It is often said that central bankers 80 years ago were responsible for
creating the Great Depression. Constrained by their commitment to the
gold standard, they failed to ease monetary policy (cutting interest
rates) fast enough, say the economists, thus turning a crisis into a
Depression. But that is not the real reason.
It is often said that central bankers 80 years ago were responsible for creating the Great Depression. Constrained by their commitment to the gold standard, they failed to ease monetary policy (cutting interest rates) fast enough, say the economists, thus turning a crisis into a Depression. But that is not the real reason. With the collapse of demand after 1929, as a result of massive over-production, no amount of monetary easing was going to rescue the capitalist system. The “upturn” came ten years later with the turn towards war production. In other words, it was the terrible destruction of the Second World War that ended the slump, but at the cost of 50 million dead.
Unlike in the 1930s, after the collapse of Lehman Brothers, the Fed and US Treasury had “learned from their mistakes” and poured in trillions of dollars to prevent a complete meltdown. While that may have helped to stave off a Despression, at least temporarily, such measures did not prevent the biggest world-wide slump since 1929. The capitalist state bailed out the banks and rescued the capitalist system at enormous cost. This led to colossal state indebtedness and the introduction of austerity across the board. This in turn has served to produce the weakest economic recovery in more than 100 years.
Without doubt, there are clear similarities between the 1930s and today. The straight-jacket of the gold standard, which nailed economic policy to austerity, has been replaced with the straight-jacket of the European Union. The capitalists set up the EU to provide European capitalism with a much bigger market. Their attempt to forge greater economic integration, which benefited them in the past, has now come unstuck. They have no alternative but attempt to hold together the Eurozone for fear of the alternative. But whatever they do will be wrong.
The introduction of austerity measures have simply served to cut the market and push the European economies deeper into recession. However, an attempt to push up state spending to “stimulate growth” will simply increase the fiscal deficits, and force up the cost of borrowing. Interest rates are almost at zero, but to no avail. The capitalists are caught between the devil and the deep blue sea. Their actions are only going to open the way for an even bigger collapse in the future.
Once again, agony is being piled upon agony. The recent downgrade by Moody’s credit agency of Spanish banks is a further eye-watering twist to the European banking crisis. Many have described it as a slow-motion train crash. All they have been able to do up until now is to buy a little time. But that is about to run out. Events could take a very ugly turn very soon as the contradictions reach breaking point and borrowing costs become unsustainable.
There are a number of scenarios, but none have a happy ending. The bailout of the Spanish banks will not solve the problem as the recession is pushing up their level of bad debts. There will come a point when more help will be needed but this can only be achieved with a full-blooded bailout of the crisis-ridden Spanish state. Without growth, this will become inevitable. And yet this would break the back of the current system given the size of the Spanish economy and the limited resources available in the European rescue fund. A bailout could cost as much as 500bn Euros, a sum that would burn through the entire financial wall that the EU has constructed to contain the crisis.
This would deepen the crisis and simply prepare the way for a full Italian bailout, the next in line, whose borrowing costs have also reached unsustainable levels. While Italy’s fiscal deficits are smaller than Spain’s, its roll-over problem is bigger. According to the IMF’s Fiscal Monitor, this year Italy neded new financing equal to 28.7% of Gross Domestic Product, far above Spain’s 20.9%.
A default by Greece, on the other hand, which is also on the cards, would immediately result in a currency crisis and breakup of the Eurozone. Such a scenario would produce a run on the European banking system, resulting in banking collapses and plunging Europe into depression.
Germany, the paymaster of Europe, has made it clear that she will not stump up more money. On the contrary, she is demanding that everyone in the Eurozone becomes like Germany! With Germany holding the purse strings that means the continuation of austerity policies. While Holland and others talk of the need for growth, Merkel agrees to a “growth with austerity” on Germany’s terms. “We’re convinced that Europe is our destiny and our future,”,she told the Bundestag. “But we’re also aware that Germany’s strength isn’t infinite.” In other words, everything will continue as before.
This is why all the European leaders are fretting. It is the reason why Mervyn King, the governor of the Bank of England, has issued such a bleak warning over the prospects for the economy. “The diagnosis is indisputable”, states the editorial in the FT, “the entire world is now contaminated with the Eurozone virus… This gloomy outlook is not unique to the periphery – German producers are now as worried as those in the other big Eurozone economies. Elsewhere, too, signs of slowdown are coming hard and fast.” (FT, 2/6/12)
However, the European Central Bank has adopted a more optimistic perspective. It is sticking to its forecast of a gradual recovery in Eurozone economic growth! They are like the Harvard Economic Society in 1930, which in its end of year forecast stated: “A depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.” Interestingly, on 18 January 1931, the Society said, “There are indications that the severest phase of the recession is over.” This is the same optimistic message Mario Draghi, the president of the ECB, made a few months ago. History, stated Marx, repeats itself first as a tragedy and then as a farce.
Under present conditions, the Spanish banks are not off the hook by a long chalk. The latest recapitalization drive is too small and too late, and comes after the European Central Bank last December already promised loans of one trillion Euros to the European banks over the next three years. But there is a tidal wave of bad debts coming. “Everyone is underestimating the next wave in Spain”, said one bank chief executive. “And that will come from the fallout from the economic problems and rising unemployment on consumer loans.”
Spanish unemployment is at 25%. Spanish home prices fell nearly 13% in the first quarter from a year earlier, their worst annual decline to date. Spanish bank borrowing from the European Central Bank hit a new high in May of 324.6bn Euros.
All this has been made more difficult since Moody’s downgrade and spells disaster in the not too distant future.
The stress tests imposed on the banks were not worth the paper they were written on. The expected losses have been completely underestimated. Apparently, Spanish banks would only need between 16bn and 62bn Euros of new capital to put their books in order. In the end, they were granted 100bn. But with the growing unemployment and mortgage failures owned by the banks, they will take a massive hit in the next period.
But what have the banks done with these loans? This banks are now busy buying Spanish government debt, further entwining the fate of the banks with the failing Spanish state.
“For the first time”, states the Financial Times, “a large Eurozone country’s lockout from financial markets – which would be a disaster – is a real possibility.” (FT, 23/6/12)
This bleak scenario has seen financial markets plummet to even greater depths, sending the costs of government debt soaring. At the same time, German business confidence has hit its lowest level in more than two years, while Eurozone economies are spluttering or shrinking fast. Now Cyprus has been drawn into the maelstrom seeking funds to prop up its banks. But this is only symptomatic of the banking system in general.
The bankers and financiers, the personification of financial capitalism, have become extremely powerful in this age of finance-capital. They have achieved domination over many parts of the capitalist system as their financial tentacles spread out over the world economy. They control the flow and concentration of vast amounts of money in their hands, which they attempt to manipulate in their own interests. The share of US profits accruing to the financial sector rose from 13.1% during the 1950s and 1960s to 45.3% in 2001.
Sitting on top of these powerful institutions are the central bankers who attempt to “regulate” the banking system in the interests of capitalism in general. They are vested with monopoly powers in the issuing of money. “The modern banking system manufactures money out of nothing”, explained Sir Josiah Stamp, President of the Bank of England in 1927. “The process is perhaps the most astounding piece of sleight of hand that was ever invented.” In fact, their profits come from a slice of the surplus value produced by the working class.
The accumulation of such money and wealth in fewer and fewer hands signifies a financial oligarchy, operating through a whole host of powerful institutions.
Crisis under capitalism can take the form of monetary and credit crises, as we have witnessed ever since the emergence of the financial system. This has been the main appearance of crisis in the recent period. The boom years following the dot.com crisis, resulted in the biggest credit and property bubble in history. It was a time of “excessive exuberation”, to use the words of Alan Greenspan, the then chairman of the Federal Reserve. The collapse of this bubble resulted in the banks and financial institution, after massive profits, taking a massive hit. This process of speculation and extended credit reached its limits and finally collapsed.
But rather than acting as the cause of crisis, the monetary crisis acted as the trigger for a crisis in the real economy. In that way, the credit crunch of 2006-7 prepared the way for a slump of 2008-9, which in turn has looped back in on itself in the form of a crisis of state finances. The slump also has served to intensify the crisis in the banking sector which has been undermined by bad loans and growing debts.
“The chain of payment obligations at specific dates is broken in a hundred places”, writes Marx, “and this is still further intensified by an accompanying breakdown of the credit system, which had developed alongside capital. All this therefore leads to violent and acute crises, sudden forcible devaluations, an actual stagnation and disruption in the reproduction process, and hence to an actual decline in reproduction.” (Capital, vol.3, p.363, Penguin)
It shows how crisis-prone the capitalist system is, where payments and obligations in the market are completely entwined. Banks in Germany and France are highly exposed to Greek banks, the Portuguese are exposed to Spain, while the British banks are exposed to Irish and French banks. In one way or another, they are all exposed to each other. It is a house of cards waiting to collapse. Whatever the exact scenario in Europe, that collapse is inevitable. On a capitalist basis we are heading for another Depression.
Only a socialist plan of production, including the nationalisation of the banks and financial institutions, can prevent the consequences of such a collapse and develop the world’s resources in a harmonious and fruitful fashion.