From the crisis of liquidity to the liquidation of capitalism!

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Over the summer of 2007, capitalism confirmed its tendency to sink into ever more frequent catastrophes: the quagmire of imperialist war as exemplified by the civilian bloodbath in Iraq; the devastation of climate change induced by the rampant profit motive; and a further lurch into economic crisis promising the greater impoverishment of the mass of the world's population. Conversely, the working class, the only force capable of saving human society, is becoming increasingly disaffected with the rotting capitalist system. But its to the economic crisis that we must turn here, given recent dramatic events, beginning in the housing industry in the United States, that have shaken international finance and the entire world economic system.

The bubble bursts

The trigger for the crisis was the fall in house prices in America, along with the slump in house construction and large scale defaults on mortgages by those who couldn't afford the escalating interest rates of the latter, now famous as "sub-prime" or risky loans. From here shock waves travelled through the entire world financial system. In August, investment funds and entire investment banks, whose assets included billions of dollars worth of these sub-prime loans either collapsed or had to be rescued. Thus two "hedge funds" of the US investment bank Bear Sterns crashed costing investors $1bn. The German bank IKD had to be bailed out and two investment funds of the French bank BNP Paribas failed. The shares of mortgage lenders and other banks declined sharply leading to steep falls on all of the world's major stock exchanges, wiping out billions of dollars worth of "accumulated labour". In order to stem the fall in confidence and the reluctance of banks to extend credit the central banks - the US Federal Reserve Bank (the Fed) and the Eurobank - intervened by making available still more billions in cheaper loans. This money was not intended of course for the hundreds of thousands of people who were being made homeless by the "sub-prime" fiasco, nor the tens of thousands of workers made redundant by the crisis in the construction industry but for the credit markets themselves. Those financial institutions who had squandered enormous sums of cash were being rewarded by more gambling money. But this by no means ended the crisis. In England it was to develop as a farce.

The Bank of England criticised the other central banks in September for bailing out the risky and imprudent investors who had set the crisis off, recommending a more tight-fisted policy which would punish the wrong doers and prevent a reoccurrence of the same speculative problems. But then the Chairman of the bank, Mervyn King took an abrupt change of course. The bank was to rescue the fifth largest mortgage provider in the UK, Northern Rock. The "business model" of the latter was to rely on borrowing from the credit markets and then re-lend the money to homebuyers at a higher rate of interest. When the credit markets began to crumble, so did Northern Rock.

After the announcement of the rescue, long queues of depositors began to form outside the branches of the bank to withdraw their money - and took out £2bn in 3 days. It was the first run of this type on an English bank in 140 years. To prevent the risk of contagion the government had to step in again to give a 100% guarantee to the depositors of Northern Rock and savers in other threatened banks.[1] Then finally the "Old Lady of Threadneedle Street" was obliged, like the other central banks it had recently criticised, to inject huge quantities of money into the creaking banking system. Result: the credibility of the headquarters of the London financial centre - now representing a quarter of the British economy - was in ruins.

The next act of the drama, which is still continuing as we write, concerns the effect of the financial crisis on the wider economy. The first cut in interest rates by the Fed in five years, in order to make credit more available, has not, for the moment, been a success. It has not brought a halt to the continuing collapse of the housing market in the US nor the prospective one in up to 40 other countries where a similar speculative bubble has developed. Nor has it arrested the wider credit squeeze and its inevitable effect on investment and consumer spending as a whole. Instead it has led to the rapid fall of the dollar: to its lowest level against other currencies since President Nixon devalued the currency in 1971, and to the record rise of the Euro and of raw materials like oil and gold.

These are all indications of both a fall in growth, or even an open recession in the world economy, and an increase in inflation in the period to come.

In a word, the previous 6 years of world economic growth, built on mortgage and credit card debt and the gigantic foreign and budget debts of the United States, is coming to an end.

Such are the facts of the current economic situation. The question is whether the approaching open recession, which everyone agrees is likely, is part of the inevitable up and down pattern of the capitalist economy which is fundamentally sound, or whether it is a sign of a process of inner disintegration and breakdown integral to capitalism that will be punctuated by more and more violent convulsions.

To answer this question it is first necessary to deal with the idea that the development of speculation and the resulting credit crisis is in some way an aberration, or a departure from the healthy functioning of the system, which could be corrected by state control or better regulation. In other words is the present crisis a result of financiers holding the economy hostage?

The role of credit in capitalism

The development of the banking system, the stock market and other credit mechanisms have been integral to the development of capitalism since the 18th century. They have been necessary for the amassing and centralising of money capital in order to permit the levels of investment required for vast industrial expansion that was outside the scope of the richest individual capitalist. The idea of the industrial entrepreneur acquiring his capital by saving or by risking his own money is a pure fiction. The bourgeoisie requires access to the sort of sums of capital that have already been concentrated in the credit markets. In the stock markets the ruling class is not betting with their own individual fortunes but with monetised social wealth.

Credit, and lots of it, has thus played an important part in immensely accelerating the growth of the productive forces in comparison with previous epochs and in the constitution of the world market.

On the other hand given the inherent tendencies of capitalist production, credit has also been a tremendous accelerator of overproduction, of overvaluing the capacity of the market to absorb products and has thus been a catalyst of speculative bubbles with the consequent crises and drying up of credit. Side by side with facilitating these social catastrophes the stock markets and the banking system have encouraged all the individual vices of greed and duplicity that are typical of an exploiting class living off the labour of others; vices that we see flourishing today in insider trading, fictitious payments, outrageous "bonuses" that amount to huge fortunes, "golden parachutes", accountancy fraud, plain theft etc.

The speculation, the risky loans, the swindles, the subsequent stock market crashes and the disappearance of huge quantities of surplus value are therefore an intrinsic feature of the anarchy of capitalist production.

Speculation is, in the last analysis, a consequence not the cause of capitalist crises. And if today, it seems that speculative activity in the financial sector dominates the whole economy, it is because over the past 40 years capitalist overproduction has increasingly lapsed into a continuing crisis, where world markets are saturated with goods, investment in production is less profitable and therefore money capital's inevitable recourse is to gamble in what has become a "casino economy".[2]

Therefore there is no possibility of a capitalism without its financial excesses, which are an intrinsic part of capitalism's tendency to produce as if the market had no limits, of the inability of even Alan Greenspan, former chairman of the Fed, to know "if the market is overvalued".

The recent slump in the housing market in the US and in other countries is an illustration of the real relationship between over production and the credit squeeze.

Housing industry illustrates the anachronism of capitalist production

The characteristics of the crisis in the housing market are reminiscent of descriptions of the capitalist crises that Karl Marx described in the Communist Manifesto in 1848:

"In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of over production. ...there is too much civilisation, too much means of subsistence, too much industry, too much commerce."

So today we don't see homelessness as a result of a shortage of homes but paradoxically because there are too many of them, there is a veritable glut of empty houses. The construction industry has been working flat out over the past five years. But at the same time the purchasing power of American workers has fallen, as American capitalism attempts to increase its profitability. A gap opened up between the number of new homes being thrown onto the market and the ability to pay for them by those who needed them. Hence the risky - i.e. sub-prime - loans to seduce new buyers who could hardly afford them to square the circle. Eventually the market crashed. Now, as more and more homeowners are evicted as a result of foreclosure on the crippling interest rates on these loans, the housing market will be further flooded - in the US some 3 million people are expected to lose their roofs as a result of defaulting on sub-prime mortgages. This human misery is anticipated in other countries where the housing bubble has either burst, or is about to. The surge in the construction industry and in mortgage lending over the past decade, then, far from reducing homelessness has put decent housing effectively out of reach for the mass of the population, or put homeowners in precarious state.[3]

Evidently what concerns the leaders of the capitalist system - its hedge fund managers, its treasury ministers, its central bankers, etc - in the current crisis are not the human tragedies created by the sub-prime debacle, the dashed aspirations to a slightly better life (except insofar as they might lead to questioning the insanity of this mode of production) but their inability as consumers to pay the inflated prices of houses and usurious rates of interest on the loans.

The sub-prime fiasco epitomises therefore the crisis of capitalism, its chronic tendency in the drive for profit to overproduce in relation to the solvent demand, its inability despite the phenomenal material, technological and labour resources at its command to satisfy the most basic human needs. [4]

However absurdly wasteful and anachronistic the capitalist system appears in the light of the recent crisis, the bourgeoisie still tries to reassure itself and the rest of the population that at least it won't be as bad as 1929.

The present situation: the same problems as 1929

The 1929 Wall Street Crash and the Great Depression continues to haunt the bourgeoisie, as the media coverage of the recent crisis testifies. Editorials, in depth articles, historical analogies, have tried to convince us that the present financial crisis won't lead to the same catastrophe, that 1929 was a unique event that turned into a disaster by wrong decision making.

The bourgeoisie's "experts" foster the illusion that the present financial crisis is rather a repeat of the relatively limited - in time and place - financial crashes of the 19th century. In reality today's situation has more in common with 1929 than this earlier period of capitalism's ascendancy, sharing many of the common characteristics of the catastrophic financial and economic crises of the decadence of capitalism, of the period opened up by the First World War; of the inner disintegration of the capitalist mode of production, of a period of wars and revolutions.

The economic crises of the capitalist ascendancy and the speculative activity that often accompanied them and preceded them were the heartbeats of a healthy system and gave way to new capitalist expansion throughout the world, through the construction of railways over entire continents, massive technological breakthroughs, the conquest of colonial markets, the conversion of artisans and peasants into armies of wage labourers, etc.

The 1929 New York stock market crash, which announced the first major crisis of capitalism's decay, put all the speculative crises of the 19th century in the shade. During the "roaring twenties" the value of shares in the New York Stock Exchange, the biggest in the world, had increased five fold. World capitalism had failed to recover from the catastrophe of the First World War, and in the now richest capitalist country the bourgeoisie sought an outlet in stock market speculation.

But on Black Thursday, October 24th 1929, a precipitous decline took place. Panic selling continued on Black Tuesday of the following week. And the stock market kept on crashing until 1932, by which time stocks had lost 89% of their peak value in 1929. They returned to levels not seen since the 19th century. The 1929 peak in share value was not reached again until 1954!

Meanwhile the US banking system, which had lent money to buy the stocks, itself collapsed. This catastrophe heralded the great depression of the thirties; the deepest crisis capitalism has ever experienced. American GDP was effectively halved. 13 million workers became unemployed with no relief to speak of. A third of the population sank into abject poverty. The effects were echoed around the world.

But there was no economic rebound as there had been after the crises of the 19th century. Production only began to resume when it had been harnessed to arms production in preparation for a new re-division of the world market in the imperialist bloodbath of World War 2. In other words when the unemployed had been transformed into cannon fodder.

The thirties depression appeared to be the result of 1929, but in reality the Wall Street Crash only precipitated the crisis, a crisis of the chronic overproduction of capitalism in its decadent phase, the essential identity of the thirties with today's crisis which began in 1968.

The bourgeoisie in the 1950s and 60s smugly claimed to have solved the problem of crises and consigned them to a historical curiosity through such palliatives as state intervention in the economy both at the national and international level, with deficit financing and progressive taxation. To its consternation the worldwide crisis of overproduction reappeared in 1968.

Over the past 40 years this crisis has lurched from low point to another, from one open recession to one more damaging, from one false Eldorado to another. The form of the crisis since 1968 hasn't taken the same abrupt nature as the crash of 1929.

In 1929 the financial experts of the bourgeoisie took measures that only allowed the financial crisis to take its course. The measures were not errors but methods that had worked in previous crashes of the system, like in the panic of 1907 but weren't sufficient in the new period. The state refused to intervene. Interest rates were increased, the money supply was allowed to shrink, tightening the credit squeeze and further shattering confidence in the banking and credit system. The Smoot-Hawley Tariff bill imposed import barriers that accelerated the downturn in world trade and consequently worsened the depression.

In the last 40 years the bourgeoisie has understood to use state mechanisms to reduce interest rates and inject liquidity into the banking system in the face of financial crises. It has been able to phase-in the crisis, but at the price of overloading the capitalist system with mountains of debt. A more gradual decline has been achieved than in the thirties but nevertheless the palliatives are wearing out, and the financial system is increasingly fragile.

The phenomenal growth of debt in the world economy during the recent decade is exemplified in the extraordinary growth, within the credit markets of the now famous "hedge funds". The estimated assets of these funds have risen from $491bn in 2000 to $1,745bn in 2007.[5] Their complicated financial transactions, mostly secret and unregulated, use debt as a tradable security in the search for short term gain. The hedge funds are judged to have spread bad debt throughout the financial system, accelerating and rapidly extending the present financial crisis.

Keynesianism - deficit financing by the state to maintain full employment - evaporated in the galloping inflation of the 1970s and the recessions of 1975 and 1981. Reaganomics and Thatcherism - restoring profits by cutting the social wage, cutting taxes and allowing unprofitable industries to collapse with mass unemployment - expired in the stock market crash of 1987, the Savings and Loans scandal, and the recession of 1991. The Asian Dragons, saddled with huge debts, ran out of puff in 1997. The dot com revolution, the "new" economy, turned out to have no visible means of support, and the boom in its shares bust in 1999. The housing booms and credit card debt explosion of the past five years, and the use of the gigantic US foreign debt to provide demand for the world economy and the "miracle" expansion of the Chinese economy - this too has now been put in question.

We can't predict exactly how the world economy will continue to decline but increasing convulsions and even greater austerity are inevitable.

Capitalism has prepared the conditions for socialism

Karl Marx in the third volume of Capital, argued that the credit system developed by capitalism revealed in embryo a new mode of production within the old. By enlarging and socialising wealth, taking it out of the hands of individual members of the bourgeoisie, capitalism had paved the way for a society where production could be centralised and controlled by the producers themselves and bourgeois ownership could be done away with as a historical anachronism:

"The credit system hence accelerates the material development of the productive forces and the creation of the world market which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production."[6]

For a century now conditions have been ripe for the abolition of capitalist exploitation. In the absence of a radical proletarian response, the contradictions of this moribund system, the economic crisis in particular, have only become more acute. While today credit continues to play a role in the evolution of these contradictions, it's not that of conquering the world market, since capitalism has long established its social relations throughout the planet. The massive indebtedness of all states has allowed the system to avoid brutal collapse despite the virtual impossibility of further expansion of the world market. But there is a price. After functioning for decades as a means of attenuating the conflict between the development of the productive forces and the obsolete social relations of capitalism, the headlong flight into debt is beginning to "accelerate the violent outbreaks of this contradiction" and to shake the social edifice as never before. However, taken in themselves, such convulsions are not a threat to the division of society into classes. They become so only when they help to move the proletariat.

Now, as revolutionaries have always asserted, it's the crisis which is going to accelerate the process of coming to consciousness about the impasse of the present world that is already under way. It is the crisis, which, in time, will precipitate numerous sectors of the working class in increasingly massive numbers into struggle. The challenge of these future experiences will be the capacity of the working class to defend and affirm itself against all the forces of the bourgeoisie, to gain confidence in its own forces and to progressively become conscious that it is the only social force capable of overthrowing capitalism.

Como 29.10.07

[1]. According to the British business magazine The Economist, this guarantee was actually a bluff.


[2]. "And none of this will be changed by the lamentations of the ‘alternative worldists' and other critics of the ‘financisation' of the economy. These political currents would like to see a cleaner and fairer capitalism that has turned its back on speculation. In reality, speculation is not at all the product of a ‘bad' type of capitalism which has forgotten its responsibility to invest in really productive sectors. As Marx already showed in the 19th century, speculation results from the fact that, when they face the perspective of a lack of sufficient outlets for productive investments, the holders of capital prefer to find short term profits in a huge lottery, which has today turned capitalism into a planetary casino. To want capitalism to renounce speculation in the present period is as realistic as wanting tigers to become vegetarians or dragons to stop breathing fire." Point 4, "Resolution on the International Situation" adopted by the 17th Congress of the ICC, International Review nº130.


[3]3. Benjamin Bernanke, Chairman of the US Fed, referred to mortgage arrears as "delinquencies": in other words crimes or misdemeanours against Mammon. Accordingly the "criminals" have been punished by still higher interest rates!

4. We can't here go into the state of homelessness in the world as a whole. According to the United Nations Commission on Human Rights, 1 billion people on the planet are considered to be without adequate housing while 100 million have no home at all.



[6]. Part 5, Chapter 27: "The Role of Credit in Capitalist Production"


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