'The worst is yet to come'
The emergency state bail-out today of Britain’s major banks to the tune of £37 billion marks the end of an era and is the clearest indication that the recession that prompted the global financial crash is already turning into economic depression.
Shortly before he became prime minister, in July 2007, Gordon Brown told bankers that the previous ten years has been a period “that history will record as the beginning of a new golden age for the City of London”. He praised bankers for being “pioneers of free trade” with a “deep and abiding belief in open markets”.
How times have changed! Over the weekend, the very same bankers were forced to go cap in hand to the state to try and stave off total collapse. But boosting banks’ capital assets with taxpayers’ billions will not save the banks from the globally economic tsunami that is building with each passing day. As recession turns to depression, the indebtedness of the banks will grow exponentially as ordinary people can’t pay their debts and businesses go broke.
What is ending is the era of corporate-driven, debt-fuelled globalisation. The consequence is not some slowdown but the destruction of large portions of capital created in this period, leading to a cycle of mass unemployment, sharp reductions in consumption, even more job losses and the wiping out of lenders when people/corporations can’t service their debts.
As one commentator observed:
Usually, a banking crisis follows some form of economic crisis: lenders are hit by wave after wave of customer bankruptcies until they themselves cannot take any more and topple over. This time, the banking collapse has preceded the recession… Instead, last week’s stock market rout marked the point when the usual direction of cause and effect was reversed: now it is the real economy that is expected to take its cue from the markets.
The indications are all present. A slowing world economy has forced down the price of oil, while mining companies are in difficulties because China is importing less. General Motors, once the world’s largest carmaker, is one of several colossal companies on the verge of bankruptcy. It has already temporarily shut down its European factories to preserve its precious cash reserves.
In Britain, Keith McGregor, restructuring partner at Ernst & Young, said: "UK profit warnings continued to come thick and fast during the third quarter, crossing over the 100 mark once again. It is deeply concerning to think that the worst is almost certainly yet to come for UK corporates." It is predicted that 2 million people could lose their jobs by the end of the year.
Homelessness charity Shelter predicted last week that there will be around 45,000 repossessions this year, with one in 150 homeowners already three months or more behind on their mortgage repayments. The number of court orders for mortgage repossessions is 24% higher than last year. The number of homes being sold in Britain has fallen to its lowest level since 1959 in August. The new house-building sector has collapsed, with tens of thousands being laid off.
Under these conditions, for the state to take on the debts of the banks is not only a massive transfer of wealth to the private sector – it also focuses future risk on itself. The next stage could be a currency crisis as government debt spirals out of control. Britain could then easily face its own “Iceland moment” and state bankruptcy. As a result of today’s actions, national public debt is likely to exceed total national income. Tax increases and spending cuts are on the immediate horizon.
The crash of banks and other financial institutions is at the same time the failure of the capitalist economic system as a whole, whose thirst for profit-driven expansion at any cost has brought humanity to this point of disaster and catastrophe. This the fundamental issue we will address at our Stand Up for Your Rights festival this Saturday.
AWTW communications editor
13 October 2008