Fear and panic greets Davos elite

The fear and panic stalking the world’s stock markets is the surest expression that a global economic recession is under way with the potential to become a catastrophic, full-scale slump. What shape this will take is impossible to predict, but it would clearly involve the destruction of capital and assets on an unprecedented scale throughout the global capitalist economy.

The developing crisis also has dramatic political implications because it is self-evident that actions at state or even multi-national levels have small to non-existent impact on the underlying problems. These revolve around the classic capitalist tendency to over-produce which, on this occasion, is accompanied by vastly inflated financial assets whose foundations resemble a house of cards.

In Britain, for example, New Labour is so desperate to prevent the Northern Rock bank from collapsing that it is essentially giving it away as a present to political friend and entrepreneur, Sir Richard Branson. Taxpayers are being tied into the deal to the tune of £50 billion with absolutely no guarantee of getting their money back. All this to try and prop up a relatively minor bank. There are absolutely no prospects of this operation being repeated on a wider basis as bigger banks run up the insolvency flag. Government finances are already in a parlous state, with a record borrowing deficit of nearly £8 billion in December alone.

So when the world’s economic and political elite meet in Davos tomorrow for their annual conference, they will have plenty to think about. Instead of congratulating themselves for being masters of the universe, they confront a global economy that is unravelling before their eyes and which they can do little about. For example, a Credit Suisse research note says: ““What we are seeing now has the hallmarks of both a financial shock and the beginning of a [US] recession, or at least of growth grinding to a halt.”

Despite the dramatic falls in share prices, many believe there may be worse to come. “We believe the trough is not reached yet,” said Teun Draaisma, European equity strategist at Morgan Stanley. Justin Urquhart-Stewart, of Seven Investment Management, warned: "There is a very good chance of a retail-led recession and, although the market will recover, trying to judge when it turns is like trying to catch a falling knife.” Even the usually optimistic International Monetary Fund described the global economic situation as "serious".


Economic crisis always results in social and political changes too, usually for the worse if corporate and financial power has the say. For working people it will mean cuts in living standards, unemployment and a loss of public services. Politically, the danger is of a turn towards even more authoritarian, anti-democratic rule accompanied by nationalist and racist rhetoric as the old ways of rule prove ineffectual.

In the 1930s, following the 1929 Wall Street crash, the slump created the conditions for the rise of Nazi Germany and led inexorably towards World War II. The horrific destruction of lives and productive capacity became the basis for the subsequent post-war economic revival. Humanity cannot afford to allow a similar process to work itself out. The economic recession cannot be prevented but the road to slump and political reaction can be averted by popular mass action. This will involve a thorough-going revolutionary process to extend democracy in new ways. It requires a strategic plan to remove economic and financial power from the Davos-style elites and the transfer of political rule into the hands of ordinary people. To paraphrase Margaret Thatcher and Tony Blair – there is no alternative.


Paul Feldman
AWTW communications editor

IMF paralysed as crisis grows

The mass of red covering the trading screens of stock markets from Asia to Europe this morning confirms that attempts to wish away the credit crisis by marking up share prices in the last few weeks has come to grief. Adding to the uncertainty was the total failure of the International Monetary Fund’s annual meeting in Washington to offer anything but platitudes. The IMF is increasingly seen as an irrelevance, with events far beyond its reach and control.

In today’s Financial Times, Chris Giles comments: “Many of the fund’s most powerful members were angry that the IMF was so feeble just at the time it should be centre stage. The global credit squeeze was, after all, truly transnational, having its roots in the US sub-prime mortgage sector, but its consequences spreading worldwide. The fear, privately expressed by central bankers, is that the credit squeeze is the first of many disorderly episodes that will result from the huge global trade imbalances that have emerged over the past decade. These have kept interest rates artificially low worldwide and encouraged reckless lending.”

At the epicentre of the global economic and financial storm is the United States, where Wall Street fell a dramatic 367 points last Friday amid growing fears that the sub-prime housing market mortgage crisis was far from over and that the economy was heading for recession. Selling on Wall Street started when the building equipment firm Caterpillar cut its profit forecast, blaming the state of the economy, and lower-than-expected earnings from Wachovia, the fourth largest bank in the US. This is against the background of a dollar that is in freefall - the consequence of massive trade and government deficits - and the refusal of countries like China to revalue their currencies.

The IMF was supposed to discuss the dollar’s crisis but failed to do so. It was planning to make proposals about what countries like China and Saudi Arabia could do with their massive dollar holdings and came up with with nothing. David Dodge, the outgoing Canadian central bank governor, was disappointed. “This is precisely the time we need the fund’s ability and skills to deal with global imbalances,” said and warned: “The longer the imbalances go on, the greater risk that we will end with a rather messy denouement.”

This is a banker’s way of talking about a crash and global slump. All the signs point in that direction. The globalisation process was fuelled by credit which has now turned into totals of debt that are impossible to calculate. This debt itself has been sold and resold by banks using fantastically complex derivative packages that hardly anyone understands. In Britain, large parts of economic growth have become utterly dependent on house price inflation, with people remortgaging to buy goods like cars. Others have borrowed up to 10 or more times their income to buy homes at prices way beyond their financial means. People are in some cases reportedly using credit cards to pay their monthly mortgages. A collapse in house prices in Britain is entirely likely as the credit crunch continues to unravel. Meanwhile, at the IMF the US Treasury Secretary Henry Paulson declared: "Fortunately, the global economy's underlying strengths should limit the negative effects that the turmoil might have on global activity.” So that’s alright then!

Paul Feldman
AWTW communications editor