The current economic crisis raises two questions. What went wrong? What can be done about it?
There is a facile answer to the first question. Capitalism is crisis prone. The current American banking crisis is like the dotcom crash, the Asian crisis, the Mexican peso collapse or the wreck of the American Savings and Loans companies. It is another in a series of upsets that have beset capitalism. Since the powers-that-be cling to the belief that capitalism offers the best economic model, we can expect to go from one crisis to another, which does not mean that each successive crisis does not have its own story, or does not matter greatly.
The current crisis has specific origins: out-of control lending by American banks. Major U.S. lending institutions lent out a greater and greater multiple of their operating capital, in search of higher and higher profits. Instead of a ratio of 10 dollars lent for each dollar kept in reserve, the banks lent upwards of 30 dollars of every dollar of capital.
It does not take many loans gone bad to leave banks unable to do business, when they are this highly levered. The collapse of residential housing prices, and bad sub-prime mortgage debt more than did the trick.
The action to stem the crisis taken by U.S. authorities (Treasury and Federal Reserve) amounts to keeping insolvent banks in business through lending them money when no else will, and covering their loan losses through direct provision of capital.
Continuing to keep feeding the banks operating capital is what is being done to fix the crisis in the American banking sector. But there is a further aspect to the crisis than should trouble anyone not fully in the grips of market fundamentalism. Assuming the American banking crisis gets fixed, should we really go back to business as usual, knowing the high likelihood of having to face another crisis, say, featuring U.S. government bonds once nobody wants to hold them any longer?
Ralph Nader used to say that American capitalism could not fail because it would be always be saved by socialism. And yes, U.S. government money does buy capitalist American banks more time to recover, and keeps bank shareholders alive.
While bank bailouts amount to the U.S. public taking over the bad debts of private capitalists, that is not the same thing as socialism. However, by assuming the cost of making private banks profitable, and free of bad debts, the U.S. authorities have socialized the risk for which capitalists are supposed to be rewarded.
The reality of the economic crisis is that as public authorities move to cover capital at risk in the banking and financial sector, social risks have gone up the world over. The crisis appears as a rapid slowdown in economic activity. The OECD secretary-general reports an expected over four per cent average decline in GDP for the OECD countries in 2009, and a 13 per cent shrinkage of world trade flows.
Significant as these figures might be in revealing that economies are not just slowing down, they are going backward, they fail to reveal the truth. The worldwide reality is the unemployment that people are suffering, the loss of retirement security and the pressure to restrict public services, as a result of the American banking crisis, comes on top of climate change, peak oil, a food crisis, an environmental catastrophe centred on water, continued American militarism on a colossal scale, and a development crisis in the Southern hemisphere.
Making the American banking system healthier, however important, is only a partial answer to the question of fixing what went wrong. Not only does it still leaves us asking what can be done to prevent the next crisis, and the one after that, we have to get to the point of thinking about the world as being about more than capitalists taking private risks in order to maximize personal gain, for the good of us all.
Today, it is not longer enough to join with others to say "a new world is possible." The multiple dimensions of the current crisis should lead us to conclude: a new world is necessary.
Duncan Cameron writes from Vancouver.
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