World capitalism in crisis – Part One

We live in exceptional times. The financial panic in the USA is creating waves that are threatening to engulf the whole world. This is rapidly transforming the consciousness of millions. Alan Woods, in a two-part article looks at how the world economy reached the stage it has, where it is on the brink of a serious downward, so serious that it could be as worse if not worse than 1929.

Global crisis

We live in exceptional times. The financial panic in the USA is creating waves that are threatening to engulf the whole world. This is rapidly transforming the consciousness of millions. Yesterday a demonstration called by the New York Central Labor Council mobilized about a thousand workers, including a large number of construction workers ‑ ironworkers, labourers, plumbers and steamfitters ‑ as well as teachers, city workers and others. The aim of the demonstration, called at less than two days' notice, was to protest against the President's plan to bail out Wall Street with a massive donation of 700 billion dollars of public money. Here is the Reuters report of the protest:

"Hard hats, transit workers, machinists, teachers and other labor unionists railed against the U.S. government's proposed bailout of Wall Street on Thursday in a protest steps from the New York Stock Exchange. Several hundred protesters yelled their enthusiastic support as union leaders decried a proposed $700 billion plan aimed at reinvigorating the credit markets by relieving financial institutions of distressed debt.

"The Bush administration wants us to pay the freight for a Wall Street bailout that does not even begin to address the roots of our crisis," said AFL-CIO National President John Sweeney. We want our tax dollars used to provide a hand up for the millions of working people who live on Main Street and not a handout to a privileged band of overpaid executives."

"Signs read ‘No Blank Checks For Wall Street' and ‘Our Hard-Earned Pensions Are Not Up For Grabs.' Protesters cheered repeated calls for the government to spend money on education, health care and housing as freely and readily as it was proposing to do for Wall Street. ‘We know that the economic situation has to be solved. But we want a responsible rescue, not an opportunistic bailout," said United Federation of Teachers President Randi Weingarten. ‘And that means, just like every single boss says to me, that there should be accountability for the teachers, then there should be accountability for Wall Street," he said.

The mood of the demonstrators was angry. One line that drew a lot of positive reaction was a call for a general strike if the bailout only benefits the rich. This represents the beginning of a sea change in the consciousness of the working class, and not only in the USA.

"A once-in-a-century event"

What has happened to financial markets in recent months is without precedent in the history of recent times. The same bourgeois economists who previously denied the possibility of a slump are now talking about the most serious crisis for sixty years. Alan Greenspan, former chairman of the US Federal Reserve, has described the current financial crisis as "probably a once-in-a-century event".

World capitalism in crisisThey actually mean 79 years, since there was no crisis at all in 1948. But economists are superstitious people and are afraid to mention 1929, just as the ancient Israelites were afraid to mention the name of their god, in case something unpleasant were to occur. They are all worried about confidence in the markets, since they all fervently believe that it is confidence (or the lack of it) that is the real cause of booms and slumps. In reality, however, booms and slumps are rooted in objective conditions. The rise and fall of confidence reflects actual conditions, although it can then itself become part of these conditions, helping to drive the market up - or, as in this case, down.

In the last few months AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch, companies that were thought to be too big to fail, have all either filed for bankruptcy, been "bailed out" by the government, or been nationalized. As the seriousness of the economic crisis begins to dawn on people, a mood is being prepared in society the like of which has not been seen for many years. This morning (September 26) came the news of the collapse yet another US bank, Washington Mutual, which was closed by the US government. This was by far the largest failure of an American bank, and its banking assets were sold to J. P. Morgan Chase for $1.9bn (£1bn). This is the financial equivalent of a devastating Tsunami, and it is not yet over.

The estimates of the economists are constantly being revised downwards. Six months ago the International Monetary Fund estimated more than $1,000bn (€691bn, £546bn) in financial sector losses and predicted a sharp slowdown in the global economy. Most economists criticized this for being too pessimistic. Now they are singing a different song. Dominique Strauss-Kahn writes in the FT:

"But with much of the losses yet to be realized, and with the financial crisis now acute, it has become clear that nothing short of a systemic solution - comprehensive in tackling the immediate fallout and comprehensive in addressing the root causes - will permit the broader economy, in the US and globally, to function with any semblance of normality." (Financial Times, September 22 2008)

Yes, indeed, the US economy no longer functions with any "semblance of normality". In fact, it is grinding to a halt, at least as far as Wall Street is concerned. As I write these lines the financial markets in the USA are virtually paralysed as they wait for confirmation of a huge outlay of government money that the authorities hope will "restore confidence". The very fact that the "free market" must depend for its very survivals on huge donations from the US taxpayer is sufficient proof of its complete bankruptcy - in the most literal sense of the word. Here is the final answer to all the rhetoric about the "invisible hand of the market", the spirit of private enterprise and all the rest of it. In the moment of truth, the bold, brave entrepreneurs of Wall Street and the City of London must go like beggars, cap in hand, to the government and ask for social security. Only these beggars are billionaires and they demand money with menaces.

What remains of any "semblance of normality" when a Republican administration led by a fanatical free marketeer nationalizes major US investment banks? Or when the US Treasury hands over a gigantic subsidy of around $1 trillion to the same? On Sunday, Morgan Stanley and Goldman Sachs gave up on attempts to remain as the only two independent investment banks and became "bank holding" companies to gain expanded access to bank deposits and permanent access to Federal Reserve liquidity support. The elimination of the two most prestigious institutions on Wall Street was an indication of the extreme seriousness of the crisis. The speed with which Morgan Stanley went to Asia in search of capital underlined how quickly the world's wealth was moving away from the US.

Congress dithers and US Treasury Secretary Henry Paulson (who, in the opinion of some commentators, is now the de facto President of the USA) rages. Meanwhile, the markets are continuing to fall and nobody can halt them. This is another argument one hears repeatedly in Congress: You are asking us to hand over all these billions with no checks or guarantees. Apart from the fact that this is rewarding the bankers for their gross mismanagement, who says that this will have any effect in halting the fall of the market?

This is an excellent question, to which neither Paulson nor Bush or anybody else has any answer. It is quite amusing to see the erstwhile advocates of the sanctity of the free market now braying for government intervention to save the market from itself. But they are condemned by their own logic, which is only the insane logic of the free market economy. The present financial crisis, which was predicted by the Marxists long ago, is the direct result of a long period of uncontrolled speculation, which produced the biggest bubble in history.

When on Friday the US government announced its $700bn bailout plan for the financial sector, markets rejoiced. But then the mood changed into its opposite, when Congress delayed its approval of this massive handout. Until Monday, the US dollar had held up surprisingly well in the face of the turmoil on Wall Street. But it finally fell back in the face of concern over the cost of the bail-out and the fragile state of the US banking system, sending the price of commodities priced in the US currency soaring. The dollar lost 2 per cent against a basket of major currencies, with the euro rising 2.6 per cent to above $1.48.

The price of oil has acquired a feverish character, with wild swings up and down. As the dollar fell, stocks tumbled and the price of oil jumped again after the previous steep fall. A 17 per cent increase on Monday, September 22, was the biggest daily price rise ever, and larger even than during the invasion of Iraq. By Tuesday the oil price had dropped again by $3 to $106 a barrel and there are good reasons to expect energy prices to continue falling. These violent swings undoubtedly reflect, on the one hand the movement of the dollar, on the other, the activity of those involved in commodity speculation. Until recently, the capitalists speculated in the housing market. When that collapsed, they looked for other fields to exploit, anything else that seemed likely to be profitable: oil, works of art, food. Despite all the complaints and demands for regulation, this speculation cannot be controlled. It is like a hydra: once you cut off one head, another dozen heads appear.

Socialism - for the rich

As a result of the economic and social convulsions, many people are beginning to question the nature of an economic system that could produce such abominations. When the capitalist state itself is compelled to nationalize financial institutions, the idea will gradually become generalized: why do we need private bankers and capitalists at all? For this reason, the politicians avoid the word nationalization as the devil avoids holy water. At all costs they seek to find ways in which the state can provide capital to banks in ways that do not imply nationalization. They struggle to invent forms of capital that leave ownership and control in private hands. But in the end, they are compelled against their will to take over the ailing banks to prevent them from collapsing. This is a damning indictment of private ownership of a key sector of the economy.

Although it would appear a paradox, it is no coincidence that the country where politicians are shouting most loudly against the sins of the market and the greed of the financiers is precisely the United States. The land of free enterprise, the country where the psychology of capitalism has sunk its deepest roots in the population, is the land where there is probably the sharpest reaction against Big Business. This fact is reflected in the speeches of the politicians, notably the candidates in the Presidential election. And the Republican candidate is even more vocal in his rhetoric than the Democrat. This is because he would like to win. McCain sees that there is a backlash against the exorbitant pay in the boardrooms of big corporations and the scandalous speculation on Wall Street and he says what most people want to hear.

Is it not grotesque that bosses at defunct Bear Stearns were amassing fortunes while pursuing reckless business strategies that led to the collapse? And why should the American taxpayers, most of who are not well off, foot the bill for $700 billion to bail out the big financial institutions? As of September 30, 2007 the federal government was in a $53,000bn dollar fiscal hole, equal to $455,000 per household and $175,000 per person. This burden is rising every year by $6,600-$9,900 per American. Medicare represents $34,000bn of this deficit and the related Medicare trust fund is set to run out of money within 10 years. The Social Security programme is projected to have negative cash flow within about 10 years. Whoever wins the presidential election and whoever controls Congress will have to preside over deep cuts in living standards. The same capitalists who have taken billions from the government and the Federal Reserve are demanding tough budget controls, cuts in federal spending, a comprehensive reform (read reduction) of entitlement to healthcare.

There is no money for Medicare, or for schools or pensions for the old. But there is plenty of money for the big banks and the fat cats. This glaring contradiction is burning itself into the consciousness of millions of ordinary Americans and will have enormous consequences in the future. The heavy burden of debt will have to be placed on the shoulder of the coming generations, who will have to pay a heavy price for it in falling living standards and cuts in social spending. This will inevitably lead to a profound change in consciousness.

The lesson is not lost on the US public. There is no money for schoolchildren or the sick or the old but when it comes to Big Business (and no business is bigger than banking) the state comes running with an open chequebook. For the plight of the poor the Bush administration has only contempt. In the land of the free, every citizen has the right to become rich. If people insist on being poor, that is their own fault! Let them show a bit of initiative or else crawl into a ditch and die. That is the stern message of the Republican Messiahs of the Free Market. But when it comes to the super-rich, George W Bush shows the tenderest concern. For verily it is written: "For whoever has, to him more shall be given, and he will have an abundance; but whoever does not have, even what he has shall be taken away from him."

As we know, President Bush is a firm believer in the Good Book. But one suspects that his motives for intervening in the financial crisis were not entirely connected with Christian charity. It had more to do with desperation. The ruling class in the USA saw an abyss opening up under their feet and was forced to take panic measures in a frantic effort to stave off a global slump. That is why a fanatical free market President was compelled to throw seven hundred billion dollars of taxpayer's money at the banks.

This remarkable initiative immediately received the plaudits of the Market, nationally and internationally. The Group of Seven industrialized nations said its members "strongly welcome the extraordinary actions taken by the US". However, other nations said they saw no immediate need to create their own funds to buy distressed assets. The capitalists of Europe and elsewhere were content to sit back and let the Americans take the strain. After all, were they not responsible for creating this mess in the first place? The same question is being asked in the United States, on every street corner - and on Capitol Hill.

The President immediately hit a problem in the form of the US Congress. It is not that the congressmen and congresswomen are any less dedicated to the survival of capitalism than the present incumbent of the White House. But they are even more dedicated to their own survival. They sense the gathering backlash against capitalism, the Market, bankers, Wall Street and all their works. The immensity of the donation (for that is what it is) is self-evident. It signifies that the equivalent of 9400 dollars will be taken from the pockets of every American taxpayer and deposited in the accounts of the very people who caused the financial crisis in the first place. This fact serves to concentrate the minds of Congress wonderfully, especially as elections are not far away.

The Democrats have been asking for a second round of measures to revive the US economy, centred around a boost to infrastructure spending, home heating assistance, and possibly more rebate cheques to consumers. But the administration and many Republicans are resisting. Money for the bankers? Of course! But money for the ordinary Americans? Sorry - the cupboard is bare! This was all too much for the gentle souls on Capitol Hill who spend all their time looking after the interests of the Nation.

As one might expect, Barack Obama, the Democratic presidential nominee, set out his concerns in a speech that called for a modernization of financial regulation based on institutions' activities rather than on their identification as banks or mortgage brokers. "We cannot give a blank cheque to Washington with no oversight and accountability when no oversight and accountability is what got us into this mess in the first place," he said.

More surprising perhaps was the reaction of the Republican candidate, who clearly did not want to be left behind by his rival (after all, words are cheap and it is election year): "This arrangement makes me deeply uncomfortable," said John McCain. "Never before in the history of our nation has so much power and money been concentrated in one person. When we're talking about a trillion dollars of taxpayer money, ‘trust me' just isn't good enough." Mr. McCain even voiced support for Democratic calls for an annual pay cap of about $400,000 for executives at companies bailed out with public funds. This is in complete contradiction to the position of the Bush administration, which insists that a pay cap would discourage banks from taking part.

Senior Democrats in the House and Senate circulated proposals involving tighter oversight, various proposals to allow or require the government to take stakes in companies taking part in the scheme, allow bankruptcy judges to write down mortgages and curb executive pay at banks selling assets to the government fund. Mr Paulson is resisting making pay or the transfer of equity to the government a precondition for selling assets to the fund, arguing this would ensure that only banks on the brink of failure take part.

This conflict, and the demands by the Democrats for more control over the money handed over to the banks, produced deadlock and a delay that upset the markets once again. After all, when the Market requests, it is used to being obeyed. The elected representatives of the Nation are not supposed to ask any questions! President Bush called on Congress to "keep the rescue bill focused on solving the crisis in our financial markets".

But Congress is under the pressure of public opinion, which, as we have seen, is reaching boiling point. Congressmen are being bombarded with telephone calls and emails, in which their constituents vent their rage against this scandalous handout to the rich. They ignore this mood at their peril! Therefore, they have hesitated to sign the deal. Congress blames the Administration for getting them into this mess. The President blames the Congress for holding up a deal that is supposed to save the US economy from collapse (Bush used precisely those words in an unprecedented television message to the nation).

Tempers flare on the floor of the House: Congressmen shout at each other and nearly come to blows. When can anybody remember such scenes on Capitol Hill? But then, when did anybody see the USA in a state of economic meltdown? And when can anyone remember the American people in such a rebellious and angry state of mind? The reason for the conduct of the Congressmen is that they can feel a fire under their backsides.

Whatever they do now will be wrong. If they sign the deal, they will earn the hatred of millions of ordinary Americans. One woman, interviewed last night on British television, when asked what she thought of the proposed bail-out, answered bitterly: "I have just come off an eleven hour shift and I work 60 hours a week. Now they want to take $2,300 off my pay to give to the bankers!" This must be typical of the attitude of millions of ordinary people in the USA. But if they refuse to sign, it will cause further sharp falls on the stock markets in the USA, posing the threat of a complete collapse on the lines of 1929. In other words, they are caught between a rock and a very hard place.

Pessimism of the bourgeoisie

The bourgeoisie suffers from periodic bouts of manic depression, passing rapidly from extreme optimism to the depths of despair. On both sides of the Atlantic, where previously there was "irrational exuberance", now there is gloom and doom. It was ever thus: the bourgeoisie always sways between the two extremes of manic depression. One minute the party is in full swing and vast fortunes are being made; the next, the whole thing is deflated and misery abounds. When the collapse finally arrives it is like the morning after a wild party. The night before, people were happily inebriated with not a care in the world. Now, in the cold light of morning it is a very different story. Men and women are painfully aware of the excesses of the night before. They solemnly swear that they will never touch strong drink again, and they are quite sincere - until the next party.

The ignominious collapse of the latest speculative boom is no exception to the general rule. It is remarkable only in the depth of the gloom, which is only a reflection of the dizzying heights from which they are now plunging. This was simply the biggest speculative boom (or bubble) in history. It was far bigger than the boom that preceded the Wall Street collapse. Yet despite the obvious severity of the crisis the bourgeois economists still try to comfort themselves with the thought that things could have been much worse. The Financial Times recently commented:

"The Great Depression began less than 80 years ago but, then again, we are in a different century. Whether or not this will be the worst such upheaval the world has to face between now and 2099, the fact that nothing as bad as the Depression occurred between the 1930s and now is in itself remarkable." This comment is interesting on two counts: the same people who for years have been denying that there was any possibility of a repeat of 1929 and the Great Depression now, without blinking an eyelid, say that it is not only possible, but that it is remarkable that it has not happened - yet.

Dominique Strauss-Kahn writes: "[...] and for what has not happened, at least not yet, to the broader economy - the onset of a severe recession. Perhaps it was the absence of the latter that lulled too many into viewing the bursting of the housing bubble merely as a correction, the defaults in US subprime mortgages just as misfortune and the failure of important financial institutions as collateral damage." (Ibid.)

The fall in prices during a crisis merely balances out their earlier inflation. In that sense one can speak of a "correction". However, we pointed out long ago how the bourgeois economists have repeatedly changed the terminology describing an economic slump in order to make it appear less serious than it is. At one time they used the word panic, then slump, then depression, then recession, until now they have finally arrived at correction. After all, if we accept the miraculous healing powers of the market, which by art of magic regulates itself without any conscious human involvement, how can we object to the market "correcting" itself?

On this subject we wrote in World Perspectives 2008:

"An earthquake can also be presented as a necessary ‘correction', which merely re-adjusts the earth's crust. Eventually, it all settles down and life goes on as before. But this comforting analysis leaves out of account the terrible trail of damage caused by the earthquake: the villages wiped off the face of the earth, the trees uprooted, the crops destroyed, the thousands killed and injured. Moreover, normal life is not so easily restored after every earthquake. Some can be so devastating and leave such a trail of destruction that the effects can be felt for many years."

These lines accurately describe the consequences of this "correction".

The dictatorship of finance capital

Our epoch is the epoch of monopoly capitalism. One of the features of this is the complete domination of finance capital. This domination has gone further in the USA and Britain than in any other major country. Britain, the former workshop of the world, has become transformed into a parasitic rentier economy, which produces very little and is dominated by finance and services. Up until recently this was presented as something positive, which would protect Britain against the turbulence of the world economy. But the opposite is the case. By slavishly following the American model, Britain is being dragged towards recession following the USA and will most likely be the worst affected. Like a parasitic worm, growing fat at the expense of the rest of the host organism, the financial sector has grown too large relative to the economy, sapping its strength and threatening to undermine it entirely.

It is an elementary proposition that what goes up must come down. For years the USA economy appeared to be defying the laws of economic gravity. Now the price must be paid. The fall, now it has arrived, is all the steeper because of the dizzying heights reached by speculation in the housing sector in the period that preceded it. Already it is far steeper than the fall in house prices in the Great Depression, In the first quarter of 2008 house prices in the USA fell officially by 14.1 percent. By contrast, in 1932, at the low point of the Depression, house prices fell by 10.5 percent. Moreover, these figures do not convey the real seriousness of the position. Some economists put the figure of the fall in house prices during the first quarter at 16 percent in real terms. And the fall in house prices is far from over.

This means that the huge sums of money being thrown at the bankers will have no effect in detaining the fall, or at best the effect will only be a temporary respite before new and even steeper falls. This is the logic of the market, which obeys no laws but its own. The so-called stabilization plans are nothing of the kind. All talk of regulating the markets is just so much nonsense. The capitalist system is anarchic by its very nature. It can neither be planned nor regulated. The attempt to stabilize the financial sector by pumping in huge amounts of cash will only succeed in making the already super-rich richer still. But it will have no lasting effect on the market.

The insolence of the bankers is quite astonishing. They demand the government to buy their bad debts, while they hang onto their profitable assets. Nobody knows what the real value of these assets is. An old proverb tells us never to buy a pig in a poke (sack). This is sensible advice, but the government is just expected to hand over vast quantities of money to the bourgeois without looking inside the sack. The crisis of the banking system is the result of a massive swindle that all the bankers merrily participated in for the last two decades. It made them fabulously rich but now has left a massive amount of debt and fictitious capital on the balance sheets of financial institutions. How to solve this little problem? Easy! Pass the bill to the taxpayer. Get the government to set up an agency to buy these assets and hold them until they "mature" and can be sold back to the private sector. This means nationalizing the losses and privatising the profits, or, to use the wonderful expression of Gore Vidal, socialism for the rich and free market economics for the poor.

The capitalists claim they are also making sacrifices, but what they mean is that they sacrifice a little of their bloated profits, whereas the workers sacrifice their livelihoods and houses. The bankers scream with pain and the governments come running with an open chequebook in their hands. The bankers demand a large transfusion of cash to heal their ailment. This is known as "liquidity provision". The problem is that the state does not possess any liquidity. It can only raise cash from taxes. But taxation reduces demand, which is already falling in the USA. This may temporarily alleviate the "suffering" of the super rich, but only at the cost of increasing the suffering of millions of ordinary Americans. That, in itself, would be nothing to worry about, of course, since it is the lot of all patriotic Americans to suffer in the greater cause of the Market. Unfortunately, this will have more serious effects on the economy.

A further cut in demand will increase unemployment. Firms will go bankrupt. More people will default on their mortgages and credit card debts. In other words, it will deepen the crisis and make it harder to resolve. Moreover, the USA in recent years has been transformed from the world's biggest creditor nation to the world's biggest debtor. The government's purchase of distressed assets and injections of capital into financial institutions will enormously increase this collective indebtedness. This must produce a further fall in the value of the dollar relative to other currencies. This will cause further convulsions in world money markets.

Central banks are supposed to prevent runs on banks and financial institutions by reassuring depositors that bank deposits are safe and by providing liquidity to financial institutions against good collateral. But there is a limit to the resources of central banks, and this is being rapidly reached. They have probably done by now most of what they could do. In the event of new banking crises, they will be powerless to act. Since nobody has the slightest idea of how much bad debt is still poisoning the world financial system, such crises are inevitable in the next period. Sooner or later they must end in the collapse of one or another of the major banks, which can send a fatal shock through the world economy, like the collapse of the largest Austrian bank, the Kredit-Anstalt in May 1931. This occurred two and a half years after the Wall Street Crash in the USA and marked the beginning of the financial collapse in Central Europe and further afield. It is entirely possible that we will see something similar in the next period.

Marx on fictitious capital

It is not a lack of money that causes a crisis, but on the contrary, it is the crisis that causes a lack of money. The bourgeois economists, with their banker's mentality, confuse cause with effect, appearance with essence. When the economy enters into crisis, credit dries up and people demand hard cash instead. This is the effect of the crisis, but in turn it becomes cause, pushing down demand and creating a downward spiral.

The bankers and their friends in government insist that the cause of the crisis is the fact that the financial system has too little capital. This is an astonishing statement to make. For the last two decades there was a vast moneymaking carnival in which the banks made huge profits. Now they claim they do not have enough capital! Actually, there was a huge amount of loan capital in circulation during the boom and this superabundance of capital itself showed the limitations of capitalist production. These were vast sums of capital available for speculation that could not find an outlet and the bourgeois had to find other ways of using it.

Marx pointed out long ago that the ideal of the bourgeois was to make money out of money, without going through the painful process of production. In the last period they appeared to have achieved this idea (except in China where there has been a real development of the productive forces). In the USA, Britain, Spain, Ireland and many other countries, the banks invested trillions in speculation, especially in the housing sector. This was the basis upon which the sub prime mortgage scandal arose and flourished, generating unimaginable amounts of fictitious capital.

Already in Marx's day there were huge amounts of circulating capital; this is capital which forms the basis of fictitious capital. In those days there were credit swindles - the equivalent of derivatives today. However, when compared to the position today, all the speculation in the past pales into insignificance. The total amount of speculation on a global scale is staggering. Let us take just one example: the credit default swap industry. This market allows two parties to bet on the likelihood of a company defaulting on its debt. It has grown to about $90 trillion in notional amounts insured. That is to say, probably more than double the total outstanding credit in the world. But contracts are registered nowhere but in the books of the partners. Nobody knows the real volume of trading, which therefore exposes the world economy to a huge risk. That explains the panic on Wall Street and in the White House. They fear - correctly - that any severe shock can bring the whole unstable edifice of international finance crashing down, with unforeseen consequences.

Even in the 19th century, at the height of the boom, when credit was easy and confidence was growing, most transactions were done without any real money. There is an abundance of capital at the beginning of the cycle and the rate of interest is low. The low rate of interest boosts the profits of enterprises early on in the cycle and stimulates growth. Later on the rate of interest reaches its average level during the height of prosperity. There is an increased demand for credit and therefore interest rates ought to rise at the peak of the boom. But in the last boom this did not occur.

In recent years the Federal Reserve pursued a policy of deliberately keeping interest rates low (they were even negative in real terms at one stage, considering the level of inflation). This was irresponsible from an orthodox capitalist point of view. It created the housing bubble and thus laid the basis for the present crisis. But as long as vast profits were being made and investors were happy, nobody cared. They all merrily joined in this mad carnival of moneymaking. The most respectable bankers and the most learned economists joined hands and danced to the chorus of: "Eat, drink and be merry, for tomorrow we die!"

The reason why they now complain they have insufficient capital is that a large part of their assets are fictitious - the result of unprecedented swindling throughout the financial sector. As long as the boom continued, nobody minded. But now that boom has turned to bust, all these assets come under scrutiny. The bankers, who yesterday were prepared to buy large amounts of debt from each other, are no longer prepared to do so. Distrust and suspicion has become general. The old easy-going optimism has been replaced by a miserly attitude to borrowing and lending. The entire banking system, upon which the circulation of capital depends, is grinding to a halt.

Unless and until all the bad assets are removed, many institutions will still lack sufficient capital to extend fresh credit to the economy. Marx described this stage in the economic cycle long ago:

"It is clear that there is a shortage of means of payment during a period of crisis. The convertibility of bills of exchange replaces the metamorphosis of commodities themselves, and so much more so exactly at such times the more a portion of the firms operates on pure credit. Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.

"In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur - a tremendous rush for means of payment - when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realized again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production." (Capital, Volume 3, Chapter 30, Money-Capital and Real Capital, I. pp. 478-9, my emphasis, AW)

The capitalists must now squeeze all this fictitious capital out of the system. Like a man whose body has been poisoned, or a drug addict who is struggling against the ill effects of his addiction, they must expel the poison from the organism or perish. But this is a painful process and creates new dangers to the organism. As the system shrinks and credit dries up, the capitalists call in their debts. Those who cannot pay will go bankrupt. Unemployment grows as a result, and this in turn reduces demand, causing new bankruptcies and new debts that cannot be paid. In this way, all the factors that pushed the economy upwards in the last period turn into their opposite.

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