After recent turmoil, can taxpayers’ £400 billion prevent a worsening crisis?
Forget the television serials and ‘soaps’ or the major sporting contests. For real drama, all you need to do is turn on the television, look at the newspapers or listen to the radio as the economic crisis of Britain and the world unfolds. First to occupy the stage were US economic ‘stars’ – Henry Paulson, Ben Bernanke and George Bush himself – frantically bailing out the banks and financial institutions. However, the real sentiments of the American people towards Richard Fuld, head of the now-defunct Lehman Brothers, were summed up by the demonstrators in Wall Street: “Jail ‘em, don’t bail ‘em”.
It is not just a few obscenely greedy individual capitalists but the system of capitalism – one based on profit for the few at the cost of the needs of the majority – which is on trial before world public opinion. Another act of the drama was played out in Britain, with the government of Gordon Brown pumping in £400 billion of taxpayers’ – our – money into the banks’ coffers. Unless this was done, a real collapse of the banks and the other financial institutions was threatened. This, in turn, could ripple through the rest of the economy, enormously aggravating the recession already under way.
Before these events, in The Guardian, Jonathan Freedland had praised Paulson’s $700 billion mopping up of the bad debts of the US banks. This was not the “pale pink socialism of Northern Rock or of Bradford and Bingley; this is the red-blooded bolshevism, seizing the commanding heights of the financial system”. A slight exaggeration! This was, in reality, a measure of ‘state capitalism’ – as with Brown and Alistair Darling’s interventions last week – aimed at rescuing the financial institutions, renovating them at our expense and returning them to the grubby hands of ‘private investors’. Nevertheless, the invoking of ‘socialism’ by commentators and reactionary US congress members and now the astonishing united hosannas of the three main capitalist parties in Britain in favour of state intervention, represents a fundamental change.
Brown could not, at the time of Northern Rock’s collapse, even mouth the ‘n-word’, nationalisation, but now boldly implements the ‘part nationalisation’ of the whole financial system. Tories George Osborne and David Cameron agree with this almost like modern-day sans culottes. The advocates of free market capitalism, the deregulators and privatisers now line up behind state ‘regulation’ of their system. John Maynard Keynes, one of their economic gurus, gave very sound advice to the capitalists when they were on the edge of the precipice in the 1930s: “When the facts change, I change my mind. What do you do, sir?”
The captains on the bridge of capitalism have heeded his advice. However, will they be capable of steering the ship into calmer waters or will they yet come to grief? Are the measures they have taken ‘fair’, will they benefit the majority of working-class people and avoid the economic and social nightmare that looms? This crisis has already underlined what the Socialist Party has consistently argued, that in today’s globalised world capitalism – a greater interdependence of the economies of each country – no country can ‘go it alone’. The contagion of the US subprime crisis and the massive indebtedness of individuals, companies and governments which fuelled the boom, have savagely recoiled against the capitalist authors of this crisis, but also against the working class. Like an uncontrollable prairie fire, the crises have leapt from one country to another, affecting the whole globe. Not just companies but whole industries and even countries, as we see with Iceland, stand on the brink of collapse.
The alarm of the capitalists and their representatives is shown by the scale of government financial intervention; the £400 billion promised by Brown is the equivalent of almost one third of the income of Britain in a year. The banks weighed down by ‘bad debts’ will be ‘recapitalised’ with taxpayers’ money. This is an attempt to repeat what happened in Japan and Sweden in the past in similar financial meltdown situations. When industries were ‘put on their feet’, they were handed back to the private sector, allegedly with no cost to the taxpayer. In a similar collapse of the savings and loans banks in the US in the 1980s, the total cost to the state was massive and was never fully recovered, in effect acting as an impost on future generations.
But this current economic crisis is against an entirely different background. It is international in scope. Will the credit crunch – the seizing up of the arteries of capitalism – be given a ‘shot in the arm’ by increased resources for lending to companies and individuals? It hasn’t up to now. In fact, the economist Nouriel Roubini believes “the world is at severe risk of a global systemic financial meltdown and a severe global depression”.
UK hitting recession
The UK is now mired in a full-blown recession, with unemployment likely to rise by anything from 200,000 to 350,000. It is already at a scandalous 40% in some of the most deprived areas of the country, according to the Daily Mirror. The overall unemployment rate could rise to at least 6% this year or even higher. At the same time, the number of companies with debt trading at ‘distressed levels’ is at a five-year high. Will individuals burdened by previously acquired debt once more binge on credit? Doubtful. Undoubtedly some lending will take place but at massively reduced levels compared to the past.
The British economy is not yet in a deep freeze, perhaps, but is still in the fridge. State debt will increase. In the recession of the early 1990s, public borrowing soared from 1% of output in 1991 to 7.8% in 1993-94. This was because reduced economic activity meant less tax income and, at the same time, more state expenditure on benefits. The deficit between government income and expenditure could be anything up to £100bn within a year. The Guardian has estimated that total state spending will swallow a whopping 50% of national income! This is the highest level since the crisis year of 1976 when the International Monetary Fund intervened to ‘bail out’ Britain.
Despite the largesse doled out, the spokespersons of capitalism will exert pressure on the government to slash public expenditure, especially ‘social’ spending. Already, the collapse of the Icelandic banks, Landsbanki, Kaupthing and Glitnir, has revealed a whole swathe of local and public authorities in Britain with deposits worth £1 billion that could ‘go down the Swannee’ unless Darling steps in.
If they cannot recover these investments, this will mean either savage council tax increases or mass sackings and closure of services. Liverpool City Council, in the 1980s, through a delay in setting its budget, lost interest worth £106,000, according to the agent of the government, the district auditor. As a consequence, the Liverpool 47 Labour councillors were banned from office by this dictator and fined £500,000. They would have lost their houses and jobs but for the magnificent solidarity collections of the working class of Liverpool and the labour movement in Britain.
If councillors in authorities that have lost money in Icelandic banks lose colossal sums, will they receive similar treatment at the hands of the district auditor? Not a cat in hell’s chance! It is doubtful whether they will even get a ‘slap on the wrist’. Instead, there is the prospect of Darling riding to the rescue.
Uncertainty and mixed mood
The net effects of the measures that Brown and Darling have undertaken may not be as successful as they hope, particularly as the world economy continues to deteriorate. It is intended that a temporary ‘floor’ is put under the financial institutions. Only with co-ordination of the major capitalist powers has this a chance of succeeding. Even then, the underlying economic situation, both in Britain and worldwide, remains in recessionary mode. The combined measures of the capitalist governments may avoid a 1930s-style slump – depression – and that is not certain, but the prospects for working-class people on the basis of capitalism remain dim.
Resulting from these events, there is a mixed mood amongst the working class and middle class at present. There is fury that the bill for the bail-out will be presented to the working class and the poor and not put at the doors of those responsible: the plutocrats who have grown fat under Blair and Brown’s regimes. A clerical assistant from Fife declared: “It looks like the fat cats are just going to get fatter. It doesn’t seem fair that we are bailing out the people who got us into the mess.” An unemployed barman, “unimpressed" at the government’s measures, stated: “Multi-billion pound companies should not be bailed out.”
This anger has penetrated even the upper reaches of the capitalist representatives in the media. Andreas Whittam-Smith, founder of The Independent, seethes with indignation that the financial moguls appear to be getting away with it. He consequently invokes the example of the US where fraud investigations have begun against some of the former ‘masters of the universe’ and suggests a similar course should be tried here against disgraced bankers. The ruling class itself is alarmed at the consequences of the crisis of its system. Paddy Power the bookmaking firm is “taking bets on which will be the first city to experience credit crisis riots”.
Increased state spending
There are some parallels with what is happening in Britain and may happen in the rest of the world later, and what Franklin Roosevelt did in the 1930s. The US government’s spending in the 1930s increased by 80% but this was against the background of the beginning of a revival in the economy. The economy is at an entirely different stage in Britain and internationally today. Therefore, if the latest rescue measures are not successful, a big injection of more ‘liquidity’, government money, will have its limits. Jeremy Warner in the Independent states: “If markets won’t lend, governments and central bankers have no option but to turn on the printing presses and lend themselves until confidence returns.”
But the churning out of more cash by government, not backed up by extra production of goods and services, risks ratcheting up inflation and bringing the return of the stagflation of the 1970s. Along any of the roads chosen by the government in defence of capitalism lies misery and suffering for working-class people who are always expected to pay the price of capitalism’s failings. It is the bosses’ crisis; let them pay the bill!
Protect working class people
John Mc Donnell, the left-wing Labour MP, was right in criticising the government for not going far enough. He called for the ‘overseeing’ of board appointments, executive pay and future business operations. “The government should be ensuring the public is protected through cuts in consumer borrowing rates, ensuring that people do not default on their debt and mortgage payments; giving a no-repossession guarantee, providing people with a ‘right to stay’ in their homes by converting repossessions to social rentals; and securing the jobs of those workers now threatened with redundancy as their bosses’ kamikaze capitalism unravels. But to do that, we would have to take a controlling stake. We should have nationalised to stabilise, with control for the taxpayer…”
These proposals represent a step forward. But they are incomplete if, as John McDonnell wants, the interests of the poor and ordinary working class people are to be protected. There should be complete nationalisation of the financial institutions as a start. There should also be a state monopoly of foreign trade to prevent the blackmail of international capital threatening to decamp to other countries unless governments bend their knees to them. Witness the ‘migration’ of Shire Pharmaceuticals and other companies to Ireland purely for tax purposes while their directors and staff still work in Britain. Compensation should be paid on the basis of proven need to small shareholders and particularly to depositors. Also the opening of the books for inspection to popular committees including the trade unions is a minimum.
Brendan Barber, the virtually invisible general secretary of the Trades Union Congress has far from a radical approach. He has boldly declared: “It is vital that the vast sums of taxpayers’ money are used to change bank behaviour.” What a contrast to the demands of the Labour Party when it was, at bottom, a workers’ party in the 1980s. Then, under the influence of the left and Marxists around Militant, the forerunner of the Socialist Party, the demand was not just for the nationalisation of the banks but the 25 largest corporations in Britain as well. This may seem a far cry from the present situation. However, even the Financial Times has carried an article in this crisis, written by Richard Sennett, who surprisingly wishes to extend the present "financial socialism”, as he puts it, to the ailing manufacturing sector.
There is no chance of the Brown government taking on board such demands. In fact, contrary to the expectations of some of the left following the Labour Party conference, the Labour cabinet has shifted towards the right with the inclusion of Peter Mandelson, the ‘prince of darkness’. The mass of the population of Britain are bitter and angry at the financiers who have held the prospect of economic collapse over the heads of the British people. Yet Mandelson is on record as being “intensely relaxed about people getting filthy rich” and is now exposed in The Sunday Times as covorting this summer on the yacht of a Russian billionaire who acquired his wealth by looting Russia. Despite the present amity between Mandelson and Brown, Mandelson also declared: “Remember the Chancellor [Brown] is mad” (Andrew Rawnsley, The Observer, 5.10.08). Yet now they are locked in a warm embrace. This signifies that there is no fundamental difference between the Blairites and the Brownites.
Even Will Hutton jeers: “This is history’s joke: the crisis of capitalism long predicted by communists and socialists who are no longer able to take advantage of it” (The Observer, 12.10.08). The leaders of the workers’ parties have abandoned the historic aim of ‘socialism’, once enshrined in the Labour Party’s famous Clause IV. On the eve of these events, both Brown and Blair said they are no longer socialists. In this situation, left trade union leaders like Mark Serwotka and Bob Crow have a great historic responsibility to provide an alternative. If an initiative to form a new party – which must be firmly based on union participation – is not urgently undertaken, then the far right, the BNP, can step in and demagogically exploit the fears and insecurities of sections of the working class to build support.
The situation is screaming out for a left, socialist, working-class alternative. A mass workers’ party could seize on the capitalists’ demands for state intervention, to go further and make the case for real socialism. This is an idea – the new mass working-class party – whose time has come, but it is urgent that steps are taken to realise this goal.
Events, particularly big events like we are passing thorough, change people’s minds and act to undermine the ideas – the pro-capitalist ideology – that held sway in a previous period. Deregulated capitalism, unrestrained capitalist globalisation, has had its day. The capitalists have now switched not to a real alternative but to a different method of perpetuating their rule. This is all that the new phase of ‘regulated’ capitalism, ‘lite’ or heavy, means. It is time to prepare the forces to put an end to this system and establish the more humane, democratic alternative of socialism.
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