Immediately after the US Federal Reserve pushed JP Morgan Chase into an emergency salvage plan for Bear Stearns, Gordon Brown felt it necessary to reassure people in Britain with an article in the Sun (19/3/8). The Prime Minister wrote that "When a major bank in America has to be rescued over a weekend and billions are wiped off share markets across the world, I understand that people are worried about the future." In fact he also knew perfectly well that it's a longer experience of the economy that has got people worried "The British people know this is going to be a tough year. They are already feeling the pinch with their shopping and fuel bills."
Capitalism's Dance of Death
Yes, far from the propaganda about a decade of ‘prosperity' under Labour governments, people know that real inflation, on essentials like food and the energy utilities like gas and electricity, is way above the official figures, in the same way that real unemployment could be three or four times what government statistics proclaim. Take the example of higher petrol prices, which is not just an increased burden for individual motorists but has an impact on the cost of every commodity that's transported by petrol-driven vehicles. The reason that people are worried is because of their actual experience of prices going up, services being cut and jobs becoming more insecure.
Brown tries to be a calming voice by saying that the decisions that his government have taken "mean that we face this period of global uncertainty much better placed than other major economies". Yet this goes against the reality of a global economy in which each national capital is interlinked. You can't understand the collapse of Bear Stearns or Northern Rock without putting them and the ‘credit crunch' in the context of a crisis of the world economy. Recession in the US in particular has an impact across the world. In Japan for example any recovery in its economy is dependent on its ability to sell its exports to America, which isn't about to happen when the dollar's value is collapsing, and with a population already massively in debt and scraping around to pay off mortgages.
Forget all the talk about a "period of global uncertainty": what we are witnessing are the convulsions of a system in a chronic state of crisis, and capitalism can only buy fleeting moments of ‘health' by adopting measures such as the flight into further debt that can only worsen the prospects of the next catastrophic plunge.
American recession, not ‘if', but ‘how deep?'
The big question for the media in the US is whether the economy is in recession. The National Bureau of Economic Research (NBER) is a respected group of several economists that provides answers to such questions, but only after it's had a protracted period of decline in activity as evidence it can examine. Other economists are prepared to announce a recession, but often only to minimise its significance. For example some point to recessions in 1991 and 2001 (the bursting of the dot.com bubble) and say that while the rate of job losses during them was typically 250,000 a month, they only lasted 8 months each.
The recently announced US unemployment figures seem to put a recession beyond doubt. They show job losses for the third month in a row, the 80,000 drop being the biggest since March 2003. 2.6 million jobs have gone from the manufacturing sector over the last two years. The New York Times (4/4/8) declared "The economy is suffering the effects of a housing collapse, a credit crunch and a financial system in turmoil. That is causing people and businesses to hunker down, crimping spending, capital investment and hiring. Those things in turn further weaken the economy in what has become a vicious cycle."
Former Federal Reserve Chairman Alan Greenspan has a longer term view: "The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War." In reality the ruling class is looking back to the Crash of 1929 and the Depression of the 1930s to draw lessons for today.
For example, the Fed had to invoke emergency provisions from 1930s legislation in order get the bailout of Bear Stearns underway. Or, again, when US Treasury Secretary Henry Paulson unveiled a review of the regulation of the financial sector - the biggest overhaul since the 1930s - it was welcomed as a response to the ‘credit crunch' and the turmoil on the markets. Paulson said it wasn't a response to the immediate situation but a long needed rectification. The actual measures give sweeping powers to the Federal Reserve and include the establishment of a new body to take over the role of the five existing banking regulators. As with other aspects of the proposals it amounts to a further strengthening of the role of state intervention in the economy. The state is the only force in capitalist society that can prevent the economy spiralling out of control.
With Bear Stearns, for example, this was not the first occasion that the Fed forced a bank into a shotgun wedding with a failing financial institution. A couple of months ago Bank of America Corp agreed to buy Countrywide Financial Corp, the largest mortgage lender in the US after encouragement from the Fed. The trouble with this policy is that many banks have credit problems of their own and others are already entangled in big takeovers. European banks have resisted the temptation to get involved, with one banker describing the process as like "catching a falling chainsaw". This is why the US taxpayer ends up footing the bill. As well as the thousands of Bear Stearns employees who will lose their jobs
The current crisis will not be limited to the financial sector, but will spread to the rest of the economy, having effects on trade, jobs and wages, not just in the US, but throughout the world. In America, like Britain, the real levels of unemployment and inflation are not revealed in official statistics. However, there are some fairly dramatic figures which do show how the working class in the US is already suffering from the crisis of the capitalist economy, beyond the numbers of repossessions, job cuts and rising prices. As the New York Times (31/3/8) described it: "Driven by a painful mix of layoffs and rising food and fuel prices, the number of Americans receiving food stamps is projected to reach 28 million in the coming year, the highest level since the aid program began in the 1960s." This projection is from an official source, the Congressional Budget Office. What is not known is what proportion of the poor take up their entitlement - a maximum of $3 per person per day. The current US definition of poverty is an income of $21,500 (£10,750) for a family of four.
It will be worse in Britain
The measures adopted in Britain have been the same as in the US. The state intervened in Northern Rock, ploughing in £55bn, and still thousands of jobs will go. The British government has massively resorted to debt; its borrowing in February was the biggest for more than a decade and in the recent budget the public sector deficit was raised £7bn to £43bn. Personal indebtedness is at one of the highest levels in the world. The CBI suggests 11,000 jobs are under threat in the financial sector alone. In the budget prescription costs went up again and the Chancellor announced there would be further attacks on those on incapacity benefit.
These are the sort of measures that are familiar to workers in many countries, but here we are focusing on aspects of the crisis which will have a particularly devastating effect on the British economy.
For a start the financial sector in Britain is on a completely different scale to most other countries. Britain has seen a long-term decline in manufacturing, so that the financial sector, already centrally important for more than a century, has acquired a disproportionate weight in the British economy. As a result financial crises have a more serious effect on the rest of the economy.
Secondly, the housing bubble in Britain is bigger than elsewhere, with a much greater proportion of non-rented property and prices outrageously inflated. In America one of the signs of the recession is that house prices have fallen nationwide for the first time since the 1930s Depression. In Britain so far there have been only regional fluctuations; bearing in mind the hysteria from papers like the Mail and Express over the slightest hint of instability in the house market, they will surely become speechless with apoplexy if the US experience is repeated here. More importantly it will have an impact on many other parts of the economy
Thirdly, the effects of the economic crisis are already quite advanced in Britain. For example, at the very time that we're being encouraged to try and manage our debts, the Evening Standard (2/4/8) reports that, with mortgage approvals down 40% over the last year, "Homeowners have gone on a borrowing binge as cheap remortgaging deals dry up. Credit card debt went up by £350m and bank loans and overdrafts soared by £2bn in February. It was the highest monthly increase since records began in 1987, according to today's Bank of England figures." Of course this ‘binge' is not a matter of post-Christmas indulgence but a desperate attempt to pay household bills. Further evidence of this is shown in the number of people cutting down on their pension contributions. As Reuters reports "Britons have cut their pension contributions by almost half in the past year as prices rise and credit becomes harder to obtain. On average, people paying into private and company pension schemes have reduced their monthly contributions by 48.3 percent, according to research by Prudential [....] It also reveals that 55 percent of non-retired people are not contributing at all to private or company pension schemes." In a recent survey the vast majority of people admitted to financial worries and many have no idea how much longer they will be able to cope.
The link between crisis and class struggle
Internationally the economic crisis has taken a qualitative lurch. After years of lies about unprecedented growth the ruling class now has to admit there's a crisis. The only options open to capitalism lie in the intervention of the state and the resort to debt. We can't predict every detail of what's ahead, but we can see what's threatened. There's a huge build up of inflationary pressures, which is something that we didn't see in the 1930s. There's the threat of the collapse of whole sectors of some economies. And although the bourgeoisie of different states is capable of co-operating at some levels, every country still remains in competition with every other and is not going to bail out the failed enterprises of its rivals.
The increasingly simultaneous nature of the crisis internationally means that it's going to be less likely that the propagandists can point to possible ‘engines' that are going to drag the rest out of the mire: the limitations of what can be expected from India and China are being rapidly exposed.
We are witnessing struggles by the working class that are responses to similar attacks in different countries - on jobs, services, wages, prices and pensions. Because the crisis more and more shows the links between all economies, there is the possibility that workers can see their shared international interests, and understand that the capitalist economy cannot deliver the basic necessities of life. The working class is pushed into a fight for survival against the effects of capitalism's crisis.
Recently there have been significant struggles in Germany, typically against negotiations which amount to a direct attack on working class living and working standards, and waves of struggle in Greece, most recently against pension reforms. At the moment the media keeps such things quiet. In the future the working class will become aware not only of the bankruptcy of capitalism but of the need for a unified international class response. Car 4/4/8