by Paul L. Quintos
20 September 2008
The worst crisis since the Great Depression
"The world economy has entered new and precarious territory", opens the
latest World Economic Outlook published by the International Monetary
Fund (IMF) last April 2008. It describes the current financial crisis
that erupted in August 2007 as "the largest financial shock since the
Great Depression, inflicting heavy damage on markets and institutions
at the core of the financial system."
Other commentators have described the current crisis as a "systemic
financial meltdown", a "financial tsunami", a "tipping point" in the
world economy or even "the Very Great Depression" in the making.
When even the most optimistic defenders of the ruling system speak of a
"systemic crisis", then something of historical significance must be
happening in our midst. Our task is to grasp the significance of the
current crisis in the world capitalist system for the laboring classes,
and draw lessons for our struggle against imperialism.
Mainstream economists explain the current crisis as the bursting of the
housing bubble that had inflated to unprecedented levels since 2001.
The Economist described this bubble in 2005 thus: "the total value of
residential property in developed economies rose by more than $30
trillion over the past five years, to over $70 trillion, an increase
equivalent to 100% of those countries’ combined GDPs. Not only does
this dwarf any previous house-price boom, it is larger than the global
stockmarket bubble in the late 1990s (an increase over five years of
80% of GDP) or America’s stockmarket bubble in the late 1920s (55% of
GDP). In other words, it looks like the biggest bubble in history."
This boom in house prices had been deliberately encouraged by the
low-interest rate policy of the US Federal Reserve as a way of
containing the impact of the dotcom bust in 2001. In the same way that
asset inflation in tech stocks underpinned the growth of the US economy
in the second half of the 1990s, the booming housing market propped up
the US economy in the first half of this decade. Rising house prices
and low interest rates encouraged millions of Americans — whose wages
had been stagnant or declining since the 1970s — to borrow money using
their houses as collateral and use this for consumer spending, thus
boosting effective demand in an otherwise stagnant US economy.
"Consumer spending and residential construction accounted for 90% of
the total growth in US GDP from 2001 to 2005. And over two-fifths of
all private-sector jobs created over the same period had been in
housing-related sectors, such as construction, real estate and mortgage
Mortgage lending had become so profitable that banks and brokers began
lending to "subprime borrowers" — those with lower incomes or poorer
credit histories — with nary a credit investigation, downpayment or
even collateral. This high-risk or subprime mortgage lending spread
hand in hand with the broader securitization strategy of finance
capitalists. This refers to the now rampant and unregulated practice of
investment banks and financial institutions of issuing loans, slicing
and dicing these loans, then repackaging them as "mortgage-backed
securities", "asset-backed securities", "collateralized debt
obligations" (CDO), "collateralized loan obligations" and other
synthetic financial instruments which are then sold to other
capitalists in search of investment opportunities for their surplus
capital. This allows the originators of these loans to transfer the
risks associated with these loans while securing greater returns on
their portfolio investments. This encouraged risky lending throughout
the system, particularly in the booming housing market where subprime
loans had expanded to 20 percent of all mortgages by 2006, up from 9
percent a decade earlier. It also magnified the likelihood of
system-wide contagion in the event of widespread credit defaults.
Indeed as house prices started to plateau in 2005 and as interest rates
started to rise, default rates and home foreclosures in the US started
to climb in the latter part of 2006. This led to the collapse of scores
of mortgage brokers and a number of mid-sized lending institutions with
a large share of sub-prime mortgages in their loan portfolio. Unfazed,
US Federal Reserve Chairman Ben Bernanke announced in June 2007 that
the crisis in the subprime sector "seem unlikely to seriously spill
over to the broader economy or the financial system."
By August 2007, subprime mortgage backed securities began imploding
in the portfolios of banks and hedge funds from around the world. Since
then, one major bank after another has announced credit losses in the
tens of billions. As of the middle of September 2008, three of Wall
Street’s top five investment banks and icons of finance capitalism –
Bear Stearns, Lehman Brothers and Merrill Lynch – have disappeared as
independent entities. Other major banks, including Morgan Stanley and
Washington Mutual, are facing the same fate.
The current financial turmoil is forcing central banks to step in
and bailout those financial institutions that are simply “too big to
fail”. The Bank of England, for instance, extended a L25 billion
emergency loan to the ailing Northern Rock last year. Last March 14,
2008 the US Federal Reserve guaranteed the loans of JP Morgan to rescue
Bear Stearns, the fifth largest investment bank in the US with $2.5
trillion worth of trading contracts with firms from around the world.8
Even more momentous was the US government’s decision last September 7,
2008 to take over the two biggest mortgage lending agencies in the
country — Fannie Mae and Freddie Mac – effectively placing US housing
finance under direct government control and increasing the gross
liabilities of the US government by $5.4 trillion, a sum equal to 40
per cent of GDP.2 Nine days later, the US Federal Reserve agreed to
provide American International Group (AIG) – among the world’s largest
private insurers with operations in 130 countries — with an $85
billion loan to help it stave off bankruptcy. This rattled stock
markets across the globe, plunging share prices and prodding private
banks to hold on to their reserves. This has forced the world’s leading
central banks to band together and inject $300 billion into the global
financial system to ease the credit crunch and prevent further panic –
But this means that taxes from working people are once again being
used to rescue capitalists, demonstrating the boundless parasitism of
financial elites. Nouriel Roubini, a New York University economist,
describes this as “socialism for the rich, the well-connected and Wall
Street (i.e. where profits are privatized and losses are socialized).”
Meanwhile, the biggest finance capitalists like JP Morgan are gobbling
up these distressed capitals at firesale prices — further
concentrating capital in the hands of a tiny finance oligarchy.
The current global financial crisis — with the US economy at its
epicenter — is merely the latest and so far most severe in a series of
financial crises that have erupted since the 1970s. Economists from the
World Bank note no fewer than 117 systemic banking crises (defined as
ones in which much or all of bank capital was exhausted) in 93
countries (that is, half the world) since the late 1970s.1 "In 27 of
the crises for which they have been able to obtain the data, the fiscal
cost of the bail out was 10 per cent of GDP, or more, sometimes vastly
In the heartland of the global capitalist system, Paul Volcker notes
that, “today’s financial crisis is the culmination, as I count them, of
at least five serious breakdowns of systemic significance in the past
25 years – on the average one every five years. Warning enough that
something rather basic is amiss.”
Indeed, these series of boom-busts in the financial sector are not
merely events that are resolved after each episode. Rather they are
generated by persistent and worsening contradictions in the real
"Globalization" and "Financialization"
The unprecedented devastation of productive forces wrought by the last
inter-imperialist war cleared the stage for around two decades of
relatively stable and sustained growth in the advanced capitalist
countries. But by the late 1960s, Europe and Japan were fully
reconstructed as industrial powers rivaling the United States and
worldwide economic growth began to slow just as monopoly capitalist
competition intensified. Even as big business continues to invest in
new technologies in its drive to extract ever greater profit, growth
rates, national productivity rates, capital stock formation and net
profit rates have been on the decline since the 1970s. Average net
profit rates in the G7 countries fell from 17.6% in the 1950-70 period
to 13.3% in 1970-93.
Only the US economy appeared vigorous in the second half of the 1990s
but only on the basis of a speculative build-up in the equities markets
using foreign borrowing which fueled overinvestment in information
technology and buoyed consumer spending. This dotcom bubble went bust
in 2001, replaced by the housing bubble which has brought upon us the
Underlying this systemic tendency towards crisis is the fundamental
contradiction in capitalism itself: between social production which
enables great strides in productivity on the one hand, and the private
ownership of the means of production which ensures that only a few
profit from production by exploiting the many. This contradiction
inevitably leads to crises of overproduction – a situation in which
there is a glut in commodities relative to the capacity of people to
The shift to neoliberal economic policies in the 1980s is monopoly
capital’s attempt to revive falling profits due to the worsening crisis
of overproduction – by forcing open markets, sourcing cheaper labor and
raw materials, and securing profitable investment outlets. Through the
IMF, the WB and the WTO – all of which are imperialist controlled
“multilateral” institutions – liberalization of investments and trade,
the privatization of public assets, deregulation of markets and
cutbacks in social services and welfare spending, are imposed on client
states under the hypocritical slogan of “free-market globalization”.
Combined with the re-integration of the former Soviet Union and China
into the global capitalist system, imperialist globalization has truly
succeeded in rewarding international monopoly capital. On the other
hand, these reforms which aim to maximize profits and minimize wages,
benefits and social spending for workers and the people have only
resulted in the immiseration of the vast majority in the world. The net
result is that by 2000, the richest 1% in the world own 40% of global
assets, the richest 2% own 51%, while the poorest half of world
population own barely 1% of global wealth.
Hence the flipside to the crisis of overproduction is the
overaccumulation of capital in the hands of the monopoly capitalist
elite. With overproduction rendering further investment in new
productive capacity (such as factories and employment) increasingly
unprofitable, a rapidly rising share of surplus capital is seeking
profits not in the real economy but in financial speculation — a
process sometimes referred to as the "financialization" of the global
economy. This involves the frenetic increase in the trading of
currencies, equities, bonds, debt securities, financial derivatives and
other complex synthetic financial instruments, taking advantage of even
the slightest differentials and momentary changes in bond prices,
interest rates, and currency exchange rates in different markets around
In 1980, the value of the world’s financial stock was roughly equal
to world GDP, itself bloated. By 1993, it was double the size, and by
the end of 2005, it had risen to 316% — more than three times world
GDP. Government and private debt securities account for more than half
of the overall growth in the global financial assets from 2000-2004 –
which indicates the role of leverage or debt in driving this process.
In 2004, daily derivatives trading amounted to $5.7 trillion while the
daily turnover in the foreign exchange market was $1.9 trillion.
Together they add up to $7.6 trillion in daily turnover of just two
types of portfolio capital flows, exceeding the annual value of global
merchandise exports by $300 billion.
This illustrates the increasing alienation of finance from
production and explains much of the heightened volatility and
instability in today’s global economy. While the value of financial
assets is ultimately grounded in the value created by the working class
in the process of production in the real economy and cannot diverge too
far from it, asset bubbles can form for a period of time driven by
“irrational exuberance” (in the words of Alan Greenspan). The positive
expectations of financial speculators feed on each other, bidding up
asset prices in a seemingly endless virtuous cycle. But like all ponzi
schemes, reality eventually takes over and all it takes is one negative
development, e.g. rising home foreclosures, to reverse expectations and
send the entire the house of cards crashing down.
The fallout from the current financial crisis is expected to be without
precedent, at least in monetary terms. The IMF estimates that expected
losses and write downs on US assets could total $945 billion — bigger
than the entire GDP of Australia — making it the most expensive
financial crisis in history. Even so, some analysts believe this is an
Unfortunately, these massive credit losses and asset write downs don’t
just affect financiers. Indeed, it is ordinary working people that bear
the brunt of its devastating consequences. An estimated 2.2 million or
1 in every 50 households in the US face foreclosure. Those who continue
to own homes would be 20-30% poorer in terms of household wealth as
home values drop as a result of the collapse in the housing bubble.
According to one estimate, a collapse of 30% in US home prices from
their overinflated peak would wipe out $6 trillion of household wealth
and leave 10 million households with negative equity in their homes —
they owe more on their homes than they are worth — increasing the
likelihood of a new round of foreclosures and credit losses.
Savings, health insurance, and retirement funds of millions of
ordinary Americans who were enticed to invest in pension funds and
assorted financial instruments will also be wiped out as banks and
investment houses write-down billions in assets.
Moreover, this financial debacle ultimately impacts on the real economy
as even the biggest banks and financial institutions faced with huge
uncertainties are now averse to issuing new loans for housing,
investment or for the purchase of cars and other durable goods. This
means less investment and consumer spending which in turn means slower
growth and even recession. The IMF warns that the US economy may shrink
by 0.7 per cent over the 1-year period ending the fourth quarter of
2008, despite aggressive rate cuts by the Federal Reserve and a fiscal
stimulus package. Recovery would be slight in 2009 with growth expected
to be only 1.6 per cent. These estimates have been revised downwards
several times and may still prove to be overstated as the crisis
Almost 10% of the US workforce is now unemployed or underemployed, and
job losses continue to mount. The private-sector has shed 411,000 jobs
over the past six months. Last month alone (May), 26,000 workers lost
their jobs in manufacturing, 34,000 in construction, 27,000 in retail
trade, and 39,000 in professional services, most of whom were temps.
Over 150,000 temps have been terminated over the past year. The nominal
rise in employees’ earnings are falling well behind inflation now
running at 4%. This implies continued losses in the real value of wages
or the purchasing power of most workers which has been stagnant or
declining since the 1970s.
As the US falls into recession, the rest of the global economy is being
sucked downwards with it. The collapse of credit instruments
originating in the U.S. is also weakening the financial balance sheets
of banks and other overseas holders of these investments, affecting not
just the banking sector but also stock markets abroad. Hence the US is
exporting a credit crunch overseas and pushing the entire global
economy towards recession.
The IMF estimates that the eurozone’s growth will fall to just 0.9 per
cent between the fourth quarter of 2007 and the fourth quarter of 2008.
Japan’s growth would slow down to 1.4% this year and 1.5% next year,
while Canada’s growth would fall back to 1.3% this year and pick up
slightly to 1.9% next year. On the whole, "the IMF staff now sees a 25
percent chance of growth slowing to 3 percent or less in 2008 and 2009,
equivalent to a global recession".
The International Labour Organisation warns that the global economic
slowdown in 2008 will add at least 5 million workers to the ranks of
the unemployed worldwide, raising the global unemployment rate to 6.1
per cent. This is based on a more optimistic scenario of 4.8% growth in
global GDP, which has been revised downwards by the IMF. A deeper
recession would add millions more to the 189.9 million unemployed as of
Impact on working people in oppressed countries
Banks from the underdeveloped countries in the South have less exposure
to sub-prime loans and the housing market bust in the US. But the
adverse consequences of the current global financial crisis on the
welfare and livelihoods of exploited classes in the oppressed countries
will be more severe and protracted.
First, the global credit crunch means reduced capital flows for third
world countries who are chronically dependent on foreign capital
inflows to pay for older debts, sustain imports from the advanced
capitalist countries and paper over chronic deficits they incur as
imperialist states plunder their economies.
Second, most unindustrialized countries who are dependent on exporting
agricultural products, raw materials, minerals, low-value added
manufactures and services (e.g. business process outsourcing) to the
advanced capitalist countries will be faced with shrinking exports due
to the combination of depressed consumption in the North.
Unindustrialized countries that are more deeply bound to neo-colonial
trade relations with imperialist centers, particularly the US, would be
the most severely affected. This includes the so-called newly
industrialized economies which export significant volumes to the US by
way of China. That is, by exporting parts and equipment of
labor-intensive manufactures that are assembled in China before being
shipped and sold in the US and EU markets.
Third, aside from being dependent on low-value commodity exports,
unindustrialized countries are also dependent on the export of labor,
particularly to the wealthy industrialized countries. International
labor migration serves as an outlet for the surplus labor that cannot
be absorbed by stunted domestic industries in these countries, as well
as an important source of foreign exchange remittances that help pay
for imports and debt-service. But recessions and rising unemployment in
the advanced capitalist countries are invariably associated with the
tightening of borders to keep out foreign workers. This means higher
unemployment in labor-exporting countries, reduced earnings for foreign
remittance-dependent households, and lower consumption spending in the
Fourth, and perhaps most importantly, as financial instruments and
stock markets become less attractive to financial investors,
speculative capital shifts more into commodities trading such as oil,
minerals and agricultural commodities. This is contributing to the
precipitous rise in food and energy prices beyond what conditions in
the real economy warrant, thereby rapidly eroding the real incomes of
the vast majority especially in the third world. Food accounts for
30-40% of the consumer-price index in most developing countries,
compared with only 15% in the G7 economies. The Economist estimated
that two-thirds of the world’s population suffer double-digit rates of
inflation this season (mid-2008).
This is pushing millions of people deeper in poverty. In the
Philippines, for instance, the Asian Development Bank estimates that
"for every 10 percent increase in food prices, about 2.3 million more
fall into poverty."1 They will be joining nearly three billion people —
half the world’s population — who are living on less than two dollars
a day, including 1.3 billion workers.
In sum, what began as a sub-prime crisis in the US housing market in
2006 exploded into a global financial crisis in 2007 and is now giving
rise to the specter of global stagflation — that dreaded combination
of no growth and high inflation which has not blighted the imperialist
countries since the 1970s.
Monopoly capital’s offensive
It was precisely the problem of stagflation in the latter half of the
1970s that monopoly capital used as an excuse for ramping up its
assault on the working class. Neoliberal economists, then ascendant,
blamed workers’ wage demands and government spending on social welfare
for causing the phenomenon of stagflation.
In 1979, then US Federal Reserve Chairman Paul Volcker tripled interest
rates in order to stem inflation. This also caused a severe recession
in the US which drove up unemployment and dampened wage demands. The
Reagan administration also dismantled social welfare spending but
greatly expanded military spending to finance US imperialist wars of
aggression overseas as well as pump-prime the flagging domestic
economy. In 1981, Reagan sacked 11,345 air traffic controllers who had
gone on strike demanding better working conditions, better pay and a
32-hour workweek — and blacklisted them from federal service for three
years. The government also decertified their union. "This was the
biggest, most dramatic act of union-busting in 20th-century America.
PATCO’s destruction ushered in a decade of lost strikes and lockouts,
triggered by management demands for pay and benefit givebacks that
continue to this day in a wide range of industries."
Today, we already hear the prelude to another such offensive against
the working class. Jean-Claude Trichet, president of the European
Central Bank, recently expressed fears that "higher headline rates
could push up inflation expectations, leading to bigger pay demands,
and so trigger a wage-price spiral, as in the 1970s."3 Hence he called
on "all economic agents, whether corporate or social partners, to be as
responsible as possible" — a diplomatic warning against workers who
dare attempt to cope with inflation by demanding higher wages.
But polite language cannot hide the increasing brutality of
capitalists, state forces, paramilitaries and mercenaries-for-hire
against workers around the world in order to pass on the burden of the
crisis and protect their profits and privileges. The latest Annual
Survey of Trade Union Rights Violations published by the ITUC shows an
alarming rise in the number of people killed as a result of their trade
union activities, from 115 in 2005 to 144 in 2006. And these are just
reported figures from 138 countries covered by the survey. In Colombia
alone, 78 trade unionists were assassinated in 2006, eight more than in
2005, while many others faced threats, abduction or “disappearance”. In
the Philippines, at least 87 unionists and labor organizers have been
killed since 2001. Three Nepali unionists were shot dead during mass
demonstrations that eventually brought the king’s absolute rule to an
end. In Guinea, 137 people were killed and 1,700 wounded in the fierce
repression of the strikes and protests of January and February 2007.
In short, monopoly capital is using the present crisis to appropriate
more of the people’s (real) wealth, erode and press down on wages and
social spending, lay off workers, promote precarious employment, tear
up workers rights, clamp down on workers concerted actions and
intensify the exploitation of the working class.
Our struggle against Imperialism
But workers are fighting back. In Vietnam, an unprecedented wave of
workers actions has erupted in the country’s export processing zones
where at least seven strikes have broken out so far this year — at
Panasonic, VICO, Nissei, Asahi Intecc, Yamaha Motor, Sumitomo and
Chiyodj Intergre — because wages aren’t meeting even the basic needs
of workers. Autoworkers and steelworkers in Romania won substantial
wage increases after launching a series of strikes last April to May.
In France, hundreds of thousands of workers took to the streets last
month in a demonstration against government plans to increase pension
contributions. There is also a wave of occupations and strikes at
construction sites, cleaning establishments and restaurants by
immigrant workers protesting the government’s planned restrictions on
immigrants. In the UK, hundreds of thousands of public sector workers
are threatening to stage a series of one-day strikes this summer to
protest the Gordon government’s 2% ceiling on pay hikes. In Norway,
state workers at the township level are preparing to strike over pay.
Drivers strikes are spreading across the globe — in the UK, Portugal,
Spain, Egypt, India, Korea and Thailand — in response to skyrocketing
In the Philippines, protesters are pouring into the streets demanded
the scrapping of the value added tax (VAT) on oil, the repeal of the
Oil Deregulation Law, and the approval of a legislated P125
across-the-board wage increase. Workers are downing tools, drivers are
leaving their vehicles, while students are walking out of their
classrooms to join these demonstrations. Egypt is now witnessing the
biggest wave of strikes in the country since the 1940s, with women
workers at the forefront. Workers are angered by neo-liberal
privatization policies carried out by the Nazif government which has
resulted in thousands of workers losing their jobs and led to an
increase in the inflation rate that is currently estimated at around
12% while salaries have not increased since the 1970s. In South Korea,
workers are at the forefront of a broad coalition opposing U.S. beef
imports comprised of citizens, students and unionists who have
mobilized in massive demonstrations and vigils calling for President
Lee Myung-bak to step down. In South Africa, COSATU is preparing to
strike against the government’s planned anti-inflation measures that
would likely lead to deeper indebtedness of working families and more
The current crisis is but the latest manifestation of fundamental
contradictions in the world capitalist system that are intensifying in
the era of imperialist globalization. Increasing economic polarization,
overaccumulation of capital and overproduction that give rise to
economic crises and ultimately ruin society’s productive forces —
these are inherent in a system based on the private monopoly control of
a few over the social means of production – and no amount of fiscal
stimulus or financial regulation can fix these problems. The Bush
Administration’s grand plan to solve the current financial crisis is to
shift the toxic debt load of private banks onto the federal government,
i.e. the American people. While this will surely please the financial
elites – witness the stock markets rally upon hearing the news – the
rescue plan will sharply increase the government’s budget deficit and
the already gargantuan US debt thus worsening fundamental imbalances in
the real economy and setting the stage for even bigger convulsions
later on. The utter helplessness and inutility of world leaders and
policy-makers in resolving the current crisis reveals the total
bankruptcy of neoliberalism and the unmitigated destructiveness of
imperialist globalization – prodding people to search for real
Hence, for the labor movement the current situation is both a
challenge and an opportunity. We must counter monopoly capital’s
desperate attempt to shift the burden of the crisis onto the people by
consolidating our ranks, reaching out and organizing more workers in
the factories, offices and in the communities, building unity with
other oppressed and exploited sections in our society and
internationally, and waging more strikes and other forms of resistance.
We must deepen our understanding of imperialism’s offensives —
economic, political, military and ideological — against the working
masses throughout the world. We must wage not just economic struggles
but raise them to political struggle against the ruling system as a
whole, win national freedom and democracy, and build socialism as the
alternative to this irredeemably rotten system.#
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