A new lurch into crisis
It is now "arguably the worst financial crisis in seven decades", according to Gillian Tett in the Financial Times (18 March).
On 17 March the US investment bank Bear Stearns went under. It had been credited as worth $18 billion only months ago. Right up to the collapse its bosses claimed it had plenty of cash to meet its commitments.
Actually, the banking business was worth much less than nothing. J P Morgan paid $230 million - petty cash in bankers' terms - to take it over, about $800 million less than the physical value of Bear Stearns' offices, and that only after getting a $30 billion credit guarantee from the US central bank, the Federal Reserve.
The question now is, who else has gone bust behind public assurances that all is fine? Who else may go bust as impressive-looking bits of financial paper turn out to be worthless? And how far will the ripples spread into trade and production?
As the Financial Times puts it: "What we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns), or even an asset class (those dodgy subprime mortgage bonds). Instead... a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms".
The boss of Deutsche Bank, Josef Ackermann, is quoted by the FT as putting it more pithily: "I don't believe in markets' self-healing powers any more".
On one level, this crisis exhibits the basic DNA-coding of capitalism: the fact that economic life is dominated by the feverish quest for ever-higher profits by a few brings "bubbles", over-extension of credit, speculation shading over into downright swindles, and eventual crashes.
In several ways, it is also something new in the history of capitalism.
One: all capitalist crises involve the unexpected. But this one is qualitatively more opaque. Gillian Tett in the FT again: "Banking has become so complex and opaque in recent years... that when shocks occur in one obscure corner of finance this creates all manner of unexpected chain reactions".
Capitalist corporations trading internationally in a world of sharply-shifting exchange rates and interest rates do financial deals to lay off the financial risks. On the other side of those transactions, financiers make profits by taking on the risks and charging commission.
Financial capital has come to feed much more off consumers, rather than industry, than ever before. Even quite poor people have credit cards and mortgages; in fact, many poor people depend on their credit cards to buy essentials.
The finance companies that issue the "risky" credit cards and mortgages then do further financial deals to "sell on" the risks; and again, financial whizzkids who fancy themselves at high-wire walking make profits by "buying" the risks. In the USA last year, 19.3% of household income went to interest payments on consumer debt. That's a lot of money for financiers to feed on. The risk spreads through the system, opaquely.
Two: one measure of the opacity is that the capitalist authorities, although very alarmed, cannot agree on what to be alarmed about.
The US Federal Reserve, cutting interest rates ultra-low and shovelling bucketloads of credit into the banks, plainly thinks that inflation and the relative decline of the dollar are secondary problems, and the chief danger to address is that of credit implosion and "deflation" (falling prices) such as prostrated previously ultra-successful Japanese capitalism for the whole of the 1990s.
The European Central Bank, and others, think inflation is a real danger.
Some experts (and the Federal Reserve would seem to agree) regard the decline of the dollar as benign (helping US exports).
US economist Fred Bergsten tells the Financial Times (19 March) that "there are no signs of significant spillover [of trouble] from the United States to China, India..." and "their continued strength" will limit the US slowdown. On a different page of the same FT (19 March) China's prime minister is reported as saying that he is "deeply worried" and that "2008 might be the most difficult year for China's economy".
China keeps its currency not exactly tied to the dollar, but relatively close to it. The decline of the dollar has thus generated 8.7% inflation in China. If China loosens its link with the dollar, however, Chinese exports will become more expensive in a US economy already weakening...
The Chinese government continues to pump its spare cash into New York, although it loses by holding wealth in declining dollars rather than other currency. If it stops pumping, then the dollar will decline faster, and the Chinese government loses further on wealth it already holds in dollars. Is that motive sufficient to keep it pumping?
Three: a moderate slowdown of profits or even of production, and a general increase in the debt burden of non-financial businesses, usually precedes any serious crisis. This time it's different.
The last four years have seen faster capitalist growth, worldwide, than any similar period in the last 30 years. Even for 2007, with the credit crisis which is now exploding already well under way, growth was relatively good.
Profit rates are fairly high; most, though not all, non-financial businesses have debt burdens which are low relative to revenues.
The usual first stage of crisis - non-financial businesses finding it difficult or expensive to get credit for new investments, so cutting back and sending the investment-goods industries into a tailspin - as yet looks remote.
But the financial implosion could well hit at industry by another route, historically unusual. So far the tightening of consumer credit has been minor. It could become major, and sharply cut consumer spending. Consumer-goods industries could drag down investment-goods industries, rather than vice versa.
Whatever the future in detail - and Marxist theory allows no better short-term predictions than ordinary academic economics - the crisis will shine a spotlight on some basic features of capitalism.
On the irrationality of a system which puts the broad economic decisions in the hands of a gang of speculators focused on short-term gain. On the contradiction between production being through ever-wider networks of social cooperation, and the gain and the decision-making power going to thos speculators. On the flagrant inequality which the system generates when in expansion, and the equally flagrant inequality of "rescue" moves in crisis ($30 billion credit to help out J P Morgan, but nothing for people in the US losing their houses, or Northern Rock workers losing their jobs).
There will also be other lessons. To help us learn them, with this issue Solidarity is starting a series of interviews with Marxist economists on their assessment of the crisis and their broader understanding of the current stage of world capitalism.
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Yet
Bear Sterns - which has not yet actually been sold to its clearing Bank J.P. Morgan - is now trading at $6 per share. It is said that if the fed had opened the Discount window to investment banks like Bear - as it has now done - two weeks earlier then Bear would have been fine. Bear Sterns - like Northern Rock - did not go bust as such, rather like a business that overtrades it hit a cash flow problem, but as Banks business itself is cash flow that is deadly for them. The problem is not a problem of profitability of banks they remain extremely profitable businesses. For example, Bear's competitor, Lehman Brothers, saw its shares fall by more than a third earlier in the week on speculation that it too had a similar problem. But both Lehman Brothers and Merrill Lynch the next day announced results which although they showed large losses resulting from sub-prime lending, were far in excess of what the market had anticipated, and the shares recovered pretty much all the earlier losses. Nor is the problem a problem of liquidity, the system is actually awash with liquidity, indeed it is the fact of excess liquidity pumped into the system as state intervention by the US, Japan and Uk to mitigate their economic weakness over the last 20 years that led to the reckless lending which has caused this problem. The problem is one of confidence, which has been the cause of every previous bank run. It is that not knowing when they might face large demands for cash the banks hoard what they have, and only lend to each other at very high rates of interest. One further consequence of that is that the markets are open to abuses by traders seeking a quick buck by shorting. There are reports that the attacks on a number of shares have resulted from rumours circulated by traders who had shorted the stock and were deliberately trying to drive down the share price.
But this remains a problem restricted to the financial markets. Traders were actually pleased that the Fed only cut interest rates by 75 basis points rather than the 100 basis points that was anticipated, because its now felt that by the end of the year the US economy may well be growing very strongly as a result of all the intervention, and that inflation will be rising so strongly that interest rates may have to rise substantially. The IMF in its meeting with the TReasury Select Committee re-iterated their view that although growth in the world economy will slow this year, their will still be growth of around 2% down from the current 5%.
Despite all the scare stories this is not the 1930's again or even the early 1980's. This is a cyclical downturn within the context of a secular upswing. The crises of the 1930's and the 1980's was the result of huge overproduction, and a low rate of profit coming at the end of a long period of growth and rise in the share of wages in total output. The current financial crisis arises from the typical blow off of debt that occurs at the end of a period of downturn. It occurred in Asia and Russia in the 1990's, and the US is now catching up. It is a crisis which is restricted to the US and UK in the main with some European banks drawn in who bought CDO's and other derivatives, but is hugely outweighed by the massive cash balances that exist not just on the books of Asian and Middle eastern states, in the savings accounts of their citizens, and on the Balance Sheeets of their companies, but also on the Balance Sheets of many large Western companies too. It arises when the world economy has been going through a period of rapid economic growth,and where the potential for demand from new consumers in Asia anad elsewhere is unprecedented. It arises when the share of wages in output is at an unprecedentedly low level, and rates of profit unprecedentedly high. In fact, one economist from one of the big finance houses actually said on CNBc yesterday that wages were too LOW, that wages needed to rise!!!
This is good news. Workers do best when capitalism is booming. They do worst when it is weak as during the 1930's.
Arthur Bough