Another capitalist crisis on the way
At a meeting of the International Monetary Fund (IMF) in Washington Mervyn King [pictured], former Governor of the Bank of England predicted a new economic crisis and declared: “By sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe, we are sleepwalking towards that crisis.” He predicted that the USA could face “financial Armageddon”.
In 2008 the world faced the most devastating capitalist crisis since the 1930s. Millions of workers all over the world lost their jobs. The crash was preceded by a mad accumulation of debt as financial markets were deregulated and allowed free rein. But credit oils the wheels of capitalism. The ensuing ‘credit crunch’ snarled up the entire system. When the crash came, the banks were in peril, and some had to be bailed out or even nationalised.
It could have been even worse. The authorities took emergency measures. Interest rates were ratcheted down in all the main capitalist countries. They are now so low that most ordinary people find they are losing money on their bank accounts, since the rate of interest is lower than inflation. This is a sign that the system has been put on life support.
Not only did the central banks slash interest rates. They resorted to a strategy that all orthodox economists hitherto had denounced as madness. They printed money. In Britain the Bank of England created £375bn out of thin air. The process is known as quantitative easing (QE). In the twenty-first century the printing presses need not roll to print more money. All the Bank has to do is create and extra row or column on a balance sheet with one keystroke on a spreadsheet. Bingo!
In more detail, the Bank of England bought government bonds from financial institutions, which increased their reserves - money they could lend out. It was hoped that this would stimulate borrowing throughout the economy. If people could borrow freely and cheaply they would very likely spend more on consumer goods and companies on real investment.
But banks are not interested in buying consumer or capital goods. In fact they purchased financial assets with the ‘free’ money given to them. This of course just bid up the price of these assets and created a financial bubble. A bubble is where prices go up because people are buying and people are buying because prices are going up. That’s the beauty of capitalism!
Housing can also be regarded as a financial asset, not just a home, and therefore subject to bubbles. The IMF is aware of the danger. Its Global housing Watch declares, “There is abundant evidence that housing cycles can be a threat to financial and macroeconomic stability.” What can the authorities do if the bubble bursts?
So QE didn’t lead to the ‘explosion of inflation’ predicted by some. But it didn’t do much good either. In effect £375bn went to waste. The recovery has been pathetic. The world economy seems locked in a permanently lower growth path than was the case before the 2008 crash.
Now, as King explained, you can only use that trick once. Interest rates are at rock bottom and QE didn’t work. There’s a huge amount of debt floating around in the world economy because of the financial liberalisation.
We’ve been here before. The two techniques the authorities can try to use to influence the movement of a capitalist economy are fiscal policy and monetary policy. Monetary policy hasn’t worked. Interest rates are very low, as they were in the 1930s. As Keynes explained, “You can pull on a piece of string, but you can’t push on it.“ When interest rates are so low, cutting them further is not much use.
In the Great Depression of the 1930s Keynes advocated expansionary fiscal policies to mop up unemployment. Fiscal policy concerns the government’s decisions to tax and spend. The government doesn’t have to balance the books day by day, only spending what it gets in as taxes. (Our Tory government is not balancing the books right now. It’s in deficit) It can spend first, putting money in people’s pockets in projects such as public investment. With money jingling in their pockets employed workers are more likely to go out and spend, stimulating the economy. With a job, they’re can pay more taxes. This could even end up balancing the government’s books in the end, only with a higher level of employment and economy activity. A free lunch! That’s the theory, anyway.
It is widely believed that Keynesian policies of economic management were responsible for the massive economic boom that took place after the Second World War. This is wrong. After the War, Britain was broke. Government debt was a massive 250% of GDP. Successive governments saw their priority as paying off the debt. By the 1970s the national debt was down to 50% of GDP. By 1990 it was 25%. So far from injecting purchasing power into the economy, governments were taking it out. The national debt has gone up since 2008, but only because of the costs of the crisis.
In the USA in the crucial period of 1953-1961 President Eisenhower was obsessed with balancing the government books. So no fiscal stimulus there either. All the same there was a consensus among conventional economists of that time that Keynesian economics was the way to go. That all changed in the 1970s with the end of the great post-War boom and the onset of inflation together with unemployment - a phenomenon called stagflation. Keynesian economics could not explain this.
A new breed of hard right economists like Milton Friedman argued that governments could do nothing about the level of economic activity in the economy. All they could act on was inflation by controlling the money supply. These theorists paved the way for the present generation of neoliberal thinkers. They were the intellectual forerunners of an intensified class war against working people.
In the 2008 Great Recession neoliberalism failed and was seen to have failed. Deregulation produced a crazy boom in financial speculation - leading from boom to bust. During and after the crash most capitalist governments accepted the monetarist nonsense and made no attempt to stimulate the economy by fiscal means. Austerity was their watchword. Meanwhile the ‘dance of the millions’ went on unchallenged in the financial markets. Unlike in the 1930s, there was no new thinking among most in the economics profession. Most governments are dragging round neoliberal advisers like stinking corpses. As a new recession looms they are snookered. They have foresworn fiscal activism and monetary policy is seen to have failed. What can they do now?
King sees the dangers. A new economic recession is bound to spill over into massive political discontent. “No one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas underpinning economic policy. That needs to change....Another economic and financial crisis would be devastating to the legitimacy of a democratic market system,” he added. Capitalism could be called into question.
Convulsions, economic and political, lie ahead.
