The global economic crisis is the worst in at least 70 years. Around the world, a million jobs have been destroyed every six days of this year. Between 200,000 and 400,000 more children will die every year from now to 2015 because of the crisis, according to the World Bank.
Massive stimulus policies, so-called Keynesianism, are now being promoted by Obama and other heads of government to ease the crisis. Increased regulation of financial markets is being put forward as the way to avoid new crises in the future.
But is there a capitalist solution to the crisis? How has the capitalist system survived previous depressions?
For socialists and politically conscious workers and youth, we must always bear in mind that today the agenda is being set mostly by the same politicians and economists whose prescriptions got us into this mess in the first place. For example, Larry Summers, a top economic advisor to Obama, played a key role in the deregulation of financial markets under Bill Clinton.
Any measures taken by capitalist governments today will inevitably fall short of solving the crisis. For starters, the crisis is global but most measures are national. Nothing has been done so far to deal with the global imbalances the U.S. trade deficit and the Chinese trade surplus that are one important cause of the crisis.
The build-up of huge budget deficits as governments employ stimulus plans is not sustainable for more than a few years. And the recent focus on curbing tax havens and hedge funds, though shocking examples of capitalist parasitism and freeloading, is a diversion from the real causes of the crisis which are rooted in the nature of the profit system.
Government regulation, as during the Great Depression, can enjoy a revival for some time, but if capitalism endures then new rules will eventually be challenged by big business. Let’s look at the most recent capitalist proposals for fighting the crisis.
Interest Rate Cuts and Bank Bailouts
In less than a year, central banks like the Federal Reserve (Fed) have used up all their ammunition in the form of interest rate cuts. By lowering the cost of borrowing, rate cuts should stimulate the economy. But in the current crisis, that hasn’t worked because banks are buried under so much bad debt that they avoid new loans regardless.
The Fed’s rate is now de facto zero, as is the Bank of Japan’s, while the Bank of England is at 0.5%, the lowest level since 1694. Interest rates can’t go lower than zero, so now and for the rest of the crisis the talk is about “unconventional” measures, which at some point could mean creating inflation (by printing more money) as a means to wipe out old debts (debts get cheaper in real terms if prices start racing upwards).
Central banks have also played a key role in rescuing banks and supplying liquidity to the banking sector. In some countries, governments admit they have nationalized banks; in others, for political reasons (to block public demands for more control and accountability), governments use other synonyms.
But whatever they call it, many of the biggest financial institutions are now under the wing of the state. “Governments are now borrowers, lenders, investors, and insurers of last resort for much of the financial system,” the Financial Times concluded recently.
The crisis in the financial system, however, remains. Banks that have received capital from the state are spending most of this by buying government bonds and other state-backed securities in order to build up their reserves against new losses. Lending is basically blocked and interest rates for ordinary households and most companies have not fallen in line with central bank rates.
The G20: What Was Agreed?
The G20 meeting in April was a triumph of presentation over content. British Prime Minister Gordon Brown announced that the 20 assembled government heads had come up with $5.5 trillion in fiscal stimulus, and $1.1 trillion in new crisis-fighting measures. But a closer look reveals another picture.
The $5.5 trillion included nothing new it was just a tally of national measures, some of them spread over several years. A big part was also in the form of “automatic stabilizers” such as higher unemployment insurance, especially in European countries.
$5.5 trillion sounds like a lot, but the OECD calculates it will boost average output (GDP) by 0.5% in 2009 and 2010. This must be measured against a projected fall in output this year of 4.3% in the OECD countries (the 30 richest countries, including the U.S., Japan, and most of Europe). Based on these figures, the stimulus measures will only limit the downturn, which will still be severe.
Proposals to stimulate the economy through increased public expenditure, including deficit financing, are often presented as left-wing ideas, such as the New Deal of the 1930s. These ideas, baptized as Keynesianism after the English economist John Maynard Keynes, are said to have put an end to the Great Depression. This was not the case. In reality, it was not until World War II that the U.S. finally came out of the Depression.
Today, budget deficits are shooting upwards. Obama’s federal deficit will likely reach $1.8 trillion this year 12.9% of GDP. In common with Roosevelt, the stimulus is enough to rattle the cage of the conservative economists, but not enough to create stable economic growth.
The New Deal did cut unemployment from a massive 15 million to 9 million. A social policy was introduced that gave “big security to big business” and small security to workers, according to economic historian John Kenneth Galbraith. However, when Roosevelt in 1936-37 began to cut back the deficit, a new downturn on the lines of 1929 followed.
Obama also intends to halve the budget deficit by end of his term, in 2012. But the experience of Japan also shows what happens when, after a period of expansive fiscal policy, a government tries to hit the brakes. The Hashimoto government did this in 1997 and produced a sharp recession, new bank collapses, and even bigger debts.
Cracking Down on Tax Havens?
When the G20 summit declared the end of tax havens and unregulated global finance markets, this was also an inflated claim. Tax havens are a product of ultra-parasitical financialized capitalism. Every year, it is estimated that poor countries lose $800 billion that is spirited away through tax havens, eight times what they receive in foreign aid.
But rather than financial rogue states operating outside the financial system, the tax havens are just small cogs in a bigger machine.
Most of the Fortune 500 companies use the services of tax havens and the Big Four accountancy firms use them as part of their corporate strategies. So, the politicians talk about a crackdown is hypocritical. Once again, when the actual proposals at the G20 are examined, they are nowhere near as tough as the talk suggests. The G20 document spoke about sanctions but did not stipulate what these would be.
Socialists would support real measures to tighten rules and close off abuses, just as we would support reforms such as a tax on financial transactions (the Tobin Tax). But how can this be done, and by whom?
Under capitalism, this is not fully possible. Of course, under mass pressure and in a deep crisis like today, some new regulatory controls will be imposed. But these will be sidestepped or eroded by the financial tricksters if their system is left intact.
There is an old truism that you can’t control what you don’t own. If the banks were genuinely under state ownership and control and run democratically by the working class and wider community, then it would be possible to enforce such controls.
The same argument applies to hedge funds, the mysterious investment companies that account for maybe one-third of stock market trades. The hedge funds are almost completely deregulated and are blamed for increasing financial instability by their reckless but profitable bets on different economic trends (they can bet on oil, currencies, bonds, and almost anything tradable).
But the companies that deal with hedge funds are already regulated. In recent years, it has been particularly pension funds, including many government-run funds, that have turned to the hedge funds to increase their returns since stock markets have imploded. Most big banks have set up their own hedge funds. And as many commentators have pointed out, the banks were the most regulated sector of the capitalist economy.
Real Solution: Democratic Control and Socialist Planning
Those like the G20 leaders who are calling for more regulation have not yet presented any concrete proposals. Their statements only confirm the need for this.
Such measures will mostly be postponed because of more urgent problems thrown up by the economic crisis such as cleaning up the banks. And those implemented are likely to be half-hearted in order to avoid protests and political upheavals from big business and will be instantly undermined by the system itself.
The fundamental roots of this crisis are not “excesses” or “greed”, even though these of course are present in the situation. The trend towards a new depression flows from the nature of the capitalist system itself. With profit as the only motive for production, devoid of planning, there exists a dictatorship of executives and corporate elites with almost total disregard for the needs of humanity and the environment.
For a real solution, democratic control of the economy is needed and for control, ownership is necessary. Capitalism solves its crises through destroying wealth and part of the productive forces. The system will only survive if it has not been challenged by a conscious workers’ movement with a clear democratic and socialist program.
The Role of the IMF
The big winner in London was the International Monetary Fund (IMF), previously much-maligned but now given extra weight and prestige.
Part of the background to this is that several countries in Eastern Europe are at risk of defaulting on their debts, and this could trigger a chain reaction that would spread to richer parts of Europe through the banking system (which has been speculating in these countries in a European version of subprime loans). Asian and some Latin American economies are also at risk from a similar scenario.
A gigantic $2.5 to $3 trillion of emerging market debt will fall due in 2009. This is as much money as the combined budget deficits of the U.S. and Europe. But access to capital to repay or turn over this debt has shrunk dramatically due to the crisis. Net private capital flows to these countries (emerging markets) is set to drop to one-sixth of its 2007 level (from $1 trillion to $165 billion) this year.
This is why the IMF’s reserves were increased at the G20 summit from $250 billion to $750 billion. But this is not in order to help the poor countries facing national bankruptcy. The IMF, although it conceals its true mission, crafts its rescue packages to save the Western banks that have overextended themselves with too much risk.
The debtor country is placed on an IMF crash diet of spending cuts (anti-stimulus) and interest rate hikes in order to restore its financial stability and prevent a default, because with a default the Western banks would get nothing.
Contrary to the impression given at the G20 summit, the IMF has not given up its traditional hard-line approach towards debtor countries. In Latvia, an IMF client, the government has been forced to cut public-sector salaries by 15% and abolish child support payments.
Still, the IMF protests that, despite Latvia cutting its state budget by a whopping 40%, the fiscal deficit will not come down to the IMF’s limit of 5% of GDP. The IMF is digging in, warning Latvia it risks losing its $7.5 billion rescue loan. In Iceland, the IMF demanded interest rates be raised to 18% as a condition for a loan.