Socialist Worker

Explaining the roots of the global economic crisis

Economist Graham Turner has written a new book about the credit crunch. Anindya Bhattacharyya spoke to Graham about his analysis

Issue No. 2109

Economic crises are unpredictable. In periods of economic growth there is a powerful ideology at work that insists the good times will last forever. Voices that point to problems ahead tend to be marginalised.

The current “credit crunch” that has hit banks such as Northern Rock and Bear Stearns – and which knocked a quarter off Marks & Spencer’s share price last week – is no different in this regard.

Most economists and politicians did not see it coming and struggle to explain how it has come about.

Graham Turner is an exception to this rule. He is one of the few economists who warned of impending problems in the global economy back when house prices were still rocketing and credit was flowing easily.

His new book, The Credit Crisis: Housing Bubbles, Globalisation and the Worldwide Economic Crisis, sets out his views on what is happening, why it has happened and what – if anything – can be done about it.

“The current crisis is an inevitable result of trying to squeeze wages, stemming back to the Thatcherism and Reaganomics of the 1980s,” Graham told Socialist Worker.

“What I try and do in this book is to cast the current debt bubble in a historical context. So I go back and talk about the attack on organised labour in the early 1980s onwards as a means of holding down inflation.

“Labour was weakened and capital was strengthened. Corporate dominance emerged, particularly from the early 1990s onwards, as the predominant economic force.”

This meant that a larger proportion of the wealth generated by society went to profits for capitalists, rather than wages for workers.

But holding down workers’ wages created another problem – they did not have enough spare money to buy all the goods that corporations were producing. The solution to this quandary was to encourage a massive increase in debt, argues Graham.

Workers were encouraged to take out personal credit for their day to day expenditure and mortgages for their housing – all in order to make up for an underlying shortfall in their wages.


This context of wages being held back leading to falling consumption gets omitted from most discussions of credit, he adds.

“There are right wing economists who say it was ‘irresponsible lending’ to have a housing bubble. Well, maybe – but just to isolate the last five years and forget everything that led us up to that point is incomplete.

“You also hear moralistic arguments that say those in debt need to be ‘taught a lesson’, and that if you help them out that will just encourage them to get into debt again.

“But the people who have got into debt are often very low income people, or people who have had loans shoved down their throats by the banks. So it’s the whole culture that led to this. People wouldn’t be borrowing so aggressively if their wages could cover their needs.”

Graham stresses that while the collapse of the subprime mortgage market in the US triggered the present crisis, the underlying credit bubble is a worldwide phenomenon – and that is why the crisis has spread so fast.

The popular image of economic cataclysm remains the 1929 Wall Street crash, which ushered in the Great Depression of the 1930s.

But Graham points out that the way that crises play out need not be quite as dramatic. He cites the Japanese banking crisis, which started in the early 1990s and staggered on for over a decade, as an alternative scenario that can be just as damaging.


“Japan was arguably the first demonstration of what happens when you have corporate dominance and a bubble bursts,” he says. In Japan’s case the initial trouble was when land prices dropped in 1989. This spread to a crash in the property market – and the problems steadily spread out.

“In the early stages people claimed the wider economy wasn’t affected. But every year there would be some kind of financial crisis. It started with the small lenders and the more speculative lenders, but then worked its way through the financial system.

“Eventually in November 1997 one of the big city banks, Hokkaido Takushoku, failed. The following year two more major banks went under, then a large life insurance firm. The problems just migrated up the chain.”

This led to what Graham calls a “debt trap” – institutions defaulting on their debts, forcing others to mark down the price of their loans to them, which makes them more vulnerable to defaulting to their creditors.”

The Japanese institutions reacted to this crisis by cutting wages – and were encouraged to do this by the US. But this triggered further collapses in the stock markets and elsewhere.

Ultimately Graham calls for more rights for workers and trade unions, combined with aggressive cuts in interest rates that he argues could work to “rebalance” the system. He acknowledges that this is a difference he has with Marxist economists.

“Some people would argue you can never get that balance right because the system is fundamentally unstable. I’m not sure whether that is true or not, but what I would say for sure is that you’re not going to find out by doing nothing.

“I don’t profess to know that if the Bank of England had acted differently we could have stopped the situation from unravelling. What I do know is that the current policy inaction guarantees that the situation will unravel – which means ordinary people will get hurt and lose their homes.”

The Credit Crisis by Graham Turner is published by Pluto Press. It is available from Bookmarks, the socialist bookshop, at the special offer price of £12.99. Phone 020 7637 1848 or go to »

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Tue 8 Jul 2008, 19:08 BST
Issue No. 2109
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