The Crisis

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Autor: Hugo Radice* **

The global credit crunch has in recent weeks
become an all-encompassing crisis on global capitalism. Governments in many
countries have had to rescue their leading banks with massive injections of
capital, while many stock markets have crashed to levels not seen for twenty
years or more. So what is going on? Is this just a temporary crisis, largely
restricted to the financial markets and the result of excessive risk-taking by
US mortgage bankers, made worse by a minority of speculators in the mysterious
world of hedge funds? Is it a broader crisis of the Anglo-Saxon neoliberal
model of capitalism, leading to a return to greater state regulation, and the
curbing of speculative excesses? Is it an even broader crisis within global
capitalism, requiring a new Bretton Woods-style conference to create a system
of international economic governance that reflects the globalisation of
economic life and the rise of new economic powers? Or is it a crisis of capitalism,
an opportunity to put socialism back on the agenda?

A speculative bubble?

Right up until September’s spectacular busts
on Wall Street and in Washington - Lehman Brothers, AIG, Fannie Mae and Freddie
Mac - the consensus among academic economists, financiers and politicians was
that the credit crunch was fundamentally down to risky mortgage lending to
low-income households in the USA (the ‘sub-prime’ market), and the practice of
securitisation by mortgage lenders. These lenders found that they could
package up sub-prime loans into tradable securities, and sell them on to
investors. Because these mortgages had been taken out when interest rates were
very low in the early 2000s, their repayment record when sold on was very good,
with the result that the credit rating agencies gave the securitised loans a
risk-free AAA rating. As interest rates climbed from 2004 onward, and real
wages stagnated or fell for many poorer households, the number of mortgage
defaults steadily rose, until it became clear that many of the securities based
on the mortgages were now in effect valueless. Those who had bought the
mortgage-based securities from banks and building societies now refused to
continue doing so, with the result that banks like Northern Rock could no
longer finance their planned lending.

None of this would have led to a general
credit crisis, had it not been for the growth in importance in recent years of
the inter-bank loan market. Historically, banks have always relied on
short-term borrowing from each other, to provide money to meet immediate needs,
arising for example because of the timing of major loans or repayments. This
market has its own interest rate, the London Interbank Offered Rate or LIBOR,
and much of the lending was traditionally overnight or for a few days only.
But in the summer of 2007 the problem of ‘toxic’ mortgage debt, and the pyramid
of financial derivative products associated with them, suddenly made banks
realise that even these short-term inter-bank loans might be at risk, if a
borrowing bank actually collapsed through insolvency. This is exactly what
happened with Northern Rock: they could no longer find anyone willing to lend
them the money to fund the mortgages that they had issued. After that
collapse, banks in general became aware that they could not trust each other to
remain solvent and repay their loans. The result was a freeze on inter-bank
lending, forcing banks to restrict their credit provision more generally. Over
the subsequent months, the sub-prime crisis became more widely appreciated by
bankers and investors. Stock markets began to identify those banks particularly
at risk, driving down their share prices and making it impossible for them to
raise funds in any of the usual ways, such as share issues. Stronger banks
meanwhile sought to strengthen their balance sheets by injections of capital
from wealthy investors, especially the sovereign wealth funds set up by
governments in the oil-producing countries of the Middle East and the boom
countries of Asia.

For a year or so from September 2007, it
seemed that the sub-prime crisis could be contained. The restoration of
confidence - to be signalled by a revival of inter-bank lending and a lower
LIBOR rate - was delayed by occasional bank collapses, most notably that of
Bear Stearns, a second-tier New York investment bank, in April 2008. But most
commentators (myself included) expected that continuing dynamic growth in China
and India would allow the world economy as a whole to ‘grow out’ of the crisis,
with banks making sufficient profits from that growth to be able to write off
their losses from the sub-prime crisis. The continuing price rises in oil,
minerals and foodstuffs could only be because global growth was going to
continue: indeed, this justified the view of both the Treasury and the Bank of
England that inflation was still a serious threat, to be contained by keeping
interest rates high. The September 2008 crashes largely discredited this
optimistic scenario: it was no longer a sub-prime mortgage crisis, but a
general crisis of liquidity, in which any bank or investor with cash to invest
felt unable to trust any borrower. This collapse in confidence threatened the
entire global financial system.

A crisis of Anglo-Saxon neoliberalism?

That global financial system has, for the
last thirty years, been transformed by the rise of neoliberalism. This
economic ideology has been closely associated with the accession of Margaret
Thatcher in Britain in 1979, and Ronald Reagan in the US in 1980; it
represents a revival of the free market, free trade ideology of liberalism that
was eclipsed by the Great depression of the 1930s and the rise of Keynesian
policies of state economic management. During the 1970s, the postwar boom
fizzled out in the return of mass unemployment and the appearance of high
levels of inflation in much of the West. Conventional Keynesian remedies
seemed powerless to address the unprecedented phenomenon of ‘stagflation’, and
economics was transformed by the monetarist revolution led by Milton Friedman.
Friedman argued that inflation was always and necessarily due to an excessive
supply of money - "too much money chasing too few goods". This monetary excess
was in turn said to be largely caused by excessive public spending, which had
the further effect of "crowding out" private investment by absorbing too big a
share of available savings.

During the 1980s and 1990s, the new economic
doctrine developed into a universal model for economic policy-makers, centred
on the privatisation of the public sector, strict limits on public spending and
borrowing, lower taxation and the deregulation of markets for labour, goods and
credit. The model steadily spread from its UK/US origin, through its
imposition first on much of the Third World after the debt crisis of 1982, then
on Eastern Europe following the collapse of the state-socialist model in 1989,
and finally on the European Union in the form of the 1992 Maastricht Treaty.
This model came to be widely known as the ‘Washington consensus’.

The widespread triumph of neoliberalism has
been resisted in many ways in academia, in parliamentary politics and on the
streets. Although neoliberalism is often derided for being doctrinaire - a
"one-size-fits-all approach" has been a common criticism - like all really
hegemonic ideologies it has been applied very flexibly in practice, with
substantial variation across countries in almost every element of the model.
This is due not only to more or less effective resistance by its victims, but
also to objective differences in national circumstances. Such differences
arise partly from to variations in the size, living standards and degree of
international integration of different economies, and partly from different
inherited institutions and practices, for example in trade union organisation
or patterns of business finance. This has led many progressive academics and
commentators - for example, Will Hutton in his book The State We’re In
(1994) - to identify an alternative ‘organised’ or ‘coordinated market’ model
of advanced capitalism exemplified by Japan and Germany. Meanwhile the
travails of Africa and Latin America under the prescriptions of the Washington
Consensus was contrasted with the successful East Asian ‘developmental state’
model of South Korea, Taiwan and later (for some writers) the People’s Republic
of China.

Through much of September 2008, the critics
of neoliberalism were encouraged by the apparent limitation of the credit
crunch to the USA and UK, albeit with echoes in other countries such as Ireland
and Spain which had experienced rapid rises in house prices and home ownership.
It seemed that the solution lay in adopting the alternative non-neoliberal
model, and reversing the more extreme free-market policy changes such as the
radical deregulation of financial markets. But by the end of the month, it was
clear that banks the world over had been drawn into the financial black hole of
securitised sub-prime mortgages and the beguiling attractions of ‘Anglo-Saxon’
financial practices more generally. For all the apparent differences in
economic institutions and policy practice, the neoliberal approach had
penetrated deeply in the crucial areas of credit provision and monetary
management: as a result, however larger the role of the state might appear to
have been in continental Europe or East Asia, governments there were equally
incapable of decisive and effective public intervention.

A crisis of globalisation?

Meanwhile, the British and American
authorities were being driven to more and more desperate measures. As well as
the emergency rescues of particular banks, in mid-September US Treasury
Secretary Paulson proposed to allocate $700b of public funds to restore
confidence by buying up the ‘toxic debts’ seen as responsible for the
freezing-up of credit markets. Ironically, this approach had been widely used
in the former Soviet-bloc countries in the 1990s as they struggled to restore
capitalism. But now, far from solving the problem, this only made matters
worse: if the banks’ estimates of their own balance sheets had lost all
credibility, surely this was because neither they, nor ‘the markets’, had a
clue as to the real extent of the losses they faced, and the ‘true value’ of
the toxic debts. Clever economists proposed various forms of auction to
establish a ‘fair price’, but that was no use at all if no-one was buying at
any price.

By the time Congress finally approved an
amended package, with proposals to extend assistance to mortgage-defaulting
householders as well as the banks, it was too little and too late. Stock
market price falls obliged more and more banks and other financial institutions
to revalue their holdings downwards, putting them in breach of one of the few
remaining universal regulations - the requirement to maintain an adequate
capital base to cover the possible withdrawal of deposits. Thus the policy
focus shifted towards the urgent need to recapitalise banks; and with few
private investors (not even the sovereign wealth funds) willing to put up fresh
capital, the only choice was for governments to do so, in exchange for
substantial ownership stakes. Although Gordon Brown has been widely hailed as
the architect of this new approach, it had been very successfully deployed in
Sweden in 1992, and later with more limited success in Japan.

At this point, however, it quickly became
clear - above all with the collapse of the bizarrely over-extended Icelandic
banks - that ad hoc national intervention would simply transfer the
pressure and the panic to the next country in line. Step forward, at long
last, the International Monetary Fund, brainchild of the long-discredited John
Maynard Keynes. Ever since the devaluation of the dollar in 1971, and the
subsequent explosive growth of global private finance, the IMF had been
sidelined as far as the leading capitalist economies were concerned: although
it continued formally to coordinate balance of payments and exchange rate
policies, its last significant loan to a G7 country was the British loan of
1976, long since repaid from North Sea oil revenues. Instead, the IMF’s main
role - in which it was later joined by the World Bank - had been to force the
neoliberal model onto indebted Third World countries through its conditional
lending. At the time of writing, a rapid succession of summits is under way,
necessarily involving not just the G7 but Russia and other rising economic
powers: the time now appears to be ripe for a substantial and significant
restructuring of global economic and monetary governance. Meanwhile, the IMF
has a growing cue of countries at its door begging for bail-outs, starting with
Iceland, Hungary, Ukraine and Pakistan.

The crucial point here is that all previous
banking crises have been essentially national in character, even if their
solution has entailed loans from international institutions and policy
coordination with other governments. The present crisis is clearly a global
one, in the important sense of requiring a global solution. However, to see it
as a crisis of globalisation would imply that first, the crisis was
particularly the result of globalisation, and secondly, that it is now
both necessary and possible to roll back globalisation. On the contrary, what
we have come to call economic globalisation - the increased dependence of all
capitalist economies on international trade, investment and finance - was a
consequence, not a cause, of the neoliberal revolution. And going back to a
world of greater national self-sufficiency, which was advocated by Keynes in
1933 not because it was a safer system, but simply to deal with the collapse of
international trade and finance after the 1929 crash, would involve enormous
costs of adjustment which we would all have to bear.

A crisis of capitalism - with Keynes to the rescue?

Are we therefore witnessing a full-blown
conventional capitalist crisis - albeit the first one that is truly global in
scope? Certainly periodic crises in the ‘real economy’, in which economic
growth comes to a halt, profits and investment fall away and unemployment
rises, have been a key element in capitalism’s perennial economic cycles, and
it is normal for a credit crunch to signal the onset of such crises. The
exuberance of the boom leads to overconfidence on the part of investors, and
stock market speculation - using borrowed money - pushes share prices far beyond
what could ‘reasonably’ be justified by future returns.

And that is just the point: given the
pervasive uncertainty of capitalist markets, ‘reason’ plays second fiddle to
what the great Keynesian economist Joan Robinson memorably termed ‘animal spirits’.
When a credit-fuelled boom falters, panic sets in as everyone seeks the
relative security of money by selling whatever financial assets they can. But
these financial assets - shares, bonds, mortgages, or nowadays a vast and
incomprehensible range of so-called ‘derivatives’ - all have value only as a
result of entitling the holder to a share in the profits generated by
productive labour in the sectors that make goods and provide non-financial
services. In the end, it is the perception that these profits will be
insufficient to cover the inflated expectations of investors that drives the
panic selling. It appears as though the crisis originates in the
‘financial’ economy and then spreads to the ‘real’ economy; the reality is
that the two remain always intimately connected, and it is in the ‘real’
economy that the crisis has both its origins and its resolution.

At long last, the workers have come onto the
scene. What has been presented to us all as a crisis of credit or of markets,
unconnected to the everyday world of work, turns out to be all too real. Firms
respond to slowing sales growth by laying off workers and cancelling planned
investments. The emphasis shifts to cutting costs and improving productivity,
aimed at raising profits for any given level of output. Because all employers
do this at the same time, there are rapid knock-on effects on retail sales,
leading to further all-round declines in business orders. Today, because of
much higher levels of international trade, these effects are spreading rapidly
across global capitalism. The momentum of unprecedented economic growth in
China and India, and the spending of the vast recent accumulations of money in
oil- and minerals-producing states, can only mask the crisis for a while.

Given the dominance of consumer spending in
total global demand, it is rising unemployment and increasing concerns about
debt repayment that provide the focus of the next phase of the crisis. To
offset falls in private consumption and investment, Keynes recommended an
increase in public expenditure, to be financed by borrowing. In conditions of
recession, this is by no means inflationary, as the monetarists allege.
Investors of all kinds find that businesses and consumers now don’t want to
borrow from them, even when interest rates start to fall: the government is no
longer the ‘lender of last resort’ to the struggling banks, but the borrower
of last resort
for those with money to invest - they prefer to buy
government bonds with at least some return, rather than leave the cash idle and
earning nothing. Furthermore, it is certainly not the case that ‘eventually
taxes will have to be raised’: as and when recovery sets in, renewed economic
growth generates an even faster recovery in revenues, given progressive income
tax rates and stamp duty rates on house purchases, and rapid declines in
spending on welfare benefits. And lastly, the claim raised by diehard
monetarists, as in their letter to the Sunday Telegraph on 26 October,
that governments are not competent to decide in which sectors to invest, is
ridiculous: the present government proposes to bring forward infrastructural
investments in transport, construction, education and training, which by
definition will benefit all sectors.

Reform / transform: a socialist agenda

Faced with the prospect of a total collapse
of the world’s banking systems, there is no question that socialists should
support reforms at all levels, including state investments in banks, the
re-regulation of financial markets, and a restructuring of global governance to
reflect greater international interdependence and the rise of new economic
powers. But the resuscitation of Keynesianism needs to be supplemented by
initiatives that go well beyond the limitations of what remains an essentially
liberal-capitalist approach, in which capitalism is effectively saved from its
own self-destructive tendencies. Otherwise, once a recovery is inaugurated, it
will only be a matter of time before the propertied rich begin to chafe at the
restrictions placed upon them, and their cheerleaders in academia and the
commentariat initiate a renewed ideological push for a return to ‘free markets’
- that is, the unfettered rule of private property.

First, it is vitally important to insist that
the revitalised systems of state regulation and of global governance are not
designed and operated by the political, governmental and social élites alone.
Trade unions, still representing substantial numbers of workers in many
countries, need to find their voice again, after several decades of retreat
into compromise with employers under the rubric of ‘business unionism’. As
more and more workers worldwide bear the brunt of the downturn, they have the
right to expect their representative bodies to campaign on their behalf. While
the most urgent task is to fight to keep jobs and maintain or raise benefit
levels, unions should also press for a role for workers’ representatives in
directing the investments of their pension funds: they could hardly do worse
than the so-called financial experts who currently have a legally-backed
monopoly over investment allocation. Unions will also face calls for
postponing progressive welfare reforms, as has already happened in relation to
flexible working time for workers with family responsibilities; no doubt they
will feel strong pressures in workplaces to reduce the cost of health and
safety enforcement, to impose compulsory overtime instead of replacing
retirees, and so on.

Second, if governments are serious about
bringing forward public investments in infrastructure, all institutions of
civil society as well as local levels of government need to have a say in
deciding on the nature and scale of these investments. There is plenty of
evidence that people want such investments to be framed by a deeper commitment
to combatting the effects of climate change, for example by promoting renewable
energy, setting much higher environmental standards in the construction
industry, restoring the supply of publicly-owned housing, and investing in railways
rather than airports or roads. But the available funds could be massively
supplemented by simultaneous massive cuts in military spending, and really
significant increases in the taxation of the rich: we need to campaign to
ensure that economic renewal embodies a real commitment to peace and greater

Lastly, we need to take full advantage of the
disarray among the political right and centre - including all but the most
radical fringes of New Labour - to establish a new agenda that can at last
bring together the long-fragmented left, and abandon the ineffectual politics
of the so-called ‘social movements’. Hitherto, the only visible alternative -
or supplement - to energetic single-issue campaigning has been the conventional
political party. But for years we have witnessed the serial failure of all the
various attempts to create a new party of the left. These new parties do not fail
only because they are so often riven by inherited sectarian problems and the
baleful traditions of ‘democratic centralism’. They fail because, at a
fundamental level, they accept the liberal definition of politics as a realm
apart from society at large, focused on a state set above its citizens, and
practiced by a chosen few ‘militants’ who assume the right to determine the policies
to be placed before an otherwise supine and disengaged citizenry. In Leninist
theory and practice, the party is and must always be ‘ahead of the masses’,
forming an élite that, as history shows, will abuse whatever power it obtains.

An alternative politics of the left needs to
be founded on a radical reversal of this relationship. The ideas and the
capabilities that we need to build a socialist society are present in
capitalism today - this was a crucial step in Marx’s reasoning in claiming to
offer a practical critical foundation for socialist politics. And how rich
those ideas have been, at scattered times and places in the history of
capitalism. The cooperative movement built zones of real economic autonomy,
based on the democratic control of productive assets, supplemented by
initiatives in welfare provision. In the field of recreation and culture,
clubs and societies of all kinds continue to enrich peoples’ lives without
funding or organisation from private capital or the state. But it is at times
of economic collapse or under the ravages of war that working people have
always shown their real abilities, harnessing energy and ideas that in normal
times are simply wasted, and held to be of no account by our economic and
political masters: the creation of the first soviets in Russia in 1905, and
again in 1917; the revolutionary movements of the post-1918 period in many
countries; Catalonia in 1936 following the nationalist uprising; the
aftermath of World War II wherever the defeat of the Axis powers left a vacuum
of governmental collapse; the East European revolts of 1956, 1968, 1970 and on
to 1989.

Can such energies be mobilised in these new
abnormal times? Social collapse may still result if our rulers fail to resolve
the present economic crisis, and is already looming as a consequence of the
likely acceleration of climate change. But why should we wait until such a
collapse? Hidden in millions of workplaces across the world, workers of every
kind, regardless of education and skill (not to mention gender, race or
religion), cooperate willingly and actively in the production of goods and
services. For far too long, we have allowed our rulers to close off what Marx
called the "hidden abode of production", to separate it from society and above
all from politics as those rulers define it. Yet in the end, it is what we
produce and how we produce it that most fundamentally shapes the social
condition. If we are ever to realise equality and solidarity, as well as
freedom for all rather than just the propertied, we need to begin by
transforming our workplaces, as well as our wider communities, into arenas of
political debate. Otherwise, the only solutions that will be offered to us
will be those that first and foremost serve the interests of the rich and
powerful who control our present political order.

* Artículo del 4 de noviembre de 2008, enviado por el autor
como contribución al Foro. Subiremos a la página la versión en castellano una
vez completada su traducción.

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