Over the last several months, a crisis originating at the lower end of the US mortgage market has become, at least incipiently, a world credit crisis.
The immediate background to the credit crisis is a bubble, since about 2003, in low-security, high-interest mortgage lending in the USA. Corporations have made a buck by lending to house-buyers with poor credit records, at high rates of interest.
They allow for some defaults in payment. But when interest rates go up, and the house-price spiral slows or reverses, the defaults swell.
By the end of 2006, “subprime” mortgages comprised about $1.5 trillion, of which $600 billion originated in 2006 alone. By early 2007, 15% of all those mortgages were in foreclosure or sixty days or more in arrears of payment.
The crisis has spread, and is pecularly opaque, because of the exotic developments in world financial markets in recent boom times.
The mortgage companies do not just hold on to the mortgages and wait for the regular payments to come in. They bundle them together into pieces of financial paper — certificates promising to pay such-and-such a percentage on their face value — and sell them on, to reap their profits faster.
When the bubble bursts, not only do the mortgage companies get into trouble, but also other financial outfits, holding some of the certificates which have now become worthless.
In one knock-on effect, in the USA $250 billion of credit in the form of “commercial paper” vanished in the last three weeks of August.
More and more exotic forms of credit mean no-one knows what's happening: the capitalists face, as the experts put it, “unmeasurable uncertainty rather than priceable risk”. “A peculiar feature of this 21st century financial crisis is its opacity. Nobody knows where risk has ended up, which is why confidence and liquidity drained away in the first place”. (John Plender, Financial Times, 29 August).
Contrary to some claims that since 1980s we have entered an unprecedented new era of capitalist stability, a recent survey of the history of financial crises finds: “The Recent Period... more 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, and they affected Britain relatively little.
Not every financial crisis spills over into a crisis in production and trade, and I don't know whether this one will.
In the USA, for the first time since the 1930s, house prices are falling on a year-over-year basis.
The US car industry is already in recession; the whole manufacturing sector is sharply slowing down.
Unemployment is rising, employment is falling, and consumer spending, as well as capitalist investment, will be hit by higher interest rates.
How far that slowdown will go, I don't know. Profit rates are still relatively high in the USA, which is a factor working against, but not guaranteeing against, serious recession.
For now, industrial and trade growth is keeping up, except in the USA. “Growth in the euro area and in Japan... around two and a half percent [per year]...China and India... close to or above double digit rates” (IMF survey, 23 August).
The ability of central banks to counter slowdown by cutting interest rates is limited, since inflation has been gradually pushed up as oil prices have risen from about $20 a barrel in 2002 to $70 today (in 2005 US dollars).
The US dollar has slid slowly on the international markets from index 108 in 2002 to index 90 today. The way this crisis could become really huge is if the slide in the dollar becomes a collapse, and Asian governments and capitalists stop buying American stocks and bonds, thus bringing the USA up hard against the basic imbalances represented in its long-term gargantuan trade deficit.