September 2008: panic selling on world stock markets, a heart attack in the global financial system, the worst banking crisis since the start of the first world war. Lehman Brothers, an American investment bank, fourth largest in the world, collapsed. Bankers and governments feared a re-run of the 1929 crash, the Great Depression, and the revolution and counter-revolution of the 1930s.
September 2018: cocktails and canapés for top bankers at a secret London venue, former Lehman bosses to attend. Billions of people’s lives were ruined by the actions of these banksters and their crisis. Working people were forced to pay for the capitalists’ catastrophe through job losses, home repossessions and massive cuts to social spending. And still the bosses at the banks and the rest of their capitalist cohort run the world for their own private profit, partying in London.
But their ideology suffered a seizure ten years ago and has been in a coma ever since. Their rule was shaken and their profit-first system has not properly recovered. A new heart attack is threatening.
In August this year The Economist magazine, a very sober old newspaper of capitalism, described the current situation. “Last time central bankers brought a global economic heart attack to an end by performing emergency surgery. But the patient has gone back to his old habits of smoking, heavy drinking and eating too much fatty food. He may be looking healthy now. But the next attack could be even more severe and the medical techniques that worked a decade ago may not be successful a second time.”
Death of the financial system by cardiac arrest was narrowly avoided by the dramatic “emergency surgery” of governments globally. The US Congress passed a desperate bailout plan that gave $700 billion USD to the banks to cover their toxic debts.
Interest rates on debt were cut to emergency levels by the US Federal Reserve. During the 2008 crisis, they made the biggest single day cut since the September 11 attacks and the 1983 stock market crash. Central banks in Europe followed along with similar measures.
The US Treasury spent another $250 billion USD to buy shares in nine major banks and many smaller ones after they had already taken control of two enormous mortgage brokers, Fannie Mae and Freddie Mac as well as the American Insurance Group.
Infamous neo-liberal US president George Bush and his regime suddenly had decisive power in banking and finance nationalising banks. Governments in Germany, France, Belgium, Luxembourg, Iceland and the Netherlands all nationalised banks too. In the years that followed even more banks in Europe were rescued by various governments while they slashed social spending and sacked thousands of workers.
Capitalist mythology says that in Australia the banks were strong, well-regulated and didn’t need help, and that’s why they’ve had a decade run of record profits since the 2008 crisis. But anyone paying attention to the ongoing banking royal commission and the scandals leading up to it can see otherwise. The Australian banks have made their profits through fraud, lies, irresponsible lending and other despicable behaviour, including inflating the speculative real estate bubble – aided and abetted by the government and its agencies over decades.
In truth, the big Australian banks were bailed out and shored up by the Rudd Labor government. Labor guaranteed the banks’ foreign debts with the risk borne by ordinary tax payers. Labor let them use the government’s credit card to borrow money with its AAA credit rating. Credit had dried up at the time and they risked insolvency. And Labor guaranteed bank deposits to prevent a bank-run. All this allowed the banksters to continue on raking in record private profits and paying obscene bonuses to executives, at the expense of a housing crisis for ordinary people and a deluge of scandals.
Workers were shocked and angry that their money was being used to bail out the big banks, but not support them. After decades of anti-socialist propaganda, suddenly it was socialism for the rich and capitalist crisis for the poor.
A new period opened up which was fundamentally different to the years preceding. The economic and political era that began under US President Reagan and UK prime minister Thatcher, put on steroids when the Soviet Union fell, abruptly ended. Capitalism, and its financial system, remains on life support today.
The political transaction cost of these measures was the smashing of neo-liberal ideology all around the world, and the latest proof that Karl Marx was right about the capitalist system. Marx explained that capitalism was inherently a chaotic system of boom and bust that causes misery and poverty for the vast bulk of people. Marx’s ideas were re-popularised, and even authoritative capitalist newspapers like the Financial Times and The Economist looked to him for explanation.
Boom and bust
Capitalists and the stewards of their system couldn’t see the crisis coming. In 2007 Gordon Brown, the British chancellor under Tony Blair and then British Prime Minister during the crash, famously declared in parliament “We will never return to boom and bust”. After the crash Alan Greenspan, the former chairman of the US Federal Reserve, told the US Congress he didn’t understand what had gone wrong!
Boom and bust cycles are natural to capitalism, the way breathing in and out is natural to the human body. The Socialist Party and our international organisation, the Committee for a Workers’ International (CWI), wrote sober analysis of the economic factors in the years before the crisis pointing out that crash and crisis was a question of when, not if, and specifically why this was the case. We did not do this in a crude determinist manner. For example, in December 2006 in Socialism Today we explained the underlying instability in the US economy.
Before Lehman Brothers went broke there was a year of worsening ill health in the financial system, which started with a crash in US “subprime mortgages”. Greedy American banks had spent years lending money to people who in reality couldn’t afford to buy homes. Often banks and brokers used fraud to do so. The result was a housing bubble that burst when mortgage defaults started mounting and banks began to take back the houses and flood the market with sales.
What made it worse was that these “sub-prime mortgages” had been packaged up inside dark and complex financial “products” sold and traded throughout the banking system. The bankers reassured themselves that they were spreading and therefore minimising the risk, while they continued making huge profits.
In reality they generalised the risk. It was as if thousands of mini-time bombs had been planted throughout the financial system and no one knew where they all were. When the bombs started going off they triggered more explosions. Soon the US went into recession.
For a long time, the US economy was reliant on consumer spending that was propped up by the “wealth effect” of rising property prices, similar to Australia. Banks encouraged people to borrow money against the increasing value of their homes to boost their consumption even though wages were stagnant. When house prices reversed it crunched consumer spending power and turned credit fuelled growth into a debt-based crisis. The myth of ever-improving living standards was shattered.
In Australia there has not been a recession since 1992, a world record. But workers have not seen the benefits of this, the vast majority of economic growth has gone to the capitalists in the form of higher profits.
Workers’ anger is reflected in the string of parliamentary-coups, electoral upsets and the growth of minor parties and independents in the last decade. There has been no real wage growth since 2011 according to the latest national economic figures, while articles pile up about insecure, precarious working conditions being the new norm, and wage theft by bosses is rampant.
Both Labor and Coalition governments, state and federal, have kept up a modest but steady policy of job cuts, pay freezes, privatisations and slashing social programs and spending. All of this means that workers’ ability to buy back the products of the economy is being increasingly undermined. When workers can’t buy back all of the products they produce, it causes a crisis in the capitalist system. Because profits are made by paying workers less money than the value of the commodities they produce, capitalism has an inherent cycle of crises. Marx was right.
Recovery or another crisis?
Since the end of Australia’s mining construction boom in the years after the 2008 crisis, the Australian economy has been propped up by a residential construction boom, especially on the east-coast, and by the continued growth of China’s economy. But neither of these sources of growth is sustainable indefinitely, nor have they lifted workers’ living standards.
China’s government used the biggest stimulus package in the world, ever, to avoid falling into crisis during 2008. But the minerals exported to China to fuel their construction frenzy were used to build the now-famous ghost cities without populations and high-speed railways to nowhere. Now the debt-binge is causing massive headaches for China’s leaders and threatens to cause a financial heart attack in China, which could result in explosive mass struggles – or even revolutionary events.
Australia’s housing bubble has its origins in Labor’s deregulation of the finance system in the 80s and 90s. It was boosted further by the Liberal’s tax changes in the late 90s. But it was deliberately inflated further by the Reserve Bank’s low interest rates after the 2008 crisis, as a replacement for the mining construction boom, and by the big banks loan-pushing. In this way an economic dynamic of debt-fuelled consumption exists here, similar to the one that blew up in the US.
House prices have crashed in Queensland and Western Australia already, causing much misery for working class people who sacrificed to try stake out a small area and build a life for themselves. Many people find themselves with bank debts higher than the value of their homes, unable to pay. Prices in Sydney and Melbourne have been falling too. Nationally there has been an entire year of falling prices. While the fall in prices is relatively small so far, particularly after the feverish growth of recent years, the risk of a US style melt-down is getting worse, reflected in daily media reports.
On an international level, the huge debt that built up and triggered the 2008 crisis has not cleared out of the financial arteries of capitalism, and the banks have not ended their addiction to it. The US editor of the Financial Times said that banks have switched from relying on private debt to public debt, from a heroin addiction to a morphine addiction.
New financial crises threaten, the fundamental problems remain. The Economist magazine says that if you fell asleep just before the last crisis and woke up now, you wouldn’t be able to tell from the financial markets that there ever was a crisis, because everything seems the same.
Socialists say that the blind, destructive chaos of capitalism must be replaced with the alternative of a democratically planned economy, based on collective ownership of the world’s wealth. On this basis the wealth of the world could be freed to solve the impending climate catastrophe, end the bloody wars that are raging and causing millions to flee their homes, and provide a high-quality life for everyone.
Instead of that, what we have is the global capitalist class hiding their wealth in the modern equivalent of pirate treasure caves on tropical tax haven islands. They are refusing to invest in solving the world’s problems and in new, sustainable production. They have no confidence in their own system, in the idea that they can make more profits by spending their money on developing society. There is therefore no justification for the existence of their system.
Instead they use government stimulus packages to supplement their capital in an orgy of financial speculation and gambling. Capitalists do not care what they invest in, whether it is useful or not, as long as they increase the rate of return on that investment. In the last two years alone, companies on the S&P 500 stock market spent $1.1 trillion on share buy backs to artificially raise their share prices and paint a pretty picture.
Living standards are going backwards globally and inequality is at unprecedented levels. Last year the charity Oxfam showed that the richest eight men own the same wealth as the poorest 3.6 billion people, half of humanity. But working people, middle class people, young people and the poor are organising and fighting back across the world already. Since 2008 there have been revolutions in Egypt and Tunisia, mass occupation movements in Spain, the US and Hong Kong, scores of general strikes in Greece, governments overthrown in Eastern Europe, and student movements across North and South America.
More economic heart attacks are guaranteed for the capitalist system. But as The Economist magazine says, the patient isn’t changing their behaviour and the surgeons are running out of options. The system is sicker now and the medicine cabinet is bare. The global cooperation that occurred through institutions like the G20 in 2008 is not possible in this new era of Trump’s trade war. Workers will not be so confused and stunned next time, and will fight back harder and quicker.
Workers can’t wait by capitalism’s deathbed to inherit society. This parasitic vampire system will resurrect itself otherwise, sucking the blood of the masses to revive. We have to organise to put a stake in its heart once and for all, and move on to build a new democratic socialist society that works for the many, not the few.
By Kirk Leonard