12.09.2007

Triggers and real causes

The reluctancy of the big five banks in the United Kingdom to lend money to each other shows how fragile the whole system of global finance capital really is, says Jim Moody

Over last weekend it emerged that the big five banks in the United Kingdom were becoming more and more reluctant to lend to each other. Not because they no longer see their competitors as good credit risks. No, their reluctance, it became clear, was and is because the banks might be forced to draw deep on their reserves.

There are two immediately pressing dangers for the British banks and indeed the whole system of global finance capital. Firstly, there is the continuing fallout from the collapsing subprime mortgage market in the US. The risks associated with this lending have been sliced and diced between one financial instruction and another. So instead of the actual lenders bearing the main losses when the poor could no longer pay, the problem ends up at the door of the Landesbanken in Germany and now it seems the clearing banks in Britain. They may well be overexposed because of unwise lending.

Secondly, there is a looming credit crunch. It just so happens that quarterly loans expire at the same time as shorter-term debts and between September 11 and September 19 a whopping £70 billion is due for repayment - £23 billion of it on Monday September 17. This is the biggest backlog of debt in modern financial history, representing some 20% of all the outstanding short-term money market loans issued by European banks.

The reason that this is so serious, and indeed problematic, is not simply the subprime mortgage collapse in the US. That was merely the trigger. The fact is that, with the US leading the way, capital has increasingly shifted from production to finance, from industry to parasitism, and using money to make money. This, being impossible, inevitably leads to overborrowing and overlending, as capitalism reaches the stage of cannibalism.

So the crisis might have begun with the subprime mortgage market and might be exacerbated by the looming credit crush, but it has far deeper, structural causes. US treasury secretary Hank Paulson has openly admitted as much. He rates what is going to happen over the coming years as being worse than the Asia crisis and the Russian default in the 1990s or the Latin American debt crisis in the 1980s. The present crisis is "going to take longer to resolve" (quoted in Financial Times September 12).

Under 'normal' conditions bank-to-bank loans that have matured are rolled over into the next period, with backstop funding arranged via a major bank in case lenders get cold feet and do not play ball. But at the moment no one is at all sure about borrowers: after all, who knows who is contaminated by the subprime crisis?

Even now, after a little over a month, the money trail of investment laid off from subprime mortgages is not at all clear, and the financial exposure to risk of any and every financial institution is therefore decidedly unknown. Moneymen do not know who is trustworthy, hence the hike in interest rates. Until those borrowers that are 'unclean' (as far as the subprime collapse is concerned) can be identified, it is distinctly safer not to lend to anyone. Thus backstop-funding facilities have melted away.

At the centre of the turmoil lies the US and its relative decline. This is more than symbolised by the dollar. On September 10, the dollar index on the New York Board of Trade fell to its lowest level for 15 years, and even then only two percent above that September 1992 trough. The following day, the dollar had dropped to within spitting distance of its record low against the euro: another indicator of concern at US economic downturn, which was also spotlighted by last Friday's US payrolls data. As the week has progressed, there have been no signs of let-up of the dollar's decline against other currencies.

Preliminary figures issued by the US department of labor at the end of last week recorded a fall of 4,000 in payroll employment in August. Although this is a tiny proportion of the total number of US workers (138,037,000), the news shocked the US establishment, as economists had been predicting an increase in jobs of around 110,000. There had been, after all, monthly rises of between 68,000 and 188,000 since the beginning of the year; and the last monthly fall in employment figures had been four years ago. The main areas of job losses were in construction, manufacturing, transportation and government, more than wiping out increased employment in the US education and healthcare, leisure and hospitality, and retail sectors. Many commentators linked the fall directly to the deepening housing slump and the developing credit crisis in the USA, as well as business worries that problems in the country's mortgage market are spilling over into the wider economy.

The whole system of finance capital is showing its fragility. Besides the US mortgage market, another sector facing crisis is the asset-backed commercial paper (ABCP) market, which has seen what amounts to an investor strike. As the ABCP market has always been considered a very safe investment and a slow-moving sector, observers have been surprised at the speed at which inward funds have dried up.

ABCP is essentially short-term debt (often maturing in less than 45 days) secured against assets, and is a means of funding investment longer term. Whereas the ABCP market grew threefold over the summer to $1,200 billion, the fact that its functioning has now been rendered largely impotent has a strong potential for creating even more strains for some of the big banks. Without money coming in to fund ABCP, those who need to repay their debts are going to be in great difficulty and will have to sell assets to clear them.

In its first statement on the turmoil in financial markets, the Organisation for Economic Cooperation and Development highlighted the problems in the US housing market in particular as a key reason for lowering its forecast for US economic growth in 2007. Obviously it has no wish to say anything that might cause a sudden panic. Anyway, it is certainly likely that the Fed (the Federal Reserve System, the USA's quasi-governmental and quasi-private central bank) will cut interest rates when it meets on September 18 in an attempt to prevent the US economy from plunging into a full blown slump.

Referred to by some as the fear index, the Vix ­- the Chicago Board Options Exchange Volatility Index - plots the share movements of the 500 mostly American top corporations. It has been steadily rising this week. Some financial analysts consider it an imperfect measure of volatility in the equity markets, but the Vix (http://finance.yahoo.com) does, even if partially, help to build a picture of what is happening, as it happens, day by day.

Jean-Claude Trichet, president of the European Central Bank, is of the school that would let investors hang out to dry, come what may. He was quoted earlier this week as asserting: "Bailing out bad investors would be the worst thing to do" (Financial Times September 11). Clearly, those of Trichet's mind worry that in helping failing concerns, recklessness will prevail instead of 'good business sense'.

What happens if the USA falls into an economic downturn? Consequences will certainly be felt in Europe and Gordon Brown could well be forced to order severe cuts in government spending, as tribute gained from the parasitic activities of the City of London dry up. We should expect a further cap on public sector pay. Under conditions where mortgage rates are expected to steadily increase this means a considerable drop in living standards for many workers. Whether or not that will lead to an explosion of strikes or merely some token action by left-talking trade union leaders is impossible to say. But class contradictions will become sharper and more antagonistic.

Sections of the small bourgeoisie face ruination (and small to medium businesses in the UK employ about 60% of all workers). If these businesses cannot obtain bank assistance to see them through what is expected to be a 'lean period', or can only do so at usurious rates of interest over much reduced periods of time, then many will simply go bankrupt or be brought out. Already the Federation of Small Businesses is squealing. Here is the material basis for the politics of xenophobia, anti-immigrant witch-hunts and christian revivalism.

What of China? Its spectacular growth over the last decade had led many Marxists or sub-Marxists to the conclusion that capitalism is not decadent or in decline, but on the contrary is still in its youth. In fact US manufacturing has been exported to China and, thanks to low-paid Chinese labour and Chinese state oppression, comes back in the form of cheap commodities and dollars reinvested in US bonds, etc. If the US economy just slows down, China could be thrown into profound crisis. Exports would dry up and the class struggle could explode