One phase of the crisis may be over, but there is more economic trouble ahead.
A YEAR ago the world was 18 months into the worst economic crisis since the 1930s. The economy was still in “free fall.” The investment banks and the shadow banking system had collapsed, the commercial banks were dysfunctional, and many were going bankrupt. Credit, even lending between banks, was frozen. World industrial production plunged by 20 percent, as did world trade—a contraction only exceeded during the Great Depression. Nobody knew where the bottom was, and various catastrophists warned that there was no bottom in sight.
It was a serious question as to whether we were about to enter a crisis similar to the Great Depression of the 1930s. But the economy did hit bottom, and over the next several quarters there were increasing signs of a recovery, purchased by the largest financial bailout in world history. The United States and the world economy have been growing since August 2009, but with the exception of Asia and emerging markets, at anemic rates, particularly when judged by the many trillions of dollars governments have spent to produce this recovery.
Indeed, there is no confidence that recovery is sustainable without ongoing state stimulus; and yet the stimulus is producing deficit and debt problems that could trigger a new stage of the crisis.
This is not a repeat of the 1930s. One reason for this is that lessons were learned from that collapse: use any means necessary to prevent failure of the banking system; don’t allow deep deflation to set in; avoid high protectionist tariffs (which led in the 1930s to the collapse of world trade); and use deficit spending to make up for falling private demand and investment.
The free-fall stage of the crisis began when Henry Paulson, then Secretary of the Treasury, and Ben Bernanke and Timothy Geithner of the Federal Reserve, decided to allow Lehman Brothers to go bankrupt. The most likely explanation for this decision, aside from stupidity, is that Lehman was allowed to collapse to shock capitalist political culture out of neoliberal stupor and into accepting the policies necessary to save the system.
Overnight, the dominant capitalist idea of a self-regulating, self-correcting, efficient free market, which operated best when unencumbered by state intervention, went the way of the woolly mammoth. The neoliberal crisis policies of the last 30 years were encapsulated in the structural adjustment programs of the International Monetary Fund (IMF)—cut government budgets, cut spending, cut consumption, devalue the currency, and export your way out of the crisis. These prescriptions were immediately discarded during the current financial crisis. The IMF, in a rare moment of candor, repudiated austerity, and confessed that its regulations had worsened recessions.
Instead, there was the reintroduction of Keynesian economics, and the rapid response of massive fiscal and monetary stimulus on an international, coordinated basis. The United States led Japan, the European Union, and BRIC (Brazil, Russia, India and China) in an unprecedented international fiscal and monetary stimulus. Interest rates were reduced to their lowest level ever. The Federal Reserve continues to provide free money to the banking system, holding interest rates close to zero. Capitalist governments transferred private capitalist debt from banks and corporations to the state—losses were socialized for the public to pay for. State intervention provided credit, demand, and infrastructure investment. The Bush-Obama administrations saved the banking system, the auto industry, and the housing industry. Their failure would have brought down the rest of the capitalist economy and likely created a 1930s-style depression.
The capitalist state, not the market, produced stabilization, the end of the free-fall, and the start of a recovery. However, the fundamentals of the capitalist economy are so weak that there is no confidence that if the state were to withdraw stimulus that recovery could be sustained. The fear is that if the “free market” was left to its own solutions, and government stimulus sharply curtailed, demand would collapse, renewing recession. All of this has to be subtly presented so that faith in “free enterprise” is not excessively undermined.
In housing and construction, for example, stabilization is problematic and recovery still distant. Four million additional foreclosures are expected in 2010. A quarter of mortgage-holders are under water, their homes valued at less than their mortgages, while a further decline of 10-15 percent in housing prices could double that number. Today there is no housing industry—robust or weak—without the state. Eighty percent of all mortgages are made or guaranteed by Fannie Mae and Freddie Mac, government agencies with state subsidies and guarantees. Their combined losses could cost the government $400 billion. In addition the state has in the last year bought $1.25 trillion of mortgage-backed securities from the banks, including toxic assets to keep the mortgage market functioning.
The banks—despite the apparent “profitability” that is used to justify mega bonuses for their meritorious, hard working, deserving executives—also would be bankrupt without continued state support. The state guarantees their deposits and their loans. The restoration of banking profits has come through three sources: revaluing toxic assets upward (called “mark to make-believe” in the capital markets), government capital to invest in higher paying assets, and speculating with the free money the government provides. The eighteen largest banks, which the government guaranteed after “stress tests” as too big to fail, now borrow money at on average 29 basis points cheaper than banks without government support. This came to a total of $3.4 billion, half of bank profits last quarter. The banks profit from the steep yield curve by borrowing money from the government at almost zero interest, or taking deposits at pathetically low rates, and recycling them by buying government debt in the form of treasury bonds at three and a half or four percent, with minimal risk. The banks have also used the free money to speculate in commodities, stocks, and international real estate, creating new bubbles internationally. Goldman Sachs, which converted itself into a bank holding company so as to be eligible for Fed money, made 11 percent of its 2009 profits from traditional banking, and 72 percent from speculation—courtesy of the taxpayers.
Despite this government welfare, the banking system continues to bleed in terms of non-performing loans from housing, commercial real estate, auto, credit card, and business loans. The banks have disguised many losses from non-performing loans by rolling them over in what Wall Street insiders call “extend and pretend.” Wall Street’s crisis has not been solved—its losses have been absorbed by the government.
To stay solvent, and to meet capital reserve requirements as loans turn sour, the banks are forced to deleverage—to cut their debt exposure. Bank assets have been cut from $7.3 trillion to $6 trillion. In the next two years, deleveraging is expected to reduce that to $4 trillion. This severe, ongoing credit contraction will constrict growth for years as consumers, small businesses, and start-up companies are denied credit.
Industry is functioning at 70–75 percent capacity. There is still little or no capital investment in business expansion. In fact, for the first time since the Depression, the means of production slightly declined last year. Corporations are flush with cash. Rather than funding expansion, they are using it to pay down debt, buy back stock, hoard capital, invest in more dynamic markets abroad, and engage in mergers.
There is also no consumer recovery. This is not surprising, given a 9.7 percent unemployment rate—almost 16 percent when the number of discouraged and underemployed is taken into account—declining income, saving in homes and pensions wiped out, and no income or job security for those still working. The credit squeeze will force consumers to cut personal debt by $4 trillion in the next few years.
Growth is not coming from industry, the banks, or consumers. This is the first time there is no “engine for growth” in the U.S. outside of the state. The United States has been the engine for growth in the world economy since the Second World War, but not this time. It is China, with its more regulated state-capitalist economy that is currently the main engine for world growth, quickly altering the imperialist balance of power.
The rapid shift to monetary and fiscal stimulus produced an equally rapid set of new problems that underline the contradictions between the capitalist state and the capitalist market that already reveal the limits of Keynesian economics.
Keynesian policy proved incapable of ending the depression of 1930s—only war production did that. And after being the dominant capitalist economic ideology from the 1930s to the 1970s, it had no answer to the stagflation crisis of the 1970s that marked the end of the post-war boom. Keynesianism was replaced by neoliberalism as the dominant capitalist economic school. But with the collapse of the neoliberal boom, Keynesianism was the only other coherent set of ideas that capitalism could turn to: state intervention, fiscal and monetary stimulus, deficit spending, cheap credit through low interest rates, the state substituting for the market’s failure to invest—all efforts to stimulate demand, to “prime the pump” until the market could be “self-sustaining.”
Keynesianism can take credit for ending the free fall, saving the banks, and producing what stability there is. But the government deficit and debt its policies recommended come up against the limits that the capitalist system, with its capital markets that function solely for private profit, are willing to fund at tolerable interest rates. It has opened up the possibility of sovereign debt defaults, of government bankruptcies replacing private bankruptcies. And since Keynesian solutions are subordinated to the logic of capitalism, it has no answer for capital markets that refuse to fund its debt programs, which demand austerity measures with the threat of deeper crisis.
Capitalist economists generally contend that government deficit spending should normally not exceed the long term nominal growth rate of 3 percent of Gross Domestic Product and that the government’s accumulated debt should be under 60 percent of GDP to ensure the ability of government revenues to service debt—particularly if interest rates rise. If debt mounts beyond these levels, states’ credit ratings and ability to borrow may start to decline. Private capital then refuses to continue to fund the debt at acceptable levels, pushing up interest rates, which both slows the economy and takes an even bigger chunk of state revenues for debt payments. Once government debt rises above 100 percent of GDP, servicing the debt, particularly as interest rates rise, can become so onerous in relation to state revenue that governments have historically tried to escape debt burdens by devaluing their currencies, attempting to inflate their way out of debt, or defaulting on the debt, forcing creditors to accept only partial paybacks.
Virtually every advanced industrial country tried to stem the destruction brought on by capitalist crisis by raising deficit spending in the last year to 6-10 percent of Gross Domestic Product. The worst-case scenarios are Greece, Britain, and Ireland, which are running government budget deficits of 12-13 percent, followed by Spain and United States, with deficits of 11 percent of Gross Domestic Product. These are figures that have only been exceeded during the two world wars.
The ongoing debt crisis
The debt bubble which triggered the crisis has not been solved. It has merely been transferred from private hands to the state: from the banks, mortgage companies, auto industry, AIG, etc., to the public. The state nationalized private capitalist debt at such unprecedented amounts that it threatens the state’s ability to fund that debt in the face of ongoing additions to national debt by the budgetary deficits. One index of the long-term nature of this crisis is that the U.S. government projects it will be running a deficit of a trillion dollars a year for the next decade. To make up for the decline in private demand, it projects a long-term crisis that is building up its debt.
Sovereign debt default, the possibility of states refusing to pay their debt, has emerged as a key contradiction of this crisis. The Greek crisis is the template for the emerging multi-year, and multi-country sovereign debt crisis. The level of Greece’s deficit and debt is making it difficult to finance that debt in the capital markets. Greek government bond ratings have declined to just above junk bond status. If they were to fall further it will be impossible for them to be used as collateral in inter-bank and money market transactions, effectively shutting down the Greek banks.
The bond market and the European Union countries, which share a common currency with Greece, forced it to introduce austerity measures. Taxes on working class and popular consumption were raised; the value-added tax went from 19 percent to 21 percent. Government salaries, pensions, and benefits were cut. Demand—consumption—is being cut. This is just the first installment to bring down the deficit from 12.5 percent to 9 percent. Next year there will be another installment to bring it down to 6 percent, and a year after, still more. What is being introduced is what used to be the IMF austerity program—through the medium of the capital markets and the insistence of the German government. Greece will be in an intolerably deep slump for years. These measures are not enough to prevent the capital markets from demanding ruinous interest rates on Greek government debt, exacerbating the downturn—but they make perfect sense for the hedge funds, banks, and corporations all speculating on Greek debt for their pound of flesh.
One of the lessons of the 1930s was not to cut demand, which only deepened and prolonged the bust. Keynes’ solution was that the state should make up for the fall in demand in the private economy by stimulating demand through state deficit spending. That was last year’s solution, when finance capital had to be rescued. Once rescued, finance capital now demands that the government deficit and debt be cut or it will not finance it. Cut the deficit, cut demand, is the new political chorus. Yet there is also the fear that if this is done too soon the recovery will collapse. And if the sovereign debt crisis spreads to other parts of Europe as well—to Spain, Portugal, Ireland, Italy, etc.—it threatens another, deeper, European-wide and international crisis. We are now very quickly approaching the 1937 dilemma, when the Roosevelt administration cut back deficit spending and cheap credit, and set off a second severe depression. That was four years into the Roosevelt administration. This very rapid stimulus, and much greater deficits than the 1930s, sped up recovery and also sped up deficit and debt problems that threaten the possibility of a new downturn.
What is in store for the future? One possibility is years of instability, of incoherent policy, of stops and goes, alternating between deficit reduction programs, new downturns, followed by new stimulus programs. There is a good possibility that further instability in the next few years will come from countries with enormous debt engaging in currency devaluations, or raising inflation to wipe out debt. The biggest fear is the impact that sovereign debt defaults may have on the financial system, with the possibility of new banking crises.
Also unknown is what the fallout of this will be on the European Union. Will the common market with common currency and monetary policy survive without a common fiscal policy and government? The contradictions of imperialism—between a globalized economy on the one hand, and nation-states on the other, of anarchy of production on a world scale with no single power capable of regulating it—emerge with full force in this crisis. The United States is no longer the only economic superpower, no longer able to play the role in the world economy that it did in the last 65 years, when it was hegemonic enough to impose its economic policies on the other capitalist states.
The change in the objective conditions, in the nature of the period, after the normal lags of consciousness, even?tually have their impact on politics. In periods of economic instability, of corroded economic fundamentals, it leads to political instability and to sharp, sudden turns in popular political opinion. The main problem of the Obama administration isn’t solely what the left views as its failure—that it hasn’t produced change—but what capital views as its failure: that it hasn’t produced a way out of this crisis despite stabilizing the situation.
Keynesian economics, capitalist state intervention, does not yet provide a way out of the capitalist crisis. This is not just Obama’s problem. This is also the problem of Papandreou and his Socialist Party that is now carrying out austerity in Greece. This used to be referred to in the socialist movement by the metaphor of squeezed lemons. The capitalists squeeze the liberals and social democrats to get popular acquiescence in accepting cuts. When they have exhausted their possibilities, they are then discarded for right-wingers who will make even further cuts. This is the dead end of capitalist politics in a crisis.
A year after the hope in Obama dissipated as people’s living standards fell, the alternative being popularized by the media is that of the Tea Partiers with their demand for “small government and cutting the deficit.” They are useful idiots. Small government is not an attack on the banks, as some of the tea baggers imagine, but an attack on government spending on entitlements and social programs. Capitalism’s love story is to solve this crisis by cutting the standard of living of the working class. On this, there is general agreement in both capitalist parties—the question is over the details, and how to sell it.
The long-term solution the U.S. government is seeking is similar to what is unfolding in Greece—austerity. The big-ticket items to cut in the government budget will be jobs, pensions, and benefits, with the age of eligibility for Social Security raised to 70 years, Medicare to 67, and Medicaid cut. Taxes are to be shifted even more onto the working class, through taxes on gasoline (packaged as “green” or “for energy independence”) to a value-added tax. Ordinary consumers will be taxed rather than businesses (packaged as necessary for exports in international competition).
Obama’s budget for 2011 calls for a freeze on discretionary spending while leaving military spending untouched, and he supports the formation of a bipartisan commission to consider ways to cut spending on Social Security, Medicare, and Medicaid.
We have already seen this move toward deep austerity play itself out in the state and municipal budget cuts in the United States, which have led to drastic layoffs and social service cuts—cuts that would be far worse if it weren’t for the $150 billion states received from the federal stimulus plan. Once the stimulus money runs out, the cuts will run even deeper.
There is great anger that banks have been bailed out at the expense of the majority, but working-class organization is still extraordinarily weak. People are open to many different solutions, including right wing populism, scapegoating immigrants, etc. But revolutionary Marxist politics today are also more relevant than they have been at any point in the last half-century. The situation demands greater ideological sophistication of Marxists. We must expose neoliberalism and the Right, but we must also explain the limits of Keynesianism, why both political parties are parties of the ruling class, and expose their plans to restore profitability on the backs of the working class.
There is no crystal ball to show us how the crisis, or politics, will unfold. It is almost unbelievable that within a year of massive stimulus, there would now be proposals for austerity. We know with the budget cuts, there is sentiment to fight back, but it has to be organized. The movement is still politically and organizationally in its infancy.
We don’t know where in the world the upsurge in class struggle is going to start, or have its first successes. The fight back against this austerity is at its beginning. Yet in this long-term crisis there are the openings to begin the process of recreating a working-class movement based on a program of class struggle and socialism.