Can public spending solve the crisis?
Many economists and politicians – Gordon Brown included – are calling for major public spending projects to stave off the worst effects of the recession. This is sometimes dubbed a “Keynesian” solution.
Left wing economists are demanding public funds be spent on infrastructure projects such as schools, hospitals and public transport, or on measures to tackle climate change with an aim to improve society and create jobs.
But Brown’s vision of Keynesianism is very different to this. He is proposing to spend billions on replacing the Trident nuclear system, aircraft carriers, the Olympics and other such projects.
Socialists should welcome Keynesian policies only if they take power away from the rich and put it into the hands of the working class.
But ultimately we need to go further and replace capitalism with a system that operates in the interests of the majority.
There is also the question of who pays for this public spending – and for the bank bailouts.
The government doesn’t have the money, so it has to borrow it from the international capital markets.
This will lead to a budget deficit, which the government will look to solve by raising taxes or making public spending cuts, or doing both at the same time.
The borrowing also has knock-on effects in the global economy.
If governments are hoovering up all the available funds, it becomes more expensive for private companies to borrow money.
This could lead to more companies going bankrupt and more job losses, thereby deepening the recession.
Why is the ruling class divided over the solutions to the crisis?
Even limited talk of a “public works programme” has provoked a backlash from the neoliberal right.
Sixteen economists wrote a letter to the Sunday Telegraph last week attacking the government’s plans.
“Economic slowdowns are natural and necessary features of a market economy,” they wrote, warning that state spending would “stunt the private sector’s recovery once recession is past”.
They called for more tax cuts instead.
Their arguments reflect the wider ideological crisis in the ruling class, as their system comes crashing down around them.
Some worry that direct state intervention into the market could lead to ordinary people believing they could exert collective control over the economy.
Can cutting interest rates help?
Some left wing economists have proposed slashing interest rates as an emergency measure to stop the slide into recession.
They argue that a drastic cut in the interest rate will alleviate the worst effects of the recession on ordinary people.
It would lead to lower mortgage payments, they say, helping homeowners facing repossession.
And it would lower borrowing costs for businesses, preventing mass job losses as firms go under.
Cutting interest rates could well lead to these beneficial outcomes. But there is no guarantee that banks would pass on any rate cut to mortgage holders, or to the firms that owe them money.
Similarly, there is no guarantee that employers would not take advantage of cheaper borrowing costs and sack people anyway.
The US government has been cutting interest rates for a while now, but unemployment is still rising.
Japan pursued a policy of low interest rates in an attempt to get its economy out of stagnation.
But this had little effect – there was no investment as firms’ profits failed to recover.
Even advocates of emergency interest rate cuts admit that it would do nothing to solve the long term problem of the debt bubble in global financial markets.
The bursting of this bubble triggered the banking crisis.
Its existence is tied to a much more fundamental issue – the crisis of profitability across the capitalist system.
Profit rates in productive areas of the economy are low and declining, which is why investors turned to the financial sector in the first place.
Why are stock markets plunging again?
The stock markets were relatively calm immediately after the announcement of coordinated bank bailouts across the world. But last week they started plunging again.
The trigger for this latest rout was the dawning realisation that a global recession was inevitable.
It was accompanied by steep falls in the value of pounds and euros relative to the US dollar.
Britain is likely to be particularly badly hit by this recession.
Economic growth in this country has been centred on financial services, with the encouragement of New Labour.
But finance is at the centre of the current economic hurricane.
Some commentators have argued that the economies of the Far East, particularly China, can act as powerhouses that will pull capitalism out of its present crisis.
But now it looks as if the crisis will drag China and other Asian economies down too. Much of their growth has come from exporting goods to the West – so a slowdown in the West will hit their economies too.