The Bank of England sets interest rates on loans to financial institutions, credit: Eluveitie/CC (uploaded 17/04/2019)
The Bank of England sets interest rates on loans to financial institutions, credit: Eluveitie/CC (uploaded 17/04/2019)

Bold socialist policies more urgent than ever

Tony Saunois, CWI secretary

The global and multifaceted crisis of capitalism has entered a new phase with turmoil in the financial markets, and the collapse of banks in the US and Credit Suisse in Switzerland.

It is likely that many features present in the current systemic crisis will now be accelerated. A global economic recession in 2023-24 is now a very strong possibility, although not a certainty. The working class and Marxists need to be prepared for dramatic economic, social, and political consequences which flow from this. In particular, an even sharper form of class and political polarisation, and more social upheavals.

The ruling classes are terrified of the prospect of banking crises in the US and Switzerland spreading, and triggering a major global financial meltdown, such as unfolded in 2007-08.

The crisis in 2007-08, like many other financial and economic crises, developed not as a single act. The recession in 2008 was preceded by a series of crises and financial implosions in February, September, and October 2007. What is certain, however, is that the global financial system, like capitalism as a whole, is in a systemic crisis.

The underlying problems faced by capitalism following 2007-08 have not been resolved, and are now exploding in turmoil and upheavals. The trigger of the current financial turmoil is not the same as in 2007-08. That was primarily caused by massive dodgy loans and speculative bubbles reflected in the subprime mortgage catastrophe.

The recent events were triggered by different factors and in an entirely different world situation with increased geopolitical conflict, the rise of inflation and hiking of interest rates, the ending of the era of ‘cheap money’, and other factors.

The collapse of Silicon Valley Bank (SVB), Signature, and Silvergate banks in the US, followed by the crisis at First Republic and the collapse of Credit Suisse, occurred as the banks, in essence, were faced with a run, as investors withdrew funds and their share prices fell.

According to some commentators, this run on the banks has been the biggest and most rapid ever. Credit Suisse saw €10 billion a day withdrawn in the run-up to its collapse. On 7 March, a few days before SVB collapsed, $42 billion was withdrawn by depositors. This also flowed from the impact of the change in policy from the Federal Reserve, European Central Bank (ECB), and other central banks, when they began to increase interest charges a year ago. The consequences of this change of policy – an attempt to deal with inflation – are now being felt throughout the banking system.

The collapse of SVB and other banks was largely triggered by the ending of the era of cheap money. The banks, including SVB, invested vast assets in long-term government bonds, which were seen as a safe bet when interest rates are low. Once interest rates were raised, the bonds lost value, exposing the banks to insufficient liquidity. While each bank has its specific issues, this exposure against the background of higher interest rates now threatens other banks.

SVB saw its deposits grow from $62 billion in 2019 to $189 billion at the end of 2021. Their investment in government bonds was essentially a $100 billion one-way bet on low interest rates, which was lost once interest rates rose.

The ruling classes, partly learning from the crisis in 2007, responded rapidly and stepped in to try and prevent contagion from spreading and triggering a collapse of the banking system. The US Federal Reserve and President Biden reverted to a form of quantitative easing (QE) by the back door, to guarantee and bail out the banks in the US. The banking crisis in the US has, thus far, only affected smaller or medium-sized banks, which are generally far more numerous and significant than in Europe. An added factor with SVB was its importance to the tech sector. According to SVB’s own figures, 25% of tech startups are linked to it.

The initial injection of cash in SVB, Signature, First Republic, and Credit Suisse, was not enough. In each case, more and more has been poured into the system. US banks, in panic, borrowed $164.8 billion from the Federal Reserve backstop. It was $4.58 billion the previous week. Morgan Stanley estimated that in the US approximately 50% of what was injected into propping up the banks in 2007 has been drawn on in mid-March 2023. The capitalist classes are desperate to prevent a meltdown. They have, at best, bought time. Further bank collapses are a near certainty in the coming period.

Credit Suisse

The collapse of Credit Suisse is a major international development. The 167-year-old institution was one of the ‘$1 trillion banks’, and a major pillar of the global financial system.

The brutality of the Swiss government in imposing the takeover of Credit Suisse by UBS, has been striking – even to the extent of tearing up the government’s own previous regulations. Commentators’ references to the “merger” of the two banks are farcical. Credit Suisse collapsed and is no more! This points to another tendency that may develop further with more banks collapsing – an even greater monopolisation of the banking system in some countries. The massive conglomerate that exists from the take-over of Credit Suisse by UBS is equal to 220% of the GDP of Switzerland.

The protestation of US Treasury Secretary, Janet Yellen, that the US banking system is “sound” belies the reality of the situation and the vulnerability which exists. The US banking system has $620 billion in unrealised losses – accounting for 28% of bank equity. In smaller banks, it is closer to 50%. Overall, the US banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets. Should half of the uninsured depositors decide to withdraw funds, almost 200 banks are at risk.

US imperialism has vast resources to step in and prop up the banks should the crisis grow. The EU, should it be confronted with a bigger banking crisis, will struggle to further contain the crisis. This is partly because of the resources of the ECB and also the prospect of national divisions and conflict arising between the governments of the Eurozone, all of which have differing economies and banking systems.

Capitalism is now faced with an irreconcilable dilemma. Do the capitalist central banks lower interest rates to stave off and try and contain the developing financial crisis, or do they maintain higher interest rates to combat inflation? They cannot do both.

Whatever they do will not resolve the underlying problems in the economy, including the inflationary features. The idea that the adjustment of interest rates alone will somehow magically resolve the inflationary and other problems is false. Should they attempt to squeeze inflation out of the system, it will need a brutal recession; a course of action that some of the capitalist class are prepared to resort to. The rise in interest rates can also wipe out many of the so-called ‘zombie’ companies.

None of the measures taken have helped lift the confidence of the capitalists, as they hoped. Massive hoarding, rather than an investment, that started to take place before the run on the banks, continues. The current crisis in the banking sector will further strengthen this trend. The squeeze on loans and liquidity arising from the banking crisis can also add to recessionary pressures.

The ECB, faced with an inflationary spike, opted to increase interest rates by 0.5%. However, this was before the banking crisis had fully developed. Jay Powell, chair of the US Federal Reserve since 2018, was robustly supporting raising interest rates, prior to the onset of the banking turmoil. These decisions would drive the economy towards recession and possibly a depression.

Now Powell and the Fed have raised interest rates by 0.25%. Both Powell and Christine Lagarde, President of the European Central Bank since 2019, have now made it clear they will raise rates further should inflation not be tamed, despite the consequences that this may have.

The rise in interest rates is crucial given the explosion of global debt, both public and private. Defaults by countries, institutions or individuals, will impact on the financial crisis. This applies to the industrialised West, and especially to Asia, Africa, and Latin America.

Now a furious struggle is taking place between different wings of the ruling class over what they should do. It is possible that they will pause interest rate rises for a period in the future. An immediate cut in interest rates is highly unlikely. Within days, ‘QE by the back door’ has been stepped up, and the higher interest rate rises discussed by the Fed scaled down, for now. Events have forced them to change policy. The turmoil unfolding is likely to see the ruling capitalist class oscillating, floundering around from policy to policy.

Apart from the massive increase in state intervention that has already taken place, attempts to regulate the banks are possible, especially in the US, following former President Trump’s weakening of the measures introduced after 2007-08. However, the systemic crisis facing the financial system cannot be reduced merely to the question of regulation, albeit it can have a temporary effect. The switch from ‘cheap money’ to higher interest rates is a crucial ingredient that cannot be simply overcome in an era of rising inflation.

State regulation?

The prospect of more state regulation will not be uniform however, given the different conditions which exist in each country. The UK, for example, prior to the current crisis, was looking for less regulation. This arises from the changed situation that the financial sector in the UK now finds itself in, particularly within the European context. The balance has shifted away from London to the Netherlands, Frankfurt, and elsewhere. In an attempt to attract back financial capital, the British Tory government, and prime minister, Sunak, who represents and is directly linked to finance capital, may still drive for even less state regulation, but this is not certain.

Global capitalism is facing a series of interconnected crises, economically and politically. These developments cannot be separated from the geopolitical conflicts that are taking place, which can and will impact on the immediate economic prospects for capitalism.

The threat of a rapidly developing banking crisis in the US drove US imperialism, Japan, Canada, Britain and the ECB to coordinate measures.


Following 2007-08, world capitalism was able to benefit from the growth and developments of the Chinese economy, underwritten by relations with the US. This escape route is not present today. China faces a domestic economic and social crisis, which means it cannot play the same role as it did after 2007-08 and previously. The reduced 5% target growth rate announced by the regime illustrates this. China is also being hit by the ban on important microchips from the US, which is crucial for the development of the economy. Taiwan’s domination of the production of advanced microchips is crucial for future developments in the world economy and also geopolitical relations.

Chinese banks, largely directed by the state, and to an extent insulated from the world financial markets, may not be hit directly or dramatically by the current banking crisis. However, the vast debt owed to them in Asia, Africa, and Latin America means that it will be hit, at a certain stage, by the impact of other global developments. Reflecting the crisis faced in China, the international mega projects of the ‘belt and road’ project have largely been placed on hold.

Along with all of these developments, the consequences of the war in Ukraine and other possible military clashes, such as is possible in the Middle East, will impact on the world economic situation, and threaten to add to the prospect of a recession in 2023 or 2024. The ruling classes may be able to take some empirical measures to ‘kick the can down the road’, for a time. Yet they are running out of road.

Dramatic changes

This will result in massive polarisation and heightened conflict. Bitter class battles are already breaking out, reflected in the heightened class struggle in Britain, France, Germany and elsewhere. The recession in 2008 eventually gave rise to the mass movements around Bernie Sanders in the US, Jeremy Corbyn in the UK, and saw mass revolts and upheavals in Asia, Africa and Latin America. It also led to the election of Trump in the US, Bolsonaro in Brazil, and other reactionary regimes.

As the Committee for a Workers’ International (CWI) has explained, the weakness and ideological collapse of the left in the recent period, and its failure to put forward an alternative to capitalism, has left a political vacuum. The far-right populists will attempt to capitalise on the current banking crisis and attack the bailouts of the bankers. The fear of further banking collapses can be very powerful, especially in countries where the trauma of what this meant historically is part of mass consciousness. A deep recession can also ‘stun’ sections of the working class, should unemployment rocket, along with other attacks on living standards. It can also lead to crucial political radicalisation and polarisation.

The building of mass workers’ parties with a socialist alternative programme to capitalism, to offer a way out of the contradictions and dilemmas of the profit system, is posed even more urgently as this crisis is unfolding.

The demand for nationalisation of the banking system, under democratic workers’ control and management, as an alternative to capitalist bailouts, is a central demand. A struggle to help fight the ravages of inflation through the establishment of a living wage, adjusted to match inflation and price increases, is essential. For committees of workers, consumers and trade unionists to determine in each country the real rate of inflation is a demand that is necessary to struggle for. We cannot trust the fixed inflation figures of capitalist economists and politicians. These policies, together with an emergency socialist programme to break with capitalism and introduce a democratic socialist plan, is the only road out of the impasse that capitalism finds itself in.