Friday, October 10, 2008
Just how bad can it get? posted by Richard Seymour
There has been nothing like this in the whole history of capitalism: the level of state intervention to shore up the financial markets is astonishing. Equally astonishing is the fact that it has had no effect whatsoever. After a steep fall on the stock markets yesterday, global equities have plunged this morning, with the FTSE 100 losing a tenth of its value in a few hours. And while it has so far been true, as Andrew Kliman points out, that the 'real' economy has contracted a lot slower than in the previous, relatively mild recession of 2001-2, the signs are that it may in fact be much worse. House prices are plummeting far more rapidly than they did in the early 1990s. For those of you who are - like me - in rented accomodation, this is actually very bad news, because it makes buy-to-let mortgages more expensive to obtain as well as driving many homeowners back into the renting market, thus driving up prices. Because the UK has, like the US, rested its economic performance to a great extent on its housing markets, the sudden decline makes the UK worse placed than other EU states to cope with the recession according to the OECD. Like the US, we are up to our eyeballs in debt and have no savings to match, and many people have relied on mortgages as collateral for credit. And like the US, in fact much more than the US, our economic growth has been driven by the financial sector while manufacturing has been allowed to implode. I mention all this because Gordon Brown is still telling anyone who will listen that this is a problem that really swept in from America, without acknowledging that his government deliberately imported the specific structural imbalances of the American economy. And I would be willing to be that the OECD's estimate, made at the beginning of last month, would be on the optimistic end of expectations today.
The coordinated interest rate cut has, reportedly, not been reflected in the Libor rates (the rate of interest on the London interbank money market). In fact, the cost of borrowing in dollars seems to have increased. So, banks are still severely restricting their lending to one another, despite unprecedented funds made available by the government. Even the weaker pound hasn't boosted exports, because global demand is falling. Falling oil prices should boost consumption, but it won't be enough to stop the slide in domestic demand - in fact, the main reason for oil prices falling is the slump in demand. Corporate profitability in the non-financial sector remains relatively high according to the most recently available statistics. But it has been inflated by strong performance in the energy sector. Even the first quarter of this year saw rates in both service and manufacturing fall in the UK. We have yet to see what impact the contracting of lending and thus investment, as well as falling demand, has had in recent months. And while it was easy to pretend for a while that the problem was just in the financial markets, notwithstanding the fact that the financial bubble originated in weaknesses in the 'real economy', one has to ask how leveraged the 'real economy' is? How dependent has consumer spending been on debt? How dependent has investment been on companies being able to get credit? We know the answer to both questions: corporate and consumer debt hit record highs in the last eight years. The 'real economy' has been, to use an irritating term, living beyond its means.
The next question that follows from all this is how bad can it get for the government? The worsening of the crisis has improved Brown's stature in the administration, and even in some of the polls (not by enough to save the government, though). Many people perhaps suspect that, however bad it is with the government, the Tory plan to cut taxes for the rich and slash public spending is no way out of the crisis. To that extent, I would expect the government to benefit in the short-term even if its bail-out plans are likely to become more unpopular as their basic inability to save jobs and prop up the economy becomes obvious. On the other hand, the growing deficit (set to be between 3 and 6% of GDP by 2010) will be used by the Tories to say that the government has overspent. Moreover, the Tories' inheritance tax and council tax plans will galvanise middle and upper income earners in the key marginals. Business will get over the mean things that George Osborne has been saying about money men (they know he's just teasing), and they appear to be moving back to the fold. And while Osborne is likely to have to raise taxes somehow, despite his 'populist' noises about the 10p tax, he will try to find a way of doing it that doesn't offend the Tories core constituencies. (An aside: one hears from some more schematically minded marxists that we shouldn't be too concerned about taxes on lower income earners and particularly services taxes like the VAT, on the grounds that workers, actually, don't pay any tax. For, in the aggregate analysis, the wage rate is set by the market, and the real wage rate is net take-home pay not gross pay - therefore, all taxes are essentially taxes on profits. Leaving aside the fact that many don't receive wages set by the market, but wages and deferred wages paid by the government, this assumes that wages in the private sector are paid at their actual market value - if this automatically took place, there would be no need for unions. Class struggle would have no bearing on wages - a preposterous idea. Tax increases on lower income earners at a time when the rhythms of class struggle are contained by an unfriendly political climate and the absence of a serious antisystemic movement are not necessarily transferred to the rich.)
The Tory lead was halved when the crisis started to get worse in mid-September, but they remain in the lead in part because as Yougov [pdf] finds, enough people think the party has changed and aren't as wary of them as they ought to be. The most recent polls [pdf] suggest that the Tory lead has risen by 4%, but the biggest squeeze is on the frankly hopeless Liberal Democrats (whose main economic spokesperson is also mooting public spending cuts). Meanwhile, even Labour Party members still think little of Brown [pdf], with half of them saying he's doing badly and 66% saying he isn't radical enough. It has come to something when they can say that Blair, arguably the most despise Prime Minister in living memory whose ratings at times dipped below those of Thatcher, is seen as having been a better bet. So much for the hopes invested in the 'secret socialist'.
The political impact of this crisis is still wide open. People expect the ideas of the radical left to gain currency, but some of the rush back to Labourism in light of the Tory resurgence has also been reinforced. Moreover, if ideological radicalisation is not matched by effective collective resistance to job cuts, then it can collapse alarmingly rapidly into despair or, worse, support for the far right. But given that the government is so bloody eager to help the bankers, it ought to be a pushover to say they should be protecting jobs - don't just part nationalise and throw money at the banks, take the whole banking system into public ownership and run it in the interests of full employment and strong wages. As it is, they seem to be allowing a sort of social Darwinism to operate in the banking system such that - rumour has it - HSBC employees are now joking that their advertising slogan "The world's local bank" should be changed to "The world's only bank". (Next to Goldman Sachs, that is). And if we can run up a debt to fund the banking system, there is no reason to accept cuts to the public services with wage cuts for public sector workers. And ultimately, if the bosses suddenly find capitalism so fucking inconvenient for them, why should we accept it?