As house prices – fuelled by idiotic government policy – approach pre-crash levels, another recession is set to follow, writes JOHN ELLISON
ECONOMIST Heather Stewart last week referred to the 2007 sub-prime mortgage crash and its aftermath as “the latest in a series of periodic convulsions in modern capitalism.” She had no doubt that “a fresh crisis looms.”
She linked this prospect to warnings in recent days from the International Monetary Fund (IMF) and the United Nations’s trade and development arm UNCTAD. A specific fear is that speculative money which “swills unchecked around the world,” may be abruptly withdrawn from these countries. The fear stems from the protracted recent fall in global commodity prices and the connected slowdown in weaker economies.
The possibility of increased global interest rates, for six years rejected as an option, only enhances this fear. Fellow economist Larry Elliott wrote in Monday’s Guardian that the IMF message to Europe and Japan is “to print some more money,” as raising interest rates could have “nasty spillover effects around the rest of the world.”
Elliott had, a week earlier, earmarked another serious danger close to home: that the current British bank and government-nurtured “asset bubble” will burst. He pointed out that in 2012, faced with a stalled recovery, the Treasury and Bank of England produced the funding for lending scheme. Working alongside reductions in stamp duty, inheritance tax relaxation and help to buy, this has powered a lurch upwards in the price of homes and of renting them — as well as making would-be buyers and renters increasingly desperate.
During this rise, interest-only mortgages taken on by buy-to-let purchasers have enormously multiplied. One in six mortgages now being granted are buy-to-let. It is plain that a rise in interest rates, or even without this, a significant fall in house prices and rents, could generate a large sell-off of buy-to-lets. And this could trigger another bank crash. And if anyone thinks that the rise in property prices can go on forever, Elliott noted that the ratio of house prices to earnings is now close to the level it reached in summer 2007 before the last house price bubble burst.
Twenty years ago economist Will Hutton’s book The State We’re In warned accurately that the world’s economy was being driven hither and thither by speculation, causing the world’s financial system to spin out of control, and called — answer came there none — for “some supranational authority” to be established to bring order to financial markets.
The world’s financial system, Hutton updated us in Sunday’s Observer, has “gone rogue.” Capital flowing into weaker economies, directed at quick and high profits, flows out again when profitability falls or risk rises. At this moment money is flooding out of the weaker economies without any prospect of rescue for the banks, companies and households facing ruin.
Within Europe the effects of in-out capital flows have been catastrophic for the peoples of Spain, Portugal, and Greece.
While still seeking a “bigger, reinvigorated IMF,” Hutton rightly insists on “massive economic stimuli, centred on infrastructure spending” by Western governments. Heather Stewart, Larry Elliott, Will Hutton and many other economists are pushing for Keynesian solutions to address the neoliberal nightmare that permeates today’s world. But our rulers are not listening.
The long build-up towards the present situation began slowly. From the end of WWII to the 1960s, in advanced capitalist European countries, a Keynesian “class compromise” between capital and labour — forced on capital by labour — facilitated both high economic growth rates and high employment, along with other socially desirable objectives including a strong public sector. True, these achievements were not shared by developing countries.
In the 1970s growth rates slowed, unemployment and inflation grew, huge industrial capacity accumulated by Western countries was not matched by available markets, and the owners of capital felt threatened.
In 1979 US and British governments washed their hands of class compromise. Previously policy-makers had mainly restricted themselves to enjoying and promoting neoliberal think tank dreams — save for the crude pilot project in dictator Pinochet’s Chile after the 1973 US-inspired coup against the democratic government.
During the 1980s the dream became a programme. Trade union strength was successfully beaten down during long years of confrontation and governments said goodbye to high employment. Karl Marx’s “reserve armies of unemployed” returned in force. In Britain the Thatcher government fostered greater freedom for the markets, encouraged deindustrialisation and more reliance on financial services, and chipped away at the large public sector.
In the 1990s first the John Major government and — from 1997 — Tony Blair and Gordon Brown’s New Labour successor regime carried the neoliberal baton further, albeit in the latter case with some concessions to the public interest. The struggle against neoliberalism went on, despite the loss of imperfect models of socialism in the Soviet Union and eastern Europe, a loss which facilitated Western capital’s intrusion and a more militarily aggressive global stance by the US and its allies.
One major feature of neoliberal capitalism has been the relocation of industrial production on a huge scale to countries where labour could be exploited more grossly.
Another was much more capital investment in weaker economies, but this “generosity” was on terms. Lending was to be profitable. If debtor governments defaulted, there was a price to be paid for rescheduling repayments. Cancelling debt was not an option. Instead, “structural adjustments” (privatisation, cuts in welfare and taxes) were to be imposed. Part of the neoliberal change process therefore required the elimination of Keynesian influences within the IMF and the World Bank, and the empowerment of these institutions to grant debt relief on brutal terms.
While standards of living in Western countries grew little, if at all, during the 1980s and later, and overproduction and spare capacity never went away, the returns for the rich, for investors, corporate and otherwise, grew handsomely.
Surplus capital for investment, however, required a home, and was increasingly applied in dangerous fashion. One method was to create demand through a vast extension of credit (through multiple credit cards, cheap housing and other loans).
Thus the time bomb of the sub-prime housing crisis of 2007 started ticking, while another housing time bomb, as Larry Elliott warns, sits on our doorsteps today.
A second chancy form of investment has been in financial sector operations: buying shares and bonds, and selling them (creating no new value) at prices artificially enhanced through the very investment process. Thus, for example, the Wall Street stock market crash of 2001 and the sharp stock market falls in August this year.
The neoliberal drive has an Achilles heel — the very same that Marx identified in his monumental work Capital, first published in English in 1887. To survive and succeed in their task of production for profit, according to Marx, capitalists must compete with each other, extracting as much profit as they can from what their workers produce, thereby keeping wages as low as possible, while facing the consequential and awkward fact that what they have produced outstrips, in the long run, the ability of consumers to purchase what has been produced.
Marx famously summarised: “The real barrier of capitalist production is capital itself … The last cause of all real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way that only the absolute power of consumption of the entire society would be their limit.”
The capitalist system has not “gone rogue” — it was always rogue, bringing with it overproduction, unemployment, poverty, environmental destruction, war, terrorism and a vast waste of human and other resources. We must be prepared for more crises — it is in the bones of the system.
The point, as Marx said, is to change the world, and Jeremy Corbyn’s Labour leadership win, the campaign which preceded it, and that which now follows, have brought the prospect of that change a little nearer.