Edgy markets make “growth” seem hollow

The eyes and ears of the world’s biggest gamblers will turn towards the US Federal Reserve announcement this evening.

Better known as ‘investors’ in the capital markets, they anxiously await a decision on whether the Fed would begin winding down the life-support system which has sustained the US - and hence the global economy - since the 2007/8 crash.

Every month, the Fed has been inventing an additional $85bn dollars which it lends to the government by buying its bonds. Like every other form of credit, government bonds are a promise to pay interest and repay the capital.

The new money is supposed to find its way into the production of real value through loans made to businesses. This, the story goes, leads to growth, a higher quantity of profits, and increasing taxes which can be used to make the repayments. 

But with competitive pressures forcing corporation taxes downward globally, governments have to extract an increasing proportion of their tax income from wages earned and purchases of commodities made by the majority, the 99%. Us.

For the last five years the US economy – still the world’s biggest - has been at the centre of efforts to restore the economic damage that was the inevitable result when the credit-fuelled boom crashed in 2008.

The decision to reduce credit creation through ‘quantitative easing’ is driven by consumer price inflation and unemployment indicators.

If price rises show signs of getting out of control there’s cause for concern as it signals the likely onset of political unrest. The Arab Spring was triggered three years ago today by impossible economic conditions as food prices rocketed due, in part, to speculation in commodities funded by emergency credit flooding on to the market in search of quick profits.

If unemployment drops to 6.5% in the US (7% in the UK) – not expected for some considerable while yet – the alarm bells will begin to ring. Although it will be trumpeted as a success for the policy, a continuing reduction in unemployment could threaten profits as wage bargaining gathers strength.

At a hearing of the House of Lords’ economic affairs committee on Tuesday, Mark Carney, governor of the Bank of England (BoE), tried to calm investors’ nerves. He said that even if the Fed slowed the pace of its bond-buying, it would still be printing money and remained far from selling the trillions of dollars worth of bonds it had bought over recent years.

The BoE holds £375bn-worth of UK gilts, a significant part of the global total of government bonds. Carney is warning of the unpredictable consequences of even a hint of a start to selling off this historically unprecedented vast accumulation of stored up credit.

Carney has another proposal up his sleeve - the BoE would raise interest rates before trying to sell its stock of government debt.

Interest rates set by central banks (not those charged by the likes of Wonga) have  been running at historically low levels since the crash. At 0.5% in the UK, and effectively negative when measured against inflation of more than 2%, interest rates are just another side of the highly volatile loose credit regime of emergency measures that have kept the economy afloat.

Those with pensions or savings of any kind are losing out massively as the ConDem coalition tempts a new generation into a lifetime of mortgage debt slavery.

Mixing his messages, Carney said yesterday that interest rates would stay low until unemployment falls to 7% which the Bank of England predicts will happen in 2016.

Britain’s current economic growth is, of course, based on low-wage jobs while fuel prices soar and a huge rise in homelessness as the house price bubble makes homes unaffordable, as austerity cuts hit the most vulnerable.

Carney’s warnings of the risks of unwinding cheap credit and that "a return to growth is not the same as a return to normality" means that the global economy is fast approaching another great crash.

Gerry Gold

Economics editor

Banks in 'collateral crunch' as debts mount

Thousands of high school students took to the streets outside parliament in Nicosia yesterday. They were protesting against the harsh consequences the people of Cyprus can expect from the deal imposed by the European Union, International Monetary Fund and European Central Bank.

This conspiracy of non-elected bodies is the technical arm of a near-dictatorship ruling throughout Europe. It is fighting belligerently to save a social, economic and political system that is wrecking the fabric of societies. The resources that are being consumed, let alone the lives ruined, surely don’t justify the results. As for the people of Cyprus, they simply get no say as the deal is not going to parliament, just in case it’s rejected.

The banking crisis in Cyprus is just one of the storms in the vast clouds of credit and debt invented to finance the global growth of production and consumption from the 1980s onwards. This one was triggered months ago when Greece was forced to write down the value of its government bonds as part of the bail-out punishment for its people. At the end of 2011, the Bank of Cyprus had $14 billion tied up in Greek debt, while Laiki Bank had more than $24 billion.

The botched and brutal temporary patch designed to prevent a formal default by the smallest member of the eurozone will reverberate throughout Europe and the rest of the world. The imposition of capital controls to stop instant transfer of funds out of the country undermines the fragile state of both the eurozone and the wider European Union.

UK  civil servants won’t have been the only ones working through the night to minimise the impact on ex-pat Cypriot bank branches, like those in Mayfair and Birmingham. President Putin’s people will have been hard at it too, searching for ways to extricate the remains of the vast amounts of Russian wealth that found its way into Europe via Cyprus in recent years.

Cyprus, already in a deep recession, now facing an estimated further 20-30% cut in its GDP as a result of the deal, will be devastated. Thousands of businesses and tens of thousands of jobs will disappear overnight. The story is being replicated throughout Europe.

Portugal, where unemployment is heading towards 20%, is entering a third year of contraction amplified by austerity; and Spain’s jobless rate will pass 27% according to its central bank as the Europe-wide contraction drives the country into a deeper slump. France, the second biggest eurozone economy, has seen 22 months of rising unemployment, now exceeding 10% and certain to rise further as car factories are shut down due to overcapacity.

The global recession is spreading like a virus across the United States too. Cities wrecked by the crisis, including Detroit in Michigan, San Bernardino and Stockton in California are seeking bankruptcy protection to exempt their pension funds from being raided to pay debts.

In the UK, observers are warning that the decision by the Bank of England today to require banks to raise another £25 billion of capital, will could lead to a “collateral crunch” that could shut down the market for credit. So don’t fall into the trap of thinking it’s just Cypriot banks that are over-stretched. UK banks have piles of debt that no one is paying interest on, which is why the Bank of England has stepped in.

Wherever you look, which ever way you turn, the conclusion must be the same. Capitalism as an economic and political system is in extermination mode. In this situation,  private and public sector employees and pensioners need to unite with finance sector workers throughout the world with one goal in mind. All the resources needed for production, distribution and exchange must come under social ownership and control. So long as they remain out of reach, the worse our prospects become.

Gerry Gold

Economics editor

FT turns to Lenin in desperation

Mark Carney isn’t due to move from being governor of the Bank of Canada to governor of the Bank of England until next July. But the intensity of the global economic crisis is so severe that policy makers can’t wait that long.

Chancellor George Osborne, who tempted him here, and the other beleaguered leaders of the capitalist world are prepared to discuss Carney’s ideas and put them into effect as soon as possible – preferably before the likely effects begin to be appreciated by those who’ll suffer the consequences.

Since the global crash in 2007/8, the top financial and economic brains in the world have tried everything they know to bring about a recovery. The shock of seeing the sudden shutdown of the credit markets bringing world trade to a virtual standstill after the decision to abandon Lehman Brothers prompted emergency action.

Governments encouraged central banks to pour trillions of every currency into the world’s financial institutions and, it must be admitted, the treatment had an effect. The patient’s heart was restarted. But capitalism has been on life-support ever since. The system has drawn its energy from the millions suffering the effects of “austerity” – soaring unemployment, falling incomes, smashed up pensions, wrecked health and social care.

Interest rates offered by central banks have been held at historic lows for years now, hovering just above zero – but below inflation, so negative in real terms. Low rates paid to savers mean the few people lucky enough to have any, have seen the income from their savings decline. The majority with debts to service find above inflation rates charged driving them further into poverty. It’s a deliberate policy called “financial repression”.

So what’s Carney’s big idea, and why is it so attractive? Does it really amount to a revolution as the Financial Times suggests?

Put simply, Carney says that its time to turn the attention from keeping inflation at bay to a more positive focus on promoting growth. The new target should be based on “nominal gross domestic product” – which brings growth and inflation together in a single figure.

It’s a way of convincing themselves that governments and their central banks can turn their attention from just rescuing the financial system to “prioritising growth”, by which they mean furthering the interests of the global corporations. It’s a refrain shared by the newly-elected centre-right government of Japan, led by prime minister Shinzo Abe.

But Carney and friends fail to understand that whatever the subjective intentions of the central bankers, or anyone else wishing for a “return to growth”, the objective conditions of the capitalist economy are what determines their actions. After several decades of growth stretched way beyond its natural limits by the deregulation of the credit system, the crash simply announced that the only way is down.

As the capitalist tide ebbs away, it continues to exposes the desperate measures taken to sustain profits, whilst millions suffer. UBS has joined Barclays in paying fines to the regulators for fixing LIBOR – the world price of financial contracts – so that it favoured them and their clients. As the regulators summed it up: “They manipulated UBS’s submissions in order to benefit their own positions and to protect UBS’s reputation, showing a total disregard for the millions of market participants around the world who were also affected.”

No surprise there.

In its article on Carney, the Financial Times actually quotes Lenin’s famous dictum that “a revolution is impossible without a revolutionary situation” to try to stand up their story. The situation is indeed pregnant with revolutionary possibilities – but not as the FT means. 

In December 1917, Lenin drafted a decree for attention of the revolutionary government. It called for joint-stock companies and the banks to be taken into social ownership. Something to consider over the holidays.

Gerry Gold

Economics editor

Barclays shows how they are all in it together

Yes, they are all in it together: Barclays, the Bank of England, the Financial Services Authority, Tories and especially the previous Labour governments.

All share responsibility for creating an environment where, in spite of numerous and repeated claims of about the virtues of a “free market”, the financial system was in reality rotten at its very core - and far from free.

Barclays manipulated the Libor inter-bank lending rate lower in 2007-08 in part to try and show that it could borrow money cheaply while others were struggling. Barclays was desperate to avoid a state bail-out/nationalisation that befell Northern Rock, RBS et al.

This may account for the apparent collusion of the Bank of England in turning a blind eye to the Libor scandal.  Late in 2008, Bank governor Sir Mervyn King made a quip in public that Libor was “the rate at which banks do not lend to each other”. Will the now ex-CEO Bob Diamond name names when he appears before a Commons committee tomorrow? 

In one of the first acts of the New Labour government in 1997, chancellor Gordon Brown stripped the Bank of England of its regulatory powers and passed them to the most toothless body you could image – the Financial Services Authority.

This was the age of deregulation driven by the globalisation of capitalism. And New Labour fell over itself to show major corporations and the City alike that Britain was the most unregulated economy of them all.

Ed Balls, now the shadow chancellor, was a cheerleader for Brown. In 2006, just a year before the unravelling began, Balls made a series of speeches extolling the City.

Balls told a joint meeting of the Hong Kong General Chamber of Commerce and the British Chamber of Commerce in June: “The UK’s financial tradition as a free, fair and open global market has resulted in tremendous growth in London’s international financial markets in the past decade – over-the-counter derivatives turnover up by 770%, foreign equities turnover up by 260%, cross-border bank lending up by 160% and foreign exchange turnover up by over 60%.”

After praising the growth of fantasy finance, Balls declared that central to London’s “success story” was “light-touch principle-based regulation” which New Labour was entirely responsible for.

Admiring the Big Bang of 1986, when the Thatcher government opened up the City to global competition as “decisive”, Balls went on to laud the FSA which had “confounded those who feared the FSA might become a heavy-handed and inflexible regulator.” In fact, Britain’s “regulatory regime continues to be the best in the world”.

In September, he said the government would block “any imposition of any rules that might endanger the light-touch, risk-based regulatory regime that underpins London’s success”. The Tories went along with all this because their City chums told them to.

All concerned are trying to sing a different tune now but it’s too late for a host of reasons. Deregulation was more than just a theory – it was a necessity. The collapse of the post-war, regulated monetary and trading system in the early 1970s showed that capitalism had reached a certain limit of expansion.

The next phase beginning in the early 1980s, was to set capital free to roam the planet. Transnational corporations demanded transnational finance – and cheap credit for consumers to buy the commodities that were turned out in increasing amounts. Deregulation was driven by this process and was not simply an ideological choice.

The genie cannot be put back into the bottle. There is a global recession that threatens imminently to become a full-blown depression. The Bank of England is resuming the printing of money this week in a desperate bid to keep the economy afloat. This will go straight into the hands of the banks and stay there.

We don’t need inquiries, parliamentary or judicial, into the banks because they will avoid the main issue. The capitalist system is broken whichever you look – politically, economically and financially. There is no “golden age” to turn the clock of history back to, even if this were possible. Moving beyond capitalism to a democratic, sustainable, people-centred, not-for-profit economy is an immediate challenge.

Paul Feldman

Communications editor

Infinity and beyond is Bank's view of crisis

Who’d be an economics forecaster at a time of chaos and crisis? Only six weeks ago, Bank of England experts thought they had the situation covered. Now they’ve ripped up those forecasts and are starting again.

Admitting they have no idea about what is going on, and even less about what to do, the worsening crisis in the eurozone led Mervyn King, the BoE’s governor, to excuse their astonishing bewilderment when he appeared before the Commons treasury committee:

“It is impossible to imagine a situation in which you just do not know what the situation will be in a part of the world that is close to you and is half of your trade”, he said. “And that makes it impossible to engage in any sensible forecasting.”

So for King and his colleagues, the laws of economics appear to have broken down. And there’s nothing in the history books to provide any insight.

Ever since the crisis erupted in Greece, European leaders, together with the heavy hitters from the IMF have attempted Herculean feats to keep it isolated, with firewalls and barriers of all kinds.

But the crisis has morphed. Strongman Hercules has given way (temporarily) to Sisyphus – the king punished by being compelled to roll an immense boulder up a hill, only to watch it roll back down, and to repeat this action forever.

Forever? Well, it certainly seems this way in the other illuminating comment from King - a weird, contradictory warning to the public against seeing any end to the crisis.

“When this crisis began in 2007-2008, most people including ourselves did not believe that we would still be right in the thick of it” [he really, really said it], “in the middle of it, quite this late,” King told MPs. “All the way through, I’ve said to this committee that I don’t think we are yet half-way through – I’ve always said that and I’m still saying it.”

So, if we’re to understand this correctly, the longer the crisis has gone on, the end disappears into infinity as “half-way” fades into the distance. He’s not wrong. On the same day, figures for the UK’s state borrowing showed that the deficit is still growing. Tax revenues are falling and unemployment has driven up welfare spending. Chancellor Osborne had to postpone a 3p petrol duty rise for fear of sending the economy over the edge. That’s how precipitate things are.

After taking a quick look at the books, Vassilis Rapanos, 64,  the finance minister of the newly elected Greek coalition government, resigned on Monday due to ill health.  

Also on Monday, Spain and Cyprus became the fourth and fifth casualties in the 17 country eurozone forced to admit bankruptcy and beg for help. Eurozone finance ministers are meeting today to consider the appeals. Spain is asking for €100 billion. Estimates put the cost of a bailout for Cyprus as high as half of its €17.3 billion economy.

The reaction from credit ratings agency Moody’s was predictable, whatever Mervyn might say. They downgraded the ratings of 28 of 33 rated banks, by one to four notches, following a cut to Spain's sovereign rating to just above junk status earlier this month.

With Germany’s Chancellor Angela Merkel refusing to share the total eurozone debt burden “as along as I live”, the struggle playing out in Europe, as in the rest of the world, is the endgame between national sovereignty and the transnational cabal of giant corporations and the investment funds that largely own them. They also have the World Trade Organisation and International Monetary Fund on their side.

A conspiracy? Yes, indeed, but one that results from the objective logic of the system of debt-fuelled profit-seeking growth known as capitalism. With its markets for commodities and credit super-saturated, its logic now demands contraction by up to 90% of pre-crisis levels and the destruction of public spending.

The interconnectedness that resulted from three decades of global expansion provides the path of transmission for the debt contagion. But in the right social hands, the technology, the infrastructure, the corporations themselves, are the source of the solution.  

Gerry Gold

Economics editor

New financial meltdown under way

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

The great contraction

Signs of a great contraction of the global conomy are appearing throughout the world, pushing aside any lingering notions of the return to growth that capitalism requires.

Following six months of stagnation, the Bank of England said today that the near-term outlook for growth had worsened since February, while prices would rise, and that first-quarter growth had been slower than it had predicted. Governor Mervyn King also blamed the extra public holiday for the royal wedding, and disruption to supply chains from the Japanese earthquake, for the slowdown.

Since the recession started, the financial sector has shrunk by 9% - twice the 4.7% decline in the economy as a whole to the end of 2010. As big banks continue to offload loans and reduce balance sheets, the process is likely to constrain the economy’s growth rate for years to come.

In the United States, the independent Consumer Metrics Institute (CMI) presents a stark truth emerging through the clouds of delusional confidence. Last week it report that “after a week-long pause our Daily Growth Index resumed its movement into record territory, setting a new all-time low representing a 6.39% year-over-year contraction on May 3, 2011”.

Revised official figures from the US Census Bureau more than confirm the CMI’s more accurate grip on the reality of deepening decline. It reported that 2010 "furniture and home furnishings stores" sales were 3.6% weaker than previously reported, turning an 0.8% gain into a -2.4% contraction while "miscellaneous store retailers" dropped some 6.7%, nearly wiping out the earlier 7.6% alleged gain.

Japan, the world’s third largest national economy, is struggling to recover from the effects of the earthquake and tsunami which overwhelmed the inadequate and badly maintained defences of Tokyo Electric Power’s Fukushima reactors, forcing the closure of swathes of production across the world. Latest estimates from Goldman Sachs economists indicate a contraction of 0.2% in 2011 revised down from an 0.7% gain.

In the eurozone, Greece’s economy contracted by 4.5% in 2010 and is expected to shrink by another 3% this year. German consumers have been hit hard with a 2.1% monthly contraction in spending. The overall drop is 1.7% for the year, and it is now at the lowest level since November 2009. The German thrift is even more remarkable given that unemployment is lower there than anywhere else in Europe. In Spain the March 1.4% fall in retail sales extended the string of losses to twelve consecutive months. In bankrupt Ireland, house prices are down by at least 33% from their peak - the largest contraction in Western Europe since the global economic crisis began.

In Serbia, the International Monetary Fund, which provided a loan of €3 billion in 2008 are busy strong-arming the country’s government into revising its shrinking GDP figure for 2009 sharply downward from a contraction of 3.1% to over 6%As a result, Serbia’s debt – and the payments to be made by its increasingly unwilling population – will be sharply higher than previously thought. Tens of thousands have attended anti-government rallies.

Meanwhile, bonuses for chief executives at 50 major US companies bounced back by an average of 30.5% in 2010, the Wall Street Journal has reported. This was the biggest gain in at least three years. Goldman Sachs chief executive Lloyd Blankfein's total compensation, including a cash bonus, had been raised to $19 million in 2010. His pay package includes a salary of $600,000, a cash bonus of $5.4 million and stock awards of $7.65 million for 2010.

But while investment banks like Goldman Sachs prosper – having moved into commodity futures in a big way – the productive economy is going to hell in a handcart. The banks left over from the crash may be too big too fail – but the global economy itself isn’t.

Gerry Gold

Economics editor

Workers must sacrifice so capitalists can profit

The Governor of the Bank of England, Mervyn King has assured us that unemployment will rise and the value of wages will fall as inflation lets rip, leading to the most dramatic assault on living standards since the 1920s.

What’s more, you’ll be pleased to know, it’s absolutely necessary. This is the price we are obliged to pay, says King, to smooth the path to growth and economic recovery.

In actuality, it’s the consequence of failed to attempts to stave off the deepening recession and confirms that they don’t have a clue what to do, apart from the usual capitalist remedy of increasing exploitation and the share of national wealth that goes to the ruling classes.

It’s a similar story across the Atlantic as the rate of repossessions accelerates, driving millions of families from their homes and unemployment touches 10%. President Obama used his annual State of the Union address to warn that the US must mobilise to meet the “mortal threat of foreign competition from China and India”.

He is proposing to reduce government spending to the lowest share of the US economy since the1950s. Despite renewed attempts to rehabilitate the policies of Keynes – who favoured higher spending in a recession – the crash of 2007-8 means that, for capitalism, the era of high levels of government spending is over.

Are these programmes of slashing cuts “ideological”? Yes indeed, they manifest the ideology of those whose job it is to sustain a society devoted to profit at the expense of the majority of people on the planet, and the planet itself.

Throughout the relatively short period in which capitalist production spread across the world, its inner dynamic forced its human agents to find ways to counteract the relentless tendency for the rate of profit to fall.

Investing in technology to increase productivity is one. Forcing wages down another. Together they lead to increases in productive capacity and the volume of goods and services. They call it “growth”.

Pretty soon production expands beyond the available marketplace of consumers. And then credit comes into play, stretching things beyond their “natural” limits - for a while. Then comes the crash. Surplus productive capacity is eliminated, and the process starts up, once again.

This time there’s a difference.

The period of growth called “globalisation” consumed the world’s natural resources at an exponential rate. Corporations spread production throughout the world by recklessly burning fossil fuels, unlocking energy and releasing it into the atmosphere and so intensifying weather patterns.

Early snow in Britain helped to reduce national output by an estimated 0.5% in the last three months of 2010. Floods in Pakistan and Queensland, Australia wiped out crops. Nature mocked capital as the floodwaters wrecked the extraction of coal.

But capital’s human agents are blind to these effects. They are tied into the historic logic of profit from which they cannot escape. Sir Richard Lambert, outgoing chief of the Confederation of British Industry accused the Coalition of having no strategy for growth.

But the Cameron-Clegg branch better reflects the needs of capital at this point in history. They are hell-bent on cutting the deficit, reducing capacity, shrinking incomes, eliminating jobs and services – every action aimed at facilitating the contraction without which “recovery” is impossible.

Rather than allow the destruction of the valuable results of a couple of centuries of human endeavour, it falls to the rest of us to bring the destructive system to an end before it threatens to end the conditions for life on the planet.

In the process of building a global network of people’s assemblies we can establish democratic stewardship of the world’s resources, utilising and advancing the science and technology for sustainable production, and setting ourselves the task of converting it to satisfy the needs of the majority.

Gerry Gold
Economics editor

Get ready for another banking crash

The Bank of England’s Paul Tucker pulled no punches on the BBC last night. “When banks take the upside and taxpayers take the downside, something has gone wrong with the very heart of capitalism”, he said.

Tucker, deputy governor of the Bank, with special responsibility for financial stability, aimed his advice at the Coalition government. Instead of further government intervention to bail out banks, they should be allowed to fail, albeit in an orderly fashion.

Cameron, Clegg and Chancellor Osborne are anxiously awaiting the recommendations from the Banking Commission they established in June 2010, to look at the “size, scale and function” of the banking sector. But there’s no time to lose.

Tucker’s bite-the bullet proposal to let the likes of Lloyd’s and RBS fail – and presumably to take all their depositors’ money down with them, was delivered as the climax of the BBC’s business editor Robert Peston’s retelling of the story of rapid expansion of the financial sector that preceded the crash of 2007/8.

Tucker is saying that there’s another, much bigger crash on the way. This time the banks will be just too big to save.

Peston and the BBC’s media expertise took us once again through the breakdown of regulation and the rise of derivative financial “products” whose face value grew to be ten times larger than the total of the world’s annual production of goods and non-financial services.

But, as with most accounts, no underlying explanation was given for the exponential expansion of credit from the 1970s onwards. Apart from using Toby Baxendale, a wealthy fish merchant, to top and tail the hour-long programme, the real economy hardly got a look in.

Amongst Baxendale’s biggest customers was Lehman’s. When they cashed in their chips, Baxendale lost out. Now he’s got a sensible-sounding idea to end the madness – legislation to force banks to keep a customer’s deposits safe rather than lending them out, if that’s what the customer wants. We didn’t find out whether he expects to pay for the privilege, or wants to receive interest.

Either way it’s just a variant on the idea of returning to the days when savings banks had to be kept separate from the more risky lenders of capital for investment. The chances of that happening are less than zero.

This won’t solve the main problem. The banks are still stuck with monumental mountains of toxic assets. These are the unsustainable debts that can never be repaid, because repayment depends on recovery and there can’t be a recovery before the excess productive capacity they funded has been eliminated.

It has always been part of the BBC’s role to protect the state when danger threatens, and this was one of its better attempts to keep attention focussed on the banks, and away from the real heart of capitalist production – the place where real value is produced by people working, and working longer and harder than they need to satisfy all of our needs.

With students leading the campaign against the cuts, and beginning to widen their campaign beyond blaming the bankers, and the soaring price of fuel and food enraging the population, the state is beginning to come under attack. They can’t wait for the Banking Commission. Some might even smell a conspiracy of the Coalition, the BBC and the Bank of England to confuse the public, to keep the attention on the banks and away from the system as a whole.

Without the fairy tale expansion of credit and debt, the capitalist economy could not have continued to grow and profits and interest payments could not have continued to be extracted from the value the workers produced all over the world. But, as Tucker is saying to Cameron, it’s all over now, baby blue.

Gerry Gold
Economics editor

All bark and no bite

There was dismay and anger amongst the several thousand trade union members who crowded Westminster Central Hall; some including a large number from the prison officers union, couldn’t get in to the TUC’s anti-cuts rally. People had travelled from Lancashire, Devon, Cornwall, Northamptonshire and around London to take part in the protest meeting and lobby of MPs.

As well as the Prison Officers Association, there were big delegations from Unison, actors’ union Equity, rail and transport workers, public services unions UNITE and GMB, the National Union of Teachers and the Right to Work Campaign. Screen actors Benedict Cumberbatch and Roger Lloyd Pack said they opposed cuts in the arts which will privilege the rich. They all shared a deep anxiety as it emerged that around half a million jobs are to go by 2015.

Tony Woodley, joint secretary of the UNITE trade union, pointed out that for every four public sector jobs scrapped by the cuts, three more would follow in the private sector. He pointed out that the Lib-Con coalition has no mandate for the cuts, and that people “did not vote for the dismantling of their schools, hospitals and communities.”

“Cuts on this scale make no sense,” he said – but they make sense to the coalition, the bankers and the IMF. It’s the survival of the capitalist system that is at stake for them.

TUC general secretary Brendan Barber continued the myth that the cuts are just a political choice, not an economic necessity for the ruling class: "They want us to believe....this is economic necessity. Yet economic experts across the spectrum warn us that the cuts are too deep and too rapid.”

Dave Prentis of Unison warned that if the government doesn’t listen, “we will be back. For every one of us in this room today, we will bring a hundred more. We’ll march in our thousands and we’ll vote in our millions,” he said in a fit of demagogy. But vote for what? For New Labour Mark 2?

None of the trade union leaders have any answers. In fact they are determined to hold back any serious movement by workers in the face of the re-shaping of the entire British state. Asked why the British workers were not angry as those in France, Woodley cited the anti-trade union laws making striking difficult. But if they were serious about halting the cuts, trade union leaders would bring every member out and let the law go hang. By directing all their fire towards parliament and the next election nearly four years hence, they hope to act as a lightning rod to defuse and disarm any movement.

And where was Milliband? He was in hiding from the trade union leaders who got him the Labour leadership. The reality is a New Labour government would be doing the same – and it may not be too long before they too are co-opted into this government of desperate decline.

Today’s spending review is not the result of a nasty bunch of old-style Thatcherite Tories. It is a response to the most serious economic and financial crisis of the capitalist profit-based system. As Bank of England governor, Mervyn King, speaking in the Midlands, made plain. Deep tensions underlay discussions at the International Monetary Fund meeting last week, he said.

Global currency conflicts, particularly between the US and China, are evidence of profound disagreements about the way to deal with the crisis. A 1930s-style collapse of business activity and international trade is possible. So much for the cuts being an “ideological exercise”! They are the ruling class’ response to an uncontrollable crisis of the system.

Fighting against the cuts agenda means challenging the ruling class by working for a transfer of power, property and control to a democratically elected and accountable network of peoples’ assemblies http://aworldtowin.net/frontline/BuildPeoplesAssemblies.html. Come to the Beyond Resistance conference on December 11 to make this come alive.

Corinna Lotz and Peter Arkell
A World to Win

More shocks on the way

The disarray – and fear – in ruling class circles over the future prospects for the financial system is growing apace. Far from rescuing the banks, unprecedented levels of state intervention have, according to Mervyn King, Governor of the Bank of England, and others, reinforced existing weaknesses.

King has put himself at odds with the New Labour government, which has poured billions of pounds of taxpayers’ cash down the throats of the banks to no avail. Not only have they failed to resume previous levels of lending, bankers are paying themselves huge sums in bonuses, which for 2009 are up 50% on last year.

So King told Scottish business organisations last night: “The sheer scale of support to the banking sector is breathtaking. In the UK… it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

He went on: “It is hard to see how the existence of institutions that are ‘too important to fail’ is consistent with their being in the private sector.” King has a point, of course. In effect he is saying that the private sector can only function through the capitalist state and that this is not a genuine kind of private enterprise capitalism. He is right there!

Just over two years ago the financial system went critical, highlighted by the panic withdrawal of funds by Northern Rock’s depositors. The combination of the worst financial crisis since the Great Depression and now the longest recession since the Second World War was triggered by a rising rate of defaults on sub-prime mortgages in the US, the weakest point in a worldwide explosion of credit secured against overpriced property.

The world’s governments and central banks were forced into drastic action. They’ve taken some bankrupt institutions into public ownership, provided guarantees against loss for others, and cast trillions into the credit markets. They’ve reduced interest rates to historic lows, effectively entering negative territory. And they’ve created new money to inflate their own balance sheets.

In a wide-ranging comment on King’s speech, Martin Wolf, the Financial Times’ senior columnist accurately assessed the effect of this intervention, and all the half-hearted attempts at regulation. He concludes: “Trying to make financial systems safer has made them more perilous. Today, as a result, neither market discipline nor regulation is effective. There is a danger, therefore, that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future.”

King is proposing something different to regulation however. It puts him at odds with the rest of the establishment. His proposal for a separation of traditional banking from investment, high-risk activities is an echo of the American Glass-Steagall Act of 1933. This was a rapid reaction to the banking crisis that swept America after the 1929 stock market crash, in which investment banks played a key role. Glass-Steagall’s restrictions were steadily eroded in the 1980s to allow globalisation to proceed and the law was finally abandoned by the US in 1999.

Both King’s proposals for a return to the pre-globalisation era and Wolf’s assessment show that the crisis is far from over. More shocks are on the way. For example, soaring stock market prices contain little of substance and are essentially a new bubble just waiting to burst while house prices remain artificially high.

The IMF is warning that the global recession is having an adverse effect on commercial property prices and defaults are soaring. Increasing unemployment is also accelerating the rate of repossessions in America and Britain. The conditions for a second wave of the global financial crisis are already present. It wouldn’t take much to touch it off.

Watch this space.

Gerry Gold
Economics editor

70 years on - preventing a new apocalypse

Business editors are scouring the world for signs of a recovery. But, despite government intervention to stimulate the credit markets, including the temporary effects of car-scrappage schemes, latest figures show the UK capitalist economy facing its worst nightmare.

Business investment is dropping sharply and debt is being repaid faster than new loans are being issued.

In the second quarter of the year:

• Businesses slashed investment spending at the fastest pace since records began in 1966
• Fixed capital formation fell by 4.5 per cent.
• Business investment for the second quarter of 2009 is estimated to be 10.4 per cent lower than the previous quarter a much sharper decline than the 3.6 per cent expected by economists, and 18.4 per cent lower than the same period last year.

“The further sharp decline in business investment signals serious threats to Britain’s long-term recovery,” said David Kern, chief economist at the British Chamber of Commerce.

“Unless this trend can be reversed, the ... productive capacity of the economy will be damaged, and the country will lack the necessary capital stock to sustain a recovery.”

Business investment has dropped more sharply over the course of the recession than in the downturns of the 1970s, 1980s or 1990s.
Hopes that increased lending is working have been knocked sideways. Consumer spending fell by a further 0.7 per cent in the second quarter, following a 1.3 % drop in the first quarter, and the issue of new credit and debt has gone into reverse. For the first time since records began in 1993 debt is being repaid faster than it is being issued

Figures from the Bank of England show that outstanding loans to companies and individuals declined at a record pace in July. Private non-financial corporations – which form the backbone of the nation’s economy – paid back £8.4bn of debt during the month, a 1.7 per cent overall drop in their bank credit and the largest decline since records began in 1997.

The intertwined worlds of finance and production are locked in a downward spiral, and in the UK at least there is no sign of it ending. Nor can there be any until the credit-induced levels of overcapacity accumulated in the globalisation decades are eliminated. Capital values are deteriorating fast, but must be destroyed outright before there can be a return to profit-led accumulation.

Seventy years ago today the Great Depression of the 1930s turned into armed conflict, as the capitalist powers, aided and abetted by Stalinism, embarked upon an orgy of destruction on a scale unprecedented in history, World War II.

Today, the crisis facing humanity is immeasurably worse as climate change induced by capitalist overproduction threatens life on earth. Wildfires threaten to engulf Los Angeles, famine stalks Ethiopia and Kenya as crops fail, and sea-levels are rising as glacial ice melts.

Millions throughout the world must be mobilised to prevent a return to the demolition of productive resources, lives, cities. This requires the transfer of land, factories, offices and financial institutions into forms of democratically-controlled collective ownership, replacing for-profit production with producing for need in a way that is compatible with sustaining life on this planet.

Gerry Gold
Economics Editor

A system beyond repair

The global economy is in bad shape, nowhere more so than in the UK and each panic measure only makes matters worse. Following a total of 2% cut in the previous two months, the Bank of England has reduced its rate by a further 1% to 2% – equal to the lowest rate since the Bank of England was founded in 1694, when capitalism began to make its mark. That’s how serious the crisis is.

The sudden and brutal deterioration in the economic outlook across Europe also prompted the European Central Bank to cut its main policy rate by three-quarters of a percentage point to 2.5% – its largest reduction ever – just hours after Sweden’s central bank cut the country’s official borrowing costs by a record 1.75%.

This is the first time that UK interest rates have plumbed these depths since rates took on their current, central role in attempts to minimise the effects of recurrent crises. This was following the 1944 Bretton Woods arrangements to restart the normal business of making profits following the Second World War’s destruction of productive capacity and people.

The Bank of England’s decision is a futile bid to stimulate the economy by getting people spending again and cutting the cost of loans. But the banks are not rushing to play ball as they are mainly interested in rebuilding their shattered balance sheets. Suddenly the banks have become “risk averse” after decades of encouraging debt. Output in the UK fell by 0.5 per cent in the third quarter of this year. Unemployment is rising sharply. Consumer and business spending are stagnant while investment in housing is falling. Yet sharper declines in output and bigger rises in unemployment are expected.

Analysts are warning of the threat of deflation. The Financial Times
warns today: “This is not a normal slowdown. Falling commodity prices, collapsing demand and a damaged financial system may well turn some inflation indices negative: spells of falling prices are quite possible. If consumers start expecting prices to fall, this could uncork the poison of deflation.”

The voice of global capitalism is also concerned that panic measure following panic measure “risks spooking investors, causing long-term interest rate spikes and prompting flights from currencies”. Judging by the plummeting pound against the dollar and euro, this is already beginning. With reports that the government is about to start printing money – regarded as the “nuclear option” – in a yet another attempt to reflate the economy, the position with the pound can only deteriorate.

The financial crisis in the US is taking its toll on other countries. The huge volumes of Treasury bonds issued as part of an effort to reverse the economic slump threaten to stop access to credit by – and therefore bankrupt - Latin American governments facing financing needs of an estimated $250bn next year, The risk is that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year

And China? The source of cheap labour which was the motor of globalization is receiving criticism for its recently announced Keynesian “New Deal” programme pouring money into roads, docks and other export infrastructure. Critics say China should encourage spending to turn savers into big spenders.

The inevitable failure of all of these attempts to stave off the effects of the global financial and economic hurricane lead to just one conclusion: the capitalist system is out of control and beyond repair. And New Labour is undoubtedly preparing other, sinister and repressive measures to deal with the massive social unrest that is heading to a community near you in 2009.


Gerry Gold
Economics editor

Brown's fantasy world

The Bank of England’s inflation report makes grim reading. Bland assurances about the strength of economic fundamentals as the credit crisis erupted in the autumn have been replaced, superseded with expectations of soaring inflation – “above 3% for several quarters”, and recession, with governor Mervyn King declaring: “The central projection is for growth to slow sharply in the near term, reflecting the squeeze on real incomes.”

All of this is explained by the anodyne “rebalancing of the economy”, as if things were under control. Nothing could be further from the truth. In reality, the UK, which under Gordon Brown’s 10 years as Chancellor had become entwined in and dependent on global financial markets is, like all other countries, being sucked into unprecedented economic storms.

Brown’s promise that New Labour will show that it can “manage” the economy to avoid recession is fantasy talk. For example, the £50 billion thrown at the banking system in a bid to unlock the credit freeze has made no impact whatsoever. According to the European Central Bank, the banks are using liquidity schemes like this simply to offload risky assets, while the Financial Times reports that the banks are looking at sums closer to £90 billion from the Bank of England. It’s a case of pick a number, then double, treble it or simply add loads of noughts!

The credit crisis, which deepens by the day in its impact on jobs, repossessions and consumer spending, marked the end of four decades of free floating currencies which began 40 years ago, on March 15, 1968. Then, the dollar was in crisis as the Tet offensive by the National Liberation Front and North Vietnamese Army turned the tide against the US. On that day in March, the American mint stopped the buying and selling of gold and ended the fixed dollar-gold exchange rate which had been at the foundation of the Bretton Woods post-Second World War arrangements set up in 1944. Three more years of running the printing presses later, on August 15, 1971, US President Nixon severed the dollar-gold link altogether, releasing a period of inflation that saw oil prices rising to historic levels to compensate for the declining value of the dollar.

For those familiar with the philosopher Hegel’s dialectic, the dollar-gold separation was the first negation of the post-war boom. It heralded the start of the period of globalisation – credit-led growth personified in world-straddling multi, then transnational and global corporations. Their vastly expanded, ecologically-destructive production of cheap-labour commodities could only be absorbed by consumers supplied with seemingly limitless debt funded by the promise of property prices rising without end.

Inevitably, as in all processes, finite limits were reached and opposite tendencies began to take over. By 2004, US consumers in particular were “all shopped out”. Consumption peaked. The second negation – the negation of the negation - marked by the sudden paralysis in credit markets last August, brought the ballooning of fictitious capital to a halt and ushered in a new period of unprecedented economic, social and political upheaval.

The contradictions inherent within capitalism, which were left unresolved by the incomplete process of 1968, have matured and deepened in the 40 years since. Food riots in more than 30 countries, and mass demonstrations by farmers against agribusiness corporations in India coincide with a growing movement against debt, foreclosure and repossession and strikes in as homes are lost, jobs are destroyed and incomes and pensions are hit by the deepening crisis.

These actions are coalescing into a new revolutionary possibility which demands the building of an independent revolutionary movement that can inspire and lead the challenge for power. The objective must be to replace a failed economic and social system based on profit with a new socialised system designed to satisfy needs identified through a greatly expanded democratic process.

Gerry Gold
Economics editor

Another 'fix' for debt junkies

The true nature of New Labour doesn’t come clearer than this. If you are a low earner, New Labour says you should pay more tax. But if you are a banker, government hand-outs are the order of the day. So prime minister Brown is “standing firm” over the abolition of the 10% tax band, which reduces the incomes of five million people, while his chancellor is today helping out the major banks to the tune of £50 billion.

New Labour, which came to power a decade ago as champions of global markets and corporate-driven globalisation, is now struggling day and night to keep the faltering fantasy finance show from closing its doors to the public. With the market system holed below the water line, Brown’s government is launching one bail-out operation after another in an increasingly desperate bid to save it from floundering altogether.

The latest move is for the banks to trade in bundles of mortgages that until recently they bought and sold speculatively in financial markets. They used this trade to support mortgage and other loans to the general public. Since the credit crunch got underway, these kind of deals have taken on the air of musical chairs, where the last banker standing ends up holding bundles of increasingly worthless “assets”. The game is no longer played and, as a result, mortgage deals and loans to businesses are hard to come by. Interest rate cuts have not been passed on and instead are being used to bolster profits.

This outrageous behaviour by financial capitalists, whose reckless profiteering threatens to bring misery to millions in every country, ought to be condemned. The way they have gambled with other people’s money provides ample ammunition for them to be taken over without compensation to their major shareholders. Here is the case for reorganising the financial system on a mutual, not-for-profit basis. This is the furthest thought from the minds of the executive management of Britain PLC – aka the Brown government.

It is left to Vince Cable, the Liberal Democrat Treasury spokesman, to say: "We cannot have a situation where the banks are able to privatise their profits and nationalise their losses. Since the mortgages from the banks are of inferior quality and higher risk than the government bonds they replace, the implication must be that taxpayers are shouldering the risks and losses of the banks. This cannot be right."

But it is right as far as the government is concerned. You give us the relatively useless mortgage bundles and we’ll give you loads of cast-iron government bonds, which you can trade on international money markets. What’s more the “independent” Bank of England – which has resisted bail-outs for feckless bankers – has been ordered to arrange this swap shop at the expense of the taxpayers.

Whether all this will work is highly questionable. The credit crunch is a global phenomenon and the financial markets are wholly inter-connected. Germany’s banks, for example, are now in major difficulties, while Britain’s second largest bank RBS is having to raise £10 billion to bolster its balance sheet and may have to sell off parts of the group.

The value of assets like housing are continuing to fall in Britain and the United States, as well as in countries like Spain. Economic activity is already slowing to the point of recession in the US. Similar pump-priming action by the Federal Reserve in the United States has made little discernible difference. US interest rates are now just 2.25%, below the rate of inflation. Yet the more Fed does, the more the markets seem to need. They have simply become debt junkies, needing one fix after another.

Paul Feldman
AWTW communications editor