The financial markets have been behaving recently as if the 2008 crash was merely an unhappy memory, of no relevance to the present.
The US stock market hit another record high on Tuesday of last week. Then two days later came what financial wonks like to call a “correction”.
Tokyo’s Nikkei index fell by 9.2 percent, its sharpest fall since the Tohoku earthquake and tsunami in March 2011. Other major stock markets followed the Nikkei down.
So what’s going on? To answer this question we have to go back to how the major capitalist states responded to the financial crash and the global economic slump that it precipitated in 2008-9.
Governments bailed out banks and increased spending to counteract the recessionary forces driving the slump. This prevented complete economic and financial collapse but it also increased government borrowing.
This was then proclaimed a “crisis of sovereign debt”, even though it originated in government rescues of the private sector. It provided the pretext for the attempt to radicalise neoliberalism by slashing public spending.
This started with the Conservative-Liberal coalition in Britain, and spread first to the eurozone then to the US.
But this programme of fiscal austerity didn’t mean that the state stepped back from the economy. On the contrary, central banks continued to fend off another slump by flooding the financial system with money.
In the US and Britain this took the form of “quantitative easing”—buying government and corporate bonds. The European Central Bank has tried some more cautious and indirect methods. But the net effect was to shove new money into the banking system.
It is this form of printing money that has driven the markets upwards. They received a huge filip when the right wing nationalist Shinzo Abe won the Japanese general election last December.
He appointed a new central bank governor to implement “Abenomics”—quantitative easing on a greater scale even than in the US—and thereby to lift Japan out of its two decade-long depression.
There are two problems with this approach, which George Osborne dubs “monetary activism”. First, it’s an emergency measure that will have to stop sometime.
But the financial markets have become addicted to a diet of cheap money—and not just them.
The Bank of England has pointed to the problem of “zombie firms” that survive only because interest rates are so low and banks don’t want to take the losses if they drove them into bankruptcy.
Many commentators argue that the stock market sell-off was a result of a press conference by Ben Bernanke, chairman of the US Federal Reserve Board (the Fed, or US central bank), on Wednesday of last week.
Bernanke said the Fed might start to “taper” its bond purchases “within the next few months”, while the Fed’s minutes revealed that other governors want to start this retreat from quantitative easing in June.
Faced with the prospect that their transfusion of government money might stop, the markets panicked. This then takes us to the second problem with the central banks’ “activism”. It hasn’t sparked a robust recovery.
The US economy has started growing a bit more strongly recently, which is why Bernanke talked about tapering quantitative easing. But Britain is stuck in the doldrums. The latest survey of purchasing managers suggests the eurozone economy is shrinking.
The equivalent survey for Chinese manufacturing indicates that the world economy’s largest industrial powerhouse is also contracting. This confronts the Chinese leadership with its own version of Bernanke’s dilemma.
Massive investment funded by cheap loans kicked China out of slump in 2008-9, but it also fuelled a huge speculative property boom. Li Keqiang, China’s new prime minister, says he wants to halt rising property prices.
But cutting the supply of cheap credit to the economy might induce a real recession. Nearly six years after the financial crisis began, world capitalism is still struggling.