The potential for a second, more catastrophic breakdown of
the global financial system is the reality behind emergency support for the
banks announced by the chancellor George Osborne and the governor of the Bank
of England, Mervyn King.
While attention was directed at the proposal to stimulate
the economy with an £80 billion fund to lend on to borrowers – which few think
will make any difference – the other half of the package is more critical.
A new credit crunch is well under way, driven by the slow-motion
collapse of the eurozone. Banks in Britain , like all others, need
short-term loans to maintain liquidity. But borrowing rates are rising because
of the crisis of the euro. This is adding to banks’ reluctance to lend to
business or would-be home owners.
So the Bank of England in a scheme exotically called the
Extended Collateral Term Repo Facility will make it easier and cheaper for
banks to borrow at least £5bn every month to cover any shortfalls in cash,
according to Robert Peston, the BBC’s man who first broke the news of the
collapse of Northern Rock in 2007.
In exchange, the Bank will accept a call on virtually any
kind of assets banks can offer, rubbish or otherwise. That’s how desperate
things are.
Governor King said that the Bank “will provide banks with
whatever liquidity they require given the prospect of turbulence ahead." There’s
plenty of that about already. Yesterday, the interest on Spain ’s
sovereign debt rose to 7%. This is regarded as a threshold point at which
repayment becomes unsustainable and a bail-out is required. Spain has
already been given €100 billion this week to hand on to its bankrupt banks. Now
the state itself is facing bankruptcy.
The world’s central banks are also nervously eyeing the
outcome of Sunday’s second Greek election in two months. At best, it will
result in another hung parliament; at worst, for capitalism, the left-wing bloc
Syriza will win and demand a renegotiation of the draconian conditions attached
to existing bail-outs by the European Union and the International Monetary
Fund.
Either way, Greece ’s
membership of the euro is in jeopardy and its economy is seizing up altogether
due to a lack of credit for the most basic commodities and services.
So stand by for an attempt at co-ordinated global action by
increasingly anxious central banks before the markets reopen on Monday.
The options are rapidly closing, however. Providing cheap
credit to banks won’t solve the problem of a contracting economy. Corporations
and households alike are cutting back on spending at a time of a sharp decline
in real earning power, part-time work and massive unemployment.
As King himself acknowledged in a graphic admission the
“industrialised world have thrown everything bar the kitchen sink” at the
global economic meltdown. Which makes his call for “bolder action” rather
meaningless. Especially as China
and India
and other “emerging economies” are slowing rapidly, adding to what King called
an “ugly picture” of the global economy.
In reality, global capitalism isn’t working and creating new
credit facilities won’t make a jot of difference. The boom that collapsed in
2007 was driven by debt that ultimately undermined the financial system itself
and precipitated a global recession.
Having thrown trillions of dollars, euros and pounds at the
problem, nothing has changed. A “return to growth” remains a mirage. Once
again, the global capitalist economy is at the precipice. An imminent lurch
into outright depression is a distinct possibility.
The system of production for profit is the root problem, not
the failure of currencies or banks. A more sustainable, co-operatively-based
economic model is urgent. To achieve this, we want a democratic transformation
of the political system to ensure we do not become the victims of a crisis not
of our making.
Paul Feldman
Communications editor
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