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Can world leaders find a way out of this crisis?

This article is over 13 years, 2 months old
George Bush has invited world leaders to Washington on Friday of this week for a summit to discuss their response to the global economic crisis. There is much talk describing the event as a new version of the Bretton Woods conference of 1944 tha
Issue 2127

Will increased public spending get us out of the recession?

World leaders are divided over how to respond to the crisis, but many have coalesced around the idea of increasing public spending to stimulate the economy.

The Chinese government announced a £370 billion package this week for infrastructure projects. It hopes these will compensate for rising job losses as demand for Chinese exports falls.

Earlier this month the South Korean government announced an £11 billion investment programme to fight the recession, focused on public projects and tax cuts.

The US has already bailed out the banks to the tune of $700 billion. Barack Obama is reportedly considering a further package of state aid for Wall Street. He may also intervene to save struggling car giants General Motors, Ford and Chrysler.

In Britain Gordon Brown has already put £500 billion of public money at risk by taking on bad debt from banks. He now plans to bring forward a series of “capital projects” – spending money on infrastructure in order to try and rejuvenate the economy.

The theory behind these moves is that they will create jobs and counteract growing unemployment. That will leave people with more money to spend, increasing the demand for consumer goods and thereby lifting the economy out of recession.

These are examples of so called “Keynesian” policies, named after the economist John Maynard Keynes who advocated such measures in the 1930s.

Keynesian policies were pursued in Britain and across the Western world after the Second World War.

But in the early 1970s capitalism went into crisis again, and the Keynesian medicine failed to work.

Moreover, the projects that Brown is pursuing are geared towards leaving power in the hands of the private sector. The plans to build schools and hospitals, for instance, involve persuading private companies to put up a share of the investment.

This leaves the government at the mercy of the markets. The government’s much vaunted “eco-towns” proposals have run into the ground because it cannot find any private company willing to be an “investment partner”.

Socialists welcome more money being put into public services. Increased public spending on services such as schools and hospitals can make an enormous difference to people’s lives.

But Brown also plans to spend billions on replacing the Trident nuclear system – something that won’t bring any benefits to ordinary people. And there is always the chance that increased spending in some areas will be paid for by cuts in others.

More fundamentally, the current crisis has made it clear to millions that chaos and instability are inherent in the capitalist system.

We need to fight the effects of the recession and galvanise resistance – but we must also fight to replace capitalism with a socialist system that operates for the interests of the majority.

Can interest rate cuts save jobs and stave off the downturn?

Last week the Bank of England announced an emergency cut in interest rates from 4.5 percent to 3 percent.

This record cut gained widespread praise from trade union leaders and Labour MPs. Interest rates are now at the lowest level since 1955 and are widely expected to fall below 2 percent.

But this cut will do little to benefit ordinary people. These rates are not what you will pay on your debts or mortgages – they will remain much higher.

Banks are scared that they cannot recoup the money they have loaned to homebuyers. House prices are falling and the number of repossessions is rising. This means that banks make less money when they auction off the homes they have repossessed.

That is why bank bosses told chancellor Alistair Darling that they will not be passing on any further interest rate cuts to mortgage holders. They say their profit margins are already “desperately small”.

Even if official interest rates collapsed to zero, the small print in a typical mortgage contract ensures there is a limit beyond which the interest you pay cannot fall.

Moreover, cutting interest rates does not directly make companies more creditworthy. Banks are already refusing to lend money to businesses – even vital short-term loans to cover cashflow problems. This is leading to bankruptcies.

In Japan, soaring share prices and a property boom collapsed spectacularly in 1991. Japan slashed its overnight rate to zero during its long economic downturn but corporations still hoarded cash rather than investing or depositing it in banks.

If there were profits to be made, capitalists would borrow money even if interest rates were high. The problem today is that available profit rates are low.

That is why investment has collapsed, and cutting interest rates will not alter that fact.

What started last year as a subprime mortgage problem has turned first into a credit crunch, then into a banking collapse and is now a global economic crisis.

The IMF has targeted Britain as the most exposed economy of the G7 leading industrialised countries. Lower interest rates cannot offset the fear that this creates in the boardrooms.

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