, not only US insurance companies that are suffering but also UK insurance companies which have seen falls of around 5% in the market price of their
shares.
Measures to kick start
the economy
In the US, the Federal Reserve has been cutting
interest rates like crazy in the hope that this will ease the situation. It
risks inflation, but the danger of recession is perceived as the greater evil.
However, there is no sign at present that the rate cuts have helped in any way
as yet. In addition George Bush is planning to increase his budget deficits so
that US government borrowing this year and next will approach the previous
all-time record deficit of $413bn. Military expenditure alone will top $515
bn, with an extra $70bn dedicated to the wars in Iraq and Afghanistan. Bush will cut taxes by $1,600 for every tax paying family at a cost of
$150bn. All these measures are designed to put demand back into the economy
and reverse the slide into recession. The inflationary effect of these measures,
however, is likely to negative any positive effect they will have. But still,
at least the US has had sovereign funds riding to the rescue, albeit at the
cost of selling the family silver. In the UK measures such as George Bush has
taken are impossible because the British government has already gone beyond its
maximum spending limits and probably cannot afford to lower taxes or increase
public expenditure, even military expenditure.
Power shift to the east
While all the old imperialist powers are suffocating
under the weight of their internal contradictions, new forces are arising in
the Middle East, Asia and Latin America. Central to the fortunes of all the
emerging powers is the growing power of China which is growing at breakneck
speed. The Asian Development Bank estimates that China will grow 10.5% in 2008
after achieving 11.4% in 2007. Besides rapidly expanding industrialisation, China is engaged in what has been called the greatest project of mass urbanisation in human
history, with the government committed to building public housing for millions
of people over the next decade. This means that demand for raw materials and
business for construction firms is practically infinite. Central planners have
designated three new special economic zones, including the gigantic metropolis
of Chongqing in southwest China, growing by 2m people a year until it reaches a
population of 22m in its central districts by 2020. Bourgeois economists
believe that China’s economy will be hurt by the impoverishment of the US
consumer resulting from the credit crunch, on the basis that the US is a $9.5
tr consumption economy, while China is merely on $1tr and India $0.65tr. This
misses the point, however, that China is infinitely more competitive and
infinitely more solvent than the US or Europe. It also misses the point that
development in China is not solely dependent on profit, but that the government
is happy to mobilise billions for social projects that will enable Chinese
standards of living to continue to rise. Although recession in America would
undoubtedly cause problems for some Chinese enterprises, overall it seems
likely that America’s weakness will be China’s opportunity, which will at the
same time create new opportunities and possibilities for millions of people in
the countries producing the food and commodities that China needs, be it the
Middle East, Russia, Africa, Latin America, or wherever.
As David Smith and Holly Watt put it in the Sunday
Times of 6 January 2008:
“Niall Ferguson sees the present record oil
prices and the global credit crunch as analogous to the Seventies – not the
1970s, but the 1870’s, when the once mighty Ottoman empire lost economic,
financial and, finally, political power.
“‘Then the shift was from the ancient oriental
empires to western Europe’, he said.
“‘Today the shift is from the US – and other financial centres – to the … Middle East and east Asia’”.