While Banks Have the Upper Hand, the Global Economic Crisis Will Continue
Because the state of the economy looms so large in the outcome of the 2012 presidential election there is a tendency on the part of those who would like to see the president re-elected to be optimistic about recent job creation, factory orders and other indicators that there may be light at the end of the tunnel. The reality may be very different however and the changes needed go far beyond what Mr. Obama is proposing or is likely to get now or in the new Congress. The stock market may be up but for working people the global political economy is likely to remain in crisis for at least another three to five years, with high unemployment and slow growth. The character of this period makes a grim cyclical crisis worse by adding to it both a financial component and a deeper structural crisis which challenges a model of accumulation dependent on financialisation and corporate globalisation. A year ago, then European Central Bank president Jean-Claude Trichet expressed the view that the next ten years could be a ‘lost decade’. Median income in the US declined by 7% between 2000 and 2010 and the Wall Street Journal’s poll of 50 leading business economists expects the losses will not be made up before 2021. These are not the testimonies of radical Marxists (who generally hold similar opinions).
It is obviously the worst crisis since the Great Depression and so is likely to go on for longer. There have been 88 banking crises over the last 40 years in a wide range of developing and developed countries. IMF economists conclude that on average in these countries output levels were 10% below pre-crisis levels, seven years after the crisis started. The crisis we are in now will have more damaging consequences than that.
There has been an over-accumulation of capital that cannot find productive outlets in increasingly unbalanced national economies (in which the rich demand and command more and more) within an unbalanced global economy. As a result, surplus flows to speculation which produces bubbles – rapidly rising prices that feed on euphoria and greed and then collapse, leaving many ordinary people suffering.
For the first decades of neoliberalism, the suffering was confined to the global South. Now, in the countries of the core of the world system, once relatively privileged workers are increasingly jobless and homeless. The right blames government spending and, even in the face of unacceptably high unemployment, demands austerity. In reality, there are greater demands on government in a downturn, while at the same time its income falls: with less economic activity less taxes are collected. It doesn’t help that governments throw money at capitalists in the misguided expectation that this will create jobs. In fact it simply fuels more speculation and increases inequality. As Harvard economist Kenneth Rogoff and former IMF chief economist Carmen Reinhart show, on average a modern banking crisis is responsible for an 86% increase in government debt in the three years following the crisis. With consumers unable to spend and businesses cutting employment until they see a market for increased production, only government spending can create jobs.
Behind this rapid increase in debt is a falling rate of profit in the real economy that produces goods and non-financial services. At the same time, transnational capital has continued to expand globally and quite profitably. In the neoliberal era (1980 or so to the present), corporate globalisation was highly dynamic, incorporating vast numbers into a single labour market that expanded by anything from 100% to 300%, depending on how conservative you are with your assessment. The incorporation of these workers in China, India and elsewhere has pushed wages down for other workers who now face the effects of this vast increase in labour supply on wages and job opportunities. The result has been a world-changing departure from a social democratic world in which labour’s share in productivity increases was stable. Now capital appropriates these increases almost entirely and, finding that it cannot invest it all in real investment, turns to speculative investments. The workers, hurt by these developments, are increasingly in the same boat regardless of where they live or who employs them.
We are now seeing the banks receiving back the effects of the continuing crisis of the rest of the economy. It is now clear that many European banks cannot withstand losses from expected defaults. They carry assets at unrealistically inflated paper valuations. This is why governments are doing so much to ‘save Greece’ and prevent contagion to other countries in crisis and potential crisis, including the much larger economies of Spain and Italy. The banks could be strengthened by raising more capital – something they should have been forced to do a long time ago. To do this would mean that they would have to sell shares. This would dilute the value of the shares of their present owners, so they don’t like this idea. They prefer government bailouts.
Another way to save the banks is to have the European Union as a whole guarantee the unpayable loans. This puts the taxpayers further on the hook. A great deal of the delay in allowing Greece to write-down its debt has been to allow time for the banks to dump these bonds by selling them to public authorities. The negotiated ‘settlement’ to the Greek debt is for those who own the bonds to take a ‘haircut’, as it is called (the bondholders will get less than the debtors owe – in the case of Greek debt maybe 40 to 60% less. The more they squeeze the Greek working class the more they will get). The reason the European governments cannot easily agree on how to address the crisis beyond short-term expedients is that they have conflicting interests as to who will end up paying for the mess.
What they do agree on is squeezing the working class as hard as they can. Austerity does two things:
- It protects capital from being forced to write off debts it cannot collect. The strategy is to squeeze the working class to the limit and then have government assume as much of the rest of the unpayable debt as they can (collecting again from the working class this time in their role as tax payers).
- It prolongs and deepens the economic crisis as people have even less money to spend and there are fewer jobs in both the public and private sectors. Corporate profits are maintained and in many cases increased in a period of crisis by closing plants, firing workers, and forcing more concessions out of those afraid of losing their jobs. Governments also make concessions, appearing to understand no other way to promote economic activity than to accept corporate blackmail. As a result the crisis drags on.
If austerity creates unemployment and slow growth, what is its purpose? The bond holders who lent to governments are mostly wealthy people and large financial institutions. If Greece defaults, French banks don’t get their money back. France doesn’t have enough money to bail out its banks once panic develops, so the government and the banks lobby together to avoid having to face up to reality. Instead they propose tax increases on working people and service cuts. They stress the need to encourage savings (that almost always favour those with the most money) and presume that what is holding back investment is lack of savings that can be used by investors. This is not the case. The world is awash with surplus capital. A borrower rated as a good risk can borrow at minimal cost. Investors are buying US treasury securities at close to 0% interest rates, clear evidence that they can find no better place to put their money.
We cannot know the future but we might imagine three main possibilities:
- The ruling class will respond with overwhelming repression and violence where it finds it necessary.
- The ruling class will be forced by the strength of progressive forces to make tactical concessions that may or may not satisfy the movements.
- If economists are right about the prolonged severity of the crisis, dramatic change is possible.
We cannot know, but a Gramscian optimism of the will can encourage effective class mobilisation and radical rejection of the system. As the crisis continues much will be up to us.