The current credit crunch was triggered by the subprime mortgage crisis in the US. But how did the global economy become so reliant on consumer debt in the first place?
The world economic system has lurched from one crisis to another ever since the mid-1970s, which saw the end of the decades long post-war boom.
As the pressure on profits became more intense, bosses responded by trying to hold down or cut workers’ wages. So in the US workers today work longer hours for the same pay. In manufacturing, the average worker was working two weeks longer in 2002 than in 1982.
But if workers are paid less, they will buy less, which would also hit profit rates. For the past decade the solution to this dilemma has been to make credit easily available to individual consumers and to encourage people to spend.
This era of cheap credit was the ruling class’s solution to the last economic crisis, when the “dotcom bubble” burst in 2000-2001. This emerged in the 1990s as capitalists invested in technology companies that had yet to make any profit.
When the bubble burst, the Federal Reserve, the US’s central bank, cut interest rates to make credit more easily available.
This led to a credit bubble arising around housing, which gave a temporary boost to the economy. A climate of rising house prices made people feel more financially secure than they actually were. It fed the illusion that people were wealthy because of the equity tied up in their property.
As the debt market expanded, finance houses soon found out they were running out of people to sell mortgages and loans to. This led companies to deliberately target people who were at much higher risk of being ultimately unable to repay their debts. In many cases ordinary people ended up with levels of debt far beyond that which they could manage.
Many lenders were unconcerned by the fact that people would be unable to cope with the debt – because they were repacking those debts and selling them on to other companies.
The long term effects of such manoeuvrings were ignored in the interests of short term profit.
When the credit crunch hit, the ruling class was sent into a panic. Some argue that to protect profits, credit should only be made available to those who can afford to repay it.
But if access to credit is tightened, millions of people will not be able to buy goods. The crisis will thus spill over from finance into the wider economy.
One of the ruling classes’ solutions is to squeeze workers harder. Public sector workers in Britain are being told they have to accept below-inflation pay to keep inflation down and stop the country from sliding into a recession.
Private sector employers are trying to do the same. But that is no way to end the crisis – it is just an attempt to make us pay for it.
The impact of economic crisis is devastating for ordinary people as it is. But things can get much nastier when the crisis spills over into the political and military arenas.
Our rulers are desperate to make sure that workers don’t draw the conclusion that the capitalist system is at fault. They will use racism to try and blame immigrants for the lack of jobs and services.
They will demonise groups of people to justify attacks on living standards – whether it’s the disabled, single mothers or young people.
Rights that people have fought for and won – free healthcare, state pensions and free education – come under sustained attack.
And as competition between the bosses intensifies, it drags in the states that back them. Wars become more likely.
The Great Depression of the 1930s led to the Second World War. This is just one example of the horror that can result when recession grips the globe. Crisis is built into capitalism – and it cannot be eliminated while that system remains intact.