World Economic Crisis

Current World Economic Crisis Asim Jaan

Sources • Chris Harman : Capitalism’s new crisis: What do Socialists say ? 2008 • Chris Harman: Zombie Capitalism : Global crisis and the relevance of Marx. Ed July, 2009

Events • DELUSION -- Davos, Jan, 2007 – meeting of WEF Financial Times says world business leaders gathered to “ enjoy the opportunities brought about by globalization, new technology & a world economy that is expanding at its fastest pace for decades “.

• CHANGING REALITY - Davos Jan, 2008. F.T says there was “Grim determination”.

Grim – because global financial system begun to grind to a halt becuz of “Credit Crunch” Determination – because, acc to it, “real economy” was still expanding and appropriate govt action would get the banks lending again.

- Davos, Jan, 2009. F.T “Ever more Doom laden prognosis”.

Govt did take Action • Jan 2008 – Central Banks slashed Interest rates.

• Feb - UK govt nationalized Northern Rock.

• March: US govt gives $30 bn J P Morgan to take over failing bank Bear Stearns.

• Apr/May: Central Banks, both sides of atlantic provide billions to Banks.

• July: Again Billions given.

• 7th Sep: US govt take over mortgage giants Fannie Mae & Freddy Mac – --Former govt adviser Nouriel Roubini describes this as “ The biggest Nationalization humanity has ever known”.

• 15 Sep : Lehman Brothers, one of the pillars of US financial system collapses.

• This causes a ‘financial Tsunami’.

• 16 Sep: AIG , biggest Insurance Co, taken over.

• End Sep: George Bush’s special TV broadcast “ our entire economy is in danger”.

• The most right wing US govt in 3 75 years, turned to nationalization to protect the rich “Socializing Losses after 30 years of Privatizing profits”.

Affects • Banks after banks in countries after countries came close to collapse, - were bailed out by govts, that costs further Billions of dollars, • Most serious financial crisis since the slump of 1930’s.

• Jobs lost, World trade fell by 40%, IMF predicted “ sharpest recession since WWII”.

• Affects not isolate to western countries. Spreads to South Korea, Malaysia, Thailand, Singapore.

• 20 Million Chinese lost jobs – its exports fell, its real estate bubble collapsed.

Cont -• Russia , Brazil affected. • Economic recovery of Easter Europe halted as millions there could not pay mortgage payments to western banks.

Sub prime housing bubble- profiting from the Poor • After exploiting developing countries in 197080’s, Finance in the 1990’s turned its attention to rich counties.

• Speculation in stock exchanges, commercial property, commodities like oil, pension fund and above all, in housing.

• Sub-prime: People with low or insecure income.

• Mortgage companies: selling indebted people’s promises to pay to banks.

• Banks parcel them into ‘financial instruments”, selling them to other banks.

• Individual Millionaires set up Hedge Funds to join in the profit.

• Insurance co’s join in also to rake in profits.

• Scale: Transactions in credit derivative market – $ 62 trillion in Sep, 2008.

Is only financial sector to blame ?

• John McCain: blames “speculator and hedge funds” who “have turned our market into a casino.

• Millionaire owner of Daily Express: denounces “ the excesses of the city of London”.

• Former IMF chief Economist, Raghuram Rajan : blames the vast bonuses bankers receive.

Is the ‘Real Economy’ different ?

• Finance is not something separate from the rest of capitalism.

• Biggest industrial firms turned to finance to boost profits – such as GE, Ford, GM • Eg. Lehman Brothers’ directors include former chair of IBM, former head of Halliburton, director of Sony & MGM, current chair of GlaxoSmithKline.

• Greed does not know any frontier between finance, industry and commerce.

Reasons for this Crisis • A word virtually barred from polite society for the last 3 decades : the word is “Capitalism”.

• Instead they say “ entrepreneurship”, ‘wealth creators” • We are meant to stand in awe of them as they reorganize our education system, run hospitals, privatized Utility companies (KESC, PTCL), Schools, Colleges and Universities, sponsor Political parties.

Reasons Cont-• Crude Reality: A system based upon competition to see who is the greediest.

• Its stars are those most adept at making money at the expense of everyone else.

• If things go wrong, they can bank on politicians who claim to stand for ‘free enterprise’ to give gigantic state handouts, while at the same time clamping down on pensions and unemployment benefits, development and social sector expenditures.

Booms & Slumps of capitalism • Last 200 years: spells of frenetic expansion of production, interspersed with sudden collapses.

• 4 such major crisis in the 20th century.

• Failure is built-in in the system. Mainstream economics can give no explanation of these failures.

• Why sudden shunting down of whole areas of production ? when people are prepared to work, materials available for them to work on and people there who demand these products.

Driving force- needs or profits ?

• Explanation is simple: • Driving force of capitalism is not satisfaction of human needs, but competition b/w capitalists to make profits.

• Each one of us survives becuz of labor of thousands from across the world – eg cloth we wear.

• Hence, in reality, the system is network of collaboration b/w 6 billion people • But, capitalist organization of the network is not based collaboration. Privileged minority groups who control tools, machinery & land needed for production.

• The majority, without these privileges, HAVE to work for the minority to survive – a minority whose sole aim is maximizing profits, not satisfying human needs.

• Inability of capitalists to control their own system.

• Blind competition: inevitably creates conditions which threaten to throw it into chaos.

• No capitalist can keep production unless he sells his products. But ability to sell depends on other capitalists – whether their own luxuries, or on wages which their workers will use in shops.

• If buying & selling breaks down at any point , the whole system grinds to a halt.