Will the stock-market crash of 21 January continue, or ease? We don't know. But what about the monolines?
The monolines? They are a fairly specialised part of the financial sphere. Yet their current crisis could have huge repercussions. That is how capital works. Hiccups in the tricks and speculations of tiny cliques of financiers can wreck the livelihoods of millions.
In early 2007, low-security, high-interest mortgage lending in the USA went into crisis. By the end of 2006, those "subprime" mortgages totalled about $1.5 trillion, of which $600 billion had originated in 2006 alone.
A lot of people had taken out mortgages they couldn't afford in the hope that house prices would keep soaring and so they would be able to get a new mortgage, based on an increased value of their house, to pay off the first mortgage. As soon as the house-price spiral slowed, they were sunk.
By early 2007, 15% of those mortgages were in foreclosure or sixty days or more in arrears of payment.
Why did that sectoral crisis spread? The mortgage companies had gone in for clever high finance. Rather than just holding on to the mortgages and waiting for the regular payments to come in, they reaped their profits faster by "bundling" the mortgages into pieces of financial paper – certificates promising to pay such-and-such a rate – and selling them on.
And then those hundreds of billions of dollars of paper value had spread through the system by further trading, and by new pieces of financial paper in turn being based on them, so that no-one knew where the dubious credit was, or who would suffer if the bubble burst.
That is why the "subprime" crisis was followed in late 2007 by the bosses of huge investment banks like Merrill Lynch and Citigroup losing their jobs, after their companies had to "write down" billions – i.e. admit that much of the financial paper they were holding was worth only a fraction of previous valuation.
But eventual losses are likely to be much greater than those "write-downs". That is where the monolines come in.
Financiers are not fools. If they buy dodgy paper, even offering high returns, they want some insurance. Monolines are companies which, for a fee, insure bonds.
They used to insure bonds issued by small local authorities. It was fairly safe business. In recent years, they have started insuring much more exotic bonds, some based on the mortgage-based bonds.
They have suffered large losses, and now the financiers are not sure that the insurers are sound. On Friday 20 January, the second-biggest monoline in the USA, Ambac, lost its triple-A (i.e. "very safe") rating.
The Financial Times quotes a financier's comment that this "has opened up a very nasty scenario. Financial institutions may very well face another hefty round of write-offs, which would reduce their future potential to extend credit to business, thus causing a vicious spiral to develop".
Another financier said: "There are no public markets open to the monolines in their quest to raise capital... The only solution that would enable triple-A ratings to be retained now is a coordinated bail-out by banks and/ or politicians".
All this is rooted in the very nature of capital. A capitalist boom means rival capitalists racing to be first to grab the expanding loot and get into position to stamp on the slower ones. By its nature, it breeds debt-bubbles, speculation, unsustainable floods of investment in particular areas, and downright swindles. (Remember Enron, which went down in the wake of the dot.com crash!)
As Marx put it: "The whole process becomes so complicated [with a developed credit system]... that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash... Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place".
Once credit has been shown to be overstretched, it shrinks; and when it shrinks, speculation that previously might have been sound now in turn becomes "excessive". No capitalist can afford to offer easy credit when others are tightening. The "debacle" comes at a point when many business failures or outright swindles have developed and had been hidden only because of easy credit.
The credit squeeze snowballs, and beyond the financial markets into trade and production. Fewer capitalists make new productive investments. Workers are laid off. Both capitalists and workers cut spending. And so production lurches down another round of the spiral.
On top of the basics, the last 20 or 30 years have added something new.
As a reaction to the crises of the 1930s, up to the 1970s credit and banking were quite closely regulated in the big capitalist economies. That was the era of “managed capitalism”, the era when social-democrats smugly imagined that capitalism was becoming more and more “socialistic” every year.
The crises of the 1970s produced the opposite reaction to those of the 1930s. Economies were deregulated and privatised — initially, mostly, as a ploy to meet more intense global competition and to turn the blade of that competition against the working class. Those measures “worked”, as slicker credit set-up generally does for capital, to make the system more flexible and agile. But they also store up vast instabilities.
The ratio of global financial assets to annual world output rose from 109% in 1980 to 316% in 2005 (and 405% in the USA). The processes are more complicated and opaque — and have become still more complicated and opaque in recent years. A new sort of bit of paper, called “credit derivatives”, has expanded from zero ten years ago to $26 trillion today.
A recent survey finds: “The Recent Period... more [financial] crisis-prone than any other period except for the Interwar Years. In particular, it seems more crisis-prone than the Gold Standard Era, the last time that capital markets were globalised as they are now”. (Franklin Allen and Douglas Gale, An Introduction to Financial Crises). The Asian-centred financial crisis of 1997, and the dot.com bubble-bursting which started in March 2000, were both substantial crises, although they did not become full global slumps.
Three factors might restrain this crisis. First, increased rates of exploitation have pushed industrial profit rates fairly high, and so industrial firms have some protective fat. In the UK, in fact, the average profit rate was 16% in 2007 quarter 3, the highest since the current run of statistics started in 1965. Usually, profit rates sag in the later stages of a boom, before any actual crisis.
Second, Citigroup and Merrill Lynch were able, on 15 January, to replenish their shaky reserves with $21 billion invested mostly by the governments of Singapore, Kuwait, and South Korea. Oil states, and manufacturing-exporter Asian states, have vast stocks of dollars available to lend. According to The Economist magazine, so-called "sovereign wealth funds" based in poorer countries have put a total of $69 billion into restoring the reserves of big Western investment banks.
On the same sort of lines, China and other big export-surplus countries are still buying US Treasury bonds, and so the economic turmoil in the USA has resulted in only a gentle relative decline of the value of the dollar compared to other currencies.
As economist Brad Setser puts it, "the world's central banks aren't adding to their [dollar commitments] because they want more dollars. Rather, they fear the consequences of stopping".
Towards the USA, the rest of the world, with its huge dollar holdings, is like the bank in Maynard Keynes's saying: "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has".
The consequences would be on quite another scale from anything seen so far. The USA has a huge trade deficit. Without that being balanced by the inflow of investment money from Asia, the USA would see a dramatic drain of dollars, and a collapse of the relative value of the dollar. But the dollar is still the keystone of world trade. A collapse of the dollar would mean an implosion of world trade.
All these countervailing factors are, however, limited. Nouriel Roubini, a US economist who has been warning about the credit crisis much longer than others, and has had his warnings confirmed pretty well so far, summed up his conclusions on 21 January: "First, the US recession will be ugly, deep, and severe, much more severe than 1990-1 and 2001. Second, the rest of the world will not decouple from the US".
In the USA, housing starts are already down 38% (from December 2006 to December 2007), house prices are slumping, and recession is clear. On 22 January the Federal Reserve cut its "federal funds" interest rate to 3.5% - the same as the USA's rate of inflation, meaning that you can (or rather, banks can) borrow effectively interest-free in the USA. Further cuts by the Fed will mean it effectively giving money away ("negative real interest rates", as in the 1970s).
The UK has not had an actual recession since 1990-2. Manufacturing went into recession in 2001, but not the whole economy. People under the age of about 30 generally have no living memory of a recession.
That is not because, globally, the system has become more stable. It has not. In large part it is luck. Capital got a big boost in 1989-91 from the collapse of Stalinism in Eastern Europe and Russia; the UK, uniquely well-connected to the markets of both the USA and continental Western Europe, has done relatively well in capitalist terms.
But the "successes" of UK capital could well contribute to crisis hitting harder here than in other countries. For example, "private equity" banditry - where capitalists borrow money to buy out companies, chop them about, and then sell them off again a few years later at a higher price - has been proportionately bigger in the UK than even in the USA. It depends on high levels of debt and quick returns.
A study of "private equity" published in November 2006 by a Greenwich University researcher quoted officials as saying even then that these deals "make companies more vulnerable to swings in the economy" and even that "the default of a large private-equity-backed company is increasingly inevitable".
The vastly disproportionate place of international high finance in the UK economy - "financial and business services" are now reckoned at 30% of the economy - also makes the UK more vulnerable.
Jack Straw seems to feel more of a need to theorise than other New Labourites,. In a recent Fabian lecture he repeated the argument he made at the time of Labour abolishing Clause Four (its nominal commitment to public ownership and to "the workers by hand and brain") in 1995.
"The choice at elections was often presented as one between competing whole life systems. No more. In the key ideological battle of the twentieth century, western liberal capitalism emerged the clear winner... Some of the argument now is more shades of grey, more technocratic, more about the means than ends".
Western capitalism was of course the winner against Stalinism. But against socialism? No! Capitalism is not the only "whole life system" possible, nor even tolerable. It is a limited, inherently inhuman and destructive, system.