This Saturday saw Socialist Party members from across the West Midlands descend upon Birmingham for an afternoon school on the economic crisis. We heard from SP deputy general secretary, Hannah Sell on the politics of the crisis in Britain, but I would like to concentrate on the contribution made by Lynn Walsh, editor of Socialism Today.
Lynn began noting how the last 16-17 years should have been a golden age for capitalism. The Soviet bloc had collapsed and what remained, principally China, embraced the market (even if the market in China is primarily between state-owned firms). The working class suffered a series of defeats that had stunned it into political quietude. Wages stagnated and the labour markets in Britain and the USA became more flexible than ever before (i.e. flexible from the point of view of capital, not from the shoes of our class). Bosses had the whip hand, real wages stagnated and the finance sector was deregulated. In other words, they'd never had it so good! And yet it still came crashing down around their ears.
For Lynn this was very much a crisis of speculative capitalism. This came into being as a response to the crisis in the Keynesian regime of accumulation of the post-war period. Reagan and Thatcher's programme (though, it has to be said, Carter and Callaghan were moving in this direction prior to being dumped out of office) deregulated the finance sector, privatised as much as they could and concentrated policy on the control of the money supply. Their "achievement" was to see an increasing share of total profits accrue to finance capital. In 1980 just 10 per cent of profits were from financial activity. In 2008 that figure, depending on who you believe, stood at between 30-50 per cent. Particularly in Britain speculation was a more attractive option than manufacturing - the profits for banking were twice as large.
The hegemony of finance capital was strengthened every time the boom it had created began to falter. The bursting of the dot com bubble? September 11th attacks? Just cut interest rates and make more government bonds available. But cheap credit can't keep the economic boat afloat forever. Something was bound to bring the edifice down, which as we now know, was the breakdown of the US sub-prime mortgage market.
The availability of cheap credit enabled millions of Americans to get on the housing ladder, and mortgage providers were only too willing to oblige. Proper credit checks went out the window as agents could accrue fees on the basis of a successful sale. In other words there were tempting short term gains to be made, which overrode the ability to keep up payments. Very quickly the finance industry cottoned on to this problem - if the debts are of poor quality it is very difficult to sell them on the markets. The solution was to chop them up and mix them in with good quality mortgages in securities. The advantage of doing so is the risky mortgages are tempered by the prime. If someone defaults on their mortgage it doesn't really matter because the payment guarantees of the prime debts cancels out the loss. At least this was what the top credit agencies thought - these packages were awarded a AAA rating, an almost zero risk! The promise of a virtually guaranteed return helped drive the expansion of credit, spurred ever more complex ways of packaging and repackaging debt and drove a boom in house building. But an economic bubble inflated by debt cannot be sustained indefinitely.
In early 2007 the credit locomotive hit the buffers. Finally the credit system began to run up against its limits as more and more people defaulted on their mortgages. Not only did the bottom of the mortgage market fall away, because of the shake 'n' bake packaging of debt no one knew whether one security was riskier than another. The composition of debt was completely unknown. Just as one apple spoils the barrel, the whole lot became toxic very quickly and the damage rippled out across the financial system, damage exacerbated by these packages being used as collateral for inter-bank loans. They panicked, inter-bank lending froze and the debts started getting called in. Northern Rock and Bear Sterns were early casualties, but more were to follow.
The crisis matured during the summer months and erupted back into the open in September. As stock markets plunged and the city went cap in hand to the US and UK governments, Bush and his advisers tried to draw a line in the sand as Lehman Brothers collapsed. They were mindful of the angry response welling up from the depths of American society and were keen not to be seen bailing out tremendously wealthy companies. The decision to let Lehman Brothers go to the wall was political. But alas it was to have tremendous economic repercussions. It's no exaggeration to say it helped deepen the panic in the markets and spread the crisis around the world. Lehman's debt obligations ignored the borders of the United States. All of a sudden it looked as though many more financial institutions were in for a rougher ride. This time governments did step in - the US and its $700 billion bail out, which, under the pressure of events, moved from a strategy for the buying up of banking debts to outright nationalisations, which currently stand at nine big and regional banks. But the UK government has really set the tone. No doubt some were impressed by the audaciousness and the apparently decisive actions taken by Brown and Darling. £500 billion has been pledged to sure up the system and the banking sector is now part nationalised. But it was events that forced their hands. The British banking system was on the brink of a 1929-style meltdown if they hadn't so acted.
But one question a lot of people are asking is where the money has come from? Printing presses haven't been going into overdrive, so Zimbabwe-style inflation is a very remote prospect. For Lynn the money governments got their hands on came from three sources. First, the last 16 years saw the largest redistribution of wealth in modern times - from the poor to the rich. Some corporations coined it like never before and those not compromised by the crisis are looking for safe places to invest their capital. The rate of return may be low but at least (for the moment) government bonds appear to be risk-free. Then there's China. By virtue of its position as the new workshop of the world it has accumulated tremendous trade surpluses. Some two trillion dollars are sitting in Chinese banks. So they have the money AND the interest in bailing out the West. If their markets dry up its rapid economic growth could run out of steam, throwing oil onto an already combustible domestic situation. And finally there are the oil producing states, particularly in the Middle East. Because of their low populations and underdeveloped infrastructures, the Arab ruling classes deposited their surpluses in Western banks for speculative accumulation. Like the corporations, this capital is looking for secure outlets.
The ruling class and their system have left a right mess. But things are much clearer for socialists. It shows up the failure of free markets. It illustrates how vast amounts of money can be found when the system is threatened. It reveals the hollowness of neoliberalism. And, incredibly, some sections of capital are falling over themselves to show their ingratitude. The part-nationalisation of banks via a system of government-owned preference shares have riled some up. You'd think they'd rather see banks fail than have the government getting first dibs on any profits, or have its appointees running the show (even if, like themselves, they are city people).
A socialist response to the crisis would be outright nationalisation of the banks, but crucially they would be taken out of the hands of the executives, speculators and spivs and run democratically by the people that work there and those who deposit in them. This would enable an immediate programme of debt cancellation, a replacement of repossessions by transferring defaulting borrowers homes into rented housing at cheap rates and a restitution of loans to small businesses on favourable terms. And because the crisis is global, similar measures would have to be taken all over the world.
These measures may be radical and complex, but they're a damn sight more realistic than the pious hope of fixing the cycle of boom and bust and the social devastation it leaves in its wake.