After a year of stabilisation, the global economy is once again on the brink of a new plunge into recession.
Europe has been convulsed by a new banking crisis, as fears have emerged that some governments, such as Greece, Spain, Portugal and Italy, may be unable to pay their debts.
European banks are threatened by the same kind of toxic assets that have seen more than 250 American banks collapse since 2008. One result has been another near-meltdown of the banking system as European banks have become reluctant to lend to each other.
In both Europe and the US, ruling classes are torn between their determination to launch an all-out war on wages, pensions, social services and jobs, and the knowledge that severe austerity will almost certainly bring a weak recovery to a shuddering halt.
Germany, the richest and most powerful government in Europe, is torn between its desire to punish indebted governments like Greece, and the knowledge that a failure to bail them out will take its own banks back to the edge of collapse.
US recovery short lived
In the United States, the financial crisis began with the collapse of the investment bank, Bear Stearns, in March 2008. The worst came that September, as banks refused to lend to each other and the world’s credit markets began to seize up.
First, the two massive mortgage insurance companies, Fannie Mae and Freddie Mac, with some $5 trillion in mortgages, failed. The neo-conservative ideologue, Hank Paulson, was Secretary of the US Treasury. He tossed out his “free market” principles and took over Fannie Mae and Freddie Mac in order to save the financial system.
Days later, the major investment bank Lehman Brothers filed for bankruptcy, followed by AIG, the world’s largest insurance company. The US government put around $200 billion into Freddie Mac and Fannie Mae, and another $85 billion into AIG. It then moved to inject billions of dollars into the surviving investment banks, such as Goldman Sachs and Morgan Stanley, taking partial ownership of them in the process, and offered $700 billion in taxpayers’ money to buy toxic assets from other banks.
The impact on the real economy was immediate. From July 2008 to June 2009, the American economy contracted by 3.2 per cent, while the number of jobs in the US fell by 5.7 million between September 2008 and October 2009.
Almost all advanced economies plunged into severe recession, with the economies of Germany, Japan, Italy and the UK contracting by 5 per cent in 2009. World trade collapsed by around 40 per cent.
Towards the end of last year, the situation began to stabilise. From January to May this year, nearly a million jobs were created in the US. In part this was due to Obama’s stimulus package, which cut taxes and spent money on infrastructure.
But since May, job creation has turned once again into job losses.
In part, this downturn is because Obama’s stimulus has started running out. In part it is because ordinary Americans simply can’t afford to spend money. Unemployment is nearly 10 per cent, but the real situation is far worse than that. Under-employment has rocketed to 16 per cent. More than one million Americans have given up looking for work in the last two months alone. The average hours worked per week has fallen to 33, the lowest figure in decades.
Ordinary Americans are incredibly insecure. One area where this insecurity is very keenly felt is in the collapse of house prices. These have fallen, on average, over 30 per cent since the peak in 2006, meaning that one in six of all homeowners owe more on their mortgages than their homes are worth. And after a short recovery this year, prices are falling again.
Seven million homeowners have stopped paying their mortgages. The banks have taken possession of over a million homes, and another five million are on track to foreclosure. The banks are selling these foreclosed homes as slowly as possible, because there are very few buyers and any attempt to sell them more quickly would risk a further collapse in house prices. A further drop of 10 per cent in house prices would leave a total of 27 per cent of homeowners owing more on their mortgages than their homes are worth, and potentially lead to another surge in defaults.
The American housing market is on the brink of an historic catastrophe, a product of a system in which the basic human need for shelter has been turned into an object of profit and financial speculation.
Everyone is furiously saving money, and demand for other goods and services is contracting.
The politics of the American ruling class is making a bad situation worse.
Starting in the 1980s, Republican neo-liberals managed to get laws passed to prevent many state and municipal authorities running budget deficits. They’re simply not allowed to do it, by law.
Now America’s state governments are broke. Collectively, they have deficits totalling around $130 billion because of the combined impact of tax cuts in the past and the current economic crisis.
California alone has a deficit of $20 billion, and that’s after brutal cuts that have savaged pensions, working hours, education and other services. It faces the prospect of running out of money, and being unable to pay its employees.
As unemployment rises, those state and municipal deficits will also rise, and jobs and services cuts by the states will see more unemployment and lower tax revenues.
This is precisely the insane logic that helped make the Great Depression of the 1930s as severe as it was. Already, state and local governments in the US have been cutting their workforces by 65,000 a month, and those cuts look likely to accelerate in coming months.
The other side of America’s looming depression is the unwillingness of American capitalists to spend and invest.
Unlike American workers, they are not short of cash. According to one estimate, private US bank accounts contain around $10 trillion in cash and liquid assets. They’ve been hoarding it to make sure that they get through this crisis intact. And there are fewer opportunities for profitable investment.
This hoarding is rational for rich individuals and corporations, but disastrous for the economy as a whole. As investment declines, so do jobs, and demand for goods and services. And as consumer demand declines, it becomes even harder to find profitable investment opportunities.
According to ratings agency, Standard and Poors, “earnings [ie profits] may hold up, but sales growth is slow and companies aren’t going to invest their record cash holdings until it improves.”
But failing to invest means that sales growth won’t improve in the short run.
While the collapse in home building was one driver of the American recession, so also was the 20 per cent drop in American business investment in the period from July 2008 to late 2009.
The whole logic of capitalism leads not to growth and prosperity, but to economic decline and poverty, as those with the wealth simply shut up shop and look after themselves.
Crisis in the Eurozone
Earlier this year, the storm centre of the financial crisis moved to Europe.
The global financial crisis saw governments in Europe also spend billions to bail out banks and to keep up demand for business. But in many countries, that led to massive government deficits.
Meanwhile, global economic downturn cut a swathe through Europe, increasing unemployment and those already massive government deficits. In Greece, the crisis saw tourism and shipping hit particularly badly in 2009. Then in November it was revealed that Greece’s budget deficit would be nearly 13 per cent of GDP. That would be like a $150 billion deficit in Australia.
The government launched a vicious program of cuts, while the ratings agencies cut Greece’s credit rating to junk bond status. This increased the interest rates on government loans. The Greek government responded with three more austerity programs, including wage cuts, pension cuts, cuts to services and jobs.
Greek workers have led militant resistance to the cuts, including six general strikes.
In May, panic hit the financial markets when banks started refusing to lend to each other again, risking a new financial meltdown. They were worried about the solvency of their fellow banks, who had lent money to Greece and now feared it wouldn’t be repaid.
Fears that major European banks might be insolvent were also driven by fears that the $2.8 trillion they had lent to Spain, Portugal, Ireland and Italy were at risk. The stated assets of banks have also been compromised by the collapse in real estate prices, especially in countries like Spain.
The European Central Bank, which is in charge of the Euro currency, has been desperately trying to shore up the banking system. It has ordered “stress tests” of Europe’s banks, but there is little confidence in the money markets that those tests will tell the truth about the condition of the banks.
The European Central Bank and the International Monetary Fund also organised a massive loan to Greece, not to bail out the Greek government, but to bail out the banks who had lent them hundreds of billions of Euros, and who were panicking at the possibility of not being paid in full.
The conditions imposed on Greece—more cuts to services and pensions, more job losses—were a direct attack on the living standards of Greek workers, who have had no say in the way the government has been managing the economy.
This new wave of crisis has seen the rhetoric of stimulus and government intervention abandoned. There are vicious plans to cut wages, pensions and government services in every European country. In Britain, the government has ordered departments to draw up concrete plans for cuts of 25 per cent and 40 per cent to their budgets. This would see wholesale sackings and social deprivation on a vast scale.
In Greece the government plans to sack 17,000 teachers next year; in a country whose population is half that of Australia. It is pushing through a massive increase in VAT tax, their version of the GST. The average income has fallen 20 per cent so far this year.
The experience of Ireland shows what’s in store for the rest of Europe if governments get their way. The crisis will only get worse.
Ireland used to be the pin-up for neo-liberals. It deregulated its economy, privatised, slashed taxes and got some investment in IT. But it was left with severe social problems and a large deficit.
In 2008, in the midst of the financial crisis, its deficit was 7.3 per cent of GDP, so the government began slashing the budget. The result was a massive new downturn in the economy, which contracted by 10 per cent. With fewer taxes and hundreds of thousands of more unemployed, the deficit was up to 14.3 per cent of GDP.
After a brief Keynesian interlude, the mad, neo-liberal economists of the International Monetary Fund are back at the centre of policy-making. These are the people who drove Thailand and Indonesia into an unbelievable depression in the late 1990s when their bubble economies collapsed, and they turned to the IMF for help. Tens of millions of Indonesians were homeless and on the brink of starvation as a result.
IMF policies in the Asian financial crisis were completely discredited. Just two years ago, the organisation looked like it was on the brink of being closed down. Very few nations were prepared to deal with it.
Fears of a new plunge into recession have not just gripped the left and labour movement in Europe, but some of the key figures in the ruling class. One of America’s most significant mainstream economists, Paul Krugman, used a column in the New York Times to warn: “We are now, I fear, in the early stages of a third depression… Around the world…governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending… [We’re seeing] the victory of an orthodoxy [neoliberalism] that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.”
Meanwhile, in the Wall Street Journal, Allen Mattick has warned that, “If policy goes through as planned, a severe depression is almost certain to follow across peripheral euro-zone countries and a significant downturn elsewhere across the continent.”
The word crisis is often misused to mean a period of difficulty or conflict. One of the hallmarks of a real crisis is that all the options seem terrible; when the very structure of society makes sustainable solutions almost impossible. This could well be the situation we are now facing.
Most governments can’t afford more massive bail-outs and stimulus; but they can’t afford a new plunge into recession either. The fundamental problem is that there isn’t enough surplus being generated in the capitalist economy to pay both the financial sector for its bad loans, and to pay for pensions, wages and government services.
Someone has to take a very big haircut, and there is now a growing conflict over who it will be.
The task for the left and the labour movement is to make sure that it is not the working class, and the poor of the world.
This is not an economic crisis we created, and it is not one we should be paying for. But unless we challenge the priorities of our governments, and the rich people they are protecting, we could face a truly terrible future.
By Phil Griffiths