Underneath the housing crisis, the crisis of the capitalist economy

At the time of writing, the huckster Richard Branson has made some sort of a bid for the bankrupt Northern Rock bank and despite the massive state intervention (estimated by some to eventually total some forty billion pounds) by the Bank of England, it is still not out of the woods. In fact if, as expected, house prices fall further, Northern Rock could be facing even bigger crises. At the same time, it's been officially confirmed that both Alliance and Leicester and Bradford and Bingley have suffered major losses over dodgy lending. Other effects of the so-called "sub-prime" crisis, all of them bad, are radiating out internationally: credit crunch, bankruptcies, unemployment, inflation and the real threat of a major recession.

In order to momentarily stem this crisis, the US Federal Reserve, the European Central Bank and, latterly, the Bank of England, have spent hundreds of billions on the market! These colossal sums injected by the various central banks alone bear witness to the breadth of the crisis and the real fears of the bourgeoisie

Today the ‘experts' and other hacks try once again to fill us with illusions that these convulsions are only a passing phase or a ‘salutary correction of excessive speculation'. Thus the governor of the Bank of England, Mervyn King, in his latest quarterly report (November 07), while laying bare the depth of the crisis, talks of a swift recovery. King suggests that there's no great underlying problem and that growth will ‘bounce back' to a much healthier level of 3% in two years time. The White House talks about "the good fundamentals of the economy". The bourgeoisie are both kidding themselves and kidding us. In reality these shocks are the sign of new phase of the acceleration of the crisis, the most serious and deepest since the end of the 60s. And once again the working class will suffer terrible consequences.

The monster of debt reveals the historic weakness of capitalism

In the media during the summer, when billions of dollars were going up in smoke, the bourgeois economists were saying it was "unprecedented". The crisis had apparently appeared out of the clear blue sky without warning. Lies! Stock market gains, rocketing house prices, and even growth, all that was built on sand and everyone knew it. Our organisation already affirmed last spring that the so-called good health of the economy resting only debt, was preparing for a bleak future: "In reality, it is a question of a real headlong rush, (into debt) which far from permitting a definitive solution to the contradictions of capitalism can only prepare for painful tomorrows and notably brutal slowdowns in its growth".[1] It's not a question of a premonition but of an analysis based on the history of capitalism. The present financial crisis is a major crisis of credit and debt. But this monstrous debt doesn't fall from the sky. It is the product of 40 years of the slow development of the world crisis.

In fact, since the 60s, capitalism itself has survived through the always growing recourse to debt. In 1967, the world economy began to slow down and since, decade after decade, growth is less and less. The only response of the bourgeoisie has been to maintain its system under perfusion, by injecting into it crazy sums of money in the form of credit and debt. The economic history of the last forty years forms a sort of infernal cycle: crisis... debt... more crisis... more debt... After the oil shocks of 1973 and 1979 there was the open recession of 1991-1993, the Asian crisis of 1997-98 and the explosion of the Internet bubble of 2000-2002[2]. Each time these convulsions are more violent and the consequences more dramatic.

Today, the crisis is breaking out anew while debt reaches unimaginable levels. The total debt of the United States, the first world economic and military power, has gone from $630 billion in 1970 to $36,850 billion in 2003. And since then, the machine has got totally out of control. This debt is growing at a rate of $1.64 billion a day! These breathtaking figures show in a striking manner the fact that the present financial crisis is much more profound than those that preceded it.

The housing crisis unleashes a major financial crisis

For a decade this speculative madness has invaded all sectors of activity. As never before the overwhelming majority of capital cannot find sufficient outlets in the real economy (firms that produce products and goods). Quite naturally then, capital is thus oriented towards speculation pure and simple. Banks, building societies, more or less specialised societies of speculation in the placing of risks (the famous hedge funds) all take part in the gold rush to a supposed new El Dorado. Money and credit are thus rushed forth and the bourgeoisie seems to have only one obsession: debt and still more debt.

It's in this totally mad context that householders in the USA, but also in Britain, Spain and other countries, have been strongly encouraged to buy houses and flats without really having the means to do so. Financial houses are ready to lend money to workers' families on extremely low incomes with the sole guarantee of their home. The basic principles of these hypothecated loans is the following: when Mr. X wants to buy a house for $100,000, a lender, a bank for example, lends him the funds without reserve and without guarantee other than the security of the house. If Mr. X is in too much debt and can't repay his borrowing, the lender will take back the house, re-sell and recuperate its funds of $100,000. That's the sole guarantee of the bank. That's why it is mainly the hedge funds (specialists in the placing of risks) that have participated in these sub-primes. Workers can borrow more easily, thus more and more want to buy a house. Consequently house prices have risen (10% a year on average). These extremely low-paid workers have only debt as purchasing power; so they continue to get into more debt by hypothecating the rising value of their house. For example, Mr. X, seeing the value of his house rise to $120,000 can credit his purchases by hypothecating up to $20,000. Then the value goes up to $130,000! And he does it again... But it's not an endless process. On the one hand the working class becomes poorer (job cuts, wage freezes...). On the other, borrowing takes place at growing variable rates and month after month payments become higher and more difficult to make. The result is inexorable. When too many workers can't make their astronomical payments, the banks increase their requisitions of hypothecated homes, the crisis breaks out and the bubble bursts as is happening now. In fact there are too many houses for sale, prices are falling (they could fall 30% or more). It's perverse; the buying power of millions of families rests on the price of their house and thus on their capacity to get into debt and, for them, the house price falls mean bankruptcy. Thus as the value of Mr. X's house falls (to $110,000 say) the banks cannot recuperate their total lending of $150,000. Not only does Mr. X no longer have a home but also he must pay back the difference of $40,000, plus interest of course! The result in the US has been rapid[3]: more than 3 million households are out on the street this autumn.

At the same time, the hedge funds, lending under the sub-prime form, have themselves not hesitated to indebt themselves to banks and other credit organisations in order to speculate on real estate. The principle, quite simple, is to buy property and re-sell it some time later on a rising housing market. Thus the collapse of the housing bubble also means the bankruptcy of all these funds. In fact, even in recuperating the hypothecated houses and throwing millions onto the street, these organisations inherit houses that are worth hardly as much. By way of the domino effect, banks and other credit organisations are also hit. Imagine it! These institutions borrow the one from the other to the point of no longer knowing who owes what monies to whom! Each passing day we are told that this or that bank or credit organisation is on the edge of bankruptcy. Such is the case for the USA, Britain, Germany and certainly more to follow. It is now the whole credit and speculative sector that is in crisis and it's the working class who will pay the cost.

Behind the financial crisis, the crisis of the real economy

"A billion dollars here, a billion dollars there - it soon adds up to real money". So said one US senator, confirming that a financial crisis always becomes a crisis of the real economy. Even before the financial crisis of the summer, the economic specialists had slyly begun to revise economic forecasts for world growth downwards. In January 2007, the United Nations announced that it would fall back to 3.2% this year (after showing 3.8% in 2006 and 4.5% in 2005). But with the latest developments of the crisis, all these figures will be further revised downwards.

In fact, the profound crisis of credit inexorably means a brutal fall in activity for all businesses. Nobody can, or wants to lend money to business to invest. But the record gains that the latter sometimes show are in reality based in great part on massive indebtedness. The tap of credit shut, these businesses, for the most part, will be in a very bad position. The most striking example is the building sector. The housing bubble being based exclusively on risky lending means the number of constructions will fall in all the major countries. And the repercussions will go way beyond that: "in the United States, as borrowing against housing finances at least 80% of consumption, it's the whole of household demand that will be affected. American consumption will thus be cut by a point, a point-and-a-half; instead of growth of 3.5% next year, it may not pass 2%" (Patrick Artuis, La Tribune de l'Economie, 27.08.07). And here we are talking about the most optimistic scenario. Some economists are saying that US growth could come in at less than 1% and, evidently, this has a global importance. Europe's economy is profoundly linked to it. Further, the awaited slowdown of these two economies will have important repercussions on China and the whole of Asia. Europe and the USA represent 40% of Chinese exports! It is the whole of world growth that will slow down dramatically.

But there's another aggravating factor in the pipeline: the return of inflation. China's inflation rate has reached 6% and continues to grow month after month. This represents a tendency that will develop internationally, particularly in the sectors of raw materials and food. The latter is rising around 10% and the snowball effect means that it will affect the consumption of the working class and the great majority of the population and that again will rebound on businesses.

Since the 1960s, market falls and recessions have followed one another. Each time they become more brutal and profound. This latest episode will not break the rule as it represents a qualitative step, an unprecedented aggravation of the historic crisis of capitalism. It's the first time that all the economic indicators go into the red simultaneously: crisis of credit and consumption, colossal debt, recession and inflation! We are facing the worst recession for more than 40 years and major blows will fall on the working class. Only a united and solid struggle can face up to them. Tino/B November 2007

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[1] Resolution on the international situation adopted by our last Congress and published in International Review no. 130 .

 

[2] A new internet bubble is being inflated, again based mostly on fresh air. Google is now worth more than IBM, a company with eight times the revenue. Betters, speculators and Hedge Funds are getting involved on a bigger scale. All the problems of the 2000 .com bubble are being revisited at a higher level.

 

[3] See the November issue of Internationalism for more on the particulars of the US economy.