Monday, 27 October 2008

Capitalism in Crisis


Capitalism in crisis by Adam Buik (Part 1)

We are living in interesting times, historic times even. We could be witnessing a once in a lifetime event, a major capitalist crisis and slump. What is now happening is an old-fashioned credit crisis such as used to occur at regular intervals in the 19Th century. But also in 1907 and 1929. It’s all there in Marx’s description and analysis of them in Volume III of Marx’s Capital. There’s the same panic, the same bank collapses, the same dash for cash, and the same government intervention to make cash available even by breaking its own rules.

What the existence of a credit crisis shows is that money has been unwisely lent by banks. The loans have turned out to have been unwise because the borrowers have found themselves unable to repay them. If these defaults are widespread and important enough then the whole financial system can be affected. Which is what has happened today?

But how does it come about in the first place that at the same time a large number of borrowers become unable to repay loans?

In the 19Th century the loans that turned bad were made, for instance, typically to cotton manufacturers to export to India or China and proved unsound when more cotton goods were produced than could be absorbed by these markets. Panic set in when the trade bills issued to finance these exports couldn't be honored. In other words, it was caused by some economic event : overproduction in some sector of the real economy in relation to the market (paying demand) for its products, an overproduction brought about by the anarchic pursuit of profits that is built-in to the capitalist system.

This time the loans that turned bad were made, in America, to individuals to buy a house. This stimulated, and then sustained, a boom in housing construction. In the end, paying demand was unable to keep up with the supply of new houses for sale, as demonstrated by the fall in house prices and the increasing number of defaults. In other words, there was overproduction in the US housing sector.

These defaults have had an impact on the whole global financial system because of the way in which the original loans had been financed - or rather re-financed. They had been pooled by batches into bonds by US investment banks, and then pooled again with other loans, into other bonds, and sold by them to other banks and other financial institutions throughout the world, but mainly in America and Europe. So that when the borrowers of the original loans defaulted in large numbers this had an effect on global credit markets.

The Banking System

I know that as Marxists we are more interested in the events in the real economy that have precipitated the current crisis but, as on the surface it is a banking crisis (which is real enough in its own right), I want to begin by describing the institutional framework within which this banking crisis is taking place.

Most people don't like banks, seeing them as institutions that in some mysterious way create money and then charge interest on it, so getting money for nothing. Actually, banks are financial intermediaries which can only lend money to people and businesses out of money that has been deposited with them or which they have themselves borrowed. As the US Federal Reserve put it in one of their educational documents:

“Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money.” (http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf. P. 57)

The IMF has even coined a new verb to describe what banks do: they “intermediate”.

Banks are profit-seeking capitalist enterprises in which the owners have invested capital with a view to making a profit. A bank has to have its own capital to invest in the buildings and office equipment and in the wages and salaries of bank workers. The business of a bank is to borrow and re-lend money, basically to channel unused money to where it can be used, most of it going in the end to capitalist enterprises to use as capital to invest in trade and industry.

1 comment:

Yourspace said...

On the 15th of October the PES organized a Prime Ministers’ meeting, prior to the EU Summit.

Yourspace met Sergei Stanishev, Prime Minister of Bulgaria, Wouter Bos, Minister of Finances and deputy Prime Minister of the Netherlands, and Alfred Gusenbauer, Austrian Chancellor, and recorded their comments on the current financial crisis – what is behind it and how can socialists and social democrats tackle the crisis.

Check the videos out and share your opinion on Yourspace.
http://manifesto2009.pes.org/en/debate/post/702

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