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An 'orderly' failure

Manchester United have a new sponsor this morning – the federal government of the United States of America! Yesterday, the global insurance company AIG was in private hands. This morning, 80% of the shares are owned by the government following a hastily-arranged take-over to prevent the company’s total collapse and a systemic failure of the global financial system.

Such is the measure and speed of the unravelling of the credit crisis that significant financial institutions are passing into the hands of the US government. In a series of desperate moves, Washington has taken control of mortgage lenders Freddie Mac and Fannie Mae. Last night in an extraordinary step, AIG was loaned up to $85 billion in emergency funds in return for a government stake of 79.9%.

George Bush is not going into the insurance business, however, which is just as well for the rest of the planet. AIG will be kept afloat just long enough to sell off its assets and repay the loan. In other words, the objective is orderly liquidation (after which United will need new sponsors). In a statement, the Fed, America’s central bank, said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.

The dramatic moves came after earlier plans for a private sector bail-out were dashed by a further 21% slump in AIG’s shares, reducing the market capitalisation of the biggest insurance company in the world to just over $7.5bn (£4.2bn). AIG’s crisis has nothing to do with ordinary insurance, however. The corporation, which is a pivotal part of the global financial system, has lost billions of dollars on derivatives and mortgage-backed securities and is bankrupt.

And so the great unravelling goes on, with the mountains of fantasy finance created over the last 30 years taking their toll on banks, insurance companies, mortgage lenders and investment houses. Today, Lloyds TSB is arranging a merger with HBOS – whose shares have been driven down on rumours of a crash.

State intervention on both sides of the Atlantic cannot halt, stabilise or reverse this process. The accumulated debts in the financial system – running into thousands of trillions of dollars – are so enormous that they cannot possibly be absorbed through central bank actions. Nor will the crisis unfold in an “orderly” way. It is like the collapse of a house of cards – it has a momentum of its own, which is already taking its toll of jobs, pensions and people’s homes. Official figures released this morning show a leap of 81,000 in UK unemployment in August alone. The subsequent loss of purchasing power will fuel the recession and the drive towards slump.

To sit back and wait for the dust to settle would not only be foolish but irresponsible. The ever-closer alliance between the state and corporate finance has sinister political implications, with its echoes of the 1930s in Germany and Italy. We have to take maximum advantage of the crisis to make the case for revolutionary political and economic changes as the way forward. Our Stand Up for Your Rights festival on October 18 emphasises the need to take control of our lives away from New Labour, the state and the corporations. Register for the festival today!

Paul Feldman
Communications editor
17 September 2008