US Politics and Economics v The UK and Europe - Part 3

The credit crunch began in 2007. For 25 years, the large rise in the global rate of profit had meant that the supply of money-capital exceeded the demand for money-capital, pushing global interest rates lower. The same forces that had caused the rate of profit to rise also caused the value of commodities to fall substantially over the same period, and in order to prevent deflation, central banks in developed economies printed large quantities of money to reduce its value – See: Rates of Profit, Interest and Inflation . The two things together had created huge speculative bubbles in property, shares and bonds. As inflation began to rise in 2007, central banks began to raise official interest rates, and the prospect of that was enough to cause jitters amongst those financial institutions that were exposed to astronomical amounts of debt in the form of derivatives, that even Alan Greenspan admitted no one understood.

Overnight interbank lending rates shot up, as every bank began to wonder if it would get its money back from other banks if it lent it. That created a credit crunch, which then meant that those banks like Northern Rock, which were the most under capitalised, and most exposed to borrowing on these capital markets to cover their over extended positions caused by reckless lending, could no longer cover the cost of their borrowing from the income they received on their lending. In other words, their problem was not one of liquidity, but of solvency. They were not just short of cash, they were bust. A similar situation will hit all of the property speculators, particularly the generation of buy to let landlords in the UK, who are grossly under capitalised, and who have borrowed at unsustainably low interest rates, to buy property whose rents will not cover their mortgage payments when those rates rise, and who will not be able to recover the capital value of their loans, as everyone rushes for the door at the same time.

The problem of the under-capitalisation of the banks, and their fundamental insolvency was not – and still has not been – resolved. Instead, governments and central banks in 2007 reached for the same policy tools they had used since the late 1980's. That is simply an example of intellectual inertia, as I've described before. In the post-war period, the ruling ideology was that of Keynesianism. Alongside the development of welfare states in all the developed economies it reflected the interests of big industrial capital. What is more, it seemed to work. Ernest Mandel in, “The Second Slump”, identifies five recessions in the period of the post-war boom - 1953, 1958, 1961, 1970, 1974-5. All of them were cut short as a result of the use of Keynesian fiscal stimulus.

Mandel sets out this effect by comparing the 1929-32 crisis with the 1957-8 crisis. In the first 9 months of both they were of a similar severity.

	1929-32	1957-8
Employment (non-agricultural	- 6.5	-4.2
GNP	-5.5	-4.1
Industrial production	-15.9	-13.1
Volume of Retail Sales	-6.1	-5.1
Orders For Durable Goods	-26.5	-20.1

But, the consequence of Keynesian intervention was that whereas the 1929 crisis lasted for three and a half, years, the 1957-8 crisis, lasted for just 12 months. So, it was not surprising that in the 1970's, and even into the early 1980's, state bureaucrats and economists automatically reached for fiscal stimulus as the means to resolve the growing capitalist crisis, even though it was clear during the 1970's that it was becoming less and less effective, and was causing an ever increasing amount of inflation, as firms used the opportunity of any pick up, not to invest but to raise prices. Despite their concern at inflation, Mandel writes,

“I had been willing to predict that in spite of all the noise about the 'absolute priority of the struggle against inflation', the imperialist governments would have no choice but to resort to massive doses of Keynesian and neo-Keynesian recovery techniques the moment a serious recession broke out simultaneously in all the major imperialist countries. In spite of appearances, and under cover of solemn sermons in favour of 'monetary rigour', this is precisely what happened as soon as the recession assumed threatening scope.” (p 62)

When Thatcher imposed austerian measures in the early 1980's, under the direct guidance of Hayek, the result was to send the economy into a nosedive, and unemployment soaring. Her standing in the opinion polls sank to all time lows, and the social-democratic wing of the Tory Party – the 'Wets' – sought to ditch her, and implement Keynesian stimulus once more. She was saved by the Falklands War, and having defeated the British labour movement, she was able to pursue a policy of monetary stimulus alongside an expansion of welfare to cover the huge rise in unemployment. A similar policy was adopted by Reagan in the US.

As big industrial capital in the US and UK, increasingly saw the opportunity to make big profits elsewhere in the globe via globalisation, which was part of the process described earlier, which caused the large rise in the global rate of profit, so its influence in those heartlands declined. It declined, but did not disappear. Ultimately, any capitalist economy depends upon its big industrial capital, because that is the source of the majority of its surplus value. But, this period saw the foundation of social-democracy, the power of the working-class and of big industrial capital weakened. Indeed, the more big industrial capital located its operations in Asia, Latin America etc. the more social-democracy in these areas was strengthened, whilst the deterioration of the economic position of workers in the US, UK and so on caused by this off-shoring, weakened their political and social position with it.

As the strength of social democracy was thereby weakened, so in its place arose other social forces. The small capitalists whose interests the Republicans and Tories represented, increased in their social and political weight, as the position of workers and big capital weakened. The other forms of capital that prospered under the low-wage/high debt economy that Reagan and Thatcher were attempting to promote in the interests of those small capitalists, were the money-capitalists and the merchant capitalists.

It is not surprising then that a new set of ideas arose on the back of these changes in material conditions. Monetary policy became the standard tool to be used by the state, and the ideas of Hayek and Friedman became the standard texts to be read by the next generation of state bureaucrats, media economics editors and professional economists. Just as Keynesianism occupied that position for 30 years after WWII, so these ideas became entrenched in the following 30 years, and it is not surprising then that they are the standard response even when, as with Keynesian solutions in the 1970's, it is clear that they are not working, and that they are having damaging consequences. Keynesianism increased consumer price inflation, money printing has and continues to produce dangerous asset price inflation. That has been the basis of the crisis that broke out in 2008, and whose effects in the PIIGs, and in the US I will examine next.

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