The past week has seen the spectacular collapse of giant financial institutions and unprecedented state intervention. Hillel Ticktin spoke to Peter Manson about the likely outcome
The immediate question in relation to the current crisis and the US government’s response is whether the funds to be authorised by Congress are going to be sufficient to stabilise the world financial system and in the short term capitalism itself.
A number of measures have been taken. Companies have been taken over, but Lehman has gone bankrupt (the US authorities now probably realise they made a mistake in allowing this). What is effectively being done is the buying up of the so-called ‘distressed loans’ or ‘toxic debt’, but, even according to official figures, the sum on offer does not represent the total of all the loans that have stopped performing. A figure of $1.5 trillion has been mentioned (even if $0.3 trillion of this has already been dealt with). In fact nobody knows the true amount.
Cash has been pumped into the US money markets funds (a $3.5 trillion market), which had previously been regarded as a haven for pensions, etc. Most importantly, $700 billion will be supplied to the banks by Congress, but everything depends on the terms. Institutions previously regarded as safe, where many ordinary people had their savings, are now in trouble. In addition the USA has supplied and is supplying funds to international markets, including central banks.
The reaction of the market shows that investors are not 100% sure whether the government intervention will work or whether the measures will get through Congress. There was a rise in the price of gold and commodities and a decline in the dollar, and this implied that no-one is certain as to the outcome. There has been a subsequent decline in the stock markets. In other words, it might just work, but it will not resolve the whole situation beyond the short term. It will do no more than hold the line for a time.
The only comparison that can be made is with 1929 - with the difference that this time the bourgeoisie is not prepared to allow a deep depression to occur: They are only too aware of the consequences, which would be much greater for them than in the 30s, when they were not really threatened politically in the United States.
The question is, though, is it going to work? I do not know, but there is a chance that it will. If so, I would say that we are at this moment somewhere between the middle and the end of the first phase of a crisis. We are certainly not in a full-blown crisis yet. The first phase has to be financial - that is what happened before the great depression and it is what is happening now. The next phase, assuming there is a degree of stabilisation, will be the overall economic downturn.
That will mean closures, redundancies and relatively high levels of unemployment. Indeed sales are already down. In the United States, which is, of course, the crucial economic centre. Car sales, for example, have decreased from a peak of around 18 million per year to about 12 million. The major American, as opposed to Japanese, car companies - General Motors, Chrysler and Ford - are all in trouble. Congress has voted to give them all a loan, which shows that the administration is prepared to support industry as well as the financial sector.
If there is some success in stabilising the financial system for the time being, I expect the second phase of the crisis to focus much more on industry, resulting in a fall in employment and declining real wages.
The other aspect of the overall downturn is one of deflation. Although the price of food and raw materials has gone up, in my view that is very largely a question of speculation. Why is that happening? The overall reason for the downturn is that the surplus capital within the system has been unable to find an outlet and is consequently turning on itself, as it were. This situation produced the multiplication of derivatives - $596 trillion at the end of 2007.
The question is, where can capital be invested in order to make a profit? It is not clear that there will be a return to investing in industry. There is no point in doing so if what it produces cannot be sold. So a high share of the surplus value produced is going to finance rather than industrial capital, which in itself creates a problem. The problem arises because the poor are getting poorer, which means that the ordinary person cannot actually buy the goods produced.
This aspect is intensifying. Wage levels have dropped and this results in a vicious circle. People will then not be able to pay off their loans or meet their credit card payments, which produces another financial crisis. Just as it was impossible to predict the details of the current financial crisis and how the government would react, so it is impossible to predict how the US or UK governments will intervene next time.
If money is pumped into the system, the question is, how far can governments go, how much can they spend, without causing higher inflation? In Britain the government is under attack for presiding over a large budget deficit, but in fact there is no objective reason why the deficit should not be increased from 3%-4% to 6%-7%. This is particularly so while interest rates are low, which means that government loans are less costly. The budget deficit is very high in Italy and Belgium, for example. It is also perfectly possible for government debt to be increased - in the United States it is rising exponentially. The question is, how far can both the budget deficit and government debt be allowed to rise? Certainly a lot further without causing any great grief to the system.
The argument against following such a policy is that this would produce an increase in inflation. That would be true if there were full employment, but in current circumstances inflation would be unlikely to be pushed up by very much. The current rise is caused by increases in the price of food and raw materials (which are, as the government claims, external factors) and that, as I say, results from speculation rather than a boom.
But this speculation is actually part and parcel of the downturn, not some extraneous feature, as the government alleges. The capitalist class, finding nowhere to invest, resorts to speculating on the price of oil, which might produce a fairly high return. Last week the government actually helped the distressed commodities sector because prices had fallen so rapidly.
As long as there is a downturn, the government will continue baling out companies in trouble. In principle it is possible for the government to pump in a lot more money without causing a large rise in inflation - although in fact it would, I think, still be forced to intervene in this way even if it resulted in some increase.
A caveat, though. The bourgeoisie is prepared to bale out the system, not reflate it. If they felt that the current course of action would produce full employment and therefore stronger unions and a more threatening working class, they just would not do it.
We cannot predict where things will be in, say, a year’s time - that will partly depend on the class struggle. We should expect much worse living conditions. So far people have not been affected in the way that is likely in the near future. While the standard of living has declined slightly, most people have kept their jobs. Of course, in Britain there is a knock-on effect when workers in the financial sector are sacked, unlike in Europe, which does not have such a huge proportion of its workforce employed in finance. Even in the United States, the effect is not so marked.
What is slowly being played out is a turning point for capitalism. We will be witnessing what is effectively the third great depression - the first was at the end of the 19th century and the second was that of the 30s. The question is not so much why it is happening, but why it did not happen before.
The answer I would give is the effect of World War II and the subsequent cold war, which maintained a political-economic stability. Capitalism has only limited means of doing this - imperialism, war (including cold war) and the welfare state. With the end of the cold war has come the end of stability. The forms this can take are now more limited than they have been at any time over the last 60 or 70 years.
The end of this period is producing effects which nobody expected would be quite so spectacular. This has already changed the mood among the whole population from top to bottom - maybe for ever. People now see that the market constantly malfunctions and it is absolutely clear that some form of planning or government intervention in the economy is essential.
And now Marx is making a reappearance in the newspapers. For example, Peter Jay - Jim Callaghan’s son-in law who became ambassador to the United States - now wants to apologise to Paul Foot for having dismissed Marxism. One of the papers quotes a woman who recalls being warned by the Workers Revolutionary Party that the crisis is coming. The fact that they are now printing this stuff is in itself interesting.
Obviously, then, the opportunities for the left are growing. Its reaction ought to be to stress the fact that the system does not work, the need for planning and for the working class to take power, for socialism. Instead we have had comments about ‘socialisation for the rich’. The point is not so much propaganda about the rich having their fortunes secured through state intervention, but demands for workers who are dismissed to have their wages guaranteed. Nobody should be evicted from their homes for non-payment of rent. These are demands that would protect the ordinary person. Of course, the state could not meet such demands - it would cause more bankruptcies.
It is not true that there is socialisation for the rich - this form of state intervention has nothing to do with socialism. In any case, for most of the rich, a company collapse hardly affects their personal wealth. The state is not baling them out: it is baling out the system. And it is the system against which we ought to be directing our fire rather than a small number of ‘greedy people’.
It is clear that the collapse of HBOS cannot be blamed on ‘short selling’, although such action might have accelerated its takeover. Of course, it is true that there are always a certain number of people in the know who can take advantage of that knowledge, but their actions are not the cause of the crisis.
It is like saying that the problem is that capitalists are greedy and should pay their workers more. They cannot do so if they are going to run their companies at a profit - they have to compete and reinvest. Similarly the US banking firms really had no alternative but to sell as many mortgages as they could, given the nature of finance capital. Whether or not they were greedy, they had to do it. The focus on individuals, such as ‘short sellers’, is a deliberate attempt to distract attention from the system itself.
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