Preface

This paper is complementary to Solidarity's pamphlet the Bubble Bursts (obtainable from www.solidarityscotland.org). It is intended to be part of a wider discussion on the origins, course and most importantly proposed solutions to the crisis. To that end it is Solidarity's intention to provide links to other socialist articles on the crisis as well as seeking comments on the issues raised. Feel free to submit comments and links to other articles, serious suggestions will be published.

Send comments to This email address is being protected from spam bots, you need Javascript enabled to view it

Introduction

Our general analysis is quite simple - this is the first synchronised global economic crisis of Capitalism. It greatly exceeds the Great Depression in its speed, scope and initial effects. In essence it was caused by deregulation of financial markets, and loose monetary policies designed to maintain US and UK growth and export inflationary effects. Inevitably this led to a greed fuelled boom followed by market collapse and the slump which is just commencing. Governments are trying to revive the corpse of these financial markets rather than plan for a different type of economy. The crisis is getting worse and its effects in unemployment, social devastation and a destroyed environment could last for decades. Only a democratically planned economy can provide solutions.

This paper examines some aspects that most of the left has an incomplete analysis of as well as some demands which at present require clearer presentation.

Commodities and Markets

Let us look at the standard Marxist model of Capitalist production. Commodities are produced by use of capital and labour, they are sold at a higher price than the production price, this surplus value or profit is expropriated by Capitalists and some of it is reinvested in new capital. Due to competition there is a tendency for the rate of surplus value or profit to decline over time.

The first thing to point out is that in a single transaction, profit is not assured. Just look at Woolworth's final sales - goods frequently are sold at less than the production price and individual capitalists and capitalist enterprises go bust. Secondly markets are rarely level playing fields - insider dealing, scams such as Madoff are all too frequent. Thirdly multinationals can manipulate different rules across continents to reduce tax, increase market share and maximise profits, often secure the help of their base government by way of sweetheart law changes. Global markets are a forum for inter-imperialist economic warfare.

Much of the current crisis stems from changes in the markets for 2 commodities - Housing and Money.

Housing Markets

How much is a house worth? We can easily find the labour and material cost and for many years land and profit meant average houses could be sold at an affordable price of 3 times average salary. However, despite their use value as places we live in, houses are commodities and their value is what they sell at in the marketplace. This selling price may be, and frequently is, much less than the cost of building it.

Banks and Building societies traditionally lent "long" over say 20 years for mortgages, and relied on mortgage payments from existing customers to lend to new customers. This regulated the housing market by limiting lending based on salary and only lending in total a low multiple of mortgage income. Around 2000 this changed. New aggressive lenders started cutting mortgage rates, lending higher multiples of salary or even ignoring salary altogether. Inevitably house prices rose. The insane assumption was that prices could keep rising, forgetting that this was a market and market prices are based on individual transactions.

I had predicted a housing price crash from 2002 on and was surprised it took till 2005 for US house prices to peak and till 2006 for UK house prices to peak. At that time based on historic prices, and average wages, in both the UK and US houses were overvalued by around 40%.

So far US house prices have fallen 27% by December 2008 and UK prices by 20.6%. The rate of the fall in prices is accelerating in the US. Prices in both the US and UK have been much faster than in the '80s or indeed the '30s recessions.

Money

The changes in the housing market were a direct result of changes in markets for the other commodity "money".

Most people now don't think of money as a commodity. It is treated as a measure of wealth, GDP etc. Nor do many politicians realise it can be readily created and destroyed. Tories are prone to this, instinctively saying that spending now must result in higher taxes to "pay back debt" later on. This harks back to 17th century Mercantilism. Both Adam Smith and Marx were quite clear that money was a commodity like any other. Smith condemned the confusion of wealth with money which led to disastrous foreign policies of seeking to seize Gold and Silver. Indeed when Smith was asked how much money there should be in the economy, he replied "enough" i.e. like Marx he viewed money as a minor commodity and its main importance was its use as a medium of exchange within the productive cycle.

The production of money had by the 20th century and particularly with the ending of the gold standard passed from the hands of merchant banks to the capitalist state. All currencies are "fiat money", that is they only exist as a result of promises (however, shallow) made by governments. Governments do however, allow private banks to create a second form of money "credit money". In other words, banks are (till recently within limits) allowed to lend more to their customers than they have received in deposits from savers. As both "credit money" and "fiat money" are indistinguishable e.g. both are pounds sterling, governments economic policy is always linked to private financial markets. Under Keynes influence, the Bretton Woods post war settlement, saw control of money supply and inflation as key to financial stability, restrictions were placed on banks and foreign exchange dealings.

Money and Politics

There was one exception to this - the US. Because the dollar was effectively a world currency, the US could print money and hence grow its economy within limits, without suffering inflationary effects. The expenditure on the Vietnam war pushed those limits and the resurgent European currencies pressed for a new world financial authority. The US engineered the '72 oil price hike which because of its greater reliance on imported oil, affected Europe more and allowed the US to continue the Dollars preeminence as a world currency through the creation of the Eurodollar. Further Wall Street manipulation of currency markets led to the collapse of the Asian Tiger economies and Russia's post USSR.

The mid '90s saw the US again under challenge from the EU and China and at strategic weakness over energy supplies. At this point they, followed by the UK decided to deregulate the Money and Capital markets in order once again to reinforce US economic supremacy, at the same time as securing Oil through Iraq and elsewhere by war etc.

Changes to Money Markets

Three main changes were made to monetary policy in the US and UK. The separation of commercial and traditional banks was removed. This allowed banks to lend more thus increasing the money supply. Secondly, stock and other markets particularly foreign exchange markets were computerised on a world scale. This reinforced the denomination of trade in Dollars (and Euros), forged even tighter links between US and UK financial markets and allowed multinationals, mainly US and UK, even more freedom to evade tax. Finally new methods of expanding private money were created through new markets in derivatives. As these were traded world wide, they initially allowed the US and UK a further way to expand their economies whilst offloading inflation to other countries.

Unforeseen consequencies were - firstly, computerised trading systems reinforce feedbacks i.e. rises and falls in markets become more extreme. Secondly, banks and other financial institutions introduced daily pricing of their assets, or at least those assets going through the books (off book trading in 2007 amounted to around 50% of trades), this made bank share prices very sensitive to short term losses. Thirdly, derivatives largely were based on 2 classes of assets - mortgages and corporate debt and to in effect a single source of risk - house prices.

To quote the Independent 12 Oct 2008:

"at the core of the market is the credit derivative swap, effectively an insurance policy against the default in the interest payment on a corporate bond. One doesnt need to own the bond itself. It is like Joe Public buying an insurance policy on someone elses house and pocketing the full value if it burns down."

There are a lot of arsonists about.

The Developing Crisis

What in effect Governments particularly the UK and US had done was create markets in the commodity money which abstracted money from its uses as a measure of value, or circulating medium and gave incentives to the markets to create new money (or to be precise, create new commodities based on expected future money flows, which in practise amounts to the same thing).

As these commodities were based on "expected" money flows, there was a risk they might not be paid. Complex mathematics were employed to "manage" this risk and this was supposedly reflected in the commodity's price. Unfortunately most of the risks related to the ability of US and UK mortgage holders to pay the interest on their mortgage and indirectly on house prices continuing to rise. The remaining risks related to corporations customers paying the interest on their debts. Unfortunately often these were the same customers expected to pay mortgages. Corporations cash flow proved very sensitive to house prices, so rather than being separate categories of risk, these risks were linked.

Enthusiasm for these new products "complex derivatives" and "credit default swaps" led to the overproduction of these money derived commodities and gradually lowered their value. When house prices fell, these commodities became worthless, losses mounted and market makers went bust. The entire market for wholesale money shut down in October 2007. Governments are now faced with having no money for use for new investment or even maintaining state infrastructure including employees salaries and pensions and real production is being affected. A reinforcing cycle has started that could lead to economic collapse.

To understand the nature of the crisis look at the following 2 diagrams. The first shows what a simplified picture of world finance looked like circa 1980, the second shows the current unstable model. (from www.marketoracle.co.uk/article6756.html )

Where we are

To understand how severe the crisis is, we have to look at the world as a whole. Where a Trillion (T) is a million million, total world production in 2007, world GDP was $65T. The notional value of the various derivatives markets is $800T that is 12 times world GDP. The value of all stocks, property and other goods in the world - notional wealth of the world, excluding derivatives - is estimated at $ 167T.

Most of these derivatives cannot be valued and if a significant portion go bust - as they are doing - then losses greater than world annual GDP could result.

The crisis began when US house prices peaked in 2005, UK house prices peaked October 2006. The banking crisis really began 18 months ago. GDP in the US and UK has been contracting since July 2008.

A few figures will illustrate where we are:

• it is estimated the housing bubble accounted for 50% to 70% of the rise in GDP in the US and UK in recent years

• a stock forecast last week expected stock market prices to fall a further 40% and suggested stocks might not return to 2007 prices for 20 years. The next casualty of crisis is likely to be pension funds.

• for the last 10 months in a row US housing repossessions have exceeded 250,000 a month

• US unemployment is expected to reach at least 8.8%

• UK unemployment has reached 2 million and is forecast to be 3 million next year.

• Japanese exports in January were over 50% down on a year before.

• US GDP was $14.2T in 2008 - it has fallen 1.7% or $212B a year from its peak

• UK GDP was £2.13T or $3T - it has fallen 2.2% or $67B a year from its peak

• Japan GDP fell 3.2% in the 4th quarter 2008

• Euro zone GDP fell 1.2% over 2008 considerably more than US

• China GDP was $3.2T in 2008, slightly more than UK, and rose 9% over year, however, it may have fallen in 4th quarter 2008.

• US car sales which peaked at 17.4m in 2000 fell a further 50% in January to an annual rate of 10.3m for the first time less than China where 10.7m annualised were sold, up 17% partly as a result of lowering of tax on small cars.

• as a direct result of the slowdown, investment in new clean energy projects has collapsed and indeed the entire market for carbon trading now in effect forces companies and industries to burn coal and oil and pollute the atmosphere as it is much cheaper than using clean energy.

• Iceland is the only country to in effect become bankrupt, however, many European countries e.g. Ireland, Spain, Hungary, even Italy are looking vulnerable. Some are discussing leaving the Euro or delinking in the case of those not yet in.

Government Solutions

Faced with market failure, particularly of the wholesale money market and threatened failure of almost all banks, most western governments have been throwing money at the banks to "save them" and to restart lending. Lending to companies, however, has frozen and companies are going to the wall, creating unemployment.

To date the UK has pledged £1.25T in support to banks - over 60% of annual GDP.

The US has pledged at least $3T dollars to banks.

In return both the UK and US have in effect nationalised the main banks, although as the Guardian said (27/2/9) "the Government dont want to admit it".

The UK Government owns 95% of RBS, a majority of Lloyds/HBOs, the US Government has just taken a ownership of a third of Citigroup, once the largest bank in the world.

As yet this has not affected the banks freeze in lending. Indeed the 100% owned Northern Rock was directed by the government to repossess houses and stop issuing new mortgages.

Other financial sectors are in trouble, particularly pension funds and insurance. AIG the largest US insurer today (3/3/9) announced a $61.7B loss for the last 3 months of 2008, the largest corporate loss in history. As yet Governments have no plans for dealing with the next round of the crisis.

The other measures taken by Governments are "fiscal stimulus" packages. Both the US and the UK have announced these. In the UK, however, a "stimulus" package of £20B, mainly a 2.5% cut in VAT, when stores were discounting by up to 50%, pales into insignificance, indeed was counterproductive.

By contrast in China a $586B stimulus package has been announced mainly on infrastructure projects and in the US a $800B package. Given the size of their economies, the Chinese stimulus is 4 times larger than the US and may be 10 times more effective.

Major industries are seeking direct aid, particularly vehicle manufacturers. General Motors "burned" $30.9B in 2008 and estimates it need $14B in 2009 to survive. It is seeking $16.6B from the US government. Other countries (China, France) are trying to boost sales of clean cars by lowering tax or giving cash to trade ins of old cars.

Governments are hugely increasing their national debt in some cases up to 175% of GDP, levels previously unthinkable in advanced countries. Quantitative easing, whereby Governments buy back their own debt, is a way of creating more money, however, the money largely goes undirected to financial institutions. Issueing further debt, assuming it is bought then gives governments cash to spend. Given a lack of credit money, in theory this need not create inflation. Countries debt is being downgraded by markets, some to the level of junk bonds. Unless there is international agreement to expand money supply across the world, unlikely given inter-imperialist rivalry, more countries could go to the wall and their currencies be in effect destroyed by the market.

Socialist Solutions

Our main slogans centre around Public ownership of the banks and other companies "failing". When Governments are in effect doing this, we must be clear what difference our proposals would make.

Banks are in effect bust. There are no assets, opening the books will merely confirm this. The money has vanished and no longer exists. This process Marx calls devalorisation. Asking banks to lend is pointless. Even with countless billions of support no assets will exist. What then does nationalisation mean?

Even the Bolsheviks when they nationalised the banks retained the old management. Are our politicians capable of setting policy? Can they be trusted?

I would suggest allowing "our banks" to lend amounts up to £5M to individuals and small businesses. All larger investments should be made democratically by boards set up to implement strategic investments.

We should demand a public debate on strategic investment priorities - schools, hospitals, clean energy etc - and also arms spending, nuclear power, foreign wars. Let the people decide their priorities in democratic forums involving Trade Unions, Local Government, Regional Government, UK plus across Europe and public ballots. Politics is about choices - let the people decide themselves.

Pensions are a right. All pension funds should be taken over by the government and companies contribution holidays abolished. It is a disgrace that the Government has up to now not underwritten state owned Royal Mail's pension fund, let alone used it as an excuse for privatisation.

We demand public energy companies. We are not at present making the case that the existing energy companies have disincentives from investing in green energy. Indeed demanding lower electricity charges under the existing system, without funding proposals, further ensures environmental disaster.

All new investment should be in a new company fully funded by government. Existing companies prices should be frozen and reducing caps set on their pollution to match new energy coming on streem. We should campaign against the energy market.

We need to revamp our approach to democratising society. This is the key to winning new support. The crisis will get worse. Our message must become more fresh and relevant.

Finally, let us turn around the age old attack on socialist, but how will you pay for it? Governments can find tens of Trillions to bale out the banks. Why can't they find £9B for Royal Mail's pension, or £200B to produce green energy, or possibly £200B to buy the "top" 200 companies. And if nationalisation is so easy for the banks what stops a socialist government nationalising energy companies or indeed all major companies? Governments have shown they can just print money when required - we won't get fooled again!