The Crisis Revisited

by Sean Thompson

That light up ahead may not be the end of the tunnel…

Its incredible how fast this crisis is still moving. I wrote most of this paper a week ago, but since then the IMF has admitted that this is the worst global recession since the Great Depression and that Britain will be among the worst hit, Brown has described the situation as the first true crisis of globalisation and one which has no precedents. It has been announced that he total deficit in occupational pension funds has increased by 49% in a matter of weeks and more and more firms are now closing their schemes to existing workers. And significantly, we have seen the first signs of unrest among working people in Europe, with demonstrations in Russia, strikes in France and, despite its confused and ambiguous character, a wave of unofficial strikes by power industry construction workers in Britain.

A fortnight ago, I watched an interview with John Varley, Chief Executive of Barclays, in the course of which he demanded that the government buy corporate bonds and other financial paper from him and his fellow bankers. When asked how bad things could get, he thought for a moment and replied that we could slide into a Japanese type recession. It was then that I realised that he didn’t have any idea of how the crisis is going to develop; he was simply saying that if the banks weren’t able to offload their dodgy assets it was possible that we could be in the worst position he could imagine, and Japan in the nineties was it.

The fact is that none of the bankers, economists, financial journalists and other sundry ‘experts’ have a clue about what may happen in the coming year and in particular, none of them have any idea about how bad things are likely to get. Of course this isn’t a new phenomenon: when the business cycle is in its up phase the system appears to be more or less predictable and economists tend to claim God like powers of foresight and wisdom. However, when this phase comes to an end, as it always does, in a credit crisis and a rapid and disorganised fall, the system becomes chaotic and disorganised. While it is possible to discern possible outcomes during such chaotic transition periods (like the one we are currently in) it is impossible to make any categorical predictions, despite what various economists and politicians may claim.

Given the intensity of the current crisis there is a vast range of possibilities. The most optimistic (from the ruling class’s point of view), sees the current second phase of government underwriting of the banks stabilising the situation, unemployment topping out at 3.4 million and the recession bottoming out some time in 2010. The worst scenario is a global collapse of the monetary system. Such a collapse would lead to what Marx and Engels, in the Communist Manifesto, described as “the mutual ruin of the contending classes”. We have seen what such a collapse would mean in the experience of countries such as Weimar Germany, Somalia or Liberia. Such an outcome on a global scale would lead inevitably to local, regional and almost certainly, world war.

The events of the last few days show that the inbuilt need to maximise profits make the financial system unreformable. On 15 January, the ban on short selling was lifted. The very next day, short selling led to a 25% fall in the value of Barclays shares. The effective government control of a big slice of the British banking system has proved valueless because of the government’s aim to use that control in the short term interests of the banks rather than the long term interests of the people.
There is a strong possibility that the current round of state bail-outs will not succeed in either stabilising the situation or increasing the banks’ liquidity – and the first suggestion that the British government’s triple A credit rating might be in question came on 20 January and lead to a collapse of sterling against the dollar on 21 January. But if the bail-outs do succeed temporarily, they will just tend to replace the systemic contradictions that caused the crisis with contradictions between states and a tendency towards protectionism. Increased state borrowing or quantitative easing by one state (particularly the USA) will either be at the expense of other countries or will lead them also to print more money, which will lead to more political conflict and mutual stagflation.

This crisis is not just another credit crunch (albeit a massive one) of the kind so familiar in the history of capitalism, but the herald of a new phase in the development of the contradictions of the system. This is a crisis of what Paul Sweezy christened ‘financialisation’, the progressive shift in gravity from production to finance that has characterised the economy and which has been the main force lifting economic growth since the 1970s.

The contradictions within this financialisation of capital are leading to ever bigger bubbles that burst more frequently and with more devastating effect, threatening each time a worsening of the condition, endemic to mature capitalism, of slow growth, and rising excess capacity and unemployment/underemployment.

It is gradually becoming clear, to all but the most rabid neo-liberals, that financialisation, the structural transformation of the capital accumulation process in which the traditional role of finance as the servant to production has been stood on its head, with finance now dominating over production, has proved disastrous.

The only things that can done within the system to stabilise the economy is to dramatically expand state spending in ways that genuinely benefit the population and to carry out a really radical redistribution of income and wealth. While more far sighted economists and corporations might see the logic of such a course (in the mid thirties, Joseph Kennedy said that “he would gladly give up half his fortune if he could be sure the other half would be safe.”) the nature of capitalism is such that if a crisis ever led to their adoption, every attempt would be made by vested interests to repeal such measures the moment the crisis had passed.

And of course, neither of these proposals is on the agenda at present, except (in the case of public works) to the most minimal extent. Even the Green New Deal, which is easily the most radical of the Keynesian proposals currently being proposed, is modest to the point of invisibility when it comes to the issue of the redistribution of wealth.

One of the problems with the orthodox fiscal measure to increase demand - cutting income taxes - is that at the moment the rich will not spend and the poor cannot. There has been a reduction in the levels of unsecured debt over the last three or four months as people who are able to have reacted to the crisis by trying to reduce their debt as much as possible. Increasing the amount of disposable income of the prosperous (the usual aim and effect of tax reductions) will have only very limited effects of demand. However, any marginal increases in the disposable incomes of poor people is spent and thus has a directly stimulating effect on the economy as an increase in demand. So we should be looking to increase the social wage, in particular benefits to the poorest.

There is an urgent need to redistribute wealth away from corporate profits and towards wages in order to increase demand; We have to campaign at a number of levels, but our demands must relate to the every day experiences of working people. They are worried about the security of their jobs, they are worried about housing and they are worried about their security in old age, or if ill, disabled or unemployed.

Therefore, in addition to the programme we have previously put forwards in response to the Green New Deal we should be making the following additional demands:

• The banking system must be reorganised to meet the needs of working people rather than the banking institutions.
• Therefore, the state must hold a monopoly on the creation of credit based on a clear overall strategy for the use of that credit and the Bank of England must be transformed into the agency for implementing that strategy.
• The corporate finance and retail functions of the banks must be separated. Trading in derivatives and other exotic financial instruments must be banned and the debts acquired in trading in them cancelled.
• In the face of rapidly rising unemployment we must campaign for a 35 hour working week, for the banning of systematic overtime working and for the extension of parental leave to at least one year.
• We must campaign for a huge programme of social housing construction for the four million families of council and housing association waiting lists and for the upgrading of existing housing.
• We should be arguing for the immediate re-indexing of the retirement pension to national incomes rather than RPI, and its increase to at least the levels it would have been at if Thatcher hadn’t sabotaged it – around £160 a week. Other benefits should be increased by the same sort of order.
• We should demand that the state underwrites (in effect, nationalises) occupational pensions in short/medium term and in the longer term introduces a new universal SERPS which would incorporate existing state and private occupational pensions.

We are in an unprecedented situation and none of us can tell where we are heading. A complete global collapse of capitalism – which is now conceivable, albeit as a remote possibility – would lead to suffering and violence on an unimaginable scale, and would certainly lead to the development of authoritarian state regimes, including in Britain, that would be in continual conflict with each other. We would have arrived at 1984.

In such an uncertain environment we must try to mobilise working people for a defensive battle with the state, on the basis of the sort of demands raised in this paper and in our critique of the Green New Deal. But to do so, the left has to turn its back on historical divisions. Realignment of the left (and that includes the Green Party as well) now becomes an urgent necessity for its existence and an essential precondition for the development of a new mass party of working people.
Sean Thompson
February 2009