2008年12月9日

Are we headed for another Great Depression?

Doug Lorimer
Direct Action
Issue7, December 2008

“The severity of this economic contraction is a once-in-a-hundred-year phenomenon. It really does compare in severity to the Depression of the late 1920s and through the ’30s”, Donald Brean, a professor of finance and economics at the Rotman School of Management at the University of Toronto, told the November 11 London Financial Times.

Addressing his company’s annual banking and financial services conference, Merrill Lynch CEO John Thain said on November 11 that the global economy is entering a slowdown of epic proportions comparable with the period after the 1929 Wall Street stock market crash. “This is not like 1987 or 1998 or 2001”, said Thain. “The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slow-down we’re seeing now.”

US President George Bush told the G20 summit in Washington on November 15 that he had agreed to a US$700 billion rescue plan for US financial institutions only after being told by his Treasury secretary, Henry Paulson, that the US was at risk of falling into “a depression greater than the Great Depression” of the 1930s. Speaking at a November 26 reception at the Swedish embassy in Washington, Nobel Prize-winning economist Paul Krugman, a columnist for the New York Times, declared that the current banking crisis is “functionally similar to that of the Great Depression” and many symptoms were the same, including the “impotence” of monetary policy to remedy financial troubles.

The current economic crisis certainly surpasses any other experienced by the developed capitalist countries since the Great Depression of the 1930s. “It’s a perfect economic storm, which is a combination of an ordinary recession, housing collapse, the credit crisis and major asset deflation”, Barry Ritholtz, CEO of stock market trading software maker Fusion IQ, told journalists on November 20.

Massive government aid
On November 24 Bloomberg.com reported that the financial crisis had wiped out $23 trillion, or 38% of the stock market value of the world’s companies, and brought down three of the biggest Wall Street firms, as well as American International Group, the world’s biggest insurance company. It also reported that the “US government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

“The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.”

The next day, the US government announced a further $800 billion in loan programs, bringing its cumulative financial industry rescue initiatives to $8.5 trillion, equivalent to 60% of the total value of the US GDP last year. Most of the money, $5.5 trillion, comes from the US central bank, the Federal Reserve Board. About $1.1 trillion comes from the Treasury and the rest is commitments from the Federal Deposit Insurance Corporation and the Federal Housing Administration.

These massive loans, and the accompanying partial nationalisations of banks and other financial companies implemented by the US and other governments across the capitalist world, will probably ensure that the capitalist financial system does not experience a 1930s-style collapse, but at the cost of saddling the developed capitalist economies with an even more enormous amount of debt. This in turn will mean that the recovery from the present global economic recession, when it eventually comes, will be slow and anaemic.

The enormous government loans provided to the banks have been justified by the Bush administration as necessary to unfreeze an alleged complete lockdown in bank lending in the wake of the September 15 collapse of Lehman Brothers, Wall Street’s fourth largest investment bank. However, the November 17 Wall Street Journal reported that US banks “are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15 per cent from a year earlier and grew at a 25 per cent annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21 per cent from a year ago and grew at a 48 per cent annual rate in three months.”

Non-bank loans
What has frozen up is not ordinary bank lending, but the $10 trillion shadow banking system that has traded “securities” derived from loans made by non-bank financial firms, but backstopped by the commercial banks, for automobile, housing and commercial real estate purchases. As the WSJ noted, “Increasingly in the past decade, [these] loans were packaged into securities and sold to investors around the world — pension funds, endowments, mutual funds, hedge funds and others. Institutional investors gobbled up this and other kinds of credit that didn’t come via traditional commercial banks, such as junk bonds or commercial paper … But investor confidence in credit markets has been shattered, in part because many debt securities performed so much worse than their credit ratings suggested they would.”

According to data examined by the WSJ, “Issuance of asset-backed securities — instruments used to package credit-card and auto-loan debt during the boom — was down 79% in the year through October from last year, to $142 billion … In 2005 and 2006, investors snapped up more than a trillion dollars of these instruments. Junk-bond issuance was down 66% in the first 10 months of the year from the same period in 2007 …

“So too are bank loans to large corporate borrowers — the kinds of loans that typically get resold and packaged into securities. While overall banks’ loan books are growing, this kind of lending fell by 46% in the August-to-October period from the same period a year earlier.”

The global financial crisis was triggered by the deflation from late 2005 of the US housing market price bubble, which exposed the fact that many housing loans were “toxic”, i.e., had been fraudulently made to people who didn’t have the means to repay them.

Overproduction crisis
Underlying the crisis in the capitalist financial system is a long-term overproduction crisis in what is misleadingly called the “real economy” — the production for profit of goods and services. Markets for most goods and services are simply too saturated to provide opportunities for high profits to made through further big investments in their production. As a result, the super-rich families that own the big industrial corporations, banks and other financial businesses in the US and other developed capitalist countries have put more and more of their capital into financial markets, to reap higher speculative paper profits from these markets.

The crisis in the overproduction of goods and services is well illustrated by the huge levels of productive overcapacity in the automotive industry. A March 8, 2003, article in the Washington National Journal reported: “Vehicle sales are at near-record levels in the United States — 16.9 million in 2002 — but that is an illusory image of success. A rising portion of those sales comes from imports, which create no high-paying U.S. manufacturing jobs. Moreover, automakers’ unprecedented and unsustainable low-rate financing deals, which amount to a subsidy for every car sold, have been artificially sustaining new-car sales. A slowdown in sales would pose problems for the industry, because production overcapacity haunts both US and foreign producers.”

The article pointed out that automobile manufacturers “around the world have added about 19 million units in production capacity since 1990 and can now build about 77 million cars and light trucks per year, according to Autofacts, a PricewaterhouseCoopers subsidiary in Bloomfield Hills, Mich. But consumption of new vehicles this year is expected to total only about 56 million units. As a result, overcapacity in the auto industry is now about 27 percent worldwide. ‘At some point, something has to give,’ said David Snyder, director of business development for Ford.”

Indeed, beginning in 2005, “something” did give — the profitability and potential survival of the three major US automobile manufacturers. In 2005, General Motors, at that time the world’s biggest auto maker, recorded a loss of $10.6 billion. Ford lost $1 billion that same year. In 2006, GM lost $2 billion, Ford lost $12.7 billion and Chrysler lost $1.47 billion. Last year, GM lost a record $38.7 billion. Ford lost $2.57 billion and Chrysler lost $3 billion.

In the first nine months of this year, GM lost $21.2 billion, while Ford lost $8.7 billion. GM has announced that it would run out of cash before the end of the year. GM, Ford and Chrysler have sought a government loan of $25 billion simply, they claim, to be able to stay in business in 2009. Without it, they warn, 2.5-3 million US jobs in the automotive and related industries will be lost.

Union officials back CEOs
The Bush administration and a host of other US federal politicians have argued against granting such a loan. However, this is simply a ploy to give the executives of the Big Three US automakers and the pro-company officials of the United Auto Workers (UAW) union a weapon to blackmail auto workers into accepting plant closings, wage cuts and the slashing of health care and other benefits.

The November 21 Detroit Free Press reported that the UAW bureaucrats were secretly negotiating with the Big Three to revise current labour contracts in accordance with demands from both Democratic and Republican congressional leaders. Testifying alongside CEOs of the Big Three before the Senate banking committee on November 18, UAW president Ron Gettelfinger said: “Between 2005 and 2008 we have lost 47,000 workers at GM and we have virtually eliminated our jobs banks [which provide for laid-off auto workers to receive 95% of their weekly wages] at all three companies. We had to take the political heat for these kinds of decisions, but as a union leadership we are proud to work with these companies.”

We may not experience an economic crisis as devastating as the Great Depression of the 1930s, when unemployment in the developed capitalist countries reached 25-30%. But the capitalists and their politicians will use the current global economic recession to deepen their neoliberal attacks on the livelihoods and social conditions of working people across the world. The only way for working people ultimately to defend themselves from this is to organise into a mass movement to take political power out of the hands of the capitalist financial oligarchy, establish a working people’s government and use it to reorganise the economy along socialist lines.

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