Market failure needs a socialist solution

Editorial, The Socialist, paper of the International Socialists

World capitalism is gripped by the worst economic crisis it has faced since the depression of the 1929-1933 era. A period that was marked by a severe banking crisis, stock market collapses and a slump in economic growth that cost tens of millions of jobs in the US and worldwide.

We cannot say that this unfolding crisis will be as severe as the 1930’s. In fact from a global point of view this downturn is only in its early stages. However, the issue is not whether there is going to be a downturn – only how long and how deep it will be.

The United States is in the vice-like grip of a severe recession. The language of the capitalist economists – especially those not directly connected with the Bush administration or the Federal Reserve - is almost apocalyptic. Leading US economist Nouriel Roubini has written: “It is now clear that the US and global financial markets are experiencing their worst financial crisis since the Great Depression. And in spite of desperate and radical actions by the Fed this crisis is getting worse.”

key factor

The key factor in the financial contagion which has now spread from the sub-prime housing market to the prime, i.e. supposedly good debt, has been the collapse of the US housing market. Roubini points out that: “This is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth.

The combination of falling US house prices and the use of sub-prime lending to families who were unable to pay the exorbitant levels of repayments led to the emergence of hundreds of billions of dollars of “toxic” debt.

Major US banks and financial institutions were exposed to these debts, as were other banks internationally. The result has been at least $400 billion in losses for a series of banks, which, in the case of Northern Rock in the UK and Bear Sterns in the US, drove them to the brink of bankruptcy. Only the effective nationalisation of these banks saved them and a wider systemic failure of the banking system.

The capitalist financial system is nevertheless facing such a systemic failure. The so-called “shadowy” financial sector – i.e. hedge funds, CDO’s SIV’s and the like – which played a key role in blowing the financial bubble to enormous proportions is falling apart. Roubini comments: We are now observing - with the Bear Stearns episode as well as with the collapse of the SIVs, the losses on money market funds and the collapse of hedge funds and highly leveraged funds – the beginning of a generalized run on the shadow financial system.

However, so integrally embedded are these financial vehicles in the world’s financial system – and so suspicious of them are the banks - that there is a panic about lending to one another which has now produced a major credit crunch.

For this reason we have seen the unprecedented actions of the world’s central banks in offering hundreds of billion in loans to try and unblock the clotted arteries of the life-blood of capitalism; credit.

nationalisation

Moreover, the capitalists have been forced to effectively adopt a policy of nationalisation to save failing financial institutions as we have seen in the UK and the US. And this is the only the beginning. That this has been done with the greatest of reluctance and through gritted teeth by Gordon Brown and George Bush is clear. However, from a capitalist point of view they will have no choice but to increasingly use government intervention, a form of state capitalism, including outright nationalisation to try and save their system. While at the same time savaging the jobs of workers as we have seen with Northern Rock where one-third of the jobs are planned for the axe.

There is a growing clamour for a change in policy by some pro-capitalist commentators. Simon Caulkin writing in the Observer damned the fundamentalist ultra - marketeers i.e. the neo-liberals who have been the dominate wing of the bourgeois. “The showdown between management's 'dark' and 'light' versions has come sooner than expected. If bad rules got us into this mess, better ones - which go with rather than against the grain of humanity, community and the physical realities of the planet - can get us out again. Capitalism is too important to leave to the capitalists.” In reality Caulkin and others want a return to “managed” capitalism of the past.

But they do not understand that the crisis in the global finance markets are only one part of what is a multi-faceted crisis. Rising housing values were crucial in maintaining economic growth over the last few years. Appreciating house prices and the availability of relatively cheap credit allowed trillions in spending to be accessed by working and middle class families through the forms of re-mortgaging, credit cards, loans and so on. Now this is over.

The credit crunch is leading to the tearing up of the 125% and 100% mortgages in Britain. And increasingly now huge deposits are needed to even get on the housing ladder. Moreover, banks don’t want to lend like they have in the past – even to each other. The result will be a collapse in consumer spending as credit dries up and the fall in house prices will have a huge impact on construction jobs, retail and other sectors most closely associated with the housing market.

In the US alone 2.2.families million will lose their homes this year. Unemployment is rising rapidly and wages are falling. This is a picture that will loom large in Britain as the capitalists attempt to make working class people pay for this deepening crisis. It is a vital and urgent task to establish organisations that can defend workers against the onslaught of capitalism in this period. The transformation of the trade unions into fighting organisations is vital. The civil servants PCS union and the railworkers in the RMT with a left and socialist leadership shows a way forward.

Central to this is also the building of mass workers parties in Scotland, Britain and internationally to act as a political point of reference for working people moving into struggle. And struggle will be vital in the next period to mitigate against the worst of the onslaught by the capitalists.

We agree with Roubini when he says: “A market solution to this crisis does not exist; those who believe in such market solutions are deluding themselves as markets left alone will enter into the mother of all meltdowns, margin calls, cascading collapse of asset prices, massive credit crunch and liquidity seizure and severe economic recession. “

Capitalism is a failing system and no part of the globe will escape its effects. The much-trumpeted “miracle” economies of China and India are dependent on the strength of the now failing US economy for a market for their commodities. This will dry up as the recession bites and consumer spending is squeezed still further.

The colossal debt of the US economy means that it has been reliant on China. Asia and other Sovereign Wealth Funds to bail it out. A recession gripped US economy will lead to a flight from the dollar causing a further crisis.

The next few months will expose that reality to tens of millions of people internationally. Even if we escape a 1930’s type depression, and that is not certain, a world recession or a significant slowdown will have profound political and social consequences.

Socialism

Socialism as a planned, democratic and sane alternative to the anarchy of capitalism will find a growing echo. Nationalisation based on working class control and management of industry as part of a planned economy is the only way forward out of this looming catastrophe.