Q. Governments are now going to part-nationalise their big banks, offer cash in return for the banks’ dodgy assets, guarantee bank deposits, guarantee inter-bank loans, and promise not to let any big bank go bust. Will that fix the crisis?
A. In principle capitalist governments should be able to guarantee their domestic banking systems against collapse by sufficiently drastic measures of “bankers’ socialism”. Governments can always print money, so they can never be unable to pay their debts to people within the same country.
However, at least four problems remains.
One: more drastic measures of “bankers’ socialism” may prove necessary than announced so far.
Two: governments can become unable to pay their debts internationally, as Mexico and other Latin American states were in the early 1980s. A government may drive itself into international bankruptcy by big measures to save its banks from collapsing. Iceland seems near that point.
Three: some important governments can’t print money, namely, those in the eurozone. The European Central Bank, which has some relative independence from all the governments, and certainly independence from the economically weaker states in the eurozone, controls the money supply. A eurozone state in severe difficulties may be pushed into quitting the eurozone.
Four: even if the credit crisis is stemmed by these government measures, its “fall-out” in production and trade remains to come.
Q. Newspapers talked about the risk of a “collapse of the financial system”. What would that mean?
A. Banks becoming simply unable to lend. Big economies ending up something like Argentina in 1999, when financial crisis made the government ban all but very small withdrawals from bank accounts for a year. People had to get by for a year mainly with improvised currencies. Argentinian capitalism eventually revived, but only after huge chaos and losses.
Q. Why shouldn’t what the governments have already done be enough to stabilise the banking system? They’ve covered all the bases, haven’t they?
A. Possibly not. The problem is that there are vast masses of dodgy financial paper in circulation — sums far exceeding even the $700 billion credit lifeline that the US government has offered to its banks.
Take credit default swaps (CDS), for example. These are bits of paper which represent “insurance policies” which the buyer of other financial bits of paper (bonds, etc.) can buy to insurance themselves against the seller of the bond (or whatever) defaulting on payments due. In 2001 there was a total value of $919 billion outstanding in CDS. In 2007, $62 trillion — nearly a hundred times as much as the $700 billion lifeline.
But credit default swaps are traded. Bank A may have bought “insurance” from bank B, but in the meantime bank B has traded away the CDS — the income (“insurance premium”) due on it, and the obligation to pay up if there’s a default - to bank C. And then maybe bank C to bank D. Who knows what their “insurance” is worth now?
Q. It’s not fair, banks being bailed out. Shouldn’t we demand that the governments bail out ordinary households instead?
A. It isn’t fair, but we need to change the system rather than just the bit of it being bailed out. Banks are more vital to the functioning of capitalism than households are. If you want a system where households are more important than banks, you can’t just change government priorities within capitalism. You have to get rid of capitalism.
marxists and the crisis
Q. What’s the Marxist explanation of this crisis? How does it differ from what the papers say?
A. Capitalism is all about rival capitalists competing ruthlessly to grab the biggest and quickest profit.
Capital is value in movement — value self-expanding over time. It belongs to the essence of capital that capitalists want to keep it moving as fast as possible, and to push the expansion of capital beyond the underlying limits of the market. If they have cash in hand, they seek to make the money “work for them” by putting it into the financial system to return, at least, a rate of interest. If they decide on new buildings or equipment or other assets, they don’t wait until they have enough cash in hand, they borrow.
That produces an inherent drive for every boom to develop a credit “bubble” — every capitalist tries to “push the envelope”.
Q. I thought the Marxist theory of crisis was all about “the tendency of the rate of profit to fall”.
A. No. In Marx’s day it was accepted wisdom among economists that profit rates were tending to fall over time. Economists like Adam Smith and David Ricardo had ideas to explain this tendency. (Later, John Maynard Keynes would have an explanation, too, similar to Smith’s).
Marx rejected the theories of Smith and Ricardo, and in his manuscripts for volume 3 of Capital (which he never finished) sketched out an alternative scheme (much less mechanical, much more balanced with “counter-tendencies”) of the presumed tendency to fall.
Whether his sketch was right, and whether the tendency actually exists long-term, are moot questions. In any case, in his sketch Marx made only a tentative suggestion as to why the tendency should produce crises. The presumed tendency does not figure at all in his most important writings on crisis.
The “tendency” became elevated to central status in a supposed “Marxist theory of crisis” only in Stalinist writings of the 1930s.
Q. What is special about this crisis as distinct from other capitalist crises?
A. Many things. In particular, it is the nemesis of Thatcherism — or “neo-liberalism”, or “economic rationalism”, or “Reaganomics”, as the same doctrines became known internationally: abolition of exchange controls, floating exchange rates, deregulation, privatisation, contracting out, union-bashing, and generally redefining the role of the government as to make it country into a suitable perch for mobile global capital.
Thatcherism, as continued by Blair, Brown, and others, brought a vast expansion of “wild-west” global credit markets.
It was already known, long before now, to bring financial instability. So far its financial crises (1987, 1991-2, 2001) had been relatively limited in “real” impact. But it was only a matter of time before a bigger one came.
Q. So this is the end of that Thatcherite, “neo-liberal” era?
A. Not necessarily. There will certainly be more regulations. But it is not at all clear that capitalist governments will see a way to restore qualitatively more checks and balances, or have the will and ability to impose it if they do.
Global corporations organising their production globally — which have become more numerous and “global” in the last three decades — need global credit and “financial insurance” markets. What is “financial insurance” for the corporation seeking guarantees against movements in interest or exchange rates is, on the other side of the coin, “speculation” for the insurer, a bet that the insurer can judge the risks finely enough to make a profit on their “insurance” deals.
It is difficult for national governments to regulate a global system of credit and speculation. Even if the most visible excesses are curbed, there always tends to be room for a “wild west” in the shadows.
Q. The governments now control the banks?
A. They have nominal control. The British government has blocked Royal Bank of Scotland, HBOS, and Lloyds from paying dividends.
In practice the governments will control the banks as lightly as they dare, for fear of antagonising the bankers. They emphasise that nationalisation or semi-nationalisation is only a temporary step, to be reversed as soon as the banks are in good shape again.
Q. What sort of control would socialists recommend?
A. Socialism does not mean administrative planning, from the centre, of every economic detail, as practised in the Stalinist USSR. Trotsky, writing about the USSR, and not suggesting that his remarks were limited to a relatively undeveloped economy such as the USSR, poured scorn on “the superstition of administrative plan and the illusion of administrative prices”.
Money, wrote Trotsky, cannot be abolished administratively any more than the state can. It can only “wither away” when “the steady growth of social wealth has made us... forget our miserly attitude toward every excess minute of labour, and our humiliating fear about the size of our ration”.
In the meantime, given the public ownership of the big enterprises in trade and production: “The budget and credit mechanism is wholly adequate for a planned distribution of the national income”.
A workers’ government would seize control of the financial institutions, and of the big enterprises in trade and production, to direct credit and investment towards social need, rather than to what is most profitable to a greedy few.
By doing so, it would lift the burden of exploitation from wage-labour, enable workers to gain security of life and real control over their working lives and the aims of production, and gear the economy towards reducing the burden of drudgery, and increasing cultured free time, for all.
Q. In the meantime, what do we do about the threat to jobs?
A. Nouriel Roubini, the American academic economist who was the first to see this credit crisis coming, now expects a severe recession in the USA over the next 18 to 24 months, with unemployment rising to 9%. Other big economies will follow the same sort of pattern.
We should demand that working hours are cut, without loss of pay, to share out the jobs among those seeking work; and that the government expands public services, thus creating more jobs there.
Q. Expanding public services? Surely governments will cut public services because of the stress on their budgets caused by huge spending on bank bailouts?
A. In rational capitalist terms, they should not. Roubini, for example, writes: “it is necessary now to boost directly public consumption of goods and services via a massive spending programme... unemployment benefits should be sharply increased together with a targeted tax rebate only for lower income households... old-fashioned traditional Keynesian spending by the government is necessary”.
Whether the governments act in that rational capitalist way remains to be seen. But to fight for them to do so is not to fight for something which is inconceivable or utopian.
Q. What will happen to inflation?
A. All the financial pages say it will decrease. Oil prices have gone down. But te governments are, most of all, terrified of deflation — a steady trend for average prices to decrease. Deflation, as in Japan in the 1990s, would probably produce a very long depression.
To counter the risk of deflation, the governments are willing to pump cash into their economies in a way which only weeks or months ago they would have denounced as recklessly inflationary.
Inflation may not drop sharply. Demand automatic protection against cost-of-living increases as a bottom line in all pay deals.
Q. What can we do about housing?
A. Experts in the USA reckon that: “Before 2012 dies down about 6.5 million houses will be foreclosed”. Hundreds of thousands of people will lose their homes in the UK too, as credit tightens.
We should demand that public authorities take over all housing going into foreclosure, turning it into social rental housing at rents affordable to the tenants.
Q. Isn’t it too risky to go in for campaigns and strikes when the economy is crashing?
A. A severe downturn will increase fear and may tend to depress confidence for struggle. But that is not automatic.
Governments and bosses will try to use the crisis to their advantage, to force structural changes in the balance of class forces which will “stick” (to their advantage) in a later recovery. That is what the Tories and the bosses did in the recession of the early 1980s.
We should resist — or the working class will suffer from the effects of this downturn long after the downturn has finished. And we can resist. The outcome is not set in advance. The US working class came out of the depression of the 1930s more unionised, and with more union rights, than it went in. The wage share of national income rose then, rather than falling as it did in the 1980s.
Q. But socialists can’t do much unless strikes and trade-union activity increase?
A. Not true. In the period of the great rise of mass socialist working-class movements before 1914, the British and Australian labour movements had lots of strikes, and the German labour movement comparatively few. Even collective-bargaining arrangements were rare in Germany.
But Marxists universally regarded the German workers’ movement as the world’s most advanced, and the British and Australian movements as backward, because the socialist political self-education and organisation of the working class in Germany was far more advanced than in Britain or Australia.
Socialist political organisation can expand, and win concessions and victories, even while trade-union activism remains depressed. Above all, this crisis highlights the need, and creates openings, for socialists to change the thinking of workers and young people around us — to make new socialists.
Timeline of a crisis
17 February: UK government nationalises Northern Rock.
11 July: US government regulators seize control of mortgage company IndyMac.
7 September: US government nationalises the giant mortgage firms Fannie Mae and Freddie Mac,
15 September: One of New York's four big investment banks, Lehmann Brothers, goes bankrupt. Another, Merrill Lynch, is rescued by being taken over by Bank of America.
17 September: US government nationalises giant insurance company AIG. British government announces it will waive rules to aid takeover-rescue of HBOS by Lloyds TSB.
19 September: US Treasury Secretary Henry Paulson puts together plan for $700 billion government money to help out banks by buying up their dodgy financial assets.
22 September: Wall Street's last two independent investment banks, Goldman Sachs and Morgan Stanley, change their legal status so they can do high street banking.
26 September: Washington Mutual bank collapes – the biggest corporate failure in US history.
29 September: UK government announces Bradford & Bingley bank is to be nationalised.
US House of Representatives votes down Paulson's $700 billion bailout plan.
Belgium, Netherlands, and Luxemburg come together to save the Fortis bank by partial state ownership.
29 September: Iceland nationalises Glitnir bank. German government bails out Hypo Real Estate, the second-largest commercial property lender in the country.
30 September: Irish government offers 100% state guarantee on bank deposits. Belgian, French, and Luxemburg governments announce joint bail-out of Dexia.
3 October: Revised $700 billion bailout plan passes through House of Representatives. Netherlands government nationalises Dutch part of Fortis.
8 October: UK goverment announces £500 billion rescue package for banks, some of it to be used to buy part-ownership in them. Iceland's other two big banks, Landsbanki and Kaupthing, go bust. Icelandic internet bank Icesave announces it will block all withdrawals.
9 October: The International Monetary Fund announces emergency plans to bail out governments affected by the financial crisis.
14 October: UK government announces it will partly nationalise the Royal Bank of Scotland, HBOS and Lloyds TSB (buying shares, thus "recapitalising" the banks and becoming the biggest shareholder).
Eurozone countries say they will do similar with their banks.