Global financial hurricane starts to blow

Turmoil on the world’s stock markets, induced by yesterday’s sharp falls in New York, is directly connected to a crisis at the heart of the global banking system. The implications for the everyday lives of ordinary working people in every country are enormous in terms of jobs, housing and living standards. In the US, the Dow Jones Industrial Average plunged more than 440 points in late trading - on course for its biggest fall since 9/11. The FTSE 100 suffered its worst day for five years while the FTSE 250 recorded its biggest points fall in history.

This instability has its roots in the frantic globalisation process. As the transnational corporations grew in size, so the need for credit ballooned to expand activities. Loans enabled corporations to buy out other companies through mergers and acquisitions. This in turn spawned a web of inter-connected complex financial markets, all eager to share in this easy “wealth”. Corporate debt was recycled over and over by a financial sector that has come to dominate the major economies. In Britain, for example, financial services account for of a third of the value of UK output, more than twice that of manufacturing. In parallel, ordinary consumers have been encouraged to borrow as much as they want on the promise that interest rates would stay low and the party would go on for ever.

But the music has suddenly stopped. Interest rate rises have made borrowing more expensive and bad debts are mounting up. In the United States, the crisis centres around loans to people with bad credit histories to help them buy homes. This is euphemistically known as the sub-prime market. A turndown in the US economy combined with rising rates has produced increasing levels of default. This leaves lenders exposed to large amounts of debt on loans which themselves are financed by borrowings from other institutions! In Britain, the consumer boom is over. Yesterday companies ranging from retailers Kingfisher, JD Sports and Kesa Electricals to Bradford & Bingley, the buy-to-let mortgage specialist, and insurer Legal & General all warned that five interest rate hikes in the past year are beginning to take their toll. Robin Evans, global strategist at Fox-Pitt Kelton, warned that "growth in the UK could slow quite sharply into the end of this year and the beginning of next year".

The capitalist press is trying to take a sanguine view. As a comment in today’s Daily Telegraph put it: “Yesterday's market falls were just an intensifying of the bad weather engulfing markets. The flood of debt that American consumers have been adrift on for years has finally turned toxic thanks to rapidly rising interest rates… To use one of the choicer quotes from a trader yesterday: ‘We're watching the slow-motion suicide of the capital markets.’ " There have been more than $3,000 billion (£1,500bn) announced acquisitions so far this year, more than 50pc above last year's levels. That activity has sent stock markets around the world sharply higher. But with banks now struggling to raise the money to finance these takeovers, investors are selling shares and fleeing to the relative security of government bonds.

The bursting of the global speculative bubble has unpredictable consequences. Banks failing, companies running out of credit, consumers spending less – it all points to an emerging global economic slump. The Brown government is aware of this and may plan an autumn election in a bid to beat the storm. Having stolen the Tories’ clothes on immigration, and wooing Conservative voters with reactionary policies on drugs, terrorism and crime, Brown calculates that New Labour could win an election with the support of right-wing Daily Mail and Daily Express readers. The financial storm of today is, however, a prelude to tomorrow's global hurricane.

Paul Feldman, communications editor