World crisis - Only the working class can break the vicious circle of capital's parasitism

Oct/Dec 2011

Since the stock markets went into a downward spin last August, reducing the paper value of shares by £3,360 billion worldwide, the spectre of the famous "double-dip" recession has been haunting Britain - just as much as the rest of the world.

This was widely expressed over the following weeks in newspaper headings such as "Bank worries bring echoes of 2008", "New debt crisis looms", "The system is ready to blow", "Britain must escape its longest depression", "How to stop a second Great Depression?", etc.., which were followed, in October, by Bank of England governor, Mervyn King, admitting for the first time that "we may be in the grip of the worst ever financial crisis".

Except that, of course, the coming of this "double-dip" - which is really nothing more than the continuation of the crisis which began in 2007 - has only ever been questioned by those who wanted to see a "recovery" at all costs, for whatever reason of their own, political or otherwise. Even among the economists of the capitalist class, there was never any shortage of voices, duly branded as "gloom and doom merchants" by their peers, to warn that there was almost certainly more, and worse, to come. In the end, as the resurgence of the banking crisis, which has been unfolding since last summer, is now showing, the "gloom and doom merchants" were proved right.

For the working class, however, the uninterrupted nature of the crisis has been a fact of life: on-going waves of "restructuring" and redundancies, wage freezes and wage cuts and, of course, government austerity measures, both under Labour and Con-Dem with their impact on the welfare system and public services, including the 300,000 or so public sector jobs which have been cut since December 2009.

Regardless of the convoluted explanations which have been used by so many "experts" and politicians over the past four years, either to conceal the real extent of the crisis or even to deny its existence, the working class has faced an on-going reduction in living standards and a worsening of living conditions which, together, result in a deep social crisis. And whatever the "experts" may say, this is where the reality lies.

The delusion of a British "safe haven"

But none of this stops Osborne from repeating that thanks to the brutal turn of the screw of his government, Britain has been and remains an economic "safe haven", with a sound banking system, in a world shaken by an uncontrollable crisis.

Never mind the fact that Britain was, with the US, the first country in which the housing bubble imploded, back in 2007, nor that it was the first country to face a run on one of its banks - Northern Rock. Never mind either, that British banks played an important role in sparking off the crisis, because of their role in real estate speculation - and not only in Britain, but also in the US where HSBC was one of the big players in the subprime market.

Four years and several bailouts later, what is the state of the British banks? In early September, once again, their share prices went tumbling down in the middle of the frantic ups and downs of the stock market. Fearing that this might trigger another credit crunch, if not a run on the banks, the Bank of England and the Treasury started to float a rumour that a new round of "quantitative easing" was being considered. The figure which was mentioned at the time was £50bn, coming on top of the £200bn already decided by Labour, back in March 2009. The hope was that this at least, would be enough to stop the fall in the banks' share prices.

As it happened, it didn't work. Not only that, but credit began to tighten up even faster than had been expected, with the banks finding it increasingly expensive to borrow. This was why, less than a month later, Mervyn King finally announced that not only would there be another round of "quantitative easing", but that it would be larger than rumoured - at £75bn.

This was obviously designed to reassure the British banks' potential creditors. It was hoped that with this additional source of liquidities at their disposal, no-one would question the banks' creditworthiness. However, within just 24 hours, Mervyn King's move was virtually torpedoed by the announcement that Moody's, the international credit rating agency, had downgraded the credit ratings of 12 of Britain's 14 largest banks. Only Barclays and HSBC escaped being given bad marks - but not for long since, just a few days later, Barclays was put on "negative watch" by Fitch, Moody's main rival, which is the usual advance warning before a downgrade.

Officially, the main reason given by the rating agencies for this downgrade was the recently published Vickers report. This report is supposed to provide the basis for future banking reform which will reduce the banks' exposure to risky operations. The rating agencies' argument was that this report implies that British banks were less likely to get government support should they get into trouble. Except that the Con-Dems have displayed an obvious reluctance to impose any constraints on the banks. And they have already decided to delay any further action on the matter until... 2019.

So, could it be that there is something else behind this downgrading? Of course, the credit ratings awarded by the likes of Moody's and Fitch are not foolproof. After all, didn't they continue awarding brownie points to subprime loans till the very last minute before the US housing bubble finally collapsed? On the other hand, there are some real reasons to question the soundness of Britain's banks.

Because, of course, Britain is not a "safe haven" from the crisis for anyone, not even for its banks, despite the unbelievably generous treatment they got from successive governments. Among the rich industrialised countries, Britain has seen the largest drop in production and GDP since the beginning of the crisis; it has the highest inflation rate, at 5.2%; the purchasing power of its population has seen one of the biggest falls, at 9%; and its economy is more heavily dominated by the very same parasitic financial activities, which are at the centre of today's crisis worldwide. Talk of a "safe haven"!

Although the banks stop short of giving precise details, they are known still to hold a substantial number of "toxic", unrecoverable loans inherited from the housing bubble. But, in addition, four years of shrinking activity implies a great deal of waste in the real economy. This means that, since 2007, another portion of the banks' loans has become "toxic"- loans to defunct companies, to abandoned infrastructure projects which will never see the light of day, to mothballed real estate developments, to cash-strapped local authorities which may not even be able to meet their interest payments due to government cuts, etc ...

The problem is that no-one knows exactly the amount of "toxic" loans, old or new, which are held by each bank in its vaults. Commercial confidentiality and competition among banks mean that such vital information is kept carefully hidden. But given what each bank knows about its own hidden "toxic" assets, it has good reason to suspect that its rivals might be hiding as much of those as it does, if not more.

It was precisely this kind of situation which, after the implosion of the housing bubble, led to the credit crunch. And history may well be repeating itself in this respect.

The parasitism of capital

Another of the Con-Dems' favourite themes is to claim that only external factors can threaten the British economy, in particular the usual suspect - the eurozone. However, regardless of the specific difficulties that the eurozone may be facing today, the Con-Dems' nationalist demagogy cannot conceal the fact that Britain, the eurozone and, in fact, the whole world, is more or less in the same sinking boat, and for the same reason - capital's parasitism.

In the post-2007 bailout of the system, every government poured public funds into the coffers of their banks in one form or another. This was done either by means of direct injections of existing public resources, or by printing new money - which is what the "quantitative easing" used in the US, Japan and Britain amounts to - or by a combination of both. Some governments resorted to nationalising their most delinquent banks, so that at a cost to the taxpayer, shareholders were compensated. But in most cases governments found a way of rejuvenating their banks' finances without even exercising any control over their operations.

Whichever methods they used, these bailouts sent the public debt of most countries through the roof - to levels comparable to those reached during WWII, when the whole economy operated on credit in order to concentrate its resources on arms production. This crippled the government's annual budget with colossal interest and debt repayments. Of course, in each country, the resulting unbalance was proportional to the size of the financial industry relative to the rest of the economy - which is why the public debt is so huge in Britain, at £2,260 billion, or 150% of GDP, according to the Office of National Statistics, once the cost of the banks' bailout is taken into account!

But the consequences of this imbalance were also bound to be more difficult to absorb by the smallest economies - which is why, in particular, the small Baltic states, Iceland, Ireland and Greece were most drastically shaken - and all the more so because, being smaller, they were in a worse bargaining position with their creditors.

Overall, in any case, all governments found themselves with the same kind of noose around their necks - even if some were tighter than others. Except that the tighter the noose was (the more difficulty they had in repaying their debt), the tighter it became (the higher the interest rates they had to pay on new loans). For the smaller countries, the medicine prescribed initially to cure the financial crisis promptly turned into poison.

However, there was every reason for the banks, which had caused the crisis, to feel satisfied with this situation. Having been bailed out, while being the governments' main creditors at the same time, the banks were now able to rake in fat profits from this ballooning public debt. So much so, that their profits went back, more or less, to what they had been before the collapse of Lehman Brothers.

In order to fund the increasing cost of their debt repayments, governments imposed austerity measures on their populations. Beyond the different methods they used to slash public expenditure - whether it was at the expense of investment, services, jobs or welfare provisions - and to increase their tax income, these measures can only cut the standard of living of the working class even further. Thus, the parasitism of the banking system on public finances is shrinking the productive sphere, by forcing the population to reduce its consumption.

Behind the financial form of the crisis, therefore, the old fundamental mechanism of the recurring crises of the capitalist system has come to the fore - the contradiction between, on the one hand, the limited consumptive capacity of the population and, on the other, capital's need to expand the scale of its operations in order to maintain and increase its profits.

In this respect, the biggest non-financial companies have been just as parasitical and have had the same impact as the banks, by maintaining, or even increasing their profits, at the expense of the rest of the economy. By producing more with fewer, lower-paid workers, and by putting pressure on their smaller contractors and suppliers to lower their prices - even if this meant pushing them to the wall - these big companies have contributed to the rise in unemployment and the reduction in workers' living standards.

Through their behaviour during the crisis, the banks, the capitalists on whose behalf they make a killing, and the big companies, are sawing off the branch on which they are themselves sitting. But it is the whole of society, and more specifically, the working class majority of the population, which is bearing the cost of this criminal behaviour.

The boomerang of the crisis

The explosion of governments' public debt had another side-effect. Doubts began to emerge as to their capacity to repay their debt. Government bonds, which were generally considered as safe investment before the crisis, started being seen as risky, feeding large speculative flows of money, moving from the bonds of one government to those of another, according to the rumours of the day. The market prices of these bonds became subject to unusually large variations. As speculators were betting on a fall in the prices of the bonds issued by the countries considered to be in the weakest position, the interest rates these countries had to pay on their new borrowing increased proportionally and their financial situation deteriorated even further. But since these interest rates were so high, the banks were keen to grab the opportunity and make a killing out of lending them more money.

But, at the same time, because the banks are the governments' main creditors, the doubts relative to the weakest governments' capacity to repay their debt turned into a suspicion that the banks which held large amounts of these governments' bonds, might find themselves in a difficult position if these governments defaulted on their debt repayments. The result is a re-enactment of the same process which produced the credit crunch in 2007-9, except that instead of being caused by "toxic" housing loans, it is caused by bonds from over-indebted governments.

This boomerang effect is the main mechanism at work behind the eurozone crisis, as a result of the problems faced by Ireland first, then by Greece, Portugal, Spain and now Italy - and maybe, tomorrow, France. But, contrary to the nonsense peddled by many so-called "eurosceptics", who are now saying that the only solution would be to get rid of the euro and break up the eurozone, if not the EU, the resulting problems have nothing to do with the common currency itself.

The risk of regional financial difficulties spreading to the rest of the country cannot happen within the narrow borders of Britain, of course - although, one may wonder what would happen if Scotland, or even one of Britain's very large cities, went bust for whatever reason. But such situations have often happened in the USA, when the federal authorities had to step in when a state, or even a state-based bank, faced financial difficulties, without anyone ever dreaming of blaming the fact that the USA is a federation of states built around a single currency!

Of course, the eurozone has a problem. But it is not due to the fact that it has a single currency. Rather, it is the result of having retained the national borders and national states, and therefore the national rivalries inherited from an antiquated past, which constitute as many obstacles to the effective operation of its economy. It is this absence of political integration which makes the operation of the eurozone so complicated and inefficient, compared to the USA, for instance.

But the main problem facing the eurozone governments at present as far as government debt is concerned, is exactly the same which is facing the governments of all rich countries, including Britain - how to protect the banks against their own reckless profiteering.

When Osborne gives moralistic lectures to the eurozone governments - primarily for the benefit of the British public - urging these governments to put together an emergency package for Greece, what he really has in mind are the Greek government bonds held by RBS (worth £1bn or so) and the Greek companies' shares held by British capitalists. Because, of course, if the Greek government defaulted on its debt, not only would banks like RBS suffer, but so probably would all the capitalists who have lent money, in one form or another, to the Greek economy.

In fact, in his admonitions about the need for an emergency eurozone aid package for Greece and his insistence that British taxpayers will not pay to "bail out the euro", Osborne conveniently forgets to mention one thing - that when the EU and IMF stepped in with their last emergency package for Ireland, their aim was to ensure that the big international banks would not loose out as a result of an Irish default. And some of the main beneficiaries of this package were none other than RBS, through its fully-owned subsidiary in Ireland, and Lloyds with its huge portfolio of "toxic" housing development loans, which were bought back by an Irish government agency with the EU-IMF loan money. In other words, British taxpayers and eurozone taxpayers both paid to bail out the British banks which had been speculating in Irish real estate!

This time round, the same thing is bound to happen with the new rescue package which is being prepared for Greece, and probably tomorrow for other embattled eurozone countries. The resources of Europe's taxpayers, including Britain's, will be mobilised in order to minimise the resulting losses for all the big banks which have been making big profits at these countries' expense so far - including the big British banks. And this will mean, inevitably, another excuse to introduce austerity measures against the working classes of Europe.

As this article is going to press, Britain's media and politicians are making considerable noise about plans to get the big European banks to "recapitalise" themselves - in other words to increase the total amount of real money they have at their disposal, compared to the total amount they borrow in order to fund their loans. The aim of the exercise would be to allow these banks to withstand the shock of a Greek default, for instance. The likely total cost of this "recapitalisation" is huge - anywhere between £90bn and £150bn - although, if calculated per head of population, it would still be far below the cost of Brown's bailout of British banks in 2008, or even the cost of Osborne's latest round of "quantitative easing".

No-one knows yet the actual sums that each bank will be "invited" (it is not clear yet whether there will be any form of compulsion) to find to recapitalise itself. But for the benefit of those politicians in Britain, who keep repeating that "we're alright, it's all the fault of the eurozone banks", the Swiss bank Crédit Suisse (which is not part of the eurozone) has just released its own estimates of these sums. It says that RBS would need to find £16bn, whereas larger banks like France's BNP-Paribas and Germany's Deutsche Bank, which are far more exposed to the eurozone, would need only £12bn. So much for the "soundness" of British banking!

In any case, none of this tinkering around with the banking system will make capitalist finance any less of a threat for the economy and society as a whole. Nor will any regulation do the trick, since, by definition, it would be enforced by the capitalists themselves on the banks they use to make their own profits! Nothing short of the complete nationalisation of all the banks without compensation for their shareholders, and the merger of these sharks into one single entity designed to serve the economy as a whole under the control of the population, will bring their recklessness to an end.

Playing with fire

When Osborne brags about the success of his austerity measures in protecting the British economy from the public debt storm which is threatening the eurozone, he forgets to mention four things. First that, once again, Britain's debt remains the largest among the rich European countries in proportion to its economy. Second, that British bonds are still considered by speculators as worse "value for money" than those of a eurozone country like Germany. Third, that if Britain's government bonds have not been manhandled by speculators so far, it is primarily due to artificial measures taken over the past years - namely, the two rounds of "quantitative easing" introduced in 2009 and this October. And, most importantly, fourth, that this "quantitative easing" entails an unpredictable cost to the economy in general and the working class in particular.

The two rounds of "quantitative easing", when completed, will have poured £275bn into the banks' coffers. This injection of cash was carried out by buying mostly government bonds and a smaller proportion of corporate bonds held by British banks.

This method of injecting fresh cash into the banking system had all sorts of short-term advantages for the banks, the big companies and the government. It enabled the big banks to get rid of bonds which they would not have been able to use easily in large quantities because this might just have been enough to destabilise over-jittery markets, thereby exposing them to losses and, by the same token, to be blamed for the resulting havoc. By contrast, the banks could use this cash without constraint and in the most opaque way, in keeping with their normal reckless profiteering - which was precisely what they wanted.

This method has also the advantage for both governments and large companies, of keeping bond prices artificially high - since by announcing its plans to buy back large quantities of bonds, the Bank of England was effectively guaranteeing their prices. This was why the year following Labour's first round of "quantitative easing" witnessed the largest volume of corporate bonds being issued in the City's history: the big companies rushed to take advantage of the artificial high level of corporate bond prices, in order to convert part of their expensive short-term debt into a cheaper long-term one.

As for the government, first under Labour and now under the Con-Dems, "quantitative easing" was an easy way of anticipating a possible run on government bonds caused by the escalating level of Britain's public debt. The odds are that, without the use of this technique, the interest rate paid by Britain on its debt would be much higher now, than the present 2.52% average.

However, as always in this irrational capitalist system, in which no-one can predict anything, the medicine way well turn out to be as bad, or even worse than the disease its is meant to cure. Because printing money does have a cost.

Many commentators who are keen to support "quantitative easing" claim that the resulting newly printed money is "not real money", because it is not meant to circulate - since it is meant to replace assets that the banks are normally expected to keep as reserves. But isn't the official purpose of this injection of fresh money precisely to increase the banks' liquidities and provide them with more room for manoeuvre? Which is another way of saying that the purpose of this injection of money is precisely that it should be used, whether in lending or in "investment", as speculative activities are usually called. And in fact, this is exactly what the banks must have done after Labour's first round, judging from the sudden surge of their profits over the following year.

In other words, part or all of this printed money inflates the mass of money in circulation at a time when material consumption is decreasing - which brings together all the required ingredients for a sharp rise in inflation. No wonder inflation, even measured using the massaged official indices, is at a record level in Britain today! In this context, Mervyn King's claim, as he was announcing his new round of "quantitative easing", that inflation had reached its peak, sounded more like a pathetic attempt at anticipating obvious criticisms, than genuine prognosis - which he could not make anyway, for lack of a crystal ball.

No-one can tell whether these two rounds of "quantitative easing" will really protect the big British banks from another major crisis, nor whether they will protect Britain's government debt from falling victim to a market run at some point, like that of Greece, Portugal or Ireland. But what is already certain is that they can only fuel a rise in inflation which, in turn, in the context of the overall falling income of the working class, is another factor in cutting its standard of living, and another way of making the working class pay for the capitalists' crisis.

The capitalists know how to cope with inflation. In so far as they can more or less set the prices of their goods, they pass on to consumers the rising cost of supplies. The working class needs to prepare itself to use precisely the same methods in order to protect its living standard from going down the drain: by imposing the principle of a "sliding scale of wages", that is, an automatic indexation of wages to real price increases, as they are taking place and as often as may be required.

Against a system gone mad

While the banking crisis was resurfacing in September, Osborne announced that his department was working on a new, so-called "credit easing" programme, designed to channel public funds into the pockets of businesses.

He was responding to vocal demands by bosses' organisations like the CBI, which want to have their cake and eat it. On the one hand, they want the government to slash public expenditure by taking more austerity measures which can only reduce the consumption of the working class, and, on the other, they demand that the government should increase public expenditure in order to compensate businesses for the loss in profits caused by this reduced consumption!

Of course, this contradiction is not altogether new. During the Great Depression of the 1930s, the governments addressed it at first by resorting to a public works policy. Subsequently, in Hitler's Germany the public works policy turned into a rearmament policy - with the development of state-funded war industries at an accelerated speed. And all the rich industrialised countries followed Hitler's example - until the armament race finally turned into a world war. Although we may not be at that stage yet, the scene is already set for such a lethal drift, should the crisis get deeper and should the capitalist classes be allowed to have their way by using public resources according to the needs of their profits.

So far, the capitalist system is proving incapable of extricating itself from the quagmire it has created. Its long period of relative stagnation has resulted in the development of a ballooning, parasitical financial "industry" which has long been an obstacle to the development of the productive forces and is now forcing them into a slump. Over the past four years, world production and world trade have been falling, together with productive investment, while unemployment was growing.

In July, even the governments' over-optimistic official statistics acknowledged that there were 44m jobless just in the 34 industrial countries belonging to the OECD - or 8.2% of the working age population. It was the second time such a level had been reached since WWII, the first time being in October 2009. But this is an average. For instance unemployment among the 16-24 age group, which averages at 20.5% across Europe, reaches 46% in Spain!

Yet, it is not as if the capitalist classes were short of cash. In the case of Britain, it was estimated last year that British non-financial companies had £650bn in cash at their disposal. But their planned investment was, and remains, at a record low. By contrast, buying back shares from shareholders as a means of redistributing profits, has come back into fashion. More importantly, dividends are rising sharply. In the third-quarter of this year they returned to their pre-crisis level. Over the year 2011, it is estimated that £67bn will be paid in dividends by companies quoted on the London stock market - an 18% increase over 2010, with an average 23% increase for industrial companies and utilities.

So, when Mervyn King, in his speech announcing his latest round of "quantitative easing" used the excuse that "we're creating money because there's not enough money in the economy", he was lying through his teeth. There is certainly not enough money in the pockets of the working class. But neither the capitalists nor the big companies are short of cash - simply they will not put it where it might be needed.

In fact, if the capitalist economy is plagued with anything, it is with an oversupply of cash which, instead of being used to create jobs and socially useful production, is either hoarded or used in blind, potentially devastating profiteering in the financial sphere. This means that the sacrifices imposed on the working classes - those resulting from its increased exploitation on the job and those due to the impact of austerity plans - will not lead to any improvement for the capitalist economy, because the parasitism of capital, which was the main initial factor in the crisis, is now the primary cause of its further deterioration.

This is why it is both the right and the duty of the working classes to stop the parasitism of capital in its tracks - and with it the vicious circle of a system gone mad - by building a position of strength from which they can force the capitalists to respect their jobs and living standards. It is not only in their interests, it is also in the interests of the whole of society.

The crisis itself, together with the increased exploitation of the working class which comes with it, and the governments' austerity plans, is part of the class struggle. But at this stage, this class struggle is still waged exclusively by the capitalist classes in order to protect their domination - and this is the main factor which is blocking the situation and pushing society deeper and deeper into the present crisis. The only way forward is for the working class to re-enter the arena of the class struggle, to fight its exploiters. Of course, no-one can predict what will spark off a remobilisation of the working class. All we can say is that it is a vital necessity and its necessity will become increasingly urgent as the crisis gets deeper.

By resuming the fight for its conditions, against the attacks of the capitalists, the working class may come to the realisation that it is the whole capitalist organisation of society that must be destroyed, that the capitalist class must be expropriated and that the economy must be reorganised along more rational lines, on the basis of a plan democratically controlled by the population.

In today's crisis, the capitalist system does not just show its chronic injustice as it always does. It also exposes its irrationality and the exorbitant human and material toll it takes on society. It is in such a period that communist ideas have a better chance to be understood for what they are - a way forward for mankind. This is why these ideas must be popularised as widely as possible within the ranks of the working class so ensure that, when things come to the crunch and the working class is mobilised, it will be able to use them as a lever and a guide for action.