01.08.2007
Debt crisis looms
Last week a minor tremor shook the world of investments. Shares on the world's stock exchanges started to wobble and many fell markedly, causing some alarm in the financial sector. Jim Moody comments
A small, temporary recovery was followed by further falls in share prices up to last weekend. Though there was a bottoming out at the start of this week, there has been at best only the tiniest restoration of fallen prices.
In the USA on July 26, the Dow Jones Industrial Average plunged by more than 440 points, rivalling the drop on 9/11. In Britain, the FTSE 100 index (a basket of 100 leading companies' share prices) had its worst day for five years, while the FTSE 250 (250 leading companies) had its biggest points fall ever. Stock market prices at the exchanges in France, Germany, Japan and Hong Kong followed suit.
Some financial commentators have given their familiar label of 'a correction' to these losses, implying that previous rises had been speculatory and unsustainable. While this may be true, much of the 'value' in financial markets is not real in a sense that we would recognise it anyway, which undermines the relevance of their comments. Exchange-value certainly exists, but the use-value of what is being traded is totally uncertain. In any event, it is the effect of the falls that counts for us, and they have already made a decisive impression on lending and consequently the way that capitalism finances itself.
At root, this crisis derives directly from what is going on in the USA, where there has been massive over-borrowing by the federal state. This has occurred to such an extent under George W Bush, with debt continually expanding, that it has risen from $5.5 trillion to $8 trillion. By anyone's reckoning, this is an enormous level of indebtedness. The tumbling of share prices have been even greater for banks such as Morgan Stanley (down 27% compared to a month ago), Merrill Lynch (down 21%), and Goldman Sachs (down 14%), thanks to their involvement in financing the previously booming acquisitions market through private equity firms.
Already this year there have been $3 trillion worth of acquisitions and mergers announced, all sustained by the banks, of course. Now, with the arrival of the credit crisis, this enormous amount of financial activity has dried up as part of a severe fall in 'confidence'. The drought of lending to private equity bidders is now affecting the highest reaches of the transnationals: for example, Cadbury Schweppes last week had to put off the £7 billion sale of its US soft drinks arm.
Taking their cue from their rulers' cavalier attitude to federal debts, many US citizens have also decided to live today, pay later. As a result, Americans individually have maintained and increased their living standards by remortgaging their houses and entering into dubious financial schemes. Mortgage lenders have scraped the barrel and scoured out every possible borrower, throwing caution to the winds. This stupendous level of personal debt would be manageable if the world economy were buoyant and interest rates low. But now that interest rates have started to climb following Federal Reserve Bank approval, predictable problems in terms of repaying debts at higher interest rates have started to appear.
Certainly what the banks and the international banking system want is something to take the inflationary pressure out of the economy. US banks are desperately seeking some cooling down, primarily by ending the spiralling debt, both personal and national. As far as they are concerned, however, a crucial proviso is that whatever mechanism is put in place must not produce a crash landing. Clearly that would be messy and definitely bad for business.
For some time bumpiness of the ride in the US housing market has been increasing. Lenders have moved to provide less than creditworthy loans for housing to members of society who would normally be considered a 'bad risk': ie, those on the lowest income, many of whom struggle to make monthly payments at the initial, sign-up rates of interest. When rates go up, as they have done recently, these borrowers go the wall. This 'sub-prime' market for mortgages has been seriously failing since last spring. So much for the US Federal Reserve Bank's blithe assumptions that a crash would not follow its evidently cautious raising of interest rates. A graphic illustration of what has happened is given by the USA's largest builder of homes, DR Horton, which reported a third-quarter loss of $823 million last week; the company is now frantically slashing prices to try to retrieve the situation.
Strangely, some observers imagine that house prices must just keep going up and up, as if there were some economic law that dictates this state of affairs. Whilst through observation it might look like that in Britain at the moment, there certainly can be no guarantee that this can or will continue in real terms. Currently the situation is not driven by real demand, which is arguably always going to be infinite, since almost everyone could do with bigger or better housing. No, what has been driving the housing price boom of late is effective demand, backed by money. And that money is borrowed money.
Once there is a block on borrowing, prices tend to start going down. Many Americans actually finance their living standards by borrowings on their houses. But that only works if the price of houses keeps going up, year on year, decade on decade. If, on the other hand, prices fall while lenders' interest rates go up, crisis inevitably follows.
Earlier this week, credit agency Fitch Ratings declared that UK house prices were at least 20% overvalued compared with their long-term average. And, as a result of high levels of debt, the UK economy is one of the most vulnerable to higher interest rates. Indeed, out of 16 countries that Fitch examined, the UK economy was the third most sensitive to higher interest rates, after New Zealand and Denmark.
Adding to the gloomy picture, Reuters reported on July 31 the results of a survey showing that "Consumer confidence took a tumble this month, as higher interest rates and the perception of a deteriorating economic backdrop encouraged people to save rather than spend ... Research group GfK NOP's consumer confidence barometer fell three points to -6 in July, its lowest since April and below forecasts for -4" (http://uk.reuters.com). Ominously, the interviews upon which the report was based were conducted back in the second week of July, long before last week's dramatic falls in global stock and credit markets. We can guess that consumer confidence is unlikely to have improved as a result.
Even George W Bush was wheeled out to pour oil on the troubled financial waters. This in fact added to the fears of those in charge of investing money, precisely because it was so unusual. The effect was a bit like Dad's army's corporal Jones telling everyone not to panic - just not so comical. Tony Crescenzi, chief bond market strategist with Miller, Tabak and Co, remarked: "By appearing on television in an unprecedented group interview, the White House is validating concern about the credit markets" (The Guardian July 28).
In Britain, after 15 months of unbroken mortgage interest rate increases, house price growth has unsurprisingly now come to a halt. Fionnuala Earley, chief economist at Nationwide, has made this assessment: "Fundamentals do suggest that household finances are coming under considerable pressure, and that house prices and consumer spending will both see a slowdown in the second half of the year" (The Daily Telegraph July 27).
As many readers will know from personal experience, salary and wage rises have not kept pace with the rapid rises in the costs of borrowing. Finding more than £200 a month extra for a £200,000 mortgage, for example, is no joke. Indeed, for very many of those not already on the property ladder, buying a flat or a house has become a pipe dream. This week's figures on repossessions from the Council of Mortgage Lenders do not make pleasant reading, following as they do a jump in repossessions from 10,000 in 2005 to 17,000 last year.
There is no way to tell yet if the stock exchange dip points to some kind of crash landing for the system or whether it can be managed smoothly. One thing is certain though: whichever way it goes, there is absolutely nothing to suggest that it automatically benefits the left.
How can it? It can all end in some sort of smash, with houses starting to be repossessed, interest rates going through the roof and people getting the sack. There is absolutely no reason to suppose that people will necessarily come to the conclusion that capitalism is to blame, nor are they likely to turn to the left.
In fact, under present circumstances, the chances are that people are more likely to vote for candidates of the extreme right. That is the distinct danger we face. In such a crisis situation the Tories would undoubtedly abandon Cameron's 'centre ground' in favour of rightwing populism.
The left, on the other hand, is most certainly not well placed to take advantage of such a crisis. There is mostly a 'wait and see' attitude. Alex Callinicos, for example, ended his commentary on the world economy and the likely outcome merely with these words: "But the important question is whether the sudden seizing up of the speculation machine will spread to the real economy and push it into recession. We may soon know the answer" (Socialist Worker August 4). Hardly an adequate conclusion, but not surprising when the effect on the SWP's creature, Respect, is very much an unknown quantity. Which way will it/should it jump?
It seems most likely that Respect will cleave along its class divide: between its working class activists on the one side and its small businessmen on the other. The party's hitherto abstract questions would, after all, become real. Naturally, for the bourgeois and petty bourgeois within Respect's ranks it would be 'How do I save my business?' rather than 'How do I save my job?'
So the looming world economic crisis raises such concrete questions as 'What is Respect's position on interest rates?' and 'What are its policies on small businesses?' For those business types in its ranks its slogans would of necessity have to switch from 'It's about the war' to 'I want relief now'.
How would Respect's 'revolutionaries' respond? By dumping popular frontism or by following through its logic and abandoning yet more working class 'shibboleths'?