• “A Billion Dollars to Save the Global Economy”

  • By Joachim Bischoff | 20 May 09
  • Crisis Summit in London

    The group of economically most powerful states (the G20) have agreed on a package of measures to combat the global financial and economic crisis. The host of the summit, British Prime Minister Gordon Brown, interpreted the larger meaning of this agreement: “A new world order is emerging, and so we are entering a new era of international cooperation”. However, this is certainly an exaggeration.

    At the conference, principles were outlined for the reform of the financial system through increased regulation of the banks, of hedge funds and manager compensations. It is unclear what the concrete steps will be. Also unanswered is the question of how the toxic credits and bonds will be eliminated. The IMF – based on the opinion of many economists – had designated this as an important condition for a successful battle against the financial crisis.

    What concrete results can be shown? To begin with, the ca. $ 500 billion supplementary budget for the IMF, as well as additional special drawing rights on $ 250 billion. Further, a package for trade financing was passed, and the facilities of the development banks were increased. All of these measures together amount to $ 1,100 billion. The expansion of lines of credit is doubtless a contribution to the stabilisation of the global economy, but its practical application will still require some time.

    For many years we have seen a gap between the boastful pronouncements at such summits and their practical realisation. There is some small progress, but an epoch-making change has so far not appeared, and this certainly will not be the case at the London Summit. The final declarations consist for the most part of promises which will soon be forgotten, unapologetically broken, or which are, in the best of cases, simply devoid of content. For the participating politicians the most important thing was to convey to the voters and to the financial markets the message that  they are trying to find a way out of the crisis together.

    What is our situation today?

    The economic crisis which erupted in the year 2007 has expanded from the narrow terrain of the mortgage sector – this is, from loans on real estate – to a worldwide crisis of the financial and credit sectors. In the meantime it can no longer be denied that we are also confronted with a steep decline of the real economy, this is, the industry and services as well as global flows of trade and economic exchange are also massively on the decline.

    The thesis of an acute global recession, which is merely deeper but still just the end of an economic cycle, is based on an erroneous notion of social development. We are dealing here with a serious crisis. Debating whether this is a normal systemic crisis or a breakdown of the capitalist economy is hardly illuminating in my opinion. Therefore I prefer the term “crisis of the century”, which is comparable in several respects to the global economic crisis of the 1930s.1

    However, and unlike at the end of the 1920s, the reaction to this break in the structure of monetary and capital accumulation was not usually one of cutting incomes and restrictive finance and fiscal policies of public budgets. Whether capitalist societies will slide into a deflationary, depressive development does not least depend on the extent and kind of state intervention. 

    Dealing with the crisis of the century will at least encompass one or two periods of an economic cycle (4 to 6 years). The anti-crisis programmes which were employed at the end of 2008 are decisive for the duration and the course the economic crisis. Although they are much more adequate than those employed in the 1930s, they also fall far short of what is needed. Administering the right dosage of anti-crisis-measures is blocked by the fear of the negative consequences of an offensive use of public credits. Keynes remarked – and he was right – that, “The long-term perspective is misleading in everyday business matters. In the long run we are all dead. Economists (and politicians) are taking the easy way when they say in turbulent times that the sea will calm down again when the storm is over.” So far there are no signs of the storm of the crisis subsiding and so there are still possibilities of influencing its course.

    The double strategy of the political left

    Basically, the political left has to follow a double strategy: first it is necessary to regain political hegemony and to relegate neoliberalism, which in the course of the crisis was stripped of its economic and social basis for acting politically, to the fringe. Second, on this basis the formation of solidarity economy with its new relationship between market and social/public regulation can be promoted.

    In his statement on the economic stimulus programmes in Germany, economist Heiner Flassbeck arrives at the conclusion that “Germany is undergoing its most difficult economic phase since World War II. A bottoming-out and self-stabilisation of the economic cycle are not in sight. In contrast to earlier crises there are no important economic spaces and sectors in the world which are growing and could counter-balance the slump. Germany is not less but more susceptible to a global recession because of its exorbitant export ratio and weak domestic demand with real wages falling for years. (…) Besides the spatial dimension on the global scale the moment of time is decisive: the longer the downward trend lasts, the more it gains in momentum and strength. The decline turns into stagnation, the stagnation into recession and the recession into a long-term depression. At the same time, inflation which has until recently been considered the major problem, can, through a significant and fast reversal of the rise of prices, turn into deflationary trends, which can in no time turn into a full-blown deflation. The crises of the financial markets and of the economic cycle are reinforcing each other negatively. (…) Many are still ignoring the problem at the core of the crisis. What we are experiencing is not a normal cyclic regression as happens every few years, but a rapid slump of global investment activity resulting from the fact that everywhere in the world through and after the financial crisis the price relations decisive for investors have drastically shifted at breathtaking speed.” (Flassbeck 2009) This assessment is can also be applied to all the other major capitalist countries.

    Resulting tasks

    From this outline of the “Crisis of the Century” the following tasks result: 

    1. We are confronted with an insolvent finance and an ailing bank system which has to be re-capitalised. So far the idea is dominant that with the help of public money or guarantees the worthless property titles can be recharged with their old market values. Already Marx derided this illusory conception of overcoming a financial crisis. In times of crisis, the earlier mightily bloated financial volume is reduced. That is why the nationalisation of the financial institutions is not in itself a solution, only the decisive step towards the organised distribution of the loss of values. Among these the price corrections of the values of bonds of all kinds must be counted as well as the pending amortisations of loans, which cannot be paid any more. The idea that it is possible to bring about a restoration with the help of capital subsidies and guarantees from the state represents a serious misjudgment and only prolongs the crisis-ridden process of adaptation.

    2. In the end, we are dealing with an economic cycle, which is breaking down simultaneously and on a global scale as rapidly as in the 1930s or even more so. In a system of production where economic growth was brought about by the expansion of loans, liquidity becomes the core question in the face of the bursting of the mortgage bubble and the large-scale devaluation of bonds. If the coherence of the reproductive process is based on the loan, and the loan suddenly disappears and only payment in cash counts, this must necessarily trigger a crisis with a massive rush on the means of payment. At its core, the financial crisis results from the fact that the major portion of assets, of bonds of all kinds (that is, claims on future social wealth), lose their value all at once. The crisis sets in when you can no longer pay with your “assets”, but have to pay with your money. In moments of crisis the function of money as means of payment becomes immediately obvious: the chain of payments is interrupted, because the maintenance of liquidity becomes the most important principle. 

    3. Several groups of debtors have to be relieved of their debts. Among others this includes the private US-American, British, Australian, Irish, Spanish, Greek, etc. households. As long as there is no middle-term levelling of wage / income differences and a bridging of the social gap, a reform of the financial system will just end in talk. One of the major causes of the formation of bubbles on the financial markets is the concentration of social wealth. Therefore one precondition of successful stabilisation is a substantial correction of this unequal distribution of incomes and properties. In addition to that, the privatisation of central forms of social security must be stopped and reversed (old age pensions, health, education). 

    4. Steps towards a new financial and economic system are indispensable. The crisis has shown that market and capital management without political regulation and democratic control have once more caused a social catastrophe. That is why democratic control and international cooperation are necessary. Financial supervision on national levels and international cooperation among the institutions of regulation and supervisory authorities – within the EU in particular – have to be strengthened and democratised. All around the globe it is necessary to draw clear boundaries for unregulated free trade and unrestricted capital mobility. In a new international treaty which overcomes the weaknesses of the post-war Bretton Woods System, financial stability, tax justice, social justice and sustainability must have priority over the free traffic of capital, commodities and services. Social rights and historical achievements of the working people must be guaranteed. 

    In the face of the deepest economic crisis since the 1930s, which has been caused by a breakdown of the financial system, prevention of risk to the system and proposals for a new regulation of the financial sector have moved to the centre of current political agendas. The hypothesis is certainly true that without a stabilisation of the financial sector a lasting economic recovery will not materialise.

    However it is also true that without putting a halt to the economy’s tailspin and achieving a stabilisation of the entire social reproductive process there will be no new regulation either of the national or the international financial and monetary system. Hence the measures applied since spring 2007 must be criticised in as far as they allocate all the resources to the financial system. Yet, by public subsidies and guarantees the inevitable re-proportioning of the financial sector cannot be stopped. In addition, the recovery operations focus too much on particular ailing financial institutions while an overall concept is missing. And finally, most of the support programmes of the real economy are insufficiently dimensioned. In particular, the focus on the social infrastructure (fixed social capital) leads to a neglect of labour-market policy and a suppression of programmes against social polarisation and for overcoming poverty.

    In the meantime, the president of the US Federal Reserve, Bernanke, emphasises that a strategy is required which comprises the entire financial system and not only its parts. Prior to a meeting of the G-20 ministers of finance and a G-20-summit in April, with deliberations on a global framework for the supervision of the financial system on its agenda, Bernanke outlines the American ideas: First, it is necessary to do away with the dependence on financial institutions of “systemic importance”, i.e., it must be possible in the future to phase out all financial institutions in an orderly way. Second, the financial infrastructure must be fundamentally overhauled. This concerns system, rules and contracts, which organise the mechanisms of trade, payment and transaction in the financial markets. Third, it is important to shape supervision policy and accounting in such a way that they do not have pro-cyclic effects. Fourth, the creation of an independent authority must be considered, which is to detect and name systemic risks. A new internationally-oriented policy could contribute to preventing the worst consequences and so lead to a better functioning of national and global economies. After considering the processes of the crisis and their causes we will come back to these efforts of reforming the financial sector.

    Parallel dimension of action

    For the near future, in which decisions are made concerning the depth, duration and further perspectives of the crisis, four parallel dimensions of action are involved:

    1. Public funds and intervention for backing the crippled financial sector: In the recent years of the credit boom the investment quota outside the traditional banking system grew dramatically. “The extent of – in the long run – risky and relatively illiquid investments, which had been financed by very short-term obligations, made many vehicles and institutions prone to a classic run on the banks, yet without protective measures such as deposit guarantees which are at the disposal of the banking system to reduce such risks. … It remains a fact, however, that the expansion of the old-fashioned bank loan was by far not sufficient to compensate for the shrinkage of the credit volume as a consequence of a breakdown of the shadow banks.” (Krugmann 2009: 189). Practically, we will not be able – after some zig-zags – to avoid a complete nationalisation of the bulk of the financial system, because neither stability nor an organised distribution of the losses can be achieved in any other way.

    2. Public funds and state intervention to cushion the decline of the real economy. So far, the capitalist metropolises have not faced what is needed. The programmes are either too small-dimensioned or too contradictory. The exception is People’s Republic of China’s anti-crisis package.

    3. Since the financial and economic crisis has seized the countries at the periphery, a global rescue plan must be found for alleviating the situation – which confronts Eastern Europe and the Asian developing countries with major problems. 

    4. Also the development of a new financial architecture is important, even if there is no end in sight to the process of the crisis yet.

    The fact remains that the ruling neoliberal economic and political elites have, under the impact of the processes of the crisis, abandoned their orientation which does not mean that they are ready for an effective anti-crisis policy. And it is true that neoliberalism is not completely smashed yet, neither as an ideology nor as a hegemonic project. However, its social power to set agendas and to enforce interpretations has been seriously damaged. The reason for this evident weakness is not the strength of the political enemy on the left side of the political spectrum but the crisis-ridden development of social reproduction.

    The background of the contradictoriness of the still prevalent neoliberal interpretation is formed by dramatic empirical evidence of a massive process of shrinkage of the global economy and also by reports of mass protests increasing in numbers. The most recent prominent example is Ireland. Not much is left of the once highly-praised prosperity of the Celtic Tiger.

    Still, we cannot speak of a radical international protest and resistance movement. More typical are the conditions in Germany: The majority of the people regard the international economic and financial crisis as a threat which has not yet reached its full extent. Therefore the indications have, for months now, pointing to a sombre future. The majority of the population is very alarmed by the development of the crisis. Since September 2008, when the crisis reached its climax with the collapse of Lehman Brothers Investment Bank, the scenario of the crisis has sunk deep into the majority of the people’s everyday consciousness (Köcher 2009: 5). 

    This majority has the impression that they have no way to judge what is happening. “78 % are convinced that the financial system has become so opaque that it completely eludes the understanding of citizens. At the same time, the majority is aware that the consequences of the crisis, for which most of them hold the United States responsible, are enormous for Germany. Only 2 % of the population believe that the crisis does not really concern Germany; only 3 % are not worried. The group which is still reacting coolly and believes the consequences are limited, amounts to about one fifth of the population and which is disproportionately made up of the young generation. 

    The vast majority of people experience the events as frightening and wonder what is still in store for them. Although only a small minority have put their money in speculative investments, 52 % of the population are worried about whether their deposits are safe. The older generation, in particular, is alarmed: 60 % of people over 60 have recently been worried about the safety of their property and so have 58 % of people between 45 and 59 years of age. Only the generation under 30, most of whom have so far been able to save little, considers the financial crisis something that does not immediately touch their material situation.” (Köcher 2009: 5)

    Against this background, the hypothesis, held by the Rosa Luxemburg Foundation, of an open historical situation is probably over-optimistic (see in this issue: Contribution by Institut für Gesellschaftsanalyse der Rosa-Luxemburg-Stiftung; and Institut für Gesellschaftsanalyse der Rosa Luxemburg-Stiftung 2009: 8). 

    Change of paradigm

    In my opinion, the hypothesis of a far-reaching change of paradigm among the ruling elites is correct. Up to now, the majority of these elites interprets state intervention as a mere emergency measure, which – being temporary – will in the near future again give way to the resumption of the old privatisation and deregulation policies. However, some critical minds cannot help but raise the question of what the repercussions of all this are on everyday consciousness and on political stability. 

    There is no doubt: The banking system is undergoing a systematic crisis in most capitalist metropolises. State investments and securities alone do not suffice to save the huge mountain of debt from a comprehensive process of inflation. For fear of the dangerous repercussions on the entire social reproduction process the majority of the political class is pawning the public finances – which means also future tax revenues – to save the credit and property titles which are losing their value.

    The only alternative

    After an overall nationalisation of the entire sector a process of obliterating the debts and property titles could be organised in a way which takes into account the social and macro-economic necessities and cancels the debt titles according to principles of social justice. It should always be kept in mind that part of the huge credit boom consists of claims on old-age pensions and other savings such as the reserves of broad layers of the population.

    Due to the pressure of the crisis even the mainstream of the financial world is demanding reforms. But as always in similar situations such reforms are discussed controversially. Everything will depend on whose interests determine the reforms. When bankers call for state intervention they mean the socialisation of losses, while the profits are to remain in private hands. When bankers talk about reforms they mean a (re)regulation in bits and pieces and short-term crisis management – which is the attempt to preserve the neoliberal rules of the game and to return to “business as usual” as soon as possible. 

    In the interest of the majority of the citizens a real change of paradigm is required: the financial markets must contribute to social justice, economic stability and lasting development. We cannot simply return next year to the status quo ex-ante.

     

    References

    Flassbeck, Heiner (2009): Globaler konjunktureller Aufschwung – nur noch vergleichbar mit der großen Depression, New York, 6. 2. 2009. Statement to be heard in the Commission for Economy and Technology of the German Bundestag on February 9, 2009; documented in: Deutscher Bundestag, Haushaltsausschuss, 16. Wahlperiode; Ausschussdrucksache 5801

    Institut für Gesellschaftsanalyse der Rosa Luxemburg-Stiftung (2009): Die Krise des Finanzmarkt-Kapitalismus – Herausforderung für die Linke. March 2009

    Köcher, R. (2009): Wasser auf die Mühlen der Linken. In: Frankfurter Allgemeine Zeitung, October 22, 2009

    Krugmann, Paul (2009): Die neue Weltwirtschaftskrise. Frankfurt/Main

     

    Note

    1. It is evident that the current global economic crisis is accompanied by a global ecological crisis. At the same time, the political arena is blocked in many countries, so that the crisis of politics and of the political arena must become part of the judgment. In this text these aspects are not considered.