What happened over the last week?
Across the world governments have been throwing cash at the money markets – global financial markets for short term borrowing and lending – in an attempt to encourage the banks to lend to each other again. The “credit crunch” that began over a year ago saw the daily lending between financial institutions dry up. The US government has provided $700 billion to bail out the US bankers. This follows a series of other bailouts in recent weeks – amounting to another $400 billion. Over the last week, five banks have been taken over or rescued with government money in Europe.
New Labour chancellor Alistair Darling is set to throw more money at the banks this week. The Bank of England put a massive £280 billion into the money markets last week.
Governments are intervening in a desperate attempt to hold things together.
What effect do the bailouts have?
Some of the bailouts involve lending the banks money – putting liquidity in the market as they put it – to try and encourage them to lend to each other. Others involve buying up all the bad debt so that the public, instead of the bankers, are responsible for them. Not surprisingly the banks are keen on this type of bailout.
The 10,000 US citizens who face repossession each day will watch as the banks – whose actions lie behind the crisis – are saved. To put the figures into perspective, simply compare how this money could be used to solve world hunger. Each night 850 million people go to bed hungry. If the $700 billion had gone to them rather than the finance houses, this dire level of hunger would be wiped out. If the combined package of more than $1 trillion had been used, a billion people who live in chronic poverty worldwide could be lifted out of it.
Don’t the deals protect people’s savings?
Many headlines on the bailouts have focused on the idea that they guarantee people’s savings. So in Britain there is a flurry of stories complaining about the supposed “lack of protection” for depositors in British banks compared to Ireland or Germany. In response, Gordon Brown agreed to increase the amount of savings the government would guarantee to £50,000.
But under the spin something more fundamental, and dodgy, is going on. Almost 50 percent of households in Britain have either no savings at all or savings of less than £1,500. And in many cases governments are guaranteeing “assets” – which include mortgages, or debt. In Ireland the government has guaranteed the banks without knowing the full scale of their debts.
Guaranteeing banks is yet another way of transferring public money to the rich.
The idea of “protecting” depositors is a red herring – of course every bank wants as much money going into their coffers rather than their rivals. In a climate of panic, rich individuals will put their spare cash into the best accounts. But this will be nowhere near enough to cover the toxic debts at the heart of the system.
Bailing out the banks causes as many problems as it solves, while at the same time transferring money from the public to the bankers.
Where has all the debt come from?
In the last decade debt has been used like elastic – it has been stretched to cover the decline in real wages and to stimulate economies. In the US, household debt now stands at $12 trillion. The average person spends 14 percent of their income just on servicing their debts. Debt is one logical outcome of a neoliberal offensive that has reduced the share of wealth going to workers.
Government and corporate debt has also expanded dramatically. The US current account deficit runs at around $2 billion per day and its total debt has risen from 1.5 times its gross domestic product (GDP) in the mid 1970s to 3.5 times its GDP today.
All these bailouts, not to mention the effect of the financial crisis on the wider economy, will push up both public borrowing and government debt. Even before the crisis, the US and Britain faced a burgeoning budget deficit. And governments can only have so much debt. Increased debt will mean cuts in public spending and increasing privatisation. The advantage of privatisation for the government is that the resulting debt from PFI projects does not appear on its balance sheet. This is not inconsiderable – the British government already has a £200 billion liability from PFI.
Can there be national solutions?
Individual national economies cannot escape the world crisis in isolation.
Injections of state money may help stave off the worst effects of a slump in the short term. But they cannot control the investment flows of currency across the globe.
There is only one real remedy to get out of crisis for our rulers – the restoration of profits. To do this they will try and restore the competitiveness of national capital, and demand that workers accept greater sacrifices. But the classic way of dealing with this, cutting wages, can only make the crisis worse. It reduces the demand for consumer goods as well as capital goods, such as machinery or factories, and so spreads the problem to a greater range of industries.
One standard remedy to try to stimulate capitalists to invest is by cutting interest rates and playing around with the money supply. But it runs the risks of rising inflation and may not work – interest rates were cut in Japan in the 1990s but the country remained in recession. Such is the insanity of capitalism that, even when profits are very low, some capitalists might decide to gamble on a new round of investment, which could lift the economy from the depths of recession. But we are a long way from that situation.
The fact is that mainstream economists and capitalist politicians have no sure way of dealing with the crisis. Economic chaos is built into the very system they are fighting to defend.
Will government bailouts stave off global recession?
It is unlikely that government intervention can halt the crisis. For one thing the sheer scale of the funds controlled by corporations means that any government would find it difficult to control them. Lehman Brothers, for example, made a loss of around $80 billion. To get that in proportion, the GDP of Kenya is less than $41 billion. More wealth was wrapped up in one secretive speculative company than was possessed by the 40 million people of an African country. To cover British banks would cost an astonishing £9 trillion. The bosses engage in a game of economic blackmail because they hold the vast majority of the resources of society in their hands. Far from states controlling corporations, it could appear that corporations control states and make them act in their interests.
Speculation has always been a part of capitalism and every panic over speculation never leads to change but rather a new speculative bubble. What’s more, the underlying world economy is in trouble. One indicator is the slightly obscure “Baltic Dry” index of world shipping costs – which acts as a kind of proxy for world demand or trade flows.
That has fallen from nearly 12,000 in June to less than 3,000 now. A typical freight vessel in the summer would have cost $240,000 to hire and ship stuff around the world. Now the same charter can be had for $40,000. The crisis has proved how hollow the arguments of those who portray the market as a rational way of organising production are. Our rulers’ “solutions” will undermine their legitimacy even more. The reality is that every bailout encourages the continued speculation that sparked crisis in the first place.
The recent measures will not somehow bring a magic end to the spread of crisis. Much more likely are deepening splits within ruling classes and their governments as they thrash about in desperation trying to solve the problem without any idea of how to do so.