|
|
The October crisis
The imminent October meltdown of the global
banking system appears to have been averted, at least for the time
being. But the credit crunch continues and capitalist leaders are forced
to recognise the world is plunging into a deep recession. For many
millions of workers this crisis in the profit system means unemployment,
slashed incomes and untold suffering. LYNN WALSH writes.
AFTER 15 SEPTEMBER, with the bankruptcy of the big
investment bank, Lehman Brothers, the deepening crisis in the global
financial system entered a new, more acute stage. A group of major banks
discussed a rescue of Lehman, but they were not prepared to step in
without financial backing from the US government. The refusal of the
treasury secretary, Hank Paulson, to underwrite a bail-out proved to be
a catastrophic mistake. Paulson, Ben Bernanke and company intended to
draw a line: no more government-financed bail-outs. Instead, the
collapse of Lehman (and the simultaneous takeover of Merrill Lynch by
the Bank of America) triggered a much wider crisis. In particular, it
spread the crisis from the US to Europe.
Banks and big investors feared that Lehman’s losses
would result in massive losses for other finance houses, especially
through claims on credit default swaps used to insure Lehman’s
borrowing. One of the first casualties was a money-market fund, which
faced a liquidity/solvency crisis as a result of Lehman losses.
Money-market funds are a key element of the
interbank lending system, the wholesale credit market normally used by
banks for low-interest, secure funds to finance their day-to-day
operations. The bankruptcy of Lehman and the takeover of Merrill Lynch
provoked fears that ‘no bank or finance house was safe’, and this
brought about a cardiac arrest of the interbank lending system.
The credit crunch had now become a total seizure of
the banking system. The whole superstructure of securitised credit
which, it was claimed, would provide abundant, cheap credit and
virtually abolish risk, had collapsed. Commentators noted that this was
the worst banking crisis since the outbreak of the first world war in
1914.
Once again, the US Federal Reserve and other central
banks had to pump huge amounts of liquidity into the banks, taking in an
ever widening circle of financial institutions and accepting more and
more risky collateral.
Within a couple of weeks, the US, British and
European governments were forced to implement the biggest bank-rescue
package in the history of capitalism. In late September to early
October, there were convulsions on world stock exchanges, which had
previously been volatile and steadily declining. Unlike many previous
crises, the stock-exchange falls have followed the banking crisis,
rather than preceding it.
Shares fell precipitously in response to a series of
events. Undoubtedly, big-business investors feared a systemic meltdown
of the banking and financial system. Shares in oil companies and mining
corporations, which have featured prominently in share indexes in recent
years, plummeted as oil and commodity prices rapidly declined. There was
also worldwide panic selling when the US House of Representatives
rejected (29 September) the $700 billion bank-rescue package proposed by
Paulson. This reflected a combination of free-market ideological
opposition to a state bail-out of the banks and massive public anger at
the handouts to bankers seen as responsible for the crisis. Later (3
October), a revised bail-out plan – already passed by the Senate – was
passed by the House, reflecting pressure from business to ease the
credit crunch and avoid a deep slump. Among workers and middle-class
people, fury at the greed of reckless bankers was tempered by fear of
economic collapse and mass unemployment.
At the same time, the fall on the stock exchanges
reflected recognition that the world economy was already well on the way
to a deep recession. ‘Global Dive by Markets on Fears of Long Slump’,
reported the Evening Standard [London], on October 22. According to
Morgan Stanley’s Global Share Index, there has been a 45% fall on major
stock exchanges since the November 2007 peak. And the financial carnage
is far from over.
Coordinated action by central banks
EVENTS ON 8 October and the following days marked
the end of the ultra-free-market era opened by the Thatcher-Reagan
deregulation measures of the early 1980s. The Brown government announced
a £400 billion rescue plan to stabilise financial markets. The package
includes measures to improve the liquidity and solvency of the banks, as
well as guaranteeing interbank loans. The government announced it would
invest up to £50 billion in banks, by taking preference shares –
effectively, partial nationalisation. Within a few days, the government
had invested a total of £37 billion in a majority shareholding of the
Royal Bank of Scotland and a 40% share of the recently merged
Lloyds-HBOS. At the same time, the government’s package added another
£100 billion to the existing Bank of England short-term loan scheme, and
also guarantees up to £250 billion of new bank debt, thus effectively
guaranteeing interbank lending.
On the same day, the Federal Reserve, Bank of
England, European Central Bank (ECB), and three other central banks
announced a simultaneous 0.5% cut in lending rates. This is the first
time there had been such a coordinated rate cut since the 11 September
attacks in 2001. This interest rate cut marked a sharp about-turn for
the ECB, which had previously refused to follow Fed and Bank of England
cuts on the doctrinaire grounds that inflation was a greater danger than
recession.
In the following few days, governments and central
banks of the eurozone took similar measures to the British government,
bailing out a series of banks with state funds and propping up the
interbank lending system.
In the US (14 October) Paulson changed tack. The
$700 billion package presented to Congress was primarily a measure to
buy up the banks’ toxic mortgage-backed securities. Now, following the
moves of Britain and the eurozone governments, Paulson used provisions
inserted into the Emergency Economic Stabilisation Act to inject state
funds into the US banking system. Paulson announced that he would put
$250 billion of public funds into the system by buying shares in the
participating banks. In reality, the US government pressured nine major
banks to participate (they will receive about half the total funds),
imposing only vaguely worded restrictions on executive pay. The rest of
the money will be offered to regional and community banks. Earlier (7
October), the Federal Reserve had implemented plans to establish a
special purpose vehicle to buy unlimited amounts of three-month
commercial paper from banks and non-financial companies – effectively
guaranteeing a key component of interbank lending.
These measures, following the nationalisation of the
housing mortgage lenders, Fannie Mae and Freddie Mac, and the effective
state takeover of AIG (the American Insurance Group), the US government
now has a decisive hold over the banking sector.
Big business internationally faces an acute dilemma.
Without state rescue, the global financial system would have collapsed,
threatening a deep slump and the very survival of the capitalist system.
At the same time, they fear the encroachment of the state into the
sphere of private property and the pursuit of profit. Michael Glos,
German economic minister, described the European bail-outs of banking
insurance as "an indispensible exception" to general free-market
policies.
The ‘indispensible exceptions’, however, are
becoming more and more extensive. In Germany itself, the government was
forced to bail out Hypo Real Estate. France, Belgium and Luxembourg
bailed out the French-Belgian Dexia. Fortis was bailed out by the
Belgian and Netherlands governments. In the case of Iceland, with the
whole national economy being run as if it were a speculative hedge fund,
the government was forced to nationalise the two biggest banks on the
basis of a $2 billion loan from the IMF.
Capitalist leaders are striving to downplay the
implications of nationalisation or semi-nationalisation of significant
sections of the banking and finance sector. It is only a temporary,
emergency measure. Governments will not ‘interfere’ in the day-to-day
running of banks (imposing minimal restrictions on directors’ pay and
shareholders’ dividends). As soon as the crisis is over, state shares
will be sold to private investors – quite likely at a profit!
But, having taken over key sectors of the banks (and
guaranteeing their deposits and, in some cases, their debts), it will
not be so easy for the state to withdraw. In fact, given the likelihood
of a prolonged economic downturn, governments may be forced to intervene
even more. Moreover, the idea that, in the next period, governments will
make a profit on their bail-out operations is likely to prove to be a
chimera.
Will it work?
WILL THE UNPRECEDENTED interventionist measures
taken by the US, British, European and other governments be enough to
prevent a systemic collapse of the global banking system? For the moment
(22 October), there appears to be a stabilisation. The premium on
interbank lending (Libor, commercial paper, money-market funds, etc) has
begun to come down, and interbank lending is slowly reviving.
Nevertheless, the credit crunch continues and is likely to go on for a
considerable time. Despite pressure from the governments that have
pumped new capital into them, the banks are hoarding cash, reluctant to
lend to any risky customers.
Referring to the US bank-rescue package, one senior
banker said: "It doesn’t matter how much Hank Paulson gives us… no one
is going to lend a nickel until the economy turns. Who are we going to
lend money to? Only people who don’t need it". (Andrew Sorkin, US Banks
Keep Hold of the Cash, International Herald Tribune, 22 October) A
financial analyst based in London made a similar comment about the
European banks. "We expect rising loan defaults and further asset
write-offs over the next couple of years to practically wipe out the
governments’ capital injections, leaving banks at square one. Given that
banks will need to increase their capital in order to expand their
lending book, these measures on their own are unlikely to prevent bank
lending from stagnating".
Further defaults on loans, for instance, by shaky
hedge funds or manufacturing corporations being hit by the downturn,
could push more banks into bankruptcy, despite the recent
government-funded recapitalisation. The existing shareholders of banks,
moreover, are angry that the value of their shares has been diluted by
governments being allocated preference shares in return for the capital
injection. Many will spurn the rights issues (options for existing
shareholders to buy additional shares) now being offered by many banks
in attempts to boost their capital base. In the event of further
insolvencies, governments may be forced to invest even more state funds,
turning partial nationalisation into fully-fledged nationalisation.
There is no gratitude from the shareholders who
enjoyed super-profits from the banks’ speculative activities over recent
years. Their response to rescue by the state is: ‘Where will it end?’ In
reality, even partial nationalisation shows the redundancy of private
shareholders. If the governments have been forced to bail out the major
banks, why should they not be run in the public interest, to meet the
needs of society rather than pursue super-profits for a tiny, hyper-rich
minority?
The emergency stabilisation of the banks, moreover,
will not prevent a recession, now expected by most capitalist leaders
and big-business investors to be deep and prolonged. The housing crisis,
for instance, is far from over. The US housing bubble, which was at the
root of the subprime banking crisis, continues to deflate. One in six US
mortgages are now ‘troubled’ (either in arrears or default). Already
$500 billion of subprime securities, arising from mortgage defaults,
have been written off, and it is expected the total could rise to $1
trillion or $1.5 trillion. So far, in the US the fall in house prices
together with the fall in the value of shares held individually in
mutual funds or retirement account equity holdings have caused a wealth
loss of $7 trillion. This has already resulted in a drop in consumer
spending (down 1% in September over the previous year) and this is
likely to become more severe.
At the same time, huge housing bubbles in Britain,
Spain, Ireland and other countries have only partially deflated so far.
As the downturn gains pace, with a rise in unemployment and a squeeze on
workers’ incomes, there will be an increase in mortgage defaults, which
will cause further problems for the banks and other financial
institutions.
A number of hedge funds are reported to be in
trouble. The US government has said it is not prepared to step in and
rescue any of them. However, many hedge fund investors are withdrawing
their investments from the funds, forcing the hedge funds to sell off
assets. This is further pushing down the price of shares, etc. Moreover,
the collapse of a major hedge fund, like Long Term Capital Management in
1998, could have a devastating effect on the finance sector. Paulson may
yet be forced to eat his words on this question.
Recession in the real economy
‘OMINOUS COMPANY NEWS Holds Down Stocks’, reports
the International Herald Tribune (22 October). The downturn in the real
economy – with a consequential decline in profits – is one of the main
factors in the recent slump on stock exchanges. Even ‘blue-chip’
companies, like Caterpillar and DuPont, have recently reported reduced
profits and warned of a bleak outlook for the global economy. The big
car manufacturers, GM, Chrysler and Ford, have been making huge losses,
and are being propped up by government-subsidised guarantees for their
loans. Chrysler and GM bosses have even been discussing a merger, which
will undoubtedly mean plant closures, massive job losses and wage cuts.
One of the biggest investors in Ford, Kirk Kerkorian of Tracinda
Investments, has recently sold his Ford shares – and others will no
doubt follow his example.
The governor of the Bank of England, Mervyn King,
finally recognised the obvious (21 October) when he said that a
recession had begun. Even Gordon Brown, who foolishly claimed to have
abolished ‘boom and bust’, has now been forced to accept that there is
now a recession. Of course, he blames it on the ‘world economy’ rather
than the performance of British capitalism or his own government’s
enthusiastic support for neo-liberal policies. All the major economies
have slowed to a virtual standstill, with the prospect of negative
growth in the US, Britain, the eurozone, and Japan for several quarters,
if not longer. Previous breakneck growth in China is also slowing.
Faced with this bleak prospect, Democratic leaders
in the US Congress have called for a new stimulus package, a proposal
which has been endorsed by Bernanke. "Now is not the time to worry about
the deficit", writes Paul Krugman, a pro-Obama New York Times columnist.
He outlines a package for the US government, which could "provide
extended benefits to the unemployed, which will both help distressed
families cope and put money into the hands of people likely to spend it.
It can provide emergency aid to state and local governments, so they
aren’t forced into steep spending cuts that both degrade public services
and destroy jobs. It can buy-up mortgages (but not at face value, as
John McCain has proposed) and restructure the terms to help families
stay in their homes. And it is also a good time to engage in some
serious infrastructure spending, which the US badly needs in any case".
(Let’s Get Fiscal, International Herald Tribune, 18 October)
If Barak Obama wins and the Democrats strengthen
their majority in Congress, it is very likely that a package on these
lines will be adopted. Something similar has already been proposed by
Nancy Pelosi, Democratic leader in the House of Representatives. Even
before the new president takes over in January, it is likely that
Democratic-controlled committees in Congress will propose some such
package. Whether Bush would veto such a package remains to be seen.
Would a massive fiscal stimulus, probably on a
bigger scale than the $150 billion implemented by Bush earlier this year
(mainly tax rebates) have a major impact on the US economy? At best, it
would limit the depth of the economic downturn. The example of Japan in
the 1990s provides a comparison. After the collapse of the property
bubble at the end of the 1980s, Japanese capitalism faced a deep and
prolonged recession. The government introduced a series of massive
stimulus packages, with government spending on infrastructure projects,
etc. They probably prevented an even worse downturn, but did not revive
the economy, which only just came out of stagnation in the last few
years – before being hit by the current credit crunch.
In the US, moreover, Democrats frequently evoke the
New Deal of the 1930s, which also involved massive government spending
on infrastructure projects and welfare provision. However, New Deal
spending failed to revive the US economy, which only began to grow again
with the advent of the second world war, which created massive worldwide
demand for US goods. In both the New Deal spending and the packages of
the Japanese government in the 1990s, state spending was heavily biased
towards the big corporations involved in the infrastructure projects.
Both stimulus packages resulted in a massive escalation of state debt.
The US national debt is already soaring because of the bank rescue plan.
A further stimulus package will escalate it further and, although it may
be delayed, it will sooner or later result in increased taxation
(hitting the working class) and future cuts in state spending,
especially on public services.
The scale and character of Keynesian-type stimulus
packages in the US, Britain and elsewhere remain to be seen. Meanwhile,
the global economic downturn is gaining momentum. A growing list of
countries is queuing up for the intensive care ward, applying to the IMF
for emergency loans: Pakistan, Hungary, Ukraine, Belarus and others. The
International Labour Organisation estimates that the crisis will add 20
million to global unemployment, raising the total from 190 million in
2007 to 210 million by late 2009. But this is only a ‘provisional’
figure: "current projections could prove to be underestimates".
|