How credit crunched
It started with the US housing bubble, and those infamous ‘sub-prime’ mortgages. Between 1996 and 2006 US house prices went up 60% more than inflation. The great real estate fantasy: if you can get on the ladder, you can just sit and watch the price of your property soar away. Money for nothing. And it wasn’t hard to join in: mortgage brokers were jumping over each other to offer loans to anyone, never mind your income or credit history. Between 2000 and 2005 total US mortgage debt rose 75%. By 2007, the housing boom had created up to $8 trillion in supposed new ‘wealth’ for US households.
The housing bubble was the biggest part of a more general phenomenon: the debt bubble. The debt bubble went hand in hand with a massive growth in financial markets, and especially the new frontiers called ‘securitisation’ and ‘derivatives’ (see the thread about finance). There were low interest rates for borrowers, and big profits for the bankers who invented new kinds of derivatives and securitisation bonds every week, and sold them to investors all over the world. US Financial assets grew from $48bn in 1990 to $194bn in 2007. One of the factors behind the debt and finance bubble was low interest rates. In 2003 the main US interest rate, set by the Federal Reserve (US Central Bank) was just 1% – cheap borrowing for all. Then it started to rise again. By 2007 it was up at 6.25%. Suddenly mortgage repayments were a lot less affordable. Mortgage borrowers, especially those classed as ‘sub-prime’ or high risk, started to default. The housing bubble burst. Then the finance bubble burst. Northern Rock was one of the UK’s five biggest mortgage lenders. Its story is typical: it was once a traditional ‘building society’, a ‘mutual society’ theoretically owned (though not really controlled) by all its customers. Then it ‘demutualised’ in 1997 and became a PLC. It used securitisation to expand in a hurry, selling bonds backed by its incoming mortgage payments. Then it got involved in sub-prime, in a partnership with US investment bank Lehman Brothers in 2006. In August 2007 it needed to issue a new run of securitisation bonds to refinance existing debts. But now no one wanted to buy mortgage-backed bonds. The Bank of England had to step in with a £3bn loan.
It wasn’t enough to stop the UK’s first bank run in 150 years, and the government eventually took on all the bank’s debts, totalling around £100bn. Northern Rock crashed because no one would lend more money to a firm embroiled in the collapsing mortgage market. But who wasn’t involved? Even if some banks and insurers didn’t themselves issue mortgages they bought, traded, or insured mortgage backed securities (MBS). Investment bank Bear Stearns collapsed in March 2008. Then in September 2008 they started to fall like dominoes. Investment banks Lehman Brothers, Wachovia and Merrill Lynch. AIG, the world’s largest insurance company. No one could tell who was ‘exposed’ to how much bad mortgage debt. So no one would lend to any one: the credit market had ‘crunched’.
400 years of bubbles
The same pattern of bubbles and busts has been repeated many times in capitalist history. Here are just a few examples.
Tulipmania (1637).
One of the first recorded bubbles involved the Dutch tulip market, where collectors and speculators bought and sold rare tulip bulbs, even using futures contracts (early derivatives) to gamble on the rising price. Single bulbs could trade for the price of a whole farm — before the market crashed in 1637.
South Sea Bubble 1720.
One of the first stock market bubbles. The South Sea Company was a British corporation headed by leading politicians, originally set up to trade with South America. In 1719 it made a deal to buy up half the government’s debt, which it funded by issuing new shares. South Sea shares became an investment craze, and the share price rose from £128 in January 1720 to £1000 inAugust. Many shares were sold on an installment plan, so that people could invest and profit from rising prices before actually having to pay for their shares. Then installment payments came due and a wave of selling started. By September the price had crashed to £150.
Bengal Bubble 1769.
Bubble and crash in the stock of the East India Company and London stock market.
Panic of 1796-7.
Transatlantic financial crash following collapse of a land speculation bubble in US. There were further financial ‘panics’ in the US in 1818, 1837, 1857, 1869 (‘Black Friday’), 1884, 1896. Banks went bankrupt, stock markets collapsed, and recessions followed. A number of these crashed were caused by fears about gold and silver shortages in the days when the money supply was tied to gold.
Railway Bubble 1847.
Railway frenzy in the UK led to a bubble as the middle classes invested in hundreds of new railway projects, many of which never got built. The crash spread to banking and financial markets. The original ‘great depression’ 1873-1896.
An investment bubble grew in Germany and Austria after German victory in the Franco-Prussian War (1871). The Vienna stock exchange crashed in May 1873 and many banks failed. The crisis spread through Europe and to the US, leading to a 20 year world economic depression.
Paris Bourse crash 1882.
Crash following a bubble in the stock of bank L’Union Generale.
New York Stock Exchange crashes 1901 and 1907.
The Wall Street Crash of 1929.
It was the ‘roaring twenties’. The US economy was booming. The new middle classes came in their droves to invest in shares and high yield bonds, encouraged by investment banks like National City Bank (today’s Citibank). The Dow Jones index of share prices grew by five times between 1923 and 1929, reaching 381.87 on 3 September 1929. Irving Fischer, one of the world’s leading economists, predicted a ‘permanently high plateau’ for the market. Without warning, the market dropped 11% on 24 October (‘Black Thursday’). On 28 October, (‘Black Monday’) it fell another 13%. Despite some periods of recovery, the market continued falling for the next four years, reaching a 20th century low of 41.22 in July 1933.
Bubbles: investing or speculating?
It’s quite common to hear bubbles and crashes being blamed on ‘speculators’ — today’s ‘hedge funds’, and ‘currency speculators’ are attacked by politicians of all kinds. They are not ‘real’ or ‘serious’ investors, just in it for short term gain. But what is speculation, exactly?
Take tulipmania as an example. Tulips were first imported from Turkey in the 16th century, and became a prized luxury good for wealthy aristocrats and early bourgeois. The first tulip investors were in the business of growing and trading new strains of the flower to sell to these rich buyers. Economists would say, they were investing in the ‘fundamentals’ of the tulip business.
But when others saw the price keep rising, then new investors came in as speculators. They weren’t particularly interested in the tulip business. They might as well have been buying daffodils, or turnips. So long as the price kept going up, and new investors came in to buy on their investments at a profit. A speculative bubble is based on confidence. So long as you believe that new investors will keep entering the market, then you can expect to make a profit. In this way a bubble is like a pyramid or Ponzi selling scheme: it needs more and more buyers. But if speculators start to think that the price will fall, then they turn from buyers into sellers, trying to get out while the market is at a ‘high’. Doubt can spread quickly, and the pyramid collapses.
How can you tell when a market is a bubble? In 2006 almost everyone thought the US housing market was solid. Economists developed theories to explain why the amazing housing boom was not just about speculation, but based on real ‘fundamentals’: people were living longer, becoming ‘middle class’ and demanding more space, etc. The few who doubted were considered crazy. Now the investors and bankers who developed the new mortgage finance industry are called ‘speculators’. But at the time, they were ‘pioneers’ and ‘innovators’.
From crash to slump: how financial collapses affect the real world
In the previous thread on finance, we saw how financial markets move financial capital from investors to producers. The financial markets are where key decisions are made about what gets produced. It’s not just ‘speculation’, but all investment, that relies on confidence. In a financial crisis, investors typically flee to safety. They move to what they see as low risk assets. For example, a scared investor might sell their shares and put their money in a bank deposit account. Or in a really serious crisis, even banks don’t look safe, and depositors withdraw their savings – causing a bank run.
Traditionally ‘safe’ assets include treasury bonds of major governments, gold, and other ‘commodities’ like basic foods which will still be in demand in even the toughest times. Investors will be less ready to finance companies, or only at high interest rates. Companies that cannot raise finance will reduce production, or even go bust. They try to cut costs by, e.g., sacking workers or lowering wages.
Unemployment means less people can afford to buy consumer goods, which hits the economy even more. In the 2008 credit crunch, the crisis really hit when the interbank lending markets dried up. This is where banks lend to each other to cover their short term needs. The banks didn’t know what bad debts from sub-prime and securitisation the others were hiding, so they just stopped lending to each other. Terrified of a run of bank crashes, governments stepped in to play the role of these markets. A similar crisis hit the commercial paper market, where companies do short term borrowing.
The last great depression
The Wall Street bubble had pumped money into US capitalism. After it crashed, investor confidence was shattered. Industrial production fell by 45% from 1929 to 1932. By 1933, 11,000 banks had gone bust, and unemployment went from 3% to 25%. As many as two million people were made homeless.
Economists argue about what could have stopped the situation getting so extreme. Monetarist economists (e.g., Milton Friedman) argue that the Federal Reserve should have created more money and slashed interest rates to keep bank lending going. (The Fed kept interest rates high to maintain the Gold Standard.) Keynesians argue that the government should have stepped in directly to create jobs and production. Keynesian policies were adopted in the New Deal from 1933. (See previous thread on the state).
The depression spread from the US to the world. The US was a major investor in Germany, Latin America, and elsewhere. It was also the world’s biggest producer and trader. In June 1930 the US passed the Smoot-Hawley Tariff Act, which set high taxes on foreign imports in order to protect American industry. This was a big blow to countries which traded with the US. Many of them retaliated with their own tariffs, hitting back at US exporters, especially farmers. World trade dropped in a new era of ‘protectionism’.
Collective action problems
Financial crises often involve ‘collective action problems’. A collective action problem is a situation where a number of people or groups (e.g., states or companies) all share an interest in a particular plan or solution; but, if they all act independently and pursue their individual self-interest, they are unable to achieve that solution. That general definition is pretty abstract; but we can see how these ‘problems’ keep cropping up in many concrete cases.
For example, in the great depression, the best plan for many national economies would have been to keep global free trade going, so they could export their goods. But it's even better still if all the other countries keep on buying your exports, but you can stop their goods coming in to compete with your domestic products. And that’s what the first protectionist countries tried to do: they put up import tariffs to protect domestic industry, while still hoping to export abroad. The problem was that everyone else then retaliated and did the same. The overall result was the worst outcome, trade death for all.
This particular type of collective action problem is also called a ‘free rider problem’. Every individual (or, here, state) hopes that everyone else will follow the best plan and trade freely; but they also hope that they can get away with being the exception (get a ‘free ride’ off the others). The problem is that everyone thinks the same. And if you can’t trust anyone else to stick to the best plan, then why should you do so yourself ? The same logic recurs in many economic situations. Capitalists (or workers) often do better if they can get together in a cartel (or union) and, for example, fix a higher price (wage): but they have to be able to trust each other not to break the agreement.
Indeed, an economic crisis and recession could be seen as one big collective action problem: the capitalist ‘best plan’ is for everyone to keep on producing - if everyone else also produces then there will be income to pay for your company’s goods. But can you rely on all the other companies to keep on going ? What can give you this ‘confidence’? Outside of economics, people do manage to co-operate and make plans together in many difficult situations. Note that in these collective action problems, the parties involved only pursue their ‘self-interest‘. These kinds of problems tend to be particularly rife in markets, and in general in capitalist environments where people (and organisations) have learned to act on self-interest alone. (See my next thread for more on this point).
Causes of crisis: the liberal story
Alan Greenspan
In January 2009 Joseph Stiglitz, the leading left-of-centre economist, and a Nobel prize winner, listed three big mistakes behind the crisis. In March 2009 Rolling Stone Magazine published an article naming and shaming the ‘dirty dozen’, 12 ‘bankers and brokers responsible for the financial crisis – and the regulators who let them get away from it.’ Alan Greenspan, former head of the US Federal Reserve (‘Fed’, or central bank) was top of both lists. Greenspan was given the job by Reagan in 1987. He then followed two main policy ideas: cut away regulation from the financial markets; and use interest rates and the money supply to keep the economy booming.
Financial deregulation can’t really all be blamed on Greenspan. The Garn–St. Germain act of 1982 started deregulation of the mortgage business, and led to the collapse of the traditional ‘Savings and Loan’ lenders. In 1999 President Clinton signed the Gramm-Leach Act, repealing the 1933 laws against banking practices which had helped cause the Great Depression.
In 1998, after the spectacular collapse of derivative-trading hedge fund Long Term Capital Management (LTCM), there were proposals for regulation of the new derivatives markets. These proposals were just dropped. Proposals to regulate the Ratings Agencies were also dropped. In 2002, after the Enron and WorldCom accounting scandals, the response was the weak Sarbanes-Oxley act. In 2004 regulation was changed to let US banks get into debt worth 30 times, instead of 12 times, what they held in capital. Deregulation was not just a US idea. Governments all over the world now agreed that the old rules were ‘out-dated’ and banks could be trusted to ‘self-regulate’. The UK was at the forefront, as the Labour government promoted the City of London as a ‘financial hub’ for Europe, where investment banks could operate free of ‘red tape’.
Liberals like Stiglitz accuse Greenspan of deliberately inflating the housing bubble. In 1997 the Asian Crisis, a panic in financial markets in ‘developing countries’, hit trade in the US and caused a recession. Luckily the US economy was saved by the ‘dot com bubble’: investment surged instead into a new craze, technology companies. Then that bubble burst in 2000. Would the US finally hit crisis? To stop a downturn the Fed cut interest rates. And kept cutting down to a low of 1% by 2003. This helped create a new bubble, consumer debt, as consumers borrowed more and more at cheap rates.
The two ingredients (deregulation and low interest rates) worked together. Abolishing the controls on banks allowed the development of a whole new ‘shadow banking’ industry (see the finance thread). Securitisation and derivatives allowed financiers to massively expand consumer lending in a hurry, without worrying about deposits or other safeguards. Whilst low interest rates meant millions of new customers could get in on the mortgage party. They also encouraged investors to chase more and more risky financial ‘products’: as the rates on ‘safe’ assets were now also low, they needed to take higher risks to get their profits.
According to the mainstream story, the crisis was the fault of greedy politicians and bankers, who forgot the lessons of the past and embraced neoliberal faith in the market. In particular, a few powerful men made bad decisions, like abolishing regulations or cutting interest rates, which ruined the whole system. Alan Greenspan is the arch super-villain. Longer lists could include top politicians like Reagan, Clinton, Blair and Brown, and a range of other evil bankers.
Causes of crisis: looking deeper
Financial deregulation certainly played a big part in creating the crisis. But there is lots more to the story.
There are many theories about deeper causes of the crisis (I will include more resources when I have finished writing all of the main points in important threads). Here is one story that I think makes a lot of sense: ‘financialisation and the debt bubble in rich countries is part of something much bigger, a global shift of power and production to parts of the old ‘third world’. This crisis is part of the death pangs of the old US/Europe hegemony.
1) A global shift.
We saw in the thread on Global Division of Labour how manufacturing industry has been moving from rich countries like Europe and the US to the ‘Third World’, especially Asia. That means: more and more of the stuff, from food to cars and gadgets, people consume in the ‘West’ is produced far away in poor countries. Wages are much cheaper in the Third World: it is more profitable for capitalists to open, or invest in, factories in low-wage countries.
2) Financial hubs.
As manufacturing leaves rich countries, what keeps economies afloat in Europe and North America? The wealth in London or New York now does not come from manufacturing, but from profits on financial transactions. The US and UK are prime examples, but most ‘First World’ countries have been following the same pattern. This is called ‘financialisation’: the shift of capital into financial services. Or: bankers using the financial markets to cream profits off global movements of capital.
3) Service work.
Ahem...
Obviously, not everyone in London and New York is making money off finance. But, until 2007, these rich economies seemed to be getting ever richer. Some of the money from finance spilled over into ‘service industries’: investment bankers need builders and estate agents to upsize their property, ‘baristas’ to make their cappuccinos, dog-walkers, pedicurists, aupairs, lap-dancers, and migrant office cleaners.
4) Wages cut, debt explodes.
But while profits and bonuses in finance grew, wages in the ‘First World’ have stayed fixed for most people, or even gone down. In many European countries, unemployment, particularly amongst the young, is chronic. So how have people survived, and even kept on feeling ‘affluent’, part of a non-stop consumer culture? By borrowing.
5) Consumer debt boom.
So a number of factors contributed to the growth of a massive debt bubble in the ‘rich’ countries. Stagnant wages meant people needed to borrow to maintain their lifestyles. A shift into financial capital meant banks pushed debt as a new growth industry. Meanwhile, all this cheap credit was made possible by vendor financing from Asia. Capitalists in China invested their profits in financial markets in the West, funding sub-prime mortgages and consumer loans in the US and Europe, which helped them keep the markets going for their products.
6) End of the party?
So far, globalisation means that workers in the Third World make nearly everything, and a global middle class in the rich countries borrows the money to keep on consuming. How long can this go on? There are two big questions. First: how long will industrialists around the world keep on letting bankers in the West cream off big profits from their products? Will new financial markets develop that that bypass London and New York? And, the even bigger question: how long will Asian investors keep on lending to support consumer lifestyles in the West? At the moment, they do this because Asian manufacturers still need customers in the west. With massive poverty and inequality, and not much of a middle class to buy the factory-produced goods, local consumer demand is not big enough to keep their profits rolling. But this credit boom is ending. The economic crisis in the west is not just about a few bad bankers. It is about a fundamental shift in power and production. And it is only just beginning.
Part Two: the European sovereign crisis
In late 2009 a new wave of financial crisis began. This time it started with the market for European ‘sovereign’ or government bonds.
The first target was Greece. On 14th January, 2009 the rating agency Standard & Poors cuts Greece’s credit rating from A to A-. The company said it was worried about Greece’s ability to repay its rising national debt in the recession. The day after S&P’s announcement, the yield on Greek ten year bonds went up to 5.43%. (See the finance thread on how bonds and rating agencies work.)
This was just the beginning. On 16th December S&P downgraded Greece again, to ‘BBB+’. On 21 January 2010 Greece’s 10 year bond yield was 6.248%, its highest since entering the Euro in 1999. On 2 February 2010 the Greek government announced a new ‘austerity package’ to cut government spending and the debt. But the markets weren’t listening. Investors kept selling Greek bonds.
Bonds and deficits
Most governments, like most companies, are continually in debt. Each year they take out new debts to pay back the old ones. This is called ‘refinancing’ the debt. The main way governments borrow is on the sovereign bond market. Bond yields are the return investors get on existing bonds if they buy them off other investors. So why does a borrower worry about what happens to yields on its old debts?
One reason is that the interest rate it has to pay on new bonds is usually set by the yield on existing bonds. So if yields go up, the borrower will have to pay more to refinance. The government may try to put off refinancing and hope the markets calm down – but sooner or later it will run out of money and have to come back to the markets to borrow more.
There are some other reasons that might also be important. One is that if bond yields go up a lot, this may trigger ‘credit events’ in Credit Default Swap (CDS) derivatives which insure its bonds. The banks who write the CDS contracts may have to pay out a lot of money. Also, banks and funds who hold existing sovereign bonds will see the value of these going down, and worry about the safety of their investments. Strictly speaking, these last two reasons are problems for the investors, not the borrower. But big investors tend to have a lot of influence over governments.
More pain, no gain
In May 2010 the European Union agreed the first ‘rescue package’ for Greece, after two months of negotiations. The ‘Troika’ of the European Commission, European Central Bank and IMF agreed to lend Greece Eu110bn. The Greek government promised to implement Eu30bn more in austerity measures: cuts and privatisations. The loan would be handed over in installments, so long as the Greek state played ball.
But now Greece wasn’t the only problem. The crisis spread to other countries on the ‘periphery’ of Europe, sometimes called the ‘PIIGS’ (Portugal, Ireland, Italy, Greece and Spain). The same pattern: investor flight from government bonds sent yields up, as rating agencies, economists, journalists and politicians spread fear about governments’ ability to repay their existing debts. And then ‘rescue packages’ from the Troika, on condition of harsh austerity cuts. The EU sets up a centralised bail-out fund called the ‘European Stability Financial Facility (ESFF), with capital initially of Eu440bn.
But, as almost everyone predicted, the ‘rescue packages’ don’t work, the market panic only deepens. In June 2010, Greek bond yields were above 10%. By theend of 2011, after yet more bail-outs and austerity measures, they were over 30%. Ireland had been bailed-out, Italy and Spain downgraded, and ‘austerity’ cuts imposed all over Europe – even in countries like the UK which weren’t in trouble with the markets.
Nationalising the collapse
Why were the markets panicking about sovereign bonds? On the face of it, investors are worried about government debt. As we saw in the thread on finance, bond yields reflect risk: where investors believe there is a higher risk of not getting repaid, they want a higher yield in return.
Why are government debts so high? According to the neoliberal politicians, and much of the media, the ‘PIIGS’ were guilty of reckless spending, with governments supporting an affluent lifestyle for civil servants, pensioners, and others living off the state. The truth is that European governments got into heavy debt because they bailed out the banks in 2008.
In 2007, the average government deficit (how much the state spends more than it receives in taxes) was 0.6% across the Euro countries. Governments owed on average 66% of their GDP. In 2010 the average deficit was 7%, and average debt 84%. The table below shows some of the changes in specific countries:
Source: Eurostat / Economist Intelligence Unit estimates.
Basically, governments had ‘nationalised’ the bad debts of the banks.
Spain and Ireland are two of the most dramatic cases. Both had some of the lowest national debts in Europe before the crisis. But also some of the biggest property bubbles. When housing markets crashed in 2008, banks in both countries were set to topple en masse.
In September 2008 the Irish state gave an unlimited guarantee to six big banks: it would cover all their losses. In 2009 it set up the ‘National Asset Management Authority’ (NAMA), which took over Eu77bn in bad debts from the banks. By September 2010 the government had spent around 32% of the country’s GDP on bailing out the banks. (This accounts for all of the rise in government debt shown in the table above.) In November 2010 Ireland took out a Eu85bn austerity-linked ‘rescue package’ from the EU and IMF.
In Spain, the government set up a Eu99bn fund to support the banks in June 2009. The big banks survive the crisis, but many local ‘cajas' (savings banks) are shut down or bailed out. Only Greece and Italy had big debt problems before the banking crisis. Greece’s financial problems are not new; it has had a public debt over 100% since long before it joined the Euro in 2001.
Whose bail-out?
Why did the ‘Troika’ step in to ‘bail out’ the Greek state? What would have happened if Greece had defaulted on its debts in 2010? It would, indeed, have caused a major crisis for the Euro. But also a more direct crisis for many major European banks and corporations – especially in France and Greece.
The table below shows who held Greek bonds in September 2009 (as estimated by Barclays Capital analysts). Greece had a total of $390bn in debt. Over three quarters of that was lent by governments and private capital from outside Greece.
By late 2011 the make-up of investors in Greece had changed substantially. The big international banks had sold most of their Greek bonds: the buyers were governments and, especially, the European Central Bank. According to figures from the Bank for International Settlements, German and French banks now owned just Eu2bn each in Greek debt.
With the first Greek bailout package of May 2010, the Troika made sure that there was no default or ‘haircut’ on bonds. (A ‘haircut’ is where bond investors agree to sell their bonds back at a percentage of the value: that is, take a loss on the debt.) In October 2011 the Troika arranged a second Eu130bn ‘rescue package’ for Greece. This time investors would take a hit, losing up to 50% of the value of their investments. But by now the big banks were mostly safe out of Greece.
Whose crisis? ‘Debtocracy’ and social war
When the credit crunch hit in 2008, there was some talk in the media of a ‘Keynesian resurgence’. Neoliberal economics seemed discredited. Left-wingers hoped governments would use their power over the bailed out banks to return to the postwar ‘social compromise’. Instead, quite the opposite happened. The current crisis has cemented the power of finance capital. Politicians of all parties have prioritised the demands of bankers, and taken neoliberalism to a new extreme with further privatisation programmes. In a classic use of ‘shock tactics’ (see previous thread), austerity is presented as the ‘only possible solution’ to crisis.
By cutting jobs and incomes, austerity throws economies even harder into depression, accelerating the economic collapse of the ‘developed world’. But financial capital, and all those who invest in it, do well, and that’s what matters.
In fact, what we have seen in this crisis so far is that most of the elite are not really interested at all in getting national economies back to growth. Rather, many capitalists and politicians take advantage of the crisis as a profit opportunity for their own or their friends' businesses, even if it hurts the economy ‘as a whole’ or ‘in the long run’. By pushing demand down even further, austerity is the last thing that will ‘solve’ the crisis. But it will bring lots of profit opportunities: wage cuts, even more deregulation, and plenty of privatised state assets to snap up cheap.
Technocrats and Populists
Yanis Varoufakis
In November 2011 the Greek government fell in a political crisis around the second Troika ‘rescue’ and austerity package. A government of ‘national unity’, of parties from the Socialists to the Far Right, appointed Lucas Papademos as ‘technocrat’ prime minister. Papademos is an economist, former governor of the Greek central bank and vice-president of the ECB. A few days later Italy’s prime minister Berlusconi resigned, and was replaced by another unelected ‘technocrat’, Mario Monti. As well as being an economics professor, Monti was also an ‘international advisor’ to investment bank Goldman Sachs. These ‘unity’ governments shared a clear agenda: to enforce austerity packages.
In January 2015 all this seemed to be changing. The left-wing party Syriza, in coalition with a right wing nationalist party, won the Greek general election promising to break with austerity politics and take a radical new path in negotiations with the Troika. In Spain, the similar left party Podemos took at least a temporary lead in the polls in early 2015, ahead of a November election.
Both are new political forces that have grown rapidly post crisis, building popular bases drawing on anti-austerity social movements, with charismatic media-savvy intellectuals at the top.
Within three months of victory, Syriza had already broken many of its anti-austerity promises and ‘red lines’, announcing that it would continue to see through major cuts and privatisations. Basically, it was offering ‘austerity lite’, a slightly softer version of the neoliberal consensus. In the world of globalised capitalism, all a single country like Greece, facing massive capital flight and depression, can do is negotiate a few more crumbs.
In any case, Syriza’s high-profile finance minister Varoufakis was clear on how he saw his role. The Left is too weak to offer any alternative to capitalism. The only other possibility is a fascist ‘bloodbath’. The one role left for leftists is to pitch in and help ‘stabilise European capitalism’ from its own worst excesses.
Crashes to come
If this analysis of the crisis is right, then none of the deeper causes of the 2007-2008 crash have gone away. Governments have propped up and bailed out finance capital, taking on its debts. The central banks have restarted the markets by holding interest rates at zero or below. None of this addresses the major global imbalances in production and consumption. It just pumps up new bubbles, which will also burst sooner or later.
Perhaps the most obvious risk is that the massive debt levels that led to the credit crunch have, within a very short time, returned and grown even further. To quote from recent research by McKinsey Global:
Quote:‘One reasonable expectation in the years following the crisis and the ensuing global recession was that actors across the economy would reduce their debts and deleverage. However, rather than declining, global debt has continued to increase. Total global debt rose by $57 trillion from the end of 2007 to the second quarter of 2014, reaching $199 trillion, or 286 percent of global GDP.’
One third of this extra debt comes from increased public sector borrowing in rich countries, as both bail-outs and tax cuts roll on. Another big factor is a rise in debt in developing economies: especially, China’s total debt has quadrupled since 2007, and is now $28 trillion or 282% of GDP.
China’s new debt economy probably will not lead to a new debt crisis, as the state there has ample resources to smooth over debt market volatility. More immediate risks, according to McKinsey’s figures, are less powerful economies that have now racked up mortgage and other consumer debt levels even higher than those of the main countries hit in 2007-8. The next debt crashes might hit in the Netherlands, South Korea, Canada, Sweden, Australia, Malaysia or Thailand. Or maybe the next wave of crises will come from a different, unexpected, source altogether.