On a knife edge

Share markets around the world suffered another roller-coaster day yesterday as nervous traders decided it was a good time to sell. Everything points to the most dangerous moment for global capitalism since the autumn 2008 meltdown.

Many and varied reasons are being cited by the traders who sold (and later bought) shares during the day, moving huge sums to (relatively) safer places, including US Treasuries and German government bonds.

The Financial Times’ Chris Giles blamed Europe’s sovereign debt crisis, which, he said, “sent shock waves across the world as it proved that the recovery from the great recession was neither steady nor guaranteed.” It sounds authoritative and convincing.

"The main reason for the fall in South Korea, is the risk of war with North Korea," said Kim Joong-hyun, a strategist at Shinhan Investment in Seoul. The warship was sunk two months ago, on March 26, and North Korea’s leader Kim Jong Il has now severed all communications with the South.

The US Dow Jones sank below 10,000 due it was said, to disappointing news of falling house prices. New regulations on US financial institutions are adding to the problems, threatening banking profits. Credit in the US has been shrinking for two years - overall bank lending is down more than 20% percent from where it began 2009 - and Obama’s legislation has been under way for months.

In London, the FTSE 100 index of Britain's biggest companies dropped 2.5%, falling below the 5,000 mark to 4938. It was shadowed downward by markets in Germany, France and Spain. Here the reason given for the collapse was an instruction from the International Monetary Fund to Spain’s government to sort out its bankrupt banking sector. At the weekend, the Bank of Spain seized Cajasur, a small but troubled savings bank and trade unions have started preparations for a general strike.

Each of these and many other different localised “explanations” for market movements reveal aspects of the crisis in each region of the global economy. Others are searching for a connecting thread. Washington Post staff writers Howard Schneider and Neil Irwin believe they have found one in the realm of politics:

“The knife-edge psychology currently governing global markets has put the future of the US economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.”

They suggest that one false move could lead to a sovereign default in Europe, adding: “Bank holdings of European debt are now being studied with the same focus given to holdings of US mortgage-backed securities as the global financial crisis unfolded in 2008 - and with the same suspicion that problems in one part of the world could wreck others.”

What they are describing is a universal crisis of the capitalist system, brought about by decades of attempts to offset falling rates of profit with pumped up balloons of credit- and debt-led growth. Politicians and states are struggling in vain to keep up with the unravelling that began two years ago.

The crisis makes its appearance in the realms of the economy, in international relations, in the crisis of the democracy and the state, in the tipping of the planet’s ecosystems into irreversible changes, and in the degrading commodification of culture.

Many new people joined A World to Win on the revolutionary road at our conference last weekend because not one of these parts of the crisis can be resolved on its own or within the economic and political framework of capitalism. You should make the same choice.

Gerry Gold

Economics editor

Prayers as 'the great unwinding' claims another casualty

Guests on last night’s Newsnight (BBC2) talked about a ‘crumbling house of cards built by the capitalist financial system’. They weren’t talking about our book A House of Cards, from fantasy finance to global crash but they might as well have been. Instead, they were discussing the latest bankruptcy of a major financial group.

This time it is Carlyle Capital Corporation (CCC), a $22bn mortgage-backed securities fund. As the Financial Times put it, “CCC represents one of the most dramatic casualties of the great unwinding that is occurring in the financial markets as lenders pull back from risk. The fund, which had $31 of debt for every $1 of its own, had hoped to use its massive borrowings to generate higher returns from investments in highly rated mortgage securities.”

This latest collapse panicked the stock market, led to further falls in the dollar, drove commodities to new records and delivered a sharp blow to chancellor Alistair Darling’s belief that slowing growth and increasing inflation are only temporary – the naïve reassurance at the heart of his first budget. If anything was clear from Wednesday’s speech, it was a tacit admission that there aren’t any measures New Labour can propose to match up to the severity of the escalating global financial and economic crisis.

Its scale and spread renders any national government incapable of defending its economy against global storms. The world’s central banks have thrown at least $100bn at the markets this week – all to no avail.

Darling’s speech was peppered with phrases which passed the buck – there’s a “slowdown in the global economy”, “turbulence in global financial markets”, “significant disruption across many credit markets: with a number of them barely functioning at all”, and falling global stock markets pose “a major risk to the world economy”. Despite this, he remains confident about the relative strength of a British economy which is utterly dependent on the fate of the global financial system.

Later that day, the International Monetary Fund’s first deputy managing director, John Lipsky told it how it really was. Things are bad, and are going to get worse. “Policy actions worldwide, so far, "may not prove to be adequate" to deal with the "low probability but high impact events" that may materialise and undermine global financial stability. Policymakers as a matter of course need to `think the unthinkable,” and to consider how they would plan to react if contingencies arise. The need to prepare systematically for potential risks has been demonstrated amply during the past few months." This was hours before CCC hit the headlines. He must have known.

In a stark admission of the failure of the IMF’s policy of unregulated, free markets Lipsky said: “I fully recognise an appropriate role for public sector intervention after market solutions have been exhausted.” Some support there, then for Darling’s Northern Rock rescue, and a strong indication that further vast sums of public sector money will have to be diverted into more ill-fated attempts to shore up the global capitalist economy.

Perhaps most worrying is the way Darling proposes to deal with the threat of climate change. “There will be catastrophic economic and social consequences if we fail to act,” he says. But, in a move hardly noticed by green critics, and certain to negate the other wholly inadequate measures he announced, Darling is going to offset the arrival of Peak Oil by reforming “the North Sea fiscal regime to help incentivise investment and support production”. This will maximise the “economic recovery of the UK’s oil and gas reserves”, he says.

More profits from more fossil fuel? Maybe the FT’s Martin Wolf was right in his conclusion to Tuesday’s column about the financial crisis: “We must pray.”

Gerry Gold
Economics editor