#83 - 1929-2008 - Is capitalism taking us to the brink of another worldwide catastrophe?

November 2008


Not very long ago, in fact right up until this last summer, it was commonplace for economic "experts" and politicians alike to predict that a crisis similar to the Great Depression of the 1930s would never happen again.

They claimed that due to international and national regulation, a financial disaster such as "Black Thursday" - the stock market crash of 24 October 1929 - was unthinkable. They added that the world economy was so much more healthy these days than in the 1920s, that no financial turmoil could possibly upset the economy as a whole on a similar scale anymore.

Never mind the financial tsunamis which swept south-east Asia in 1997, then Russia and a number of American speculative funds the following year and finally every single stock market in the world, after the so-called "dotcom" boom came to an abrupt end in 2001! Just because, each time, the system's speculative bingo machine survived and even managed to push up financial profits to new heights, the pundits dismissed these advance warnings out of hand. That these crises had left a trail of destruction and undermined the living and working conditions of large sections of the world population, in the rich but even more so in the poor countries, was quite simply irrelevant, for the champions of capitalism!

Today, however, it is the kind of predictions that these characters have made so often in the past which are proving irrelevant. The crisis that they claimed would never happen again is here and it is already hitting hard, if only with now daily announcements of job cuts, plant closures and short-time working.

Does it mean that we are on the eve of a new version of the "Great Depression" of the 1930s? There is no definite answer to this question - not yet, at least. But it is possible to compare the scale of the two crisis in different ways.

For instance, since this September, stock markets have been going into a downward spiral, punctuated by short-lived respites, as more public money was being offered to bail out the capitalist class. Although not triggered by one single "Black Thursday" as in 1929, this spiral already includes a whole series of such one-day mini-crashes. Indeed, the 5-7% falls in the London FTSE 100 index on four different days during October alone, were not very much less than the 9% drop of Wall Street's Dow Jones index, on "Black Thursday" 1929.

As to the fall in share prices, this time round it varies between 30 and 65% over the past year - the worst affected stock markets being Tokyo and Hong Kong. By comparison, over the 12 months to December 1929, the New York Dow Jones share index lost 40% - although the fall turned far more spectacular over the following two years.

In other words, if one uses share prices as a yardstick to assess the present crisis, it appears to be comparable to that of 1929. But what makes it potentially even worse is that, this time, the protracted crash which is taking place on stock markets is not the trigger, but the consequence of a banking crisis which has been unfolding over the past year. In 1929, it took another two years before the crisis finally brought the world banking sector to its knees. This did not prevent large sectors of the economy from being affected almost immediately by the stock market crash, but its impact was relatively cushioned by the fact that credit remained available until 1931, in many countries at least. Today, this cushion does not exist. The losses incurred by the banks as a result of the credit crisis are so huge that, despite the massive state bail-outs which have been organised in every one of the rich countries by now, they are unable to carry out their normal function as lenders to the real economy.

The sheer scale of banking losses is mind-boggling. So far, western banks have acknowledged and written off around £450 billion worth of loans to the housing sector alone. The IMF reckons that another £380 billion of housing debt will have to be written off over the coming months. But this is only the tip of the iceberg, as financial institutions are loaded with a huge variety of credit papers, many of which are more or less worthless by now. The IMF works currently on a "rough" working estimate that, before the end of next year and assuming the whole system does not collapse altogether, the world's financial sphere will have to write off some £6,000 billion worth of credit-related so-called "assets", involving anything from housing and credit card loans to loans to bankrupt companies and loans to speculators. If so, the equivalent of about a fifth of the value of the world's total annual production of goods and services will have disappeared into thin air!

And this is just the visible extent of today's crisis. No-one can be sure that other skeletons will not pop out of the cupboard at some point, to make things even more ugly.

Of course, every capitalist crisis has its particular features and specific impact on society. Although this crisis appears to be taking on, from the outset, far larger proportions than the 1929 crisis, it may turn out to be absorbed much faster by the system - although, not without large-scale casualties. But then, it may also assume even more devastating forms than the Great Depression, which are still difficult to imagine. Any attempt to make a prognosis one way or the other would be futile. Only the future will tell. But we can be certain that, even if this crisis is finally absorbed by the system without the consequences as devastating as those of the Great Depression - that, is as devastating as World War II, which was a direct consequence of this crisis - it will leave us with an unviable system whose recovery will merely be the first stage towards its next crisis.

Beyond their specific features, however, all capitalist crises stem, ultimately, from the same mechanisms which are built into the capitalist system itself. It is in this respect, and in this respect only, that the lessons of the Great Depression can be relevant to us in the present crisis.

Capital's welfare state

Before looking into the events of the 1930s, it is worth going into more detail on some of the aspects of the present crisis and, to begin with, the policy of the states of the capitalist class, since they are playing such a big role today in trying to bail out their system.

In this respect, mouthpieces of big business such as the Financial Times or The Economist make a hilarious read these days. Not so long ago, these papers vociferously opposed any form of state regulation on businesses - which they branded as unnecessary "red-tape" and an "unbearable" burden on companies. In fact, even when Northern Rock's debts were taken over by the government, under the cover of so-called "nationalisation", for fear of a general run on the big banks, most of these papers still raised the flag of rebellion against Darling's "covert socialism", on behalf of the bank's shareholders.

But what are these same papers saying these days? They fall over themselves to hail Brown's "leadership", in other words his generous support to the banks - that is, the very institutions whose greed was responsible for the present crisis in the first place! For these papers, the fact that the government squanders public funds, becoming the largest single shareholder in two of Britain's "Big Five" banks, while taking over the unrecoverable loans of "buy-to-let" lender Bradford & Bingley, is no longer an expression of "covert socialism". All of a sudden, such state interference in business affairs has become government's essential duty!

Such apparent double standards are hardly surprising, of course. The role of the state under capitalism is and has always been, to serve as a milch-cow for the capitalist class. Whether it be in the form of state procurement, PFI contracts, tax incentives or other forms of state subsidy, the public purse managed by government is the source of a significant part of the capitalists' profits. Their usual opposition to government interference in their businesses has always been an expression of their desire to get even more handouts from the state, not fewer. That the capitalist class should expect their politicians in government to bail out their system is, therefore, entirely consistent.

In fact, the reason why business papers are so satisfied with the performance of Brown and Bush, is based, precisely, on their comparison between today's crisis and that of 1929. As a recent supplement on the world economy published by The Economist points out, it took more than 3 years after "Black Thursday" in Wall Street, before the US government introduced the first large-scale measures aimed at bailing out the system. And The Economist goes on contrasting appreciatively this past passivity to the almost immediate measures taken by Darling, long before the government had officially acknowledged that there was even such a thing as a crisis. According to this journal's implicit argument, this is what makes the present crisis so different from that of 1929 and what should make it far less damaging too.

Maybe, maybe not. However, given the very limited success of the state bailouts in bringing to an end the on-going chaos on stock markets, it is hard to see how these bailouts will actually stop the rot. On the other hand, what is obvious is the price tag that this welfare state for capital will entail for the working classes of the world. It will not take long before the capitalist classes and their politicians try to make the working class foot the bill for their ballooning state indebtedness as a result of these bail-outs. This will come in all sorts of forms, over and above the direct social cost of the crisis itself, whether it be in the shape of inflation, public sector job and wage cuts, social budget cutbacks, indirect tax increases and even more derelict public infrastructure - not to mention the possibility of even more drastic measures, such as the compulsory freeze of a certain proportion of every bank account, for instance.

The men of capital

The bailout of the banking system organised by the Bushs, the Browns and the Darlings of this world, demonstrated, if this was still needed, their total commitment to the capitalist class.

But to the working population, these trustees of big business have nothing to offer, but lies and deception. All along, they consciously deceived working people about the health of an economy which was already showing many signs of stress, wear and tear, even though capitalist profits were still booming. And of course, they lied through their teeth about their ability to make predictions as to the future of the system!

The first cracks began to appear in March 2007, when the US speculative housing-based credit bubble claimed its first victims among US mortgage lenders. Nevertheless the official line remained that all was hunky-dory. Meanwhile, the value of credit notes sold on regulated and non-regulated money markets started going down in the US and then went down across the world. Speculators realised that the mountains of credit paper held as assets by banks would soon turn into junk as the housing bubble burst. So bank shares began to slide as well. By August 2007, for the first time, two major banks - one British and one French - approached their respective governments, admitting major losses due to their exposure to the US housing credit bubble. Then came the queues outside Northern Rock and its so-called "nationalisation" in an attempt to protect the rest of the banking system. Meanwhile, across the world, credit and banking institutions were trying to assess their losses and to conceal them as much as possible.

Yet, all along, the official motto remained that the "fundamentals of the British economy" were healthy. Across the world, every single government peddled the same lies, as if what was happening under their noses could simply be talked out of existence. Brown's official line was not even altered by the near-failure of Northern Rock, even if, at the same time, he was instructing the "independent" Bank of England to open its coffers wider and wider to meet the banks' increasing needs for cash.

In the autumn of last year, building workers started being laid off up and down Britain. Factories producing equipment and supplies for construction closed down. And so did some of the smaller retail chains, despite optimistic official figures about rising high-street sales. The number of repossessions of homes and shops increased and so did small business bankruptcies. Unemployment rose, even if this remained partly hidden due to unreported joblessness among casual workers. But none of this was ever considered serious enough for Brown and Darling to stray from their "healthy fundamentals" line.

What does it take for the trustees of big business in government to admit that there is a crisis when it is staring them in the face? Quite simply it must come to the point of threatening to dent the profits of their capitalist masters to such an extent that it puts the need for a massive state bailout on the agenda. Since a justification for the squandering of public money on such a scale must be given to the population which will have to pay for it, an emergency situation has to be acknowledged. This was what happened early this summer, after Britain's big banks disclosed one after the other, the multi-billion losses they had suffered as a result of their involvement in dubious credit trading. Then, and only then, did Darling start referring to a crisis - first as the most serious crisis since the recession of the early 1990s and then, as the most serious since the Great Depression of the 1930s.

Finance - born out of capital's straightjacket

What was happening by then was that, due to their losses the banks were having difficulties to borrow the increased amounts of funds they required, at least not without having to pay a significant interest premium. As a result they were no longer able nor willing to lend on the same scale as before, thereby threatening the whole economy with collapse.

All of a sudden, the chickens were coming home to roost. For a very long time, an over-inflated financial bubble had concealed the fault lines in the real economy. It boosted GDP figures year after year, thereby giving the impression of continuous economic growth - although this growth benefited capitalist profits only, whereas the overwhelming majority of the world population only saw an on-going slide in its standard of living. But now, the madness of this financial bubble was being exposed. And not only did it bring to the fore the faults in the real economy, but it threatened to make them even worse. So, how and why did this financial bubble develop?

The very existence of the financial sphere stems from the built-in limitations of capitalism itself. Under this system, no productive activity can be undertaken without funds. But all the available capital is owned privately by a small number of very rich individuals, most of whom are not involved in production. Moreover, the scale of capitalist undertakings has reached such a level that, in most cases, no individual capitalist can alone provide the investments required. Hence the vital role played by the various forms of credit in oiling the wheels of the capitalist economy and preventing its paralysis, while allowing every capitalist, whether involved in production or not, to cash in on the exploitation of the working class.

More recently, of course, credit has also become a means for capitalists to overcome the limitations imposed on their markets by the shrinking real income of the majority of the population. Mortgages, HP loans, credit cards, overdrafts, not to mention door-to-door lending, are all credit devices without which many companies - if not industries - would have gone bust long ago.

Credit always means that the lender expects to make profits by anticipating future income - whether future profits, or future wages. But in so far as, under this irrational system, no future income is ever guaranteed, credit always involves an element of risk. The capitalists protect themselves against such risk by avoiding their wealth being frozen in long-term loans. Nevertheless, if they want their capital to grow, which is the only thing they are really concerned about, they still have to invest it in some way in the productive sphere, if only indirectly, in order to benefit from the exploitation of the working class. And they do this mostly by lending it short-term.

This is why, especially since the currency and economic meltdown of the early 1970s, the world has been awash with huge masses of so-called "floating capital" - i.e. funds looking for a quick buck through short-term loans. The management of these enormous funds fuelled a huge growth in financial activity. The banking industry became over-inflated while there was an explosion in the number and variety of speculative investment funds. All kinds of new devices were invented to make the financial jackpot even more attractive to the wealthy, by making it even more profitable and, as much as possible, less risky.

Of course, if capitalism was about organising the economy rationally and efficiently, there would be one single bank to channel the available capital towards the productive undertakings that need investment. But capitalism is only about allowing the capitalists to make more profits. So "efficiency" is supposed to be provided by the market - that is, by the cut-throat competition between financial institutions. And instead of the planning of investment which would be needed to give the system some sort of rationality, capitalist investment is always speculative first. What matters to the capitalists is not the economic activity for which their capital is used, but whether they can sell their investment to others at a higher price than it cost them in the first place.

Predictably, on this crazy basis, there developed a crazy financial system. Banking itself is a blatant illustration of this madness. To make up for the reluctance of capitalists to invest their capital in the real economy, banks are allowed to lend far more funds than they actually have in their custody, thereby effectively creating forged money, legally. Of course, banks have to abide by certain rules defined by an international body called the BIS, or Bank for International Settlements. But the BIS record speaks for itself. It was originally set up in 1930 as a co-ordinating body between the world's central banks, to bring some sort of rationality into the banking system, in the middle of the Great Depression. Ironically, however, as we will see later, within one year of its launch, a devastating banking crisis broke out - which probably says it all as regards the effectiveness of the BIS and its regulation! The fact that, in Britain today, BIS rules allow banks to lend up to 12 times the value of their core assets (such as shares, long-term bonds, deposits, etc..) probably speaks for itself!

Greed's wonderland

Banks, like all financial institutions, operate on a number of markets, which have developed on a tremendous scale over the past two decades. The stock market, where shares of companies' capital are bought and sold, is the least sophisticated of these markets. Nevertheless, as the recurring stock market crashes of the past decade showed, this does not protect this market against speculative storms, in which tens of billions of pounds worth of shares can be wiped out in just one day.

The bond market is similar to the stock market in that most of the pieces of paper bought and sold on this market have a well-defined link with a particular company. The only difference between bonds and shares is that bonds usually provide a fixed income, unlike dividends from shares, which depend on a company's (variable) profits. Besides, bonds are meant to be repaid at a set date, unlike shares which are open-ended investments. Bonds are often considered "safer" than shares. Ironically, however, the bond market is often the target of even more cut-throat speculation in periods of crisis, precisely because so many stock market operators switch their funds to the bond market to protect themselves against stock market turmoil!

Even more potentially volatile, are the so-called "money markets", where funds are lent on a "short-term" basis - anything from one night to 3 months. What is traded on these markets is debt paper - that is, IOUs written by operators in return for short-term loans. Contrary to what happens on the stock and bond market, the actual use of these loans is unknown. For instance, Northern Rock used the money markets to finance most of its long-term mortgage loans with short-term borrowing. But those who lent money to Northern Rock knew nothing about the real value of the houses behind these mortgages, let alone whether borrowers could afford to meet their mortgage payments. Vast amounts of floating capital operate on the money markets on a daily basis, precisely because this capital seeks short-term investment and a quick buck. This, in turn, fuels intense speculation based on the fluctuations of the debt paper which is traded on these markets.

These markets are even more risky than the stock and bond markets. Money market loans are only secured by borrowers depositing some assets (which can be any tradeable financial asset). If borrowers fail to pay back their debt with interest, lenders share their deposit. But if this does not cover what they are owed, there is not much more they can do - which is why, in theory, only institutions duly vetted by financial regulators can borrow on these markets. However, since the financial deregulation of the 1980s, far more players have been allowed in. It is common practice, for instance, for big companies to lend their available cash on money markets in order to make it "sweat", until they need it for whatever it was meant for in the first place, whether it was paying their workers' wages or their suppliers. But it is also common practice for the biggest among them to borrow on these markets.

Money markets are particularly vital for banks, in three different ways. These markets provide banks with mechanisms, first to share the cost of their loans with other financial operators by funding long-term loans with short-term borrowing, which they repeat again and again; second to have access to cheap money for new loans; and third, to allow them to re-balance their books in order to meet their BIS capital requirement, something they have to do at the end of each day. A freeze in the money markets or, what amounts to the same thing, a sharp increase in the interest rate required for loans on these markets, inevitably spells huge losses and possible bankruptcy for the banks.

The capitalists' permanent fear of losing any of their precious capital has given birth to various mechanisms which are designed to protect them against losses incurred on money markets. Thus, companies specialise in providing insurances against borrowers' default or against a fall in the value of any debt paper on the money market. Providing such insurance can be risky business in a period of crisis, as was shown by the recent failure of the world's largest insurance company, the American International Group (AIG), which went to the wall precisely because it provided insurance cover for the huge amount of debt contracted by the now defunct Lehman Brothers bank.

Likewise the banks have invented tricks to make their loans look safer to investors, while reducing their own dependence on short-term lending. One of these tricks, which is at the centre of today's banking losses, is the practice of slicing and packaging long-term loans into bonds, which are then sold on the bond market. Much in the same way as supermarkets package low-quality apples with better-quality ones and sell the whole lot at a slightly reduced price, banks package slices of dodgy debt with slices of better quality one into a single debt bond, which they sell as top notch debt. And who would question their say-so since there is no way to know what is really behind these pieces of paper? Especially when they are issued by big names such as HBOS, Barclays, or Bradford & Bingley and when hefty profits can be made by buying and selling such bonds, as has been the case for the past 7 years or so? The irony of this, of course, is that most major banks allowed themselves to fall for their own trick, by buying huge amounts of such bonds issued by their rivals - especially by US banks.

The banks' trillion pound slot machine

To provide the capitalists with a way of protecting themselves against business losses, another type of financial market has developed over the past period, reaching an astronomical dimension, today. As their name indicates, what is traded on the so-called "derivative" markets, are pieces of paper whose own value is derived from the value of a specific product, financial or otherwise. The seller of a "derivative" bets on the fact that the value of this product will behave in a certain way, while the buyer insures himself against this happening (or the reverse, depending on which way one looks at it).

"Derivatives" stem from a perfectly understandable need. They were invented in the 19th century, in the US, in order to provide big farmers with insurance against falling wheat prices, thereby allowing them to budget for their investments on a predictable basis. Long before the harvest was done, farmers had to find an investor, usually a banker, who was prepared to bet that the price of wheat would rise. If the price went down, the investor paid for the farmer's losses. If, on the contrary, the price increased, the investor received the farmer's unexpected gain.

Today, "derivatives" are used as insurances against all kinds of things, like changes in currency exchange rates or fluctuations in commodity prices. But 80% of all "derivatives" are credit-related, in one shape or another - whether they provide an insurance against changes in interest rates, against borrowers' default, against losses incurred on trading debt paper and bonds, etc... Derivatives markets attract an enormous amount of floating capital for a variety of reasons. One reason is that, since the 1980s, most trading is done "over the counter", thereby escaping any institutional control. But another reason is that operators only have to provide a fraction of their bets in actual cash (usually around 10% of the overall value of their combined bets) as a guarantee. As a result, gains on winning bets can be very high compared to the guarantee. Conversely, of course, if a bet goes wrong, losses can be many times larger than the guarantee.

For these reasons, "derivative" markets are ideal places to make a quick buck on speculative bets, for those who have the stomach for the risks involved. This is why so many speculative investment funds, such as the notorious "hedge funds", operate on "derivative" markets. By the same token, the speculative nature of the frantic trading in "derivatives" conceals totally the real nature of what they are supposed to derive their value from. For instance, "derivatives" insuring against default by different companies should trade at different prices depending on the underlying companies' health. But this is not necessarily the case, because the companies are invisible. Usually, what is insured is a particular debt paper, which can be issued by any financial institution on behalf of the said companies. The opacity of the system guarantees that no-one questions it - at least, as long as returns are high.

The banks are among the main beneficiaries of this over-inflated financial bubble and the largest contributors to it. In particular, banks make extensive use of the facilities it provides for by-passing regulations. So, the kind of debt repackaging mentioned above enables the banks to turn debt paper into bonds and to include them in their core capital (which they cannot do with most debt). Banks can also transfer part of their loan management to a special kind of "arms-length" subsidiary whose liabilities are not included on their balance-sheets. In addition, they can exclude from their liabilities any debt paper provided it is insured, regardless of the actual quality of the debt.

None of this is illegal. Bank regulators know very well that the banks turn the regulatory system on its head. But who said that in this society, regulation was ever designed to stop capitalists and companies from exploiting loopholes in order to make profits? After all regulators and bankers brush shoulders in the same milieu. Why should regulators seek to undermine their pals? In fact, what the banks' recent losses revealed was precisely the huge scale of their cheating. And the cheating goes on, regardless of the crisis. Thus, in September, Barclays' outstanding loans represented, officially, 10 times its core capital - well within regulatory limits, therefore. However, when a BBC economic journalist calculated Barclays' real core capital - that is the result obtained without the tricks and loopholes that can be used to inflate its value - his conclusion was that the bank's lending represents no less than 60 times this real core capital, very far beyond limits!

The financial engineering described so far was never designed to stop the scale of risky debt from increasing and it has not. Quite the opposite, in fact, since it provides financial operators with a false sense of security, by giving them the impression that they will be protected, whatever happens. As it was, the fact that bad debts littered the banking system and money markets has been an open secret for a long time. So much so that, in every year over the past decade, all British banks made large provisions for bad debts on their balance sheets, thereby showing that they, themselves, did not really trust their own credit machine. But since the price of debt paper showed no sign of weakness and insurance devices were expected to kick in when there was a default problem, financial operators saw no reason to look into the real nature of what they were buying or selling, thereby keeping this increasingly fictitious system afloat.

Nevertheless, the signs of threatening trouble were more and more visible. Derivatives market figures, in particular, gave a good idea of the colossal scale of the speculative credit bubble which was developing. In 1997, the IMF estimated that the total notional value of unregulated credit-related derivatives - that is the value of the debt value these derivatives were meant to insure - was equivalent to 2.5 times the value of the planet's annual output. Ten years later, by the end of 2007, this had risen to 11 times the value of the world's output. Of course, there was a large speculative element in this increase. Nevertheless it did show that the world's indebtedness problem had increased four or five-fold compared to world output, in a matter of 10 years. Any household faced with such a predicament knows it is heading straight for personal bankruptcy. So did the world's capitalist classes and there was no shortage of warnings from all sorts of quarters. But as long as profits kept flowing, what the heck? The speculative merry-go-round went on.

From credit to banking...

To go back to today's crisis, let us recall briefly the chain of events. After March 2007 came the relatively slow realisation that the loans lying behind many of the credit paper traded on money markets might be far more risky than rating agencies claimed. The value of some of the credit paper related to US mortgage collapsed as a result. A snowball effect followed as everything connected to American real estate and then to real estate in general, came under suspicion. Then the snowball effect turned into an avalanche, which first engulfed credit papers issued by institutions dealing with real estate in one shape or form or another and then just about any kind of credit paper.

Thus far, the various insurance devices designed to provide protection against market fluctuations had more or less worked. However the scale of the problem was soon so great that the institutions responsible for insuring debt paper were soon overstretched. Most used debt derivatives in order to hedge their position against their customers defaulting. When the credit rating of these institutions was downgraded they were requested to produce huge amounts of additional securities to back up their derivatives. So much more, in fact, that some of them just could not face the demand. This was what brought about the downfall of the above-mentioned AIG, which had contracted debt derivatives worth over £160bn. Had it not been for the US Treasury's last minute injection of £51bn in AIG's capital, the insurer would have gone to the wall, taking with it a whole number of other financial institutions. AIG was too big and too important for the financial sector to be allowed to fall, so it was rescued. Its bail-out resolved things in the short-term, but in the longer term its failure was practical proof that the financial insurance system could not and would not cope with the unfolding crisis. And this accelerated the rot on the debt market.

There is an ironic twist to what happened on the money markets over this early period. The drop in value of some debt paper was due to the fact that those who held them feared potential losses and wanted to get rid of them. But its consequence was that no-one wanted to put any fresh money on anything related to debt. The opacity of debt packaging, which had worked such wonders in the previous period by concealing the underlying real level of risk, led market operators to suspect all debt papers, including many which were probably perfectly healthy. The sophistication of these marketing techniques resulted in the exact opposite of what they had been designed for and the debt markets ground to a virtual standstill. A lot of debt paper became worthless, not because it had no intrinsic value, but because there was no-one to buy it, not even at a bargain-basement price!

British banks were especially hurt by this because, even more than most, they held massive amounts of US housing debt. In particular, the largest US subprime lender was not an American bank, as one might expect, but a British one - namely, HSBC, thanks to its acquisition of US lender Household International for £9bn, in 2003! In fact, earlier this month, HSBC announced yet another £3bn write-off of US-related unrecoverable debt paper - the third such loss announced by the banking giant over the past year.

The big British banks were confronted with a catch 22 situation. Writing off billions of pounds of assets from their books weakened their core capital, tightened up their capital requirements and reduced their ability to lend. But, by then, the money markets were already more or less frozen. This made it impossible for the banks to reduce their loan portfolio. As a result they had to resort even more heavily than ever to overnight and short-term borrowing in order to meet their capital requirements and refinance their long-term lending. But the money markets could not provide them with the cash they needed either, especially as the only security the banks could offer in return was mostly made of the very same kind of debt paper which was now worthless. This was why the Bank of England was instructed to step in and substitute itself for the money markets with a special credit facility. However, by introducing this facility, the government also gave the banks a license to by-pass its own banking regulations, thereby creating new potential problems for the system as a whole.

As it happened, the £200bn which was loaned to the banks through this credit facility, did not solve the problem. This was partly because the banks registered yet more losses. But far worse even, they did not actually know the real extent of their final losses. So that not only did they cut their lending, but they started hoarding cash, as a precaution against events turning really ugly. A possible option was for them to raise fresh cash, either from investors or by selling parts of their businesses . However, few banks had much to sell, after years of cutting overheads to boost profits. As to those which tried to raise cash from investors, they found that investors were reluctant to burden themselves with shares whose prices were going down the drain and whose future seemed uncertain. The result was so bad at times that some banks came out of such attempts even worse off, like RBS which nearly went bust as a result. Other banks chose to avoid taking such a risk by turning to so-called "sovereign funds" - i.e. state-managed investment funds based in mostly oil-producing countries. Barclays, for instance, got a financial injection from Qatar and even considered taking its begging bowl to Russian president Putin - although, this time, irate shareholders seem to have blocked this move.

What was true in Britain, was true all over the world. Eventually the weakest links in the speculative chain had to give way, just as Northern Rock had done one year before. Weakest meant most dependent on the money markets, but not necessarily smallest, though. Among the casualties, Merrill Lynch was the world's largest brokerage firm (meaning that it operated directly on stock markets, rather than through intermediaries as most banks do) as well as one of the largest asset-managers, looking after £1,100 bn of funds belonging to the wealthy. Wachovia was America's fourth-largest banking institution in terms of overall assets. Lehman Brothers was the 4th largest US investment bank. Washington Mutual was its 6th largest bank. Likewise, in Europe, HBOS was Britain's 1st mortgage lender and 4th largest bank, Fortis was the 4th largest bank in the euro zone, Hypo Real Estate was Germany's largest mortgage lender and its largest provider of loans to local authorities, etc..

... And to the wider economy

Neither the demise of the weakest, nor the huge programs aimed at recapitalising the remaining banks with fresh funds, proved enough to stop the course of the crisis. Because, in the meantime, another new factor had come into play - the stock markets.

So far, the only industries whose shares were really affected by the credit crunch were finance, construction and real estate. Even then, with a few exceptions like RBS in Britain, there was nothing catastrophic yet. But, by the end of September, stock markets began to behave far more erratically. Among the big casualties of the credit crunch, Lehman Brothers was the first one to fall - not due to refinancing difficulties like the others, but due to panic selling of its shares on Wall Street and in London. Soon all industries were affected, including blue chip companies which had nothing to do with banking, such as General Electric and General Motors, for instance.

In fact, this was a predictable and almost mechanical consequence of the events of the previous weeks. On 20 September, a US money market fund - an investment fund which makes profits for investors by speculating on the money markets - announced that it would only be able to refund 97% of its customers' money. This was like a thunderbolt in a blue sky. Investors in such funds were used to annual returns of 15-20%, if not more, and suddenly they were told that they stood to lose some of their precious capital! This triggered a run on all money market funds. In just one day, £54 bn was withdrawn from these funds in the US. The same process affected hedge funds, many of which gamble on credit-related derivatives. By the last week of September, another £25bn had been withdrawn from US hedge funds.

This exodus of capital forced fund managers to find alternative sources of funding to carry on their speculative activity. And since borrowing on the money markets would have been either impossible, or at least prohibitively expensive, they had to sell whatever assets they had at hand - shares, in particular. Hence the frantic wave of selling orders which flooded Wall Street, from the end of September. This, in turn, triggered a chain reaction. As share prices dropped, financial institutions and capitalists began to pull their money out of mutual funds operating on the stock markets. Over the first two weeks of October alone, £40bn were withdrawn from these funds in the US, resulting in an even larger wave of share sales.

By that time, whether governments were bailing out banks which were on the brink of bankruptcy or not, no longer really mattered. Thousands of investors were pulling their money out, hundreds of stock market operators were busy trying to disentangle themselves from the threat of bankruptcy and hundreds of others were striving to make a quick buck out of a market which was in free fall. The capitalist law of the jungle in its crudest form was now overtly in operation and it was unlikely to be sweet talked into disappearing by the politicians, not even on the strength of hundreds of billions of pounds of state subsidies. Hence the 24% drop of the FTSE 100 index over just 3 weeks and the chaotic ups and downs, although many more downs than ups, which followed.

Ironically, it is this moment that Brown has chosen to announce "officially" that the British economy is entering a state of recession. In fact, this is merely revealing an open secret that the entire working class knew already out of first hand experience - whether it be the tens of thousands who have already lost their jobs in construction-related industries, the hundreds of thousand of households for whom paying bills and keeping the threat of repossession away is a daily battle, not to mention the vast majority who have had to face a cut in their standard of living due to the sharp price increases of the past year.

Yes the capitalist bingo machine has done it once again. Its irrational profit-making frenzy has wreaked havoc in the financial sphere and this havoc is now spreading to the real economy. Working class households are having a hell of a time finding affordable credit and many fail. For some time already, building sites have been mothballed for lack of funding. New house starts have reached an even lower level than during the last housing crisis, in the early 1990s, while homelessness is on the rise. Small companies are starved of vital credit, while the big ones, which are not as much affected by far, are anticipating the recession by cutting jobs and real wages. Who can believe that such profitable companies as BT, the pharmaceutical giant Glaxo-SmithKline, Cable &Wireless, let alone BP, are in any need to cut thousands of jobs, as they have just announced? But this is the only prospect that this capitalist system has in store for working people. And this may well be only the beginning.

The build up to the Great Depression

While there are many differences between today's crisis and the crisis of the 1930s, there are striking similarities in the circumstances which produced both crises.

Just like the present crisis, the 1929 crash did not arrive as a storm in a bright blue sky. The first half of the previous decade had seen a number of crises. The 1921 crisis affected most industrialised countries. It was, in fact, the system's brutal way of mutating out of the war economy of World War I. Then a series of regional crises followed, between 1923 and 1926, which again affected most industrialised countries. But with the exception of Germany, they were short and, in any way, isolated.

The period of the so-called "roaring twenties" only really started by the end of 1926, with a huge increase in labour productivity and the rapid development of new manufacturing industries - automobile, radio, electrical consumer goods, etc.. Although, this did not mean that this new affluence was in anyway shared by everyone. On the eve of the crash, an official report showed that 60% of American families lived on an income which was below the minimum considered necessary to sustain a family. This did not prevent someone like John Moody, the founder of the US Credit Rating Agency, from claiming that "a new age is taking shape throughout the whole civilised world. (...)We are only now starting to realise, perhaps, that this modern, mechanistic civilisation in which we live is now in the process of perfecting itself". Or to put it another way, this new "scientific" industry was somehow proof that capitalism had turned over a new leaf and that its bad old crises were over for good. One cannot avoid noting a striking similarity to the language used during the heyday of the so-called "new technology boom" - that is, before the "dotcom crash" of 2001 brought all that rhetoric to an end!

However, the fact that the capitalist economy was far from healthy in the 1920s, was illustrated by another meteoric rise - that of speculation. It took all kinds of forms, from the famous Ponzi schemes - the ancestor of every pyramid scheme invented since, to convince the most gullible to part with their savings - to a Florida-based real estate speculative bubble, in which developed swamp-land was parcelled out and sold at astronomical prices to rich citizens from the Northern states who were desperate to find a fashionable place to spend their holidays. But the most spectacular speculative bubble of the "roaring twenties" was, of course, the stock market in Wall Street.

In those days, none of today's sophisticated speculative instruments existed. But the banks had invented a gimmick to make the nitty-gritty of stock market speculation more attractive to wealthy punters. They allowed their customers to play on the stock exchange while providing only around 10 to 20% of the money needed for their bets. The banks lent them the remaining 80 to 90% - of course, in return for a highly profitable interest rate. As share prices kept going up every day, it became common practice for the banks to accept share deposits as security for these so-called "call loans", so that their customers never had to pay a cent to back up their gambling bets.

As a result the number of punters increased rapidly. By 1929, it was estimated that 1.4 million individuals were betting on Wall Street, with 80% of them using the banks' "call loan" facility. In and of itself, this was not an enormous number compared to a population which included over 40 million households. But it meant that a significant section of the petty-bourgeoisie was risking its savings.

In this speculative craze, thousands of companies emerged out of nowhere for the sole purpose of raising cash on the stock market. Within a few months, their directors mysteriously disappeared, taking the money with them and forgetting to leave an address. Then and only then did their shareholders discover that these companies had never produced anything or even existed in any shape or form outside of the glossy brochure produced to promote their shares.

Even companies which had a more real existence enjoyed a success which they hardly deserved. RCA, Radio Company of America, was a typical example. By September 1929, the value of its shares had increased six-fold after only 21 months on the market. And yet this company had never paid a cent in dividends. In fact many companies did not even bother to pay dividends, except to the most wealthy minority who held privileged shares. The fact that share prices kept going up was enough to ensure that there were always enough buyers when they needed to raise fresh capital. Indeed, in the last 20 months before the crash, the average share price doubled.

Another similarity with today's situation was the fact that during the two years preceding the crash, many companies cut productive investment. They found it more profitable to invest their profits in big takeover battles, in order to grab a rival's share of the market, or even in outright stock market speculation. So, over the 12 months preceding the crash, the proportion of "call loans" to non-financial operators soared from 50 to 75%, reflecting the fact that many companies, big and small, were betting on the stock market. And since most of them had few reserves in cash, what they were betting with was the money set aside for their employees' wages or for paying their suppliers - just like in the recent past.

Finally, it should be added, that this last year before the stock market crash saw, in the USA in particular, but in most European countries as well, a cut in industrial production. This was concealed by the continuing increase of the value of services, which meant that it did not translate into a drop in GDP. Nevertheless, the signals from the real economy were already red when the crash happened.

The crash and its consequences in the US

The day before Thursday 24th October 1929 had been a gloomy day with many shares falling - not much, but enough to worry many players. So that the next morning, a large number of shares were for sale. Unexpectedly, there were no buyers and prices started to fall as they had not done for years. Within a few hours, the value of the shares deposited by many speculators as a guarantee against their "call loans" became insufficient. They were requested to either increase their guarantee or else withdraw from the game after having sold the shares they had in hand. Most chose the latter option and the selling of shares turned into panic selling. By closing time, despite a concerted intervention by the big banks to try to kick-start a wave of buying, share prices had fallen by 9%.

Over the following days, share prices went on falling, albeit more slowly. The banks gave up any attempt to turn the tide and by the following Tuesday they started to offload their own shares. After a week of these large-scale sales, share prices had fallen by just over 20%. There were two days of respite with slight increases, after a number of big companies announced plans to pay a dividend to all their shareholders. But in the first week of November, the downward slide resumed. It was to carry on almost continuously until the summer of 1932, by which time share prices bottomed out at less than 20% of their September 1929 level.

There was not one single cause of this crash. It could probably have happened one or two months before or later. But it did reflect the fact that the speculative bubble had reached a size which was less and less sustainable, especially as, at the same time industrial production was beginning to fall. The more inflated the speculative bubble became, the more risk there was that a relatively insignificant event could trigger a panic - which was effectively what happened. Once the movement had started, the "call loan" system created a self-feeding mechanism which increased the volume of sales and, therefore, the operators' losses, just as the same system had mechanically increased their profits in the past.

Because so many banks and companies have staked large resources in stock market speculation, either directly or by lending funds to operators, the impact of the crash was almost instantaneous. As many brokers and punters were unable to cover their losses, these losses were passed on to those who had provided them with the funds for their bets. Companies found themselves without the cash to carry on operating. The banks, which had to use all the liquidities at their disposal to deal with their own losses and those of their stock market customers, were unable to open new lines of credit to companies in difficulty and often not even able to honour existing ones. As a result bankruptcies spread almost immediately across the country.

The worst affected were the working class, on the one hand, and the farmers on the other. In rural areas, regional banks which had been playing happily on the stock market with their customers' money, found themselves on the brink of bankruptcy, leaving farmers without the credit they needed to buy seeds or maintain their farms. As to the working class, it was immediately affected by large scale redundancies due to factory closures. Unemployment shot up by a third within a few months of the crash, reaching 8 million in 1931 and 12.5 million in 1932, by which time a quarter of all US households had no employed wage earner. As to those workers who remained, most were on part-time working and 90% of them had their hourly rate cut.

What made the crisis far deeper, however, was that from a stock market crisis it soon turned into a liquidity crisis in the banking sector, leading to a series of regional banking panics, starting from the middle of 1930. None of the big banks was ever seriously at risk, in so far as they could rely on the Federal Reserve's backup. But no fewer than 1,300 local banks had to close down, some only for a few months and others for good. Either way, many depositors were left without a cent as a result.

Far more than the stock market crash itself, it was this banking crisis, which, by drying up liquidities in the US led to the brutal repatriation of US investment and profits from abroad, thereby spreading the crisis across the world.

Britain in the Depression

One can say that Britain was less affected by the Great Depression than countries like the USA or Germany, because the postwar recession had never really ceased, at least not for the vast majority of the population. Nevertheless the 1929 crash did have drastic consequences, even against the gloomy backdrop of a society which was already in crisis.

In May 1929, the army of registered unemployed already stood at 1.1m. A year later, after the crash, it had risen to 1.8m and was to reach 2.6m in December 1930, or 21% of the insured workforce, although many uninsured unemployed should be added to this figure. By 1932, Home Office figures reckoned that there were two suicides each day among the unemployed. Children became malnourished and many went without shoes and warm clothes for winter. Deaths in childbirth increased because of poor maternal health as did all the disease rates for infections, including tuberculosis.

Official history often presents the Jarrow Hunger march, which was organised by the Labour MP for Jarrow, Ellen Wilkinson, in 1936, as a symbol of the period. In reality, not only was it one of the smallest, but most of the hunger marches and other protests by the unemployed held during the Depression itself, were organised not by the Labour party, but against it, by the Communist Party-led National Unemployed Workers Movement (NUWM).

Indeed, the Labour Party had come into office in May 1929, under McDonald's leadership, who had spelt out his intentions "to pursue a policy of continuity" with his Tory predecessor. Once the crisis broke out, the Labour leadership embarked wholeheartedly on a policy aimed at getting the working class to pay for the capitalists' losses.

So, in June 1930, JH Thomas, the then Employment minister and former leader of the rail workers' union, stated that "I have deliberately and will continue deliberately, to proceed on the basis of a process of rationalisation in industry, which must increase unemployment figures. I have got to do this in the interests of the country". By "rationalisation", what Thomas meant was, of course, closures and job cuts. As to Bevin, the then president of the Transport union, he offered his support to companies which were seeking to cut workers' wages buy arguing that "a readiness to accept that the value of income is something which must be accommodated to changing circumstances is an essential of the sound working of an economic system." Of course, Bevin would not have dared to propose that the income or wealth of the capitalist class should be "accommodated" to the needs of working class families so that they could have a decent life!

By 1931, McDonald decided to slash benefits for the unemployed, on the grounds that the unemployment insurance scheme was insolvent. As if such a scheme could ever be solvent in a period of high unemployment! The report of a commission into this scheme recommended in June 1931 that married women, part-time workers, casual workers and seasonal workers would all have their claims on the scheme disallowed - to make savings of up to £5m. This was followed by further measures, recommending a cut of 10% in all benefits to the by then 2.7m unemployed and similar cuts in the wages of all civil servants, teachers, police, and the armed forces, including the navy.

There were protests within the Labour party and a number of ministers defected to show their opposition. But McDonald was determined to implement the City's demand to slash government social budgets. In August he chose to resign in order to force a general election, in which he and a number of his ex-ministers joined forces with the Tories and the Liberals as part of a National Coalition, which then proceeded to adopt all the cuts originally planned.

In fact, McDonald was to turn the screw on the unemployed even further. In 1932, a Royal Commission asked "whether, by the organisation of some form of public work, some use could not be made of this great reserve of valuable labour, and the workers have the satisfaction of giving some return for the money expended on their maintenance." It recommended that the unemployed should be made to work for their benefit, first on a voluntary basis, but as it said "we see no objection in principle to the application of compulsion." This was the basis on which residential "work camps" were set up for the jobless. These were meant to be voluntary but in fact the unemployed were usually threatened with loss of benefits if they refused to take up a place. The resistance put up by the NUWM and the unemployed however ensured that this compulsion was put into question and strikes were also organised against the bad food and poor conditions. Nevertheless these 20th century workhouses remained in place until the outbreak of the war, by which time there were still 35 of them across the country.

From Germany's banking crisis to fascism

Germany was probably the country which was most dramatically affected by the Depression, even more than the USA in many respects. The immediate consequences of the Wall Street crash was, like in the USA, a brutal industrial slowdown caused by a combination of reduced orders and anticipation of worse trouble to come by the bosses. But in addition, Germany was confronted very quickly with monetary problems.

In 1929, the exchange rate of the deutschmark was, like that of the pound, defined by a fixed quantity of gold (the so-called "gold standard"). The main advantage of such a system was to make the fluctuations of the German currency more predictable, which helped German companies which were operating on the world market. However, unlike Britain, Germany had no colonial empire which could be made to pay for its economic difficulties (although, in the end, this did not prevent Britain from being forced to give up the gold standard). Moreover, a large part of Germany's deposits (18% in 1929) were short-term foreign deposits. Having the deutschmark pegged to gold meant that the withdrawal of these foreign deposits could result in a reduction in Germany's gold reserves.

And this was precisely what happened, when American financial institutions in need of liquidity started withdrawing their deposits from German banks. These withdrawals turned into a panic after the attempts by Germany to reschedule its World War I debt failed and even more so, after the collapse of the Austrian Kreditanstaldt bank, in the spring of 1931, which created doubts about the health of the German banking system. Soon British investors joined their US counterparts in withdrawing their funds from Germany.

On 13 July 1931, a number of big German banks had had to stop all payments to their customers. Other banks had to call in the police in order to avoid a panic run. That same evening, the government ordered all banks and stock markets to close down in order to avoid a complete collapse of the financial system. The banks were to reopen slowly within a few weeks or months, while the stock markets only reopened in April 1932. Meanwhile, there was a run against the deutschmark. The central bank of Germany had already lost so much gold and foreign currencies that it had no option but to give up any resistance, exit the gold standard and allow the German currency to collapse.

The collapse of the German monetary and banking system led to the failure of hundreds of companies. So much so that six months later, Germany's industrial production was down to 50% of its 1929 level. At the same time, the austerity measures taken by right-wing chancellor Brünig, with the support of the Social-Democrats, resulted in a catastrophic cut in the standard of living of the working class. By 1932, one third of the working class was unemployed, while the nominal wages of those still in work had been cut by 35%. A whole section of the petty-bourgeoisie was also seriously affected by the crisis, particularly among those who had lost everything in the banking collapse.

A whole number of factors paved the way for the victory of Hitler's fascist movement, a year later. The social catastrophe caused by the crisis was, by far, the most decisive factor in pushing a whole section of the petty-bourgeoisie, together with desperate elements of the working class and the unemployed, into the arms of Hitler. Although, there were also important political factors - particularly the passive acceptance of successive government's pro-business policies by the Social Democrats, and the refusal of the Communist Party to lead the working class into a united counter-offensive against the attacks of the capitalist class.

Protectionism and World War II

Almost as soon as the stock market crisis broke out, trade barriers went up and this did more to reduce world trade to one-third of its 1928 volume than the crisis as such.

In June 1930, the Smoot-Hawley tariff (or import duty) was introduced in the USA. Although officially meant to protect American farmers, the most drastic increases were aimed at industrial products - up to 90% of their value in some cases. France followed in 1931, by raising tariffs and introducing import quotas for many imported products. Finally, Britain restored the old "imperial preference" system, which had given preferential treatment to goods imported from the empire in the early 19th century, while import duties of between 20 and 33% were imposed on all other imports except agricultural products.

The crisis did not just give birth to protectionist measures. It also exacerbated inter-imperialist rivalries, with each one of the main imperialist powers setting up its own gangs of subordinate countries against its imperialist rivals. So, in 1931, London set up the so-called "Sterling Area", with all the countries which were willing to peg the value of their currency to the pound and keep part of their central banks' reserves in pounds rather than gold. Among these countries was most of the empire (except for Canada and British Honduras), but also a host of countries whose trade was mostly with Britain - the Scandinavian and Baltic countries, Portugal, Ireland, Argentina, Iraq, Egypt and today's Thailand.

The Sterling Area was not the only currency bloc set up in that period. Another one was formed by the USA with most Central and South American countries, on the basis of the dollar. There was also the so-called "gold bloc" formed in 1933 by France, Italy, Switzerland, Belgium, Holland and Luxemburg, which was based on a mutually-agreed system of convertibility into gold. However, the "gold bloc" was to collapse in 1936, when most of the participants were forced to devalue their currencies simultaneously. Next came Germany's own bloc with its satellites in Central and Southern Europe, based on drastic trade barriers and currency and capital controls. As to Japan, while trailing at a distance behind the Sterling Area, it increased its sphere of influence in South East Asia by annexing Manchuria in 1931 and invading Northern China in 1933, with the passive acquiescence of the League of Nations.

To all intents and purposes, therefore, the world was thus divided into five main spheres of influence formed around the five main imperialist countries. Four of them were currency blocs, but of course they were not just currency blocs. Due to unpredictable currency movements and shortage of credit, they were also effectively trade blocks, thereby adding to the restriction to international trade caused by the Depression and paving the way for the next stage in the absorption of the crisis by the capitalist system - World War II.

Indeed, even after 1933, the crisis did not stop everywhere. The years 1936 and 1937 saw a resurgence of the crisis in the USA and some parts of Europe. In others, like Britain and Germany, the rubble left by the crisis only began to be cleared thanks to the government kick starting the economy with the development of a whole new war industry. However, weapons, especially heavy weapons such as the new generation of combat aircraft which started to be built in Britain from 1935, tend to get used, once they are produced. Especially when the capitalist class has decided that this is the best course to follow in order to improve its profits and get an ambitious rival out of the way.

In this respect, World War II, with its catalogue of atrocities on all sides, was a direct by-product of the Great Depression. It was, in fact, the only method that the capitalist system managed to find in order to restart from a clean sheet, free of the decaying remnants that it had produced during the previous period.

Crises - capitalism's "normal" regulation

One of the most remarkable features of the Great Depression is how, in every one of the rich countries, and regardless of the political colour of the ruling party, the governments presided over a huge process of concentration, in the financial sphere as well as in the productive sphere.

This is something that we are already beginning to see happening today, even in this early stage of the present crisis. Both in the US and in Britain, the big banks have been busy absorbing their weaker rivals. What is more, in both countries, the so-called "bail-out" of the banking system is now openly geared towards providing the strongest banks with the finance necessary to take over the weakest, out of public funds.

Contrary to what the media keep telling us here, Brown did not show the way to anyone in this respect, let alone to the world. His bail-out plan is far less ambitious than America's Paulson plan. Indeed, the bulk of Paulson's $700 bn plan aims not only at reconstituting the capital of the big banks but at providing them with the fresh cash they will need in order to expand their empire by swallowing other banks in the US, but also elsewhere in the world. From this point of view, it is an overtly imperialist plan designed to help US banks to take opportunity of the crisis to expand the financial clout of US imperialism.

Brown's plan, on the other hand, is proportionate to the much more limited capacity of a minor imperialism such as Britain. Its primary aim is to recapitalise domestic banks within their domestic market, but does not go further than that. It is no coincidence if the three British banks which have the most diversified activities outside Britain - HSBC, Barclays and Standard Chartered - prefer to seek the backing of private investors rather than the backing of the state. This is not because they are afraid of being "nationalised". Indeed, they know that, whatever rhetoric Brown may use in this respect, it is only for the benefit of public opinion. They also know that Brown never had any intention of nationalising any bank in the sense of the government really imposing its decisions on them, not even Northern Rock. The reason why these three banks prefer to do without the government's direct participation in their capital is rather because they fear it might frighten away the private capitalists they want to attract in order to finance their foreign ventures - particularly foreign investors, such as the Qatari monarchs who are backing Barclays.

With or without the direct intervention of the state, the capitalist system has never managed to sort out the mess of its competitive markets without going through brutal crises. During boom periods, when there is space for more players on the market, their number increases far beyond what the market can really absorb - which is yet another expression of the anarchy of the capitalist market. The development of speculative bubbles merely reflects the exacerbation of the competition between too many rivals. Such bubbles can only keep growing by losing, increasingly, any connection with the real world, until such a time when the smallest upset becomes sufficient to make the bubble burst. At that point the capitalist law of the jungle applies: the weakest end up as dead bodies on the floor while the strongest pick up all that remains. And order is finally restored on the capitalist market.

Those who, despite what they see under their own noses, still hang on to the illusion that capitalism can be managed due to some sort of hidden rationality, should remember the story of Myron Scholes. Together with his colleague Robert Merton, Scholes won the 1997 Nobel prize in economics. This was meant to reward his discovery of a set of mathematical equations which made it possible, in theory, to program computers to carry out unattended speculation in financial markets. As if there was anything rational or scientific in the behaviour of speculators! Evidently, Scholes did not, and could not, factor into his equations the unpredictable effect of greed and fear on the behaviour of market operators. Nor could he take into account the impact of stock market changes on the wider economy or how this impact could feed back into the financial sphere. Ironically, just a year after winning his Nobel prize, Myron Scholes saw one of the speculative funds he had co-founded, Long-Term Capital Management, lose $4.6 billion in a matter of four months before going flatly to the wall. Some "rational system"!

The truth is that, ultimately, capitalism regulates itself by allowing the law of the jungle to take its toll - and this, regardless of the regulators who are meant to oversee its operation. What we are seeing today is not the result of "bad" or "insufficient" regulation, as some claim today. Nor is it the expression of capitalism's " excesses", as others argue, implying that such "excesses" are circumstantial and can, therefore, be resolved. No, what we are seeing is the real inner-workings of capitalism as such, without anything to conceal it.

This system is too dangerous to be allowed to go on

If only the capitalists sorted out their market problems between themselves in a closed arena, without this having any impact on the real world, who would bother? They could cut each other's throats at will and that would be their problem, and their problem only.

The point, however, is that every time their system "regulates" its market through such a crisis, it threatens entire populations, millions if not billions of women and men, with the most terrible disaster. If there is a lesson to remember from the Great Depression it is precisely this one - the exorbitant cost that this crisis involved for the whole of mankind, a cost that we are still paying today, due to the mess that the victorious powers felt strong enough to create after the war in the poor countries and, in particular, in the Middle East.

So what is there to be done about this crisis? First of all, the working class needs to be ready to defend itself against the inevitable attempts by politicians and bosses alike to make it foot the bill for their crisis. And they will try it on in all sorts of different ways.

The capitalist class will try to cut jobs and wages. Already we can hear reports on factories in which the workforce has voted in favour of a wage cut in order to avoid more job cuts - such as was the case in the construction equipment giant JCB. These cases are presented both by the media and by the unions machineries, which were instrumental in getting these votes, as "examples" of "responsibility" for all to follow!

But there is only one possible way for workers to be "responsible" towards themselves, towards others workers and towards their children who will be tomorrow's workers. And that is to refuse such blackmail point blank. It is to insist in no uncertain terms that if anyone should take a pay cut it should be the directors, shareholders and all the other parasites who made such a comfortable living out of workers' sweat when things were going well. Isn't it high time they paid their share, now that the going is getting tough? Even if order books are empty, why should workers lose their wages? Isn't it time for the parasites to return some of what they stole from workers? And any union leader who does not endorse such a position and is not prepared to help the workers to organise in order to fight for what is owed to them, should be seen for what he or she is - a bosses' auxiliary!

Yes, the only "responsible" programme for workers against the bosses' hypocritical whining about this crisis, is that not one job should be cut, that all work should be shared out between all workers without loss of pay for any of them, and that if companies are hard up, they should get their shareholders to return some of the dividends they piled up over the past years and decades, instead of trying to rip off the workforce once again!

Likewise, when we are told that banks are to be "nationalised", just because public funds are used to buy a 40% share in the bank and two bankers will be appointed by Darling to sit on its board, shouldn't we say: "nationalised? That's perfect. But since all these public funds are going to go into the bank, why not nationalise it completely - that is without compensation for its shareholders, who have made enough money from their shares already, anyway! And why not nationalise all the banks, since it is their mindless competition which triggered today's mess in the first place. And once this is done, why not take the obvious next logical move, to merge all banks into one single nationalised bank, under the direct control of its employees and, through them, of the working population as a whole, so that we, workers, can have a say over what is done with its funds.

Neither the capitalists nor their politicians have any solution for this crisis, or rather their only "solution" is to throw an extremely expensive lifeline to the system in the hope that it will work, and then turn to working people to foot the bill. But even if their "solution" does happen to work, and at what cost for all of us, we can be sure that it will only lay the first stone for yet another crisis at some point in the future. Why would the working class help them to do that?

The truth is that the only "responsible" and effective way for workers to confront this crisis is first, to be prepared morally for the possibility that it may become far worse than anything we have ever seen so far in our lifetimes; and, second, that the only way to counter this is not to keep our heads down and wait for the dust to settle, as union leaders want us to do, but to raise our heads, defend our class interests proudly and set ourselves the task of ridding the world of this parasitic system which has long lost any right to exist.