No easy fixes

To those who have been preaching state intervention as the solution to the credit crunch and the recession it must seem as though their time has come. Out go the discredited free-market assumptions of the late 20th century and in come the theories that found favour in the late 1930s and the immediate post-war.

These were largely the work of the British economist John Maynard Keynes. He claimed that relatively low government spending and/or high taxes had contributed to and then reinforced the economic depression of the 1930s. Now New Labour has apparently gone back to Keynes in their desperation to find some answers to the lethal cocktail of a collapse in jobs, sharp falls in consumer spending and financial meltdown.

But bringing forward a few infrastructure projects does not even begin to address the enormity and breadth of what is a global economic as well as a financial catastrophe. Bringing already budgeted spending forward, funded by new borrowing but without creating new money, is at best a new twist on an old solution to a different problem.

All forms of credit and debt, including money, are promises to pay in the future, so the prescription to bring future spending forward most certainly means a massive expansion of the injections of the drug that produced the current mayhem. The system can’t survive without it. New Labour already has accumulated record debt, and some doubts have already been raised about the availability of enough lenders to fund the new borrowing needed to bail out the bankers. Where will these additional lenders be found? When they fail to materialise, will the government simply print money?

With many of world’s banks and corporate behemoths - Ford, GM, Chrysler, GE on the point of bankruptcy, and most, including Starbucks in retreat, the cost of limiting the recession and preventing or even reducing the looming prospect of a depression, will be too great. There’s simply not - and can’t be - enough real value in the economy to service the debt already accumulated during the last years of globalisation. It’s why we have the present crisis.

The vast unimaginable gulf between the value of global production, even before the recession set in ($65 trillion), and the monstrous imploding balloons of credit and debt ($550 trillion in the credit derivatives markets alone – this is a small fraction of the total) puts the few trillion guaranteed to the banks into perspective. There is not, and reflation cannot provide sufficient real value in the economy to stave off the financial hurricanes still building to force 5 and beyond.

In any case, tax rates are at rock bottom thanks to decades of Tory/New Labour policies; UK consumers are weighed down with personal debt (with millions now in negative equity); tax income from medium-sized business is falling away (the transnational corporations hardly pay any tax in Britain); and unemployment is growing rapidly throughout the world. The global crisis is now penetrating China, with that country’s export markets in a state of collapse.

The sudden infatuation with Keynes (even the right-wing Daily Mail is on board) should also come with a health warning. Claims that Keynesian policies were working before World War II are simply not true. Unemployment in the United States – where his theories were put into practice by Roosevelt – remained persistently high until the preparations for war began to reflate the economy.

A return to growth was only possible once the overcapacity produced in the speculative frenzy of the run up to the Wall Street crash 1929 was destroyed in the war itself. And then, when the orgy of destruction abated (including the slaughter of 60 million people) Keynes was once again called upon to provide a means of restarting production and capital accumulation, at Bretton Woods. And, lest we forget, that agreement broke down in crisis by the late 1960s.

What all this shows is that are no simple, state-led fixes to the recession we are now in and that leaving power in the hands of New Labour and their corporate/financial friends is a recipe for large-scale social disaster.

Gerry Gold
Economics editor

A Sunday crash on Wall Street

It has come to something when the right-wing Daily Telegraph starts talking about the possibility that "capitalism is collapsing under the weight of its internal contradictions". But with Lehman Brothers, one of the world’s biggest investment banks going to the wall overnight, and another, Merrill Lynch, disappearing in a rescue takeover on the same day, you can understand the paper’s concerns.

Sunday’s Wall Street crash with its echoes of 1929, followed by a sea of red on the London stock market, is a qualitative turning point in the debt-driven financial crisis which surfaced in the summer of 2007. The US government took the ailing mortgage companies Freddie Mac and Fannie Mae – both created by Washington in the 1930s – under its a wing only a week ago. Seven days later, the Federal Reserve was not prepared or able to save Lehman Brothers or Merrill Lynch. Instead, America’s central bank is allowing securities firms to swap shares for short-term loans, which sounds like a recipe for further disaster.

With one of the world's biggest insurers, AIG, seeking a $40bn bridging loan after reeling from losses on its exposure to property and financial insurance deals, the global financial system has entered into the unknown. The crisis has developed a momentum all of its own, where state interventions are unable to deal with the outcome of those infernal “internal contradictions” referred to by the Telegraph (which doesn’t, however, acknowledge Karl Marx’s analysis of capitalism as its source).

The Telegraph is unable to explain what these contradictions are, preferring instead to lambast central bankers for keeping interest rates too low as the cause of the crisis. But as A House of Cards explained, the contradictions are more profound. They centre around capital’s need for constant expansion and the spawning of incalculable amounts of corporate, state and personal debt in the process. Converting debts like mortgages into credit seemed an easy way to make money – until the economy went into reverse.

In the end, the Telegraph cannot grapple with the contradiction of being a paper of the big business and the Tory party and insists that “the free market remains our best hope” for coming out of the crisis. This is not such an outrageous view as it first appears. In the absence of a non-capitalist alternative, global capitalism will eventually emerge from the crisis – at a price. This is the crucial lesson of the history of capitalism.

Previous slumps and crisis were “solved” – through the destruction of capital and jobs (25,000 worked for Lehman Brothers and 2,500 the XL holiday company), homelessness and poverty, authoritarian rule, fascism and world wars with their tens of millions of dead and injured. This is how the “free market” sorts out the internal contradictions of capitalism and is a price we cannot afford to pay. The growing political instability in Britain, with New Labour in permanent turmoil, the Lib Dems moving sharply to the right and the ugly face of state-sponsored racism coming to the surface, are intimately connected to the economic and financial crisis.

These are the issues that have to be addressed, for example, by this weekend’s Convention of the Left in Manchester. Building a movement that can mobilise to create not-for-profit, commonly-owned enterprises and banks as an alternative to the capitalist market economy is the priority. This is the focus of A World to Win’s Stand Up for Your Rights festival on October 18 which you are warmly invited to take part in.

Paul Feldman
Communications editor

Policies for a crisis without precedent

The global financial crisis, which this weekend claimed the giant investment bank Bear Stearns and led to a hysterical response on world stock markets, has no precedent. Comparisons with the Wall Street crash of 1929 or even the “bankers’ panic” of 1907 don’t even begin to get near the essence of the crisis.

Bear Stearns, the fifth largest investment bank in the US, was sold for just $230m. This was a tiny fraction of its value a year ago – before it became one of the early victims of the end of the 60-year credit-led boom (see our blog Financial 'Katrina' begins to blow , June 2007). The bank is the latest in what is becoming a torrent of failures. Global investment giant Lehman Brothers looks very shaky. In the UK, big names like Barclays, HBOS – owners of the Halifax - Alliance and Leicester are in the frame.

But however far back you look on any scale, previous events are dwarfed by the yawning gulf that had grown between the billowing clouds of credit blowing around the world - Marx appropriately called it “fictitious value” - and the real value in the global economy produced by human labour.

Attempts to pour more money in to stem the panic have the same effect as assurances from Brown and Bush. More panic. Stock market meltdown. Soaring prices for oil, gold and food. Mortgages becoming scarce, expensive, or just simply unobtainable. The Bank of England tossed another paltry £5bn into the collection plate yesterday, but it got sucked into the vortex of the tornado and scattered into the air, like so much confetti.

The Financial Times, the voice of global capitalism, has given up on government action, preferring divine intervention. After Martin Wolf’s call to prayer last week, assistant editor Gillian Tett has this to say : “For as anyone with a classical education knows, credit takes its root from the Latin word credere (‘to trust’). And as the current credit turmoil now mutates into ever-more virulent forms, it is faith – or, rather, the lack of it – that has turned a subprime squall into a what is arguably the worst financial crisis in seven decades.”

If they’d all taken the trouble to read the review copies of A House of Cards, from fantasy finance to global crash we sent them four months ago, they wouldn’t have been so surprised by events. Our book tells the story of the credit-led growth of global corporations and the dismantling of regulation. It explains the objective necessity – for the capitalist economy - of this process of expansion at all costs, and how consumers had to be fitted up with debt and seduced with three-for-the price of two offers, buy now - pay later, go large.

A House of Cards doesn’t take up much space asking how bad the crisis can get. We’re more concerned to move forward through proposals aimed at composting capitalism.

We put forward the following principles as a way to act globally by starting locally:
• ownership of production facilities of the major corporations and of land and water through a variety of forms of co-ownership
• democratic control and self-management of economic and financial resources, including public services
• productive capacity shifted towards satisfying need rather than generating profit
• ecologically sustainable production and distribution
• encouraging and supporting small-scale enterprises, creative workers and farmers to work sustainably
• favouring local production for local needs
• facilitating the development of the “thinking market”.

Humanity has arrived at an historical crossroads where we face key decisions. Capitalism has its own “solutions” to the crisis: financial and economic disorder, war and dictatorship. The development of a global society based on co-operation, co-ownership and sustainability offers another way forward. This is nothing less than a challenge for power over capitalism and its political system. Get a copy of A House of Cards. Read it. Help us to build A World to Win as a movement that can inspire people to take the path of revolutionary change.

Gerry Gold
Economics editor