”The markets have gone crazy” – this comment was heard on stock trading floors around the world after two days of total mayhem. ”The financial system is in terrible shape, and no one knows where this will end,” a financial analyst in Stockholm told Bloomberg News.
On Tuesday 22 January, Asian bourses recorded their worst day of losses since 1990, when Japan’s bubble economy burst. Trading was suspended on both the Bombay and Seoul exchanges so sharp were the falls there. The sell-off continued albeit at a slower pace in New York, despite the Federal Reserve’s (US central bank) emergency interest rate cut. This brings the combined losses on global stock markets during the first three weeks of 2008 to a staggering $7.3 trillion – a sum that far exceeds Japan’s GDP. Many major stock markets have suffered falls in 2008 alone of around 20 percent, the official definition of a ’bear market’. The Tokyo stock market’s Nikkei index has slumped 22 percent, and London’s FTSE 100 almost 17 percent, since the start of the year. The Hong Kong stock market has seen a quarter of its value erased in the same period, while New York’s Dow Jones index has plunged ten percent in 14 trading days – the worst such period in its history. ”We’re in panic territory,” declared a fund manager in Kuala Lumpur. ”The markets are pricing in a recession”.
The entire corps of global speculators – representatives of the big banks and financial institutions – are struggling to make sense of what is happening to their world. The answer is that the multiple speculative bubbles created during the past two decades of untrammelled neo-liberal capitalism – bubbles in property, financial assets such as company stocks, currencies and almost every tradeable commodity – are bursting. Rather than an ’orderly’ retreat from the financial ’excesses’ of the past period, which many capitalist commentators hoped for, the events of the last few weeks especially are beginning to look like a full-blown collapse.
Worst recession since 1945?
The panicky mood in financial markets is a sign the capitalist class are coming out of denial and beginning to see not only that a recession is increasingly likely, if not already a fact in the US economy, but also that this downturn – aggravated by the bursting of financial bubbles – may be far more serious than other recessions in the post-1945 period. Two eminent US economists now warn that ”the current crisis appears on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II.” [University of Maryland economist Carmen Reinhart and Harvard University economist Kenneth Rogoff quoted in The Wall Street Journal, 21 January]
Their dire view is shared by super speculator George Soros and a host of recent financial reports. ”The US has suffered recessions only twice in the past quarter century, and both were short and mild. But there are good reasons to fear that the looming recession, if it arrives, could be worse,” explained the same Wall Street Journal article, citing a report from investment bank Merrill Lynch. As this report explained, ”The combination of heavy debt loads, still-high energy and food prices and a weakening job market has households tightening their belts. Consumer spending, long a bulwark of the economy, is faltering. That sets the stage for something more severe than the 2001 recession, which spanned just eight months.”
The US housing market is experiencing its worst slump since the 1970s, with prices falling by a national average of 8 percent since their peak in 2005, but up to 40 percent in the worst-hit regions. The futures market is pricing in a decline of up to 30 percent in house prices – an ominous sign of where the US economy may be headed. With unemployment hitting a two-year high of 5 percent in December, and possibly rising to 7 percent later this year according to some forecasts, the US consumer, long seen as an infallible driver of global growth, is finally throwing in the towel. Consumption fell by 0.4% in December. While the ’experts’ are still debating the issue, six out of ten Americans believe the country is already in recession. [The Economist, 12 January 2008]
”People are up to their eyeballs in debt, and they’re being asked to borrow more,” a senior economist for the Credit Union National Association told the Associated Press.
But the financial crisis triggered by the US housing slump is still only in its early stages. There is almost certainly worse, maybe much worse, to come. As The Economist notes, ”Commercial property looks more precarious by the day, as do car loans, student loans and credit-card debt. All of these were, like residential mortgages, fed into Wall Street’s stalled securitisation machine. Many now sit in complex products with the same questionable credit ratings.” [The Economist, 12 January 2008]
The prospect of major banks coming forward with a new crop of losses and write-downs as their speculative practises in the above mentioned areas also go sour, can keep the financial markets in bearish mood for a long time to come. The crisis is multi-faceted, with economic problems in several different sectors impacting upon each other in a complex interplay. A slowdown in US consumption for example will speed up a crisis in the commercial property sector which has so far been spared the sharp price falls in the residential sector. According to a report from Property & Portfolio Research, only 40 percent of the new store space built in the US over the last two years is needed if current consumer sales forecasts hold. Overcapacity in this sector will, as in the housing market after a wave of foreclosures, further depress prices. Banks will be left with more losses. Higher unemployment and the destruction of pensions and other forms of private saving, as a result of falling share prices, will put the brakes on consumer spending, as will tougher credit terms from banks and credit institutions as they grapple with the housing slump.
New rate cuts
Since the crisis erupted last summer, with the implosion of several hedge funds linked to high-risk subprime loans in the US housing market, a succession of government and central bank initiatives – involving phantasmagorical amounts of money – have failed to restore stability to financial markets. This has shaken the confidence of the capitalist class worldwide. Capitalist governments and central bankers are scratching their heads over what to do next. Nothing seems to help. A cut in US interest rates by one percentage point since last September, gigantic globally-coordinated capital injections to keep money markets liquid, and action by national governments to shore up troubled banks, have all so far washed off financial markets like water off a duck’s back. This represents uncharted and scary territory as far as top capitalist policy-makers are concerned, after two decades when economic management appeared to be like flying the economy on neo-liberal ’autopilot’. Government leaders from New Delhi to Paris are telling people to ’stay calm’ and insisting that local economies are in ’good shape’. But this message is wearing thin.
”The administration, Congress, the Fed and the day traders on Wall Street all seem to be in panic mode,” veteran US economist Allan Meltzer told the Los Angeles Times (17 January). This mood gave rise to the $145bn package of tax cuts and other measures aimed at jump-starting the US economy, which George W Bush unveiled in a televised address last Friday. But despite this package being larger than the combined IMF programmes for Thailand, South Korea, Indonesia, Russia, and Brazil during the 1997-98 ’emerging markets crisis’, and exceeding what the press expected, the announcement failed to calm the markets. The Bush package was ”too little, too late” according to commentators from Manila to Sao Paulo as stock indexes plummeted.
The mood of panic is underlined even more starkly by yesterday’s emergency intervention by the Fed, cutting its overnight interbank interest rate by a further 0.75% to 3.5%, the largest reduction in 23 years. This cut was brought forward from the Fed’s next regular meeting on 29-30 January and motivated by ”increasing downside risks to growth” and worsening ”broader financial market conditions”. Coming just days after Bush’s rescue package, the Fed action confirms the impression of an economic leadership in crisis, making up policy from one day to the next. ”People may see it as an extreme step and feel that it’s a sign the situation is worse than they had anticipated,” a Boston-based economist told Bloomberg News.
Certainly, the reaction to this latest interest rate cut on the New York stock market was underwhelming, with the sell-off continuing. As each official intervention becomes bigger, more dramatic and desperate than the one before, there are signs the market is becoming immune. The underlying problems created by two decades of bubble economics keep asserting themselves with a brutal logic. The problem for Bush and central bank chiefs like Bernanke and Trichet was summed up by one Hong Kong trader: ”We don’t believe all the bad news is out!”
Most market commentators fear worse is still to come. In February it will be the turn of some of Europe’s biggest banks like BNP Paribas and Deutsche Bank to present quarterly reports.
Governments everywhere will attempt to blame the crisis on global events ’outside’ their control. Like Bush in the US, however, all today’s ruling parties and politicians have been willing accomplices of the Wall Street speculators, giving them free rein to invent an array of incomprehensible and – as they now admit – uncontrollable financial instruments, misnamed ’securities’, that in just six months have seriously eroded the balance sheets of the world’s biggest banks such as Citigroup, Merrill Lynch and UBS. Top politicians and bankers form a tight-knit alliance at the core of the global capitalist system. Hank Paulson, the US Treasury Secretary is a former executive of investment bank Goldman Sachs, while Britain’s former prime minister Tony Blair is now managing director of Morgan Stanley Investment Management in Europe. This elite club is responsible for the mayhem on global financial markets.
The losses reported by major banks in recent weeks are the largest in history. In Citigroup’s case – its biggest loss for 196 years! Citigroup and Merrill Lynch alone have so far notched up losses from the subprime meltdown of nearly $50bn. Remember Bernanke’s hopelessly optimistic prediction of last August that the subprime crisis would cost $100bn – in total – to clean up. Any ordinary worker who made a miscalculation that cost his boss even a millionth of these sums would be looking for another job. Yet this same corporate elite and their government friends remain at the helm of the global economy.
Now, Wall Street’s banks are being pushed into a marriage of convenience with foreign state-owned banks and sovereign wealth funds – the state-owned investment arms set up by countries like China, Singapore and Saudi Arabia, who run big trade surpluses. US banks have so far received a combined $59bn capital injection from such funds in exchange for minority ownership stakes. Swiss banking giant UBS has been given the nickname ”Union Bank of Singapore” as a result of the Southeast Asian state’s $10bn bail out agreed in December. But while this process has raised protectionist warnings in the US and elsewhere, it seems set to continue given the seriousness of the banking crisis. The only alternative would be a domestic state takeover – nationalisation – which is not ruled out, but would require politicians in the US and elsewhere to make a humiliating departure from certain fundamental neo-liberal tenets. Troubled banks were nationalised in Japan, Sweden and in several Asian ’crisis’ countries during the 1990s. In these cases, however, without mass pressure and a clear socialist alternative offered by workers’ organisations, the banks were rescued with public money but then sold back to the speculators, often with significant job losses and attacks on employees’ conditions.
No ’safe havens’
Unlike previous rounds of financial market turbulence there is no ’safe haven’ for the speculators to flee to. So-called ’emerging markets’ are now in the same boat as the US and other older capitalist economies. The theory of ’decoupling’ – that Asia and other ’emerging markets’ could shrug off a US recession, has been debunked, first by socialists in these pages, and now also on the trading floors of the global casino. The notion of ’decoupling’ is a negation of everything the capitalist economists have been telling us about globalisation for the last two decades. The fact is that their system is inter-linked under the dictatorial regime of the big banks and financial institutions and today there are very few escape hatches, not at least without a complete root-and-branch transformation of the economic system.
Scepticism towards the ’decoupling’ theory is also apparent from the sharp falls in the prices of commodities like oil, gold and copper in recent days. This is driven by concerns that India, China and other fast-growing economies will suffer considerable damage from the US downturn. Oil prices have fallen to $88 a barrel from their record level of $100 at the start of the year. One Swiss oil trader summed up the gloom even here: ”There is blood on Wall Street and given the high correlation seen lately between oil and equities, the risk remains for further downside pressure on oil commodities”.
World-leading corporations in fields as diverse as finance, mining and consumer electronics have all been pounded in the last few weeks of market mayhem. Since the start of 2008, shares in BHP Billiton, the world’s biggest mining corporation and Toyota, the world’s number one car producer, have fallen by one-fifth. PetroChina, briefly the world’s most valuable company last year when its stock value hit an incredible $1 trillion, has lost more than half since its November peak, wiping more than $500 billion from its market worth. Citigroup, the biggest US bank measured by assets, has lost 47 percent of its market value since the US mortgage crisis erupted last August. Last week, the bank announced 4,200 job cuts with its shareholders screaming for more.
Forecasters everywhere are revising down their growth predictions for the coming year. The German government announced GDP growth may slow to 1.7 percent from 2.5 percent in 2007. Just three months ago they projected growth of 2 percent for 2008. Meanwhile in the world’s number two economy, Japan, prime minister Fukuda cited deteriorating economic conditions to justify delaying a general election. He also pledged to intervene if necessary to prevent a collapse of the Tokyo stock market amid speculation that Japan too is sliding into recession.
As for China, it will not escape a global downturn. Its economy is not only extremely dependent on exports to the US and even more so to Europe, but the integration of its banks with Wall Street’s ’subprime’ giants is yet another transmission route for the crisis. Trading was suspended on Tuesday 22 January in Bank of China, the country’s third-largest bank, on fears of an imminent write-down from securities linked to US subprime mortgages. Some press reports put the expected write-down at $8bn.
”It is the largest subprime exposure in Asia. I don’t know of any bigger exposure,” Tang Yayun, a Shanghai-based analyst told AFP. But other Chinese banks including ICBC, the biggest, are likely to be caught up in the subprime fallout. ”It’s only the tip of the iceberg,” warned Tang. ”Chinese lenders are really inexperienced in investment in financial derivatives. To be frank, they are liable to be cheated by international investment banks.”
Banks and insurers have led the sell-off on China’s stock market which has plummeted 17 percent in the last six days. China’s financial bubble – a pirate copy of the US original – seems already to be bursting even before Beijing plays host to the Olympic Games in August.
The likely effects of the unfolding crisis are impossible to predict in their entirety, but it is clear that the global capitalist economy is now in a serious crisis. The speed of developments means even socialists and other political activists can be caught off guard. Socialists should seize the initiative and jump into discussions with workmates and friends. Our ideas – for an economic system based on democratic planning, a pooling of society’s resources and an end to the chaos and destruction of capitalism – offer the only way out of the crisis.
Governments around the world will increasingly be wracked by political instability, crises and scandals. As jobs, pensions, living standards and welfare are threatened by a global recession, tens of millions more worldwide will question if the capitalist casino economy is a sane way to run society. Continued government attempts to hand over control of vital services – from water to public transport and hospitals – to the self same speculators and financial ’wizards’ who gave us the ’subprime’ banking virus, will meet even stiffer resistance from the poor and dispossessed.
Workers, farmers and the poor – including billions who have never owned a single share – will now be asked to foot the bill as capitalist governments try to rescue their system and bail out the banks and financial institutions that created this mess. We say, no bail-outs without democratic control! If the banks, insurers and other financial institutions are so central to economic life – if they are ”too big to fail” – then how can something so big, so vital, be entrusted to a small, secretive, unelected and criminally reckless elite? The case for public ownership and democratic control has never been clearer:
– Nationalise the banks and financial institutions under democratic workers’ control and management.
– Stop the speculation with our pensions – for a fully publicly funded and controlled pensions system.
– For democratic regulation of the economy – put an end to privatisation, deregulation, speculation and financial scams.
– Compensate the small investor but let the speculators and fat cats go down!
– For a socialist society, based on public ownership and democratic planning to meet the needs of the majority.
Vincent Kolo, Chinaworker.info