“The worst is over in the financial crisis or will be very soon.” This is what Alan Greenspan, former head of the US central bank, said back in May.
This view is echoed by some people on the left. The Canadian Marxists Sam Gindin and Leo Panitch recently stressed the power of the US state to counteract the forces driving the economy into recession.
But they also insist that “financialisation” – the greater power that financial markets have gained in the era of neoliberalism – “has been absolutely essential to the making and reproduction of global capitalism”.
To the extent that this is true, surely it means that a financial crisis will have very serious implications for the economic system as a whole?
In the trenches it certainly doesn’t look as if “the worst is over”. Greenspan predicted that the interest rate that banks charge to lend money to each other would come down. But it has remained high.
This reflects the lack of confidence that banks have in each other. On this side of the pond, Bradford & Bingley, once a symbol of suburban security, has seen its share price fall nine-tenths since last August and needed a rescue organised by the Financial Services Authority to raise the capital it had lost gambling in the mortgages market.
US treasury secretary Hank Paulson faces a much bigger problem. Last week he had to launch a rescue plan for the two giant US government sponsored mortgage companies, Fannie Mae and Freddie Mac. Paulson announced they would get access to cheap credit and asked Congress for the power to take them over.
This makes the Northern Rock saga seem like a tea party. It held mortgages worth £100 billion, while Fannie Mae and Freddie Mac between them owe or guarantee debt worth $5,300 billion.
What would otherwise have been headline news, the second biggest bank failure in US history, by California-based IndyMac, was overshadowed by this crisis.
All this reflects the fact that the housing markets in the US, Britain, and elsewhere in Europe are in freefall. A month or so ago we were being told that any housing recession in Britain would be easily containable.
The mood has shifted sharply, with comparisons being made with the terrible negative equity crunch of the early 1990s.
The most visible effect in the “real” economy is in closely related industries, most obviously construction, where projects are being frozen and jobs are haemorrhaging. Big retail firms like Marks & Spencer are also feeling the pain.
The signs of a spreading global slowdown are becoming more and more visible. Until recently, the euro-zone in general and Germany in particular boasted that they would ride out the crisis in the Anglo-Saxon economies.
But the latest figures show sharp falls in industrial output in May right across the euro-zone.
According to the Financial Times “the change in mood has been sharpest in Germany, where the economy is thought to have contracted in the three months to June after an exceptional growth spurt at the start of the year”.
The turnaround in some countries is very sharp. Southern Ireland has been the euro-zone’s miracle economy, averaging growth of 7 percent a year for the past decade. In the first quarter of 2008, the economy shrank by 1.5 percent.
Even China’s trade surplus in June was a fifth lower than it had been a year before.
None of this means that we are entering a depression comparable to the economic slump of the 1930s. As recent events show, states can pump money into the economy and rescue bankrupt firms.
But they are constrained. The leap in the rate of inflation means that central banks are scared of cutting interest rates too sharply and sending prices through the roof.
That’s why, despite all the bad economic news, the Bank of England decided last week to leave interest rates unchanged.
The present crisis is likely to be a lesson in the limits of states as well as markets.