The world economy appears once again to be on the brink of disaster. The volatility that swept through markets in recent days is reminiscent of the panic of autumn 2008, when the Wall Street bank Lehman Brothers collapsed.
Today, as three years ago, the turbulence reflects deep-rooted problems in the system.
The immediate causes of the panic are the continued debt crisis across the eurozone and the decision of ratings agency Standard & Poor’s (S&P) to downgrade the US’s debt.
Both of these reflect the way that action taken by states in 2008, far from solving the crisis, simply shuffled it around.
Back then governments moved to stave off complete collapse—intervening in markets, bailing out banks, stimulating economies and shouldering ever-increasing levels of debt.
But this has not solved the system’s problems, and further chaos is spreading across the world. Here Socialist Worker answers some questions about the crisis.
What impact has the global recovery plan had on the eurozone?
If the plan had led to rapid recovery, states’ huge debts would not have presented major problems. However, this promised growth has failed to materialise.
Weaker eurozone economies face the greatest problems—Greece, Ireland and Portugal each had to be bailed out.
In the run-up to the crash, they had borrowed at similar rates to much stronger eurozone economies, leading to credit and property bubbles.
When they ran into problems they could not use traditional remedies, such as driving down the value of their currency to boost exports or cutting interest rates, because they were locked into the euro.
States ended up saddled with debts they could not repay. As their problems grew, the interest rates they paid on their debts were driven up by bond dealers, compounding their indebtedness.
To qualify for a bailout they were forced to impose austerity on a huge scale—cuts to public sector wages, privatisation and reduced state spending.
But these measures increased the problems, just as chancellor George Osborne’s cuts are doing in Britain.
It soon became clear that the Greek government was effectively insolvent and would not be able to pay back the money it borrowed.
After weeks of wrangling, the European Central Bank (ECB), other financial institutions and European rulers—notably Nicolas Sarkozy in France and Angela Merkel in Germany—struck a deal to “rescue” Greece.
Why was Greece bailed out?
The deal was not based on helping Greek people. European leaders sought to prevent a Greek collapse dragging down the eurozone’s core banks, which held the debt, and the ECB, which had bought Greek bonds.
They also wanted to stop the panic spreading to other European countries.
The deal involved an effective Greek default, with bond holders taking some losses, along with a new bailout sponsored by other European states. The European Financial Stability Facility was supposed to take over from the ECB in intervening to stave off future crisis.
However, the very contagion that the European leaders were hoping to prevent is spreading.
What is happening to Italy and Spain?
They have seen their borrowing costs shoot up. The Spanish economy is twice as big as that of Greece, Portugal and Ireland combined. The Italian economy is even larger than that.
The market in Italian debt is the third largest sovereign bond market in the world—only the US and Japanese markets are bigger.
Spain and Italy are “too big to fail”. Their default could precipitate a far bigger crisis than we have seen so far. But they are also “too big to rescue”. The existing bailout funds simply could not cover their debts.
Anyway, the Greek deal was sold by European leaders as something that would not be replicated for other economies.
The ECB was forced to make emergency purchases of Italian bonds on Monday of this week to try to calm the panic.
But such action risks repeating the Greek experience on an even greater scale.
How is the turmoil in the US affecting the situtation?
The US remains the biggest economy in the world, with its currency a key pillar of the global financial system.
Markets were already spooked by arguments over the US debt ceiling. A decision to lift this ceiling, to allow the US to borrow more to meet its spending requirements, was carried right to the brink.
Hardline Republicans insisted on a plan that involved cuts to scale down future debt, while the Democratic administration wanted one combining (still savage) cuts with some tax increases.
The political fractures helped persuade S&P, a private agency not subject to any democratic control, to downgrade the US government’s credit rating.
This rating is a label that says how likely it is that lenders will get their money back. The effect of this is not clear—it has never happened before. But it is likely to raise the borrowing cost for the US government.
Is the crisis spreading?
There will be knock‑on effects elsewhere in the system. US borrowing—both by consumers and the government—has been a major driving force for the world economy in recent decades.
Even the Chinese boom, another engine of the system, depends heavily on the capacity of US workers to buy its goods.
Much of the money made from these sales is then loaned to the US government through purchasing the treasury bonds it issues. A collapse in confidence in these T-bonds creates problems for China, which holds over $1 trillion of them, and other lenders.
More generally, T-bonds are used as collateral in both the regular banking system and the “shadow banking system”. This is composed of those sections of the financial system not under the same regulatory control and obligations as the banks.
It has swelled to a colossal size, dwarfing the traditional banking system. It includes derivatives markets, hedge funds, money market funds and so on.
Contagion through the shadow banking system helped spread the crisis of autumn 2008. Complex assets based on US subprime mortgages, taken up by US workers who were unable to pay them back, were loaned and traded in these markets.
When these assets turned out to be “toxic” it helped to drag down companies such as Lehman Brothers.
One fear evident in the financial press is that similar problems will develop as the strength of the supposedly rock-solid T-bond is called into question.
What went wrong?
None of this was supposed to happen. State intervention in 2008 was on an unprecedented scale. And for a time it seemed to be working.
If the problems now resurface, states may find that they have used up all their ammunition in a battle to postpone the crisis only to have nothing left when the war resumes.
The action taken by states in 2008 was premised on the notion that the system was experiencing a short-term financial crisis.
This could be shrugged off relatively quickly, with the extra debts acquired by states being repaid once growth returned.
Many Marxists saw things differently. We argued that the crisis was rooted in the long-term decline in profitability across the capitalist system from the late 1940s to the early 1980s.
Attacks on workers in the 1980s, combined with limited restructuring of the system and the colossal growth of the financial sector, prevented further falls in profitability.
But this could not restore the system to full health.
The fundamental problems remained, below the surface.
Debt and financial expansion played an increasingly important role in driving the world system forwards—but storing up problems for the future.
The crisis that developed in 2007 and escalated in 2008 was not simply a financial crisis, even if it started that way. It was a crisis of a capitalist system that had been living on borrowed time.
A solution to the problems will ultimately require a far more drastic clearing out of the system than we have seen.
What does the future hold?
In the Great Depression of the 1930s it required the state-driven reorganisation of capitalism to prepare for the Second World War, and the devastation of that war, to end the crisis.
Nobody knows if the current hole capitalism has got itself into is as deep as that. But it is clear even to many mainstream commentators that the recovery is horribly weak and that this underlies the current problems.
Most European economies are stagnant or contracting. Britain grew just 0.2 percent between April and June.
The US has seen production and consumption slow and cannot shrug off unemployment rates of around 9 percent.
Even China faces problems. Its growth is heavily dependent on colossal levels of investment.
There are now signs that it is overheating, with growing levels of debt, a real estate bubble and an overdependence on exports to a world economy that may not be able to purchase them.
Substantially more chaos and upheaval will be required to give capitalism even the prospect of a new period of sustained expansion.
And while comparisons with autumn 2008 are relevant, in one respect the new phase could be quite different.
Now, the tide of struggle is rising, our rulers are more divided and disorientated, and many workers are convinced of the need for resistance.
The left needs to be at the centre of nurturing this.
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