As it has remorselessly unwound, the global economic and financial crisis has passed through a succession of turning points. The first came when the credit crunch began in August 2007. Then there was the collapse of Lehman Brothers in September 2008, precipitating the greatest financial crash since 1929. The onset of the eurozone crisis in the spring of 2010 marked a third turning point. In all probability, the summer of 2011 saw another—panic falls in financial markets as the realisation spread that, four years on, the crisis is very far from any kind of resolution. We go to press as the International Monetary Fund (IMF) acknowledges that “the global economy is in a dangerous new phase”.1
This grim situation is being registered by those Marx called the “hired prize-fighters” of the bourgeoisie.2 Thus Martin Wolf, chief economic commentator of the Financial Times, wrote at the end of August:
Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no, because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become. The point is that, by the second quarter of 2011, none of the six largest high-income economies had surpassed output levels reached before the crisis hit, in 2008.3
Wolf went on to add another note of good cheer when he predicted, “The current UK depression will be the longest since at least the First World War”.4 This is a remarkable shift from the line Wolf had been taking less than two years earlier, for example in a debate with me about the future of capitalism in November 2009, when he argued that “the most spectacular response of governments ever in peacetime…the most Keynesian policy there’s ever been” had prevented the collapse of the financial system and cut short the global recession precipitated by the crash.5
Will Hutton, also on the Keynesian side in current debates, warns that “the way capitalism has been conceived and practised for the last 30 years has hit the buffers. Unless and until that is recognised, Western economies will be locked in stagnation which could even transmute into a major economic disaster”.6
One sign of this shift in opinion is the sudden willingness of mainstream economic commentators to cite Marx favourably. In the lead was Nouriel Roubini, celebrated for his warnings that the credit boom of the mid-2000s would end in disaster, who told the Wall Street Journal in August, “Karl Marx had it right. At some point capitalism can self-destroy itself. That’s because you cannot keep on shifting income from labour to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational…is a self-destructive process”.7
Among those expressing the same kind of thought is George Magnus, senior economic adviser to the giant Swiss bank UBS, who describes himself as “a member of the Marx-is-relevant school”.8 He argues:
Put simply, the economic model that drove the long boom from the 1980s to 2008 has broken down.
Considering the scale of the bust, and the system malfunctions in advanced economies that have been exposed, I would argue that the 2008/09 financial crisis has bequeathed a once-in-a-generation crisis of capitalism, the footprints of which can be found in widespread challenges to the political order, and not just in developed economies.
Markets may actually have twigged this, with equity indices volatile but unable to attain pre-crisis peaks, and bond markets turning very Japanese. But it is not fashionable to say so, not least in policy circles. 9
Widening financial fractures
Both the markets’ gyrations and the commentators’ interpretations are based on perceptions (though ones that have real consequences in the case of market behaviour). But there is no doubt that the condition of global capitalism is extremely serious. One can see this along three dimensions.
First, a deluge of data about output, employment, sales, consumer confidence, house prices, etc, has demonstrated that the two main centres of advanced capitalism, the United States and the European Union, are slowing down to a near standstill, or worse. The recovery from what was called (perhaps too hastily, since it implied a speedy end to the contraction) the Great Recession of 2008-9 has run into the sand. Fundamentally this reflects the fact that the causes of the crisis are yet to be overcome.
As Guglielmo Carchedi and Joseph Choonara convincingly argue elsewhere in this issue, chief among these causes is what Marx called the tendency of the rate of profit to fall. More precisely, despite massive restructuring and a sharp rise in the rate of exploitation, the advanced capitalist economies have failed to resolve the long-term crisis of over-accumulation and profitability that developed during the 1960s. What increasingly kept the world economy afloat during what Magnus misleadingly calls “the long boom”—the neoliberal era that began during the recession at the end of the 1970s—was a flood of cheap credit. It was the bursting of the latest in the financial bubbles that this created, centred on the US housing market, that precipitated the present crisis.10
The collapse of a credit bubble can produce an economic slump that is peculiarly intractable. The business economist Richard Koo has developed the concept of a balance-sheet recession, based on a comparison between the Great Depression of the 1930s and the long Japanese slump that started in the early 1990s.11 Bubbles involve the price of various assets rising far above their long-term average: this happened with real estate in the US, Britain, Spain and southern Ireland among others during the mid-2000s. In the short term this can act as an economic stimulus thanks to what has been called the “wealth effect”: households borrow and spend more on the strength of the higher price of their homes, thereby increasing effective demand.
Riccardo Bellofiore argues that this kind of “asset-bubble driven privatised Keynesianism” became the main driver of global economic growth in recent decades.12 But the collapse of a bubble means that asset prices fall. Firms and households find themselves facing bankruptcy: they are much poorer than they thought they were and are saddled with the debt they accumulated in the bubble years. So they cut spending and concentrate on paying off their debt. The wealth effect goes into reverse as “deleveraging” reduces aggregate effective demand and traps the economy in recession.
It seems clear that Western capitalism is in the grip of a balance-sheet recession. For example, British house prices have already fallen 20 percent from their peak, but, according to one forecast, will drop by another third in coming years.13 In itself, this will have a huge depressive effect on consumer spending: a buoyant housing market has been a crucial ingredient in British economic growth since the 1980s. Right across the advanced capitalist world consumers’ financial fragility has meant that they have tended to respond to the recent uptick in the inflation rate by cutting spending.
But the problem doesn’t simply affect ordinary households. The credit bubble was fuelled by banks that both lent generously and financed these loans by heavy borrowing: British banks’ leverage—the ratio between their assets (loans, etc) and the capital supplied by their shareholders—reached nearly 50x at the start of the crisis in 2007-8.14 The collapse of the bubble left them burdened with large debts while many of their assets became worthless. The state bailouts in response to the 2008 crash were supposed to have put the surviving banks back on their feet, but it is clear that much of the Western financial system remains very weak.
One of the driving forces in the eurozone crisis has been widespread suspicion that European banks are still carrying substantial bad loans—most obviously to the growing number of EU member states that are being targeted by the bond markets. According to the IMF, banks in the eurozone are much more highly leveraged and dependent on short-term wholesale funding than those in the US and Britain.15 Gordon Brown claims that he argued that European banks needed to be recapitalised as long ago as a eurozone summit in October 2008, but was rebuffed.16 Hutton goes so far as to say that “many European banks are technically insolvent, [which is] recognised by Christine Lagarde, the IMF’s new managing director, if not by the banks themselves”.17
This situation is making it harder for suspect banks to borrow dollars, for example from US money market funds, and has led to a collapse in bank share prices. This situation prompted the US Federal Reserve Board, the Bank of England, the Bank of Japan and the Swiss National Bank to join the European Central Bank (ECB) in announcing on 15 September—the third anniversary of the collapse of Lehman Brothers—that they would provide banks with three-month dollar loans to tide them over.
The banks’ plight has made them less willing to lend, particularly to small and medium-sized businesses, which in the US and Britain constantly complain of being starved of credit. Big industrial and commercial firms are in a much better state thanks to a brutal squeeze on labour costs during the depths of the slump in 2008-9. But, as Roubini notes, compressing wages also reduces effective demand. James Mackintosh, the investment editor of the Financial Times, points out that the surge in corporate profits may therefore prove something of a poisoned chalice:
While the fall in [profit] margins from their pre-crisis peak was harder [than in previous recessions], they rebounded as soon as the economy started to recover. Margins are now almost back to where they were, and analyst predictions for margins are actually higher than their pre-crisis predictions. Apart from a brief period at the end of 2006 and early 2007, US margins have not been this high since Lyndon Johnson was president in the 1960s.This is at once a great support for shares, and a great risk… Corporate profits are the difference between revenue and cost.
Costs are mostly labour, so job cuts in a recession—about 7 million in the US in the recession of 2008-09, more than previous downturns—widen margins. The usual offset to that is that fewer jobs inherently means lower spending, cutting revenues faster than costs can be cut.
This time round, the US government has gone to extraordinary lengths to keep spending up. On top of standard counter-cyclical spending, such as food stamps, came extended unemployment benefits, tax cuts, stimulus projects, and the extension of healthcare. The budget deficit is running at levels never seen outside wartime.
Companies managed, in other words, to dump a big chunk of their labour costs on to the government, without incurring as much damage as usual to revenues… But if government transfers are supporting profits, then the $2.4 billion retrenchment forced on the Obama administration by the Republicans in Congress will be bad for profits.18
This brings us to the second dimension in which the crisis has deteriorated, which is the extraordinary political disarray in the main Western ruling classes. This in turn has two elements—ideological frenzy and internal division. The frenzy is most obvious in the case of the Tea Party movement, which is driven by rage at the massive leap in state intervention represented by the bailouts and fiscal stimulus of 2008-9. But consider the extraordinary vogue for constitutional amendments mandating a balanced budget—passed by the German parliament in 2009, this has been embraced, for example, by the Spanish and French political elites and is also advocated by the Republicans in the US Congress. David Harvey has pointed out that, since the “accumulation of capital and the accumulation of debt…have in fact run alongside each other in the history of capitalism…both feeding and supporting each other”, this amounts to “a vote to end capitalism!”19
But at present such fervent ideological reaffirmations of an imaginary neoliberalism are overdetermined by the divisions within the ruling classes of advanced capitalism. The standoff between Barack Obama and the Republicans in Congress is in a certain way relatively easily to understand. The Republican right, reinvigorated by the Tea Party, are desperately seeking to ensure that Obama becomes, in the favourite slogan of that champion know-nothing Michele Bachmann, a one-term president. Obama’s response, like that of his Democratic predecessor Bill Clinton, is to attempt to outmanoeuvre the Congressional Republicans, while operating on the same ideological terrain as his opponents: thus his $447 billion “jobs plan” unveiled in early September is to be paid for largely by cuts in Medicare, Medicaid and other spending programmes.
The result, however, is the paralysis that marked the absurd row over raising the US debt limit, which goaded Standard & Poor’s into lowering the US’s credit status in August. Similar immobility reigns on this side of the Atlantic, where the eurozone has moved at a snail’s pace in response to an accelerating crisis caused by, on the one hand, the imminent prospect of a Greece default and, on the other, the markets remorselessly targeting progressively larger member states’ debt. The second “rescue” of Greece, agreed in July and worth €109 billion, was, in effect, a plan for a controlled Greek default, since it required private bondholders to agree to lose 21 percent of the value of their original loans.
Roubini nevertheless dismisses the deal as “a rip-off, providing much less debt relief than the country needed. If you pick apart the figures, and take into account the large sweeteners the plan gave to creditors, the true debt relief is actually close to zero”.20But it still has to be approved by eurozone parliaments. Meanwhile, the supervising troika of the ECB, the IMF and the European Commission are, as we go to press, seeking to squeeze yet more cuts out of the government of George Papandreou in exchange for even the next €8 billion tranche of the original May 2010 “rescue”. Now it is Spain and Italy that are being forced to make obeisance to the markets by offering increasingly harsh austerity packages (though Silvio Berlusconi’s bows carry little conviction, which may help explain the decision of Standard & Poor’s also to downgrade Italy’s credit status). The prospect of a sudden Greek default that might destabilise the entire eurozone and with it the world economy goaded US Treasury secretary Tim Geithner to appeal to European finance ministers “to take out the catastrophic risk from markets”.21
It is easy enough to point to the fundamental contradictions in the design of the eurozone that have been exposed by the crisis: European Economic and Monetary Union (EMU) presupposed a federal political structure to support it, but instead the EU remains dominated by the nation states composing it. As this journal argued long before the euro’s launch in 1999, EMU bound together rich and poor, big and small economies into a single monetary system but explicitly did not back this up with the taxing and spending powers possessed by a state that could even out these differences and defend vulnerable members when they were under pressure. It is the absence of this fiscal underpinning that, together with the chronic weakness of European banks, has driven the eurozone ever closer to collapse since the 2008 crash.22
The financial collapse of the eurozone periphery has tilted continental Europe’s economy even further towards Germany, which till recently was enjoying a relatively robust recovery thanks to a surge in exports to China. And Germany’s response has been dictated by a combination of a strategic refusal to allow the eurozone to become a “transfer union”, in which the rich north underwrites the poorer south, and the parish-pump politics of the governing conservative-liberal coalition in Berlin. It seems to have been the latter factor that dictated the extraordinarily leisurely pace that Chancellor Angela Merkel imposed on eurozone decision-making during a summer where every week, every day even, brought worse news.
The severity of the crisis has prompted much talk, and even an agreement between Merkel and French president Nicolas Sarkozy in August about setting an “economic government” for the eurozone that would control member states’ fiscal policies. Transforming the eurozone into a fiscal union could fend off disaster by mobilising the resources of the entire region to bolster heavily indebted member states and recapitalise the banks. The proposal—fiercely resisted by Germany—for a Eurobond that would allow eurozone governments to borrow jointly at much lower interest rates than the weaker states can now obtain would be a step in this direction. But fiscal union would involve a decisive shift of political power away from nation states. There is negligible political support for such a leap towards a federal state. On the contrary, the trend seems to be in the other direction, towards disintegration.
For example, the latest Greek “rescue” was no sooner agreed than some northern European governments started demanding that Greece provide them with collateral for their share of the loan, which prompted markets to sell Greek government bonds, and thereby to increase the interest Greece has to pay on its debt—making a default more likely. The conflicts aren’t simply among the member states, but affect key EU institutions. The ECB under Jean-Claude Trichet, which has been forced to fill the vacuum left by the political paralysis, is increasingly at odds with Germany: this tension was dramatised when Jürgen Stark, the German member of the ECB executive board, resigned in early September in protest at Trichet’s willingness to prop up indebted member states by buying their bonds. Meanwhile, José Manuel Barroso, President of the European Commission, has been reduced to ineffectually wringing his hands. No wonder commentators such as Wolfgang Munchau now argue that “we are moving closer towards an involuntary breakup” of the eurozone.23 It remains to be seen whether the proposal mooted at the IMF meeting in Washington in late September to expand the European Financial Stability Facility set up as part of the first Greek “rescue” to €2 trillion will be agreed on sufficiently quickly to bolster the eurozone.
The political shambles in Washington and Brussels has been a powerful factor in the great market sell-offs over the summer. It would be wrong to give way to the temptation to put this all down to sheer stupidity—though in some cases, for example the suggestion by Germany’s EU commissioner, Günther Oettinger, of “flying the flags of deficit sinners at half mast in front of EU buildings”, there seems little reason to resist.24 The disarray arises fundamentally from the deep contradictions with which the advanced capitalist states are grappling. Thus Berlin’s hard line over the eurozone crisis arises from the effort to maintain an export model painfully reconstructed by German capital (with the pain felt by German workers) over the past decade: but could this model survive if the Mediterranean economies were pushed out of the eurozone, as many northern European politicians now propose?
The more general contradiction arises from the original bailouts themselves. A crisis of over-accumulation and profitability comes down to the fact that there is too much capital compared to the surplus value extracted from workers. Recessions help to restore profitability by destroying capital. But the bailouts limited that destruction of capital. The free-market right (including elements of the governing Conservative-Liberal coalition in Britain), in demanding that the crisis of neoliberalism is cured by yet more neoliberalism, sense the problem. Their solution is to kick away the crutch of the state. The trouble is that, as we have seen, it is the crutch of the state that has been holding up the world economy.
Nevertheless, the US, the eurozone and Britain are all locked into policies of austerity and deficit-cutting. At a time when deleveraging by indebted firms and households is putting downward pressure on aggregate effective demand, the countervailing pressure provided by public spending is also being reduced. Moreover, as the IMF points out, “low growth makes it more difficult to achieve debt sustainability”: if economies stagnate or shrink (as, for example, Greece is doing) the effective burden of debt rises.