New Labour’s chancellor Alistair Darling said last August economic times were “the worst they’ve been in 60 years”. Earlier this month cabinet minister Ed Balls said the recession is “the most serious for over 100 years”. Gordon Brown recently let slip the dreaded D-word – “depression”.
There now seems to be a consensus that this is the deepest crisis of capitalism since the Great Depression of the 1930s. Some commentators argue that the global nature of the current turmoil makes it the worst crisis in the history of capitalism.
It is certainly spreading faster than any earlier crisis.
The crisis has already engulfed every major country. The Japanese economy has shrunk by 13 percent in the past 12 months. Only last summer its leaders thought they could escape the worst effects. But along with Germany and China, it is being hit by a slump in demand for its exports.
The picture in Britain may be even worse. Unemployment is predicted to reach three million at some point this year. So how did this extraordinary mess arise?
The first signs of the crisis emerged 18 months ago when banks suddenly stopped lending money to each other out of fear of “toxic” mortgage-based securities. Banks had snapped these up when the housing market was booming, but found they were rapidly becoming worthless.
Financial regulators responded to this freeze by injecting public funds into the system. The injections were designed as a temporary measure to restore confidence in the market and kickstart the stalled cycle of borrowing and lending.
Instead the banks have just sucked up any further funds that have been made available and the crisis has continued to intensify.
The crisis claimed its first high profile victim when Northern Rock collapsed in September 2007.
Two years ago the notion that any of Britain’s major banks would be nationalised seemed outlandishly left wing. Yet many have now come into public ownership, without much fuss, and to the general approval of the ruling class.
Events took a more dramatic turn in the US, as a string of Wall Street firms collapsed. These included Bear Stearns, which survived the 1929 Wall Street Crash unscathed, as well as housing giants Freddie Mac and Fannie Mae.
The US Federal Reserve (Fed) organised bailouts to save these three institutions. But when investment bank Lehman Brothers went bankrupt last September, the Fed decided to let it go to the wall rather than intervene.
The Fed had hoped to make an example out of Lehman and teach Wall Street firms that they couldn’t just gobble up profits in the good times and leave the state to pick up the tab when things went wrong.
But when Lehman went down it took much of the rest of the financial system with it. The generalised panic behind the “credit crunch” broke out of the arcane world of banks and investment funds, and swept into the wider economy. Soon the US government was dealing with a crisis of unprecedented proportions.
There have been sharp arguments in the ruling class over every aspect of their plans to counter the crisis, from former US treasury secretary Hank Paulson’s plan to buy up “toxic assets” to President Barack Obama’s current attempts to use state subsidies and protectionist measures to shore up US industry.
So far every solution they try seems to simply rebound on them.
Perhaps more seriously, the ruling class’s ideological cupboard lies bare. The Great Depression of the 1930s saw the emergence of the liberal economist John Maynard Keynes.
His ideas on how to save capitalism went from the margins to the mainstream. They formed the basis of the global economic order after the Second World War.
This Keynesian consensus lasted until the 1970s, when the world economy was once more plunged into crisis. Again there was a rival school of economic thought waiting in the wings – the neoliberal theories championed by Milton Friedman and implemented with gusto by Margaret Thatcher in Britain and Ronald Reagan in the US.
But the current crisis has thoroughly discredited neoliberal free market ideology. Former champions of neoliberalism have dumped their convictions with unseemly haste and embraced a modified Keynesianism.
Yet it is increasingly becoming clear that the Keynesian solutions don’t work either.
But there is another theorist of capitalism whose name is rarely mentioned by the ruling class. Karl Marx argued that capitalism was built upon ruthless exploitation coupled with mindless competition – and that it was ultimately doomed to fail.
Marx predicted in the 19th century that the capitalist system would grow to take over the world, but that it would never free itself from the instabilities and contradictions at its heart.
His theories said that despite its voracious appetite and accelerated growth, the system’s dynamics involved an unavoidable long term tendency for profit rates to diminish.
This left a stark choice. Either the capitalist system would drive us all to oblivion, or the people exploited by the capitalists – the working class – would unite and overthrow their masters. That would involve replacing capitalism with a socialist system based on material equality, democratic decision making and rational planning.
Today more and more people are coming to the conclusion that it is Marx’s theories that offer the best guide to the mess we’re in. Over the next few weeks Socialist Worker will examine different aspects of the crisis and demonstrate how Marxist ideas can illuminate them.
Even if the crisis is no worse then the Great Depression its effects will be cataclysmic. It’s time to spell out the socialist alternative.
For more go to The slump of the 1930s and the crisis today, by Chris Harman in International Socialism 121, » www.isj.org.uk/index.php4?id=506&issue=121