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The Great Crash of 2008

After the biggest financial crisis since 1929 came the biggest ever bailout of the banks.It didn’t work.

Capitalism is still facing what Charles Bean, Deputy Governor of the Bank of England, called a “once in a lifetime crisis and possibly the largest financial crisis of its kind in human history”.

Despite pouring more than $2 trillion into the banks in October 2008, governments in Britain and America failed to unblock credit markets.The scale of the rescue operation was awesome; the landscape of the global finance system has been reshaped. The US investment banks (once dubbed ‘Lords of the Universe’ by fawning City journalists) have gone under or been swallowed up. The US government now owns the biggest insurance company in the world and the British state has taken huge shareholdings in all its High Street banks.The Governor of the Bank of England, Mervyn King, with staggering chutzpah, calls on the banks to ask the government for ‘more than they need’ to restore flows of credit and investment. Imagine how long he’d have kept his job if he’d called on NHS managers to ask the government for ‘more than they need’!

Trillions of dollars paid out of workers’ taxes

The BBC estimates that the total cost of the global bank bailout is a breathtaking £5 trillion: one sixth of humanity’s total output in a year.One day soon, someone will calculate what that could have been spent on: what it would mean in hospitals expanded, schools re-equipped, cataracts cured, pensions secured, flood defences repaired, access to clean water assured, homes built, living standards protected. How many who live in poverty could live in decency; how many sicknesses could be cured; for how long could shortened lives be extended; how much senseless drudgery could be converted into blessed free time if only that sixth of humanity’s annual labour were applied for genuine human ends.

Never again let the capitalists and their governments put us on rations with the penny-pinching lie that ‘the money isn’t there’. It is there. It is being hoarded by private institutions awaiting more profitable times.

Because right now, at the same time as one in every six pounds’ worth of every human being’s labour is being handed to private banks by our trusted political leaders, those selfsame banks are still ‘deleveraging’  withdrawing loans, sitting on cash and refusing to lend to one another and to consumers.Inter-bank lending rates  the price banks charge each other for cash  remain historically high. By 23 October tension in credit markets was even worse than at the height of the credit crunch last year, with the iTraxx index – which measures ‘investment grade’ debt – breaching even the record levels reached only once before, at the time of the US bank Bear Stearns’ collapse.

For a few days after October’s trillion-dollar bailout the bankers were sitting pretty. They told themselves that the ‘courageous’ action of the central banks and governments had saved the financial system. But then news quickly emerged in the week commencing 20 October of the scale of the recession that is about to hit on both sides of the Atlantic. And of how it is punching a hole through the economies of nearly every country in the world, bringing mass unemployment, poverty, hunger and instability in its wake. Stock markets, initially buoyed by the bailout, dived like screaming Stukas.On Thursday 23 October a profits warning from Sony sent Japanese shares into a full-scale crash. Asian stock markets followed like dominos. On the morning of Friday 24 October  dubbed ‘Black Hole Friday’ by the Financial Times  shares plunged by around 10 percent on stock exchanges in London, Paris and Frankfurt. On Monday 27 the carnage continued, with a 12 percent fall in Hong Kong, an even bigger fall in the Philippines and the Japanese stock exchange’s weakest closing since November 1982.

There’s no getting away from the fact that, by any reckoning, this was a historic global stock market crash. October 2008 may turn out to be the biggest ever global fall in share prices over a single month.

New York University Professor of Economics Nouriel Roubini said: “There is a free fall as most investors are rapidly deleveraging and we are on the verge of a capitulation/collapse… while panic and destabilizing market dynamics is the driver of financial markets even economic fundamentals are awful as investors are finally realizing that a severe US and Eurozone and G7 and emerging markets and global recession is coming and will be deep and protracted.”

Fundamentals unsound

Bank shares got it in the neck, of course. Yet at the same time the ‘awful’ fundamentals were sickeningly clear, spreading the seismic devaluation from finance to the ‘real economy’. Rumours swept markets that flagship US auto manufacturer General Motors was about to file for bankruptcy, causing a sharp sell off of shares in car companies. Ford lost more than 9 percent over fears for its solvency. Volvo lost over 20 percent of its value as news came out that orders for its trucks from Western Europe had gone from nearly 42,000 in this quarter a year ago to 115 in the same period this year.Not 115 thousand: 115 trucks.

The global economy’s downward plunge is massively reducing demand for raw materials too. So the price of oil, which soared this year to $140 a barrel, dived back down to $63, in anticipation of a serious downturn in production. No surprise then that companies around the world are issuing profit warnings, including Daimler, Renault, Air France and Hannover Re, or announcing job losses, like Italy’s Unicredit or German company Henkel. Of course the selfsame manufacturing and trading ‘real economy’ companies that insisted they would not be affected by the crisis ‘in the finance system’ will now bitterly blame ‘finance capital’ for destroying their ‘productive’ businesses.The Credit Crunch and its impact on the real economy is a simple phenomenon: as profit rates and wages decline around the world, the banks charge companies more for their loans to ensure that falling profits are compensated by a higher percentage return.When capitalists complain that this expression of the ‘laws of the market’ leaves them bankrupt and demand to be bailed out with workers’ money, the workers’ reply should be the same, whether to a bank, a trader or a manufacturer: live by the sword, die by the sword. Your ruin is not our concern: we demand social ownership and democratic control of any business that makes a real difference to our communities, our loved ones and our lives, whether it is doing well or on its uppers. We workers already run production in every practical sense but if we owned it we could do it for the general need, irrespective of whether some gang of privateers can make a profit from it.

Nasty little island

Is Britain insulated from this crisis? Is it hell.This island has an unbalanced economy skewed towards financial services like banking, insurance, stockbroking and derivatives trading (what Lenin called ‘coupon clipping’), towards real estate, retail and leisure. With a credit intensity of GDP growth higher than almost any other developed nation, far from being in a strong position because of Brown’s ‘prudence’, the UK is in an especially vulnerable position.It’s not because Brown has somehow spent too much money on working people’s services, as the hypocritical Etonian Tory clique now claim. It is because of Britain’s historic place in the world. Britain’s pre-eminent role in the international finance system, is a privilege acquired from its one-time status as imperial overlord and the world’s first developed capitalist power. Standing on the shoulders of its blood-soaked past, modern British imperialism continues to super-exploit less developed (‘semi-colonial’) countries around the world through domination of finance and unfair terms of trade, relying on its alliance with America for military muscle when protecting its interests around the world.

But US cluster bombs and Humvees won’t protect Britain from this enemy: the unfolding of capital’s contradictions has set in motion a global deflationary collapse and a bursting of the bubble of finance capital that is dragging Britain into a deep recession.

The UK economy shrank for the first time in 16 years between July and September 2008, a fall in GDP (output) of 0.5 percent (the sharpest fall since 1990). The underlying numbers painted a very clear picture of sharp contraction across the board.In its biggest drop for 18 years the service sector  which, as a result of the decline of UK manufacturing, now accounts for around 75 percent of the UK economy – fell 0.4 percent. Leisure services like hotels and restaurants fell especially sharply, by 1.7 percent. Building fell by 0.8 percent and overall manufacturing fell 1 percent.The Financial Times called the figures “terrible” and said they signalled a much deeper recession than had been anticipated. Ben Broadbent of Goldman Sachs said the collapse of the private sector makes the official GDP figure “even weaker than it looks”. Mark Tucker of Prudential predicts recession for “the rest of 2008 and probably leading to late 2009, then seeing some sort of anaemic slower recovery in 2010”. While Andrew Witty of GlaxoSmithKline says “challenging times are going to be around for a few years.”

Falling consumer spending will hit companies too. Signs of a really tight pinch on ordinary working class and lower middle class people are becoming more and more obvious. Home repossessions shot up by a startling 17 percent in the second quarter of this year. Mortgage lending has plunged to historic lows, as have figures for house sales, as the repossessions mount. The Council of Mortgage Lenders predicts that negative equity will affect 2 million people by the end of next year, leaving their homes worth less than they paid for them, stuck with mortgage repayments well above the real value of their homes.This is the final act of the Great Housing Rip-Off that began with Reagan and Thatcher’s ‘home-owning democracy’. It developed through local housing stock privatisation and the deliberate restriction of social housing construction. It built steadily towards an orgy of self-satisfaction in the mid-decade speculative frenzy of estate agents and ‘location-location’ TV promotions. It then exploded as the overpricing of financialised housing debt was violently reacquainted with the underlying value of domestic rents, driven down by the falling real wages and living standards that really paid for the global credit boom.What credit this does to Thatcher and Reagan and to their followers: Clinton, Bush, Blair, Brown. Can there really be ‘no alternative’ to this?Submerging markets

Every policy response of the major capitalist governments and the central banks has met with a blessed sigh of relief from financial commentators and journalists, who declare with a striking mixture of absolute certainty and complete lack of evidence that this time the crisis is over. So it was after each of the Federal Reserve’s interest rate cuts, each announcement of billions more for the banks, each nationalisation. Most recently, the trillions handed to the banks in the Paulson Plan and the Brown/Darling bailout promised to ‘contain’ the crisis.

Each time the hopes of the ‘financial experts’ are rudely dashed as capital’s deep contradictions, and the pressure of fictitious interest-bearing capital accumulated over decades, continue to burst out in a geyser of devaluation.

The latest form the crisis has taken is especially sinister: a sweeping currency collapse bearing the risk of the imminent bankruptcy of underdeveloped capitalist nations which have over recent years been awarded the ideologically charged title of ’emerging markets’. In central and Eastern Europe this has hit Hungary, Ukraine and Belarus hard. It’s affecting Turkey too. Argentina faces a new disaster after only just recovering from its collapse in 2000. South Korea  one of the largest economies effected  has also had to move fast to prop up its currency and prevent collapse. And Pakistan has been pitched into utter turmoil (see pages 24 – 26).

As the global recession comes into clearer view, international investors are simply pulling out of the ’emerging markets’. This affects not only stock prices, but also bonds issued by third world governments and of course the value of their currencies.

The unwinding of the global ‘carry trade’ further aggravates this. As we warned in our article ‘Foreshocks of a global economic earthquake?’ (Workers Power, 6 July 2007), the modern technique of structuring cross-border investment funds by relying on money borrowed in Japan at historically low interest rates made global finance peculiarly vulnerable to sharp changes in capital’s relative post-1992 equilibrium.As the difference between interest rates in Japan and the rest of the world narrows, the carry trade is going into reverse. The yen rose in relation to other currencies that are falling across the board because of recession fears, prompting the G7 group of industrialised nations to issue a statement on 27 October warning that the strength of the yen is a threat to economic stability. Hedge funds are liquidating positions and there is a flight of huge sums of money back toward the relative safety of the dollar, further aggravating the fall of other currencies.The International Monetary Fund has had to rush an emergency loan of $16.5 billion to Ukraine to prop up the former Soviet republic’s “economic and financial stability” as the country’s ebullient property boom suddenly burst with investors withdrawing loans, leaving massive uncompleted building projects littering the Kiev landscape. As we go to press a larger $25 billion package is being finalised to rescue Hungary, which had to hike interest rates massively in late October to prevent a run on its currency, the forint. Iceland has also had a loan  some $2.1 billion  from the IMF, and Pakistan and Belarus are in the queue.

These IMF loans come with a deadly sting in the tail though. The ’emerging markets’ will be expected to take even more of the neoliberal medicine that has left them so vulnerable to the global crisis in the first place. The ‘strong policies’ demanded by the IMF include savage cuts in welfare spending to ‘reduce inflation’, and ‘reforms’ to promote financial sector ‘stability’  but will the people take it? Won’t ever more people be wondering whether our international financial institutions are really well qualified to educate the world in financial ‘stability’?

And now another question has arisen. Has the IMF got enough cash to bail out all the basket cases of this great crisis? The total funds available to it are around $250 billion  hence Gordon Brown’s 27 October call for ‘oil rich states’ (read Russia) and China to increase their contributions to the IMF. The dynamic is clear: Britain and the USA are trying to spread the cost of the crisis onto rival emerging powers. The conflicts between states are sharpening as a result of the competitive struggle over who is to bear the burden of devaluation.The crisis has also intensified commercial struggle as rival companies and financial institutions take over their competitors, forcing states to tear up their cartel controls as a vast centralisation of ownership and growth of monopoly sweeps finance and industry. It has intensified international and inter-state struggles as the major powers aggressively cut interest rates to export the burden of recession and beggar smaller, weaker powers.And now inevitably an ideological struggle has begun  over how to explain the crisis, who to blame for the crisis, who should pay for the crisis, and how to deflect the rising recognition around the world that if this can happen, there must be something wrong with the system of global capitalism.That’s why George W. Bush in an October speech pleaded with world leaders not to abandon “democratic capitalism”, while in a subtly different speech French president Nicolas Sarkozy railed against the “Anglo-Saxon” model of finance. Gordon Brown quietly adopts the reflationary policies of John Maynard Keynes, increasing state borrowing in order to bring forward spending plans to offset recession. Meanwhile, US presidential candidate John McCain accuses Barack Obama of “socialism”.

Behind this unedifying argument, we can detect clear signs of a shared concern among the ruling class and its politicians. How can they, in Keynes’ words, “defend capitalism from itself”? How can the IMF impose terms on borrowing countries that involve “liberalising finance” when the dominant model of liberalised finance has so obviously failed? How can the West tell China to follow their financial model and privatise their banks when the West is today, in desperation, nationalising theirs?

Surely, this is time for the left to enter the stage?But the leaderships of the international working class movement has been stunningly silent in the face of this most propitious opportunity. Yet these extraordinary times are impressing on the consciousness of hundreds of millions of people that capitalism has its limits, that globalisation is beginning to unwind, that in crisis the system wastefully destroys value it cannot apply for narrow private profit and that faced with collapse, even capitalist governments step in and socialise losses, rather than let their class go down.

The working class needs to draw a simple conclusion: we need to socialise the economy to protect against our losses. We should not bear the brunt of a crisis we never made. An associated mode of production, based on public ownership and under democratic control, can plan and allocate human labour and natural resources in a rational and sustainable way.This project  socialism  is clearly visible today through the cracks and chasms opening up in capital. A new socialist movement, organised on an international basis, needs to come to the fore in the resistance mounted by workers all over the world to job losses, higher prices, cuts in services, poverty and war. That way we can coordinate and direct our struggles from defensive resistance to paying the price of the crisis, to an offensive struggle against capitalism itself.

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