Crisis is alll pain and no gain for workers

The crisis in Greece, which comes to a head today with the vote in parliament to impose further massive cuts, also marks four years since the mother of all financial bubbles burst.

The post-war expansion of credit that funded globalisation showed itself to be unsustainable when the effects of the credit crunch emerged into the open in 2007. Attempts to limit the effects of a global collapse of production with colossal amounts of credit invented by governments and central banks simply spread responsibility for the problem.

Toxic debt was in effect transferred from a failing system of global financial and manufacturing corporations to sovereign states which are, in turn, forcing it on to their increasingly resistant populations. In Greece, an estimated 80% are against “austerity” measures being forced through.

On a global scale, contradictory pressures are at work. Growth is giving way to contraction. The hard line views of the Bank for International Settlements (BIS) are in the ascendant, causing consternation amongst softer, liberal Keynesians, like Martin Wolf of the Financial Times, and Adam Posen, a member of the Bank of England’s influential Monetary Policy Committee

The real message from the BIS in its annual report published this week is precisely the opposite of a confident recovery. Challenges left in the aftermath of the 2007/8 crisis require further actions that will most certainly produce a severe contraction. That is what they are intended to achieve.

Challenges are grouped under several headings. At the top of the list is public sector debt. The BIS believes that governments have hardly begun bringing debt down to “sustainable levels”. In addition to short-term measures, pension schemes and social benefits will have to go. “Governments that put off addressing their fiscal problems run a risk of being punished both suddenly and harshly,” the report warns.

Next comes private sector debt. In the United States and Europe, households, financial and non-financial firms are still drowning in debt, despite millions of repossessions, massive write-offs, the disappearance of many financial and retail institutions, and mass unemployment across the world. Once again they’ve only made a start.

“Growth during the pre-crisis years was heavily weighted towards finance and construction. In a number of countries, these sectors grew disproportionately to the rest of the economy and now have to shrink. [emphasis added]. Like most adjustments, it will be painful in the short run. Not only will this reallocation impose suffering on the people who worked and invested in those sectors, it will weigh on aggregate growth and public revenues as well.”

The BIS sees the need for globally co-ordinated action to deal with “global imbalances in financial flows”. As the report states: “The financial crisis showed us that the build-up of gross investment positions can lead to substantial currency, liquidity and other mismatches that can propagate and magnify shocks, creating damaging volatility in the international financial system.”

But they are whistling in the wind if they think that governments have any more hope of controlling the movement of capital corporate interests after the crisis than before.

And then there’s the problem of monetary policy. “Unconventional actions” including negative real interest rates and quantitative easing – central banks inventing credit to lend money to governments - have led directly to soaring inflation, especially in food and fuel. The BIS “solution”? Monetary easing must be reined in and interest rates must rise – especially in the UK. As soon as they do house-buyers in Britain will be facing a tsunami of house repossessions.

Fixing the aftermath of the global capitalist crisis is too painful for countless millions to bear. The workers of Greece are saying they’ve had enough and are not prepared to sacrifice living standards further on the altar of creditors and their profits. Up to 750,000 workers in Britain go on strike tomorrow, defying both the ConDems and Labour, in defence of hard-won pensions which are being cut to reduce the budget deficit. The message is clear: We can’t be doing with this unsustainable, ruthless system any more.

Gerry Gold
Economics editor

Banks star in the 'Great Escape'

When President Obama informed the White House press corps yesterday that he would shortly sign into law a package of measures that would ensure that the financial collapse of 2008 could not happen again, he was promising something he could not possibly deliver.

Congress has created a compromise bill that is so cumbersome that many critics see it as unworkable; it has nothing to say on “leverage” or borrowing to fund speculation; plans to break up big banks are on the back burner; and the United States has no international agreement on its approach.

In the meantime, the conditions that gave rise to the global financial crash of 2008 remain very much in place, with warnings that a new bubble is ready to burst. The system remains weighed down by debt at every level – financial, state and household.

Congress has created more than 2,300 pages of new regulations, which will be supplemented by more than 250 rule-making interpretations. Words and no teeth, according to investment adviser Terry Savage, who says: “Yet when it came to the basics, like requiring brokers to act as ‘fiduciaries’ – putting their client's interests ahead of their own and fully disclosing any conflicts – this simple act was consigned to a ‘study group”. And when it came to prohibiting the banks' risky activities … the law will take as long as 10 years to fully go into effect.”

Even the Financial Times views the new legislation as relatively harmless. Senior writer John Authers, whose new book is a gripping tale called The fearful rise of markets, writes: “After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago, it looked as though the Great Re-regulation might turn into a Great Revenge, as politicians planned to squeeze the banks. Now, for the banks it begins to look like a Great Escape.”

First Goldman Sachs was fined just $550 million for betting against itself with no admission of guilt. This is just three days’ revenue for the investment bank and reflects the power of Goldman Sachs, whose former employees include the treasury secretary Timothy Geithner.

Authers, whose book warns that the rise in markets in the last year has no connection with reality, admits that the bill Obama is about to sign does not tackle the “central issue of leverage”, through which banks and others borrowed to multiply many times over the effect of their investments – and their eventual losses.

His concern at the political failure is barely disguised: “Having toyed with going too far, politicians and regulators have not gone far enough in the needed re-regulation. That is worrying for the long-term health of the financial system, but good for shareholders in financial stocks.”

Meanwhile, at a global level the story is more or less the same. The Bank for International Settlements (BIS) is drafting new rules about the levels of capital that banks should have. But all the indications are that attempts to raise thresholds to curb excessive and speculative lending will be omitted when the BIS publishes its proposals later this year.

The moral of the story is this: politicians can huff and puff all they want and play to the public gallery over the banks. But when it comes to the crunch, the capitalist state is under the thumb of financial markets that have a compelling logic, life and power of their own as Greece, Ireland and Spain have already found out. Despite bailing out the banks, he who pays the piper does not, in this case, call the tune.

Paul Feldman

Communications editor

'Honey - I shrank the economy', a nightmare by Brown & Darling

The graph from the Office of National Statistics, showing Britain’s incredible shrinking economy, surely has a much bigger immediate impact on our ability to grasp what is happening than the many thousands of words pouring from journalists’ keyboards and spewing from politicians’ mouths.

What it reveals is that the recession is rapidly turning into another Great Depression. ONS figures show that the British economy shrank by a massive 4.9% in the year to the end of March 2009. According to economic historian Angus Maddison, this contraction is the biggest since 1931, the year when the Ramsay MacDonald Labour government collapsed and the prime minister formed a national coalition with the Tories.

"Clearly this is now the worst peacetime recession since the 1930s," said Michael Saunders, chief UK economist at Citigroup. "The worst contraction then was a year of around -5pc; this year will not be hugely different." The Great Depression only ended when preparations began for World War Two.

The ONS also announced that GDP (gross domestic product) in real terms in the first quarter of 2009 fell by 2.4% compared with the previous quarter. Yet only a month ago, the ONS still estimated a decline of 1.9% for the same period.

It is important to understand the reason for the revision: the rate and scale of the collapse are both so great that they overwhelm the predictive statistical techniques which the ONS use. Largely based on inferring trends from historical data, the ONS is no longer able to accurately approximate the immediate past, let alone say much about the present or the future. When more of the real concrete evidence came in, the shock of the new took most of those supposedly in the know by surprise.

Put simply, things are getting much worse and faster. Output of the production industries fell 5.1%, but construction output fell 6.9% compared with a fall of 5.0% in the previous quarter, and it is set to deteriorate further, as investment in machinery and new buildings has slumped.

And what of the future? With tax income declining and having tested the limits of its ability to issue new debt, the New Labour government is caught between denial and a charade of lies about the cuts it will have to make if it remains in power after the next election. So much so that, according to the unelected autocrat-in-waiting Lord Mandelson, it has either postponed or cancelled its comprehensive review of public spending.

The Bank for International Settlements (BIS), in its annual report is forced to acknowledge that the crisis shows that the “presumed benefits of diversification derived from the creation of financial conglomerates” were – wait for it – “an illusion”. Well, who would have thought it!

The shattering of the financial illusion resulted in a financial collapse, which in turn precipitated the economic collapse now taking place, ending another delusion – a boom based on debt-driven consumer spending. As to the notion of a swift recovery, the BIS report is sobering. It warns: “The very speed of the recent downturn could create larger than average second-round effects. In particular, if the propensity to save were to rise further in the industrial economies – as could easily happen, given the high overhang of household debt and dramatic reduction in household wealth – contractionary impulses in the global economy could be prolonged.”

Don’t say we haven’t been warned. The echoes of 1931 are resounding across the globe, reinforcing the urgency of our developing practical alternatives to capitalist slump which tackle the roots of the crisis by replacing a profit-driven economy that relies on illusions with one designed to meet the needs of people and the planet.

Gerry Gold
Economics editor