The Socialist 23 September 2008 |
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British capitalism in crisis
Make the super-rich pay!
This was the week that the world changed. For over two decades all we have heard from the UK government is that the market must decide. Schools, hospitals and public services have been cut and privatised on the basis of 'insufficient money' while profits have skyrocketed.
But with the chaos in the world economic system, brought about by the unrelenting drive for profit, all that is forgotten. Instead we see the US and UK governments tearing up their old rules like so many pieces of paper as they rush to save their flawed and failing system.
Robin Clapp of the Socialist Party National Committee outlines the impact the current crisis in the world economy is having on Britain.
A decisive change is taking place in the world. As one economic period comes crashing to an end, another begins, in which workers will increasingly turn their anger against the reckless policies that are dragging living standards to the edge of the precipice.
The rapid unravelling of the world's finance markets has reached breakneck speeds over the last month and spells disaster for working-class people internationally. This crisis, which first began to manifest itself a year ago through the collapse of the US sub-prime housing market, has now extended its tentacles from the property sector into the heart of the finance sector and lately into industry. Wall Street's contagion has spread to Main Street, as businesses report a seizing up of credit and falling order books.
House prices in America have been falling faster than during the Great Depression of the 1930s and with such ferocity that almost a third of homebuyers are trapped in negative equity, where the value of their mortgage exceeds the value of their home.
The puncturing of the housing bubble is not the only cause for concern. The tidal wave of cheap credit has led to debt levels described by Lombard Street Research as "a 30 year leveraging up of America, ending in an unchecked orgy". Unsustainable bubbles have also been built up in shares, foreign currency, emerging markets, oil and commodities, junk bonds, utilities and take-overs.
As the formerly all-powerful and self-proclaimed financial 'masters of the universe' stampede towards the safety of government bail-outs, they leave in their wake an economic legacy, whose costs include plunging house prices and pension funds, huge rises in unemployment and the developing recession in much of Europe, Japan and the United States.
US financial guru George Soros has reiterated in the last week that "this is the most serious crisis of our lifetime". The free-market props, which a greedy capitalist class has grown rich on, and has thus come to depend on for a generation, are being removed. Bankers, speculators, hedge fund managers and private equity bosses believed that through the manipulation of obscure and speculative financial instruments like derivatives, the carry trade, short share selling and the parcelling up and relabeling of dodgy housing debt as asset-backed securities, capitalism could carry on enjoying a bonanza of profits without pause. But this was just postponing the crisis.
Now, another day, another disaster. 'Esteemed' investment banks like Lehman Brothers have declared bankruptcy, victims of their reckless addiction to the derivatives market, that set of money-making spells which turned out to produce only fool's gold. The Economist wryly comments: "It does not help that financial products are now so complex that it is very hard to make even an educated guess about the real value of a bank." Merrill Lynch, America's third largest investment bank has disappeared too, bought up by Bank of America for just $50 billion as it faced the prospect of collapse.
The US government has been forced to ride to the rescue of the two huge mortgage banks Fannie Mae and Freddie Mac, nationalising them on 6 September when it became clear that their $1.6 trillion debt was threatening to bring them down. This has been followed by the nationalisation of insurance giant AIG, with the government injecting $85 billion into propping it up.
A year ago, 91% of the assets of the US central bank, the Fed, were invested in US government bonds. Even before the AIG rescue, that figure had fallen to just 53%. Loans to banks and investment banks, backed by a hotchpotch of 'collateral', account for the difference.
Despite these staggering state takeovers, which are at variance with all the instincts of the extreme neo-liberal Bush administration, stock markets continue to fall with a speed and on a scale that is leading some economists to claim that the meltdown is approaching the panic levels of the 1929 crash.
Even the remaining two US investment bank giants, Morgan Stanley and Goldman Sachs, saw their share price pummelled by 37% and 25% respectively in just one day's trading on 17 September. The state bail-outs may be able to rally the markets for a brief period, but they will not stave off the problems permanently. As Larry Elliot wrote in the Guardian: "Emergency action was necessary, perhaps inevitable, but it won't save either the US or the UK from recession. What's at stake is how deep and long those downturns will be."
At the root of this volatility lies the fear that toxic debt levels are much deeper and more extensive than have been declared. Consequently the capitalists are forced to think the unthinkable; going to the state they have so despised in the glory days of globalisation, and begging for handouts. But the virus continues to mutate as it leaps across countries and continents.
British housing crisis
Cardiff Socialist Party puts forward the socialist alternative to capitalist credit crunch, photo Cardiff Socialist Party
The takeover of HBOS, the UK's largest mortgage and savings provider, by Lloyds TSB reflects the extreme exposure of the British finance sector to the unfolding crisis. Even though such a measure would ordinarily be blocked by Britain's competition laws, the government engineered the acquisition, fearing both a crash of this giant player and the budgetary implications of having to step in with an emergency nationalisation package.
HBOS had insisted that it was not in danger, but with 22 million customers and 20% of British mortgages, the markets deemed it to be particularly vulnerable to falling house prices.
Fears abound that up to 40,000 more jobs will be lost and up to 500 branches will close. Merrill Lynch experts have previously stated that a third of all British estate agents could close their doors for the last time during this recession.
British workers are particularly exposed to the housing minefield, with the bubble having been one of the frothiest in the world, with real prices increasing by 140% in the decade from 1997.
The crash has been sudden and brutal. Britain no longer has a functioning mortgage and property market. House sales are under half the level of last year and construction is lower now than any time since 1945. Whereas in the first half of 2007, half of the UK's mortgage loans came from lenders raising money on the world's finance markets, that source of funding has dried up and cannot be replaced as the deflationary effects of the credit crunch worsen by the hour.
According to the ratings agency Standard and Poor, the British housing market is at least heading towards a repeat of the negative equity crisis of the early 1990s. Repossessions in the six months to June were up by 48% on a year before.
The value of British housing stock is falling by £1 billion a day. Prices may ultimately slump by 30% and Merrill Lynch calculates that should this occur, in real terms, there would be little recovery for 20 years.
Only a few months ago a reluctant Gordon Brown had to step in and bring sub-prime specialist Northern Rock into public ownership. That was a huge dent to the concept of a 'property-owning democracy', yet still the flashing red lights were largely ignored as government spokespeople waffled on about the 'strong economic fundamentals' in Great Britain plc.
The indebtedness of British consumers is a critical factor in this situation. The average household possesses debts worth more than a year and a half's income, which is higher than in any other G7 country. Compounding years of stagnating wages, which have made saving an impossibility for millions, people have been battered and seduced by credit card companies and banks into borrowing like there is no tomorrow. Now tomorrow has arrived and the savings ratio is at the lowest level since the austere 1950s.
The chief economist at HSBC has calculated that 10% of Britain's workforce - three million people - are directly employed in property, with 2.2 million of those in construction and the rest in related industries and estate agency.
With banks refusing to lend as bad debts mount and begin to erode their foundations, both domestic and commercial property markets are at a standstill. House builder Barratt Homes is cutting one quarter of its workforce, while Persimmon is laying off 2,000 staff. In total up to 50,000 construction workers have already lost their jobs and the House Builders Association estimates that recession will cost at least another 250,000 jobs in the wider supply and construction industries.
Contraction in housing investment could slice over a percentage point off GDP growth in both 2008 and 2009. The accompanying fall in consumer sales linked to housing would cut GDP growth by another 0.2%.
The Bank of England chiefs and the politicians are exposed like naked swimmers when the tide has unexpectedly receded. Bank governor Mervyn King talked a few months ago about the "nice decade" being over and the necessity for consumers to "prepare for a bumpy ride", oblivious to the stresses and strains that low wages, bad and often unsafe workplace conditions, poorly-funded public services and a growing wealth divide have meant for most of us during these so-called boom years.
Wealth is now divided as unfairly as it was before 1945. In two decades the earnings of an average FTSE 100 company chief executive have gone up from 17 times the average employee's pay to 75.5 times.
In cosseting the rich and turning the City of London into one of the world's top casinos, New Labour has allowed relative poverty to rise and the commitment to ending child poverty has been effectively shelved. This year saw a second successive 100,000 jump in the number of children living below the government's poverty threshold.
At the other end of the scale, the annual bonuses paid out to the City bosses stood at £5.7 billion in 2003, but by 2007 leapfrogged to an astonishing £13.7 billion. Business secretary John Hutton cheerfully egged on the speculators by urging them to become ever richer. Redistribution policies were derided as being the outmoded dogma of 'old Labour' reformists and socialists.
The City of London demanded a bonfire of regulations controlling its activities and New Labour duly responded, like their counterparts in the US. It is ironic that many of those who upheld liberal market values now denounce the recklessness of the speculators and demand urgent re-regulation.
The hollowing-out of the manufacturing sector and the obsession with turning the City of London into the world's most powerful gambling den has created a serious imbalance in the British economy, making Britain extremely vulnerable to the current crisis. In 2006 finance made up 9.4% of the overall economy, but was responsible for 30% of overall GDP growth between 2004 and 2007.
How the world has changed! Lehman Brothers' UK staff turned up to work in the City on Monday 15 September, and were told to pack their bags. Stockbrokers will be joining them on the stones in ever growing numbers as the great money illusion trick is finally rumbled.
The Ernst and Young Item Club has described the economic downturn as being similar to a 'horror movie', while David Blanchflower, a member of the Bank of England's monetary policy committee warns that unemployment will hit two million by Christmas.
Stubbornly high levels of inflation, at least in part exacerbated by the gambling of unregulated hedge funds on the fuel and food markets, have already made people feel a lot poorer. The average household is 15% worse off now than five years ago.
The massaged headline figure might be 4.7%, but food prices have rocketed by 13% on a year-on-year basis and even though a barrel of oil has fallen by 37% over the last three months and is now trading at a seven-month low of $91, the fuel companies have all raised their domestic energy prices by around one third.
The pound's fall against the euro has given a potential boost to exports. But this will be limited as a slowdown takes hold in Germany, France, Spain and elsewhere, and given the generally parlous state of the manufacturing sector after decades of neglect.
The main trend is towards recession with two negative quarters of growth being predicted even by the bosses' union, the Confederation of British Industry (CBI). Overall the Capital Economics think-tank predicts annual growth of just 1.2% this year, with a constriction in 2009 which will be the first full year of recession since 1992. In this economic quicksand, figures are difficult to predict. The pro-market organisation, the OECD, has recently stated that the turmoil in stock markets has put recovery back by at least another year.
Some things are clearer however. In August high street sales fell at their sharpest pace for 25 years. Car sales have plummeted to their lowest level since 1966, while the number of people putting money into personal pensions fell by one million in the last year.
Manufacturing, retail and leisure will follow the construction sector into decline. About one quarter of the British workforce is currently employed in the vulnerable retail and leisure sector, but already, according to the media planning group MPG, 67% of households have reined back spending on luxury items with 54% now spending less on groceries and 53% spending less on clothing.
The collapse of the XL Leisure Group as a result of rising fuel costs and the credit squeeze is indicative of the present crisis. Not only were 85,000 passengers left stranded at airports or even in mid-flight, but the management defaulted on a €207 million debt owed to Iceland's Landsbanki, thereby further spreading the virus.
Capitalist globalisation is now tarnished in the minds of millions, as a result of the coming together of the credit crunch, the hike in inflation and now full-blown recession. However, somewhat ironically, the beneficiaries of this mood of anger and frustration in Britain appear to be the Tories, who despite having no alternative to these problems, are riding high in opinion polls with a 20% lead over Labour.
New Labour's slavish devotion to the very system that has brought living standards crashing down, is coming back to haunt them. Having moved so far to the right, they are seen to be responsible for the mess. There is no cogent left alternative being put forward by any significant Labour or trade union leader.
Workers meanwhile will reacquaint themselves with questions that have lain dormant for some time. If the government can step in and rescue banks like Northern Rock and the US government can spend billions rescuing Fannie and Freddie, then why can't they nationalise firms that threaten redundancies, or energy firms that hold consumers to ransom?
There will be no swift end to this downturn and workers will be expected to pay the price. In demonstrating at such cost its incapacity to develop the economy, capitalism and its political apologists have forfeited their right to rule. Many will now look for an alternative. It will be the Socialist Party's task to arm working people with confidence in the ideas of socialism so that real forces can be built that can clear the way for a socialist society.
- Open the books of companies, especially the big companies that dominate the economy, to determine their real costs, profits, executive pay and bonuses, etc.
- As a first step in fighting inflation from a working-class standpoint, set up popular committees, including trade unions and consumer groups, to monitor prices and measure the real cost of living increases for working people.
- Immediately implement a windfall tax on the oil and gas companies that have made huge profits out of recent price increases, as a step towards nationalisation of the assets of the big oil and gas companies.
- Electricity, gas and water utilities to be run as public companies under workers' control and management, to meet the needs of the majority of society.
- Immediately raise the minimum wage to £8 an hour. Introduce a sliding scale of wages with automatic increases to cover inflation. Substantially increase pensions and other benefits to compensate for inflation.
- Nationalise the banks and financial institutions, to provide cheap credit for the planned development of industry and services, and to provide cheap credit for housing and small business.
- Nationalisation should be carried out with minimum compensation, on the basis of proven need of shareholders.