The article below was written in early 2008, but still provides useful analysis of how the global financial crisis came about and capitalism’s problems recovering.
by John Edmundson and Philip Ferguson
In late 2006 IMF chief economist Raghuram Rajan declared, “the global economic expansion has been stronger in this period than at any time since the early 1970s.” Yet barely a year later there are much more pessimistic views about the state of the world economy being expressed by ‘mainstream’ (capitalist) economists and forecasters.
Most recently economic woes in the United States have impacted on the global economy as the US remains by far the largest economy in the world. However, the problems in the United States – of which the state of subprime mortgages are a classic case (see below) – indicate deeper problems in the world economy.
What capitalist economic commentators often don’t consider are the underlying trends in growth. For instance, growth can be registered under capitalism merely as growth in paper ‘values’ but this tells us little about the underlying strength of the economy at either a national or global level. Since the post-WW2 ‘long boom’ ended in 1973-74, there have been bouts of growth but nothing that comes anywhere near the scale of the postwar boom. Booms have been shorter and less dramatic and, increasingly, they have had an artificial character.
The postwar boom was based on long-term, dramatic increases in output in industry and manufacturing due to massive increases in productivity, in turn made possible by a massive expansion of investment in plant, machinery and technology as well as expanding the workforce. The booms since the early 1970s, however, have mainly been based on the artificial economy – that is, sectors of the economy that do not create new value but merely increase paper values – ie prices – and thus returns on investment. Junk bonds, property, shares and currency speculation, mergers, futures markets and so on became important fields of investment. In addition, companies often paid out massive dividends to shareholders rather than reinvesting in improving productivity and expanding output. There was also a massive extension of credit to stave off crisis.
What did not happen was any massive new round of investment in plant, machinery, research and development etc to revolutionise productivity again and increase production of new value, ie real wealth. Thus while a report on global corporate investment by the Bank of France in August 2006 celebrated the fact that “As a percentage of GDP, corporate profits are at their highest level in decades”, it also noted that in relation to GDP, “the ratio of investments is at its lowest level in many decades for all countries of the G7.” (In NZ, it might be noted, investment in the productive sector is even lower – see below)
From time to time the sluggishness in the real economy, starved of new investment, drags down the booming artificial economy. This happened most dramatically in October 1987 with a global share market crash and it has happened on a smaller scale with the dotcom crash of the late 1990s, the stock market crisis of 2001-2002, and with the problems of subprime mortgages in the United States more recently. In New Zealand, the vastly inflated prices of houses are now starting to fall.
Subprime crisis in the United States
The financial news in recent months has been dominated by the subprime mortgage crisis, which began in the United States, but has spread nervousness around the world. The subprime mortgage crisis has seen a massive increase in the number of mortgage defaults in the USA and many more are threatened, along with the financial institutions exposed to these defaults.
Until the onset of the crisis, few people had ever even heard of a subprime mortgage and had no idea what one might actually be. Traditionally, when a bank advanced a home loan, it required quite rigorous conditions to secure the loan. This could mean a combination proof of sufficient income to repay the loan, a significant deposit from the borrower and mortgage repayment insurance to cover mortgage payments in the event that the borrower was sick or otherwise unable to make payments. These customers are “prime” borrowers as the risk to the bank is low.
Subprime mortgages are loans advanced without these traditional protections for the lending institution. In the rush to lend out surplus capital, banks lowered the bar, allowing mortgages of up to 100% of the property’s value, and lending at riskier levels of repayment relative to ability to repay. This situation was compounded by the fact that lenders often bundled and on-sold these loans to third parties, as “asset backed bonds”. Mortgage dealers were less concerned about ongoing ability to pay, as they could simply on-sell the risk. It also became common practice to offer “teaser” rates of interest at lower than standard market rates. Borrowers were confident that they would be able to refinance at the end of the term of the “teaser” loan.
This all worked well as long as speculation meant that property prices continued to rise. As property prices slowed and even began to fall, refinancing got harder, especially on those properties where the borrower had little equity – had borrowed close to or at the full market price of the property. Unable to make payments, many subprime home owners have been forced to default on their debts, resulting in mortgagee sales of their properties at less than the value of the loan. In the last quarter of 2007, subprime adjustable rate mortgages (ARMs, the equivalent of floating mortgages in new Zealand) represented 6.8% of mortgages in arrears in the United States, but they represented 43% of foreclosures begun. Because by definition, subprime mortgages are mortgages to low income people with smaller or nonexistent asset bases, the bulk of the bank foreclosures have affected working class home owners. In America, this especially means Blacks and Latinos are being forced from their homes and losing the savings they had put into buying their own home.
Crises like the current one are analysed and reanalysed to present them as unique events, able to be avoided in the future by specific counter measures. It is more useful, though, to see the crisis in the context of the way capitalism functions normally. When capitalism has a profit decline in some sectors, it looks for sectors giving a higher return. If that means private home mortgages, then that is where the capital will go. If it is not the domestic mortgage market, it will be any other sector that appears to be offering good profits; think of the dot.com internet companies or any other bubble crisis. It is in the nature of capitalism to go through periodic crises. When it emerges from the crisis, some capital has been destroyed and other capital will have been concentrated into the hands of an ever smaller group of ever wealthier capitalists. This is what capitalism does. As long as there is no significant working class movement to tip it over the edge it will continue to put the world through crisis after crisis, and continue to concentrate capital, to the detriment of the rest of us.
Good times in New Zealand?
Labour and National agree that the period of the Clark Labour government has been a good one. New Zealand’s economy has enjoyed growth that even the opposition will not deny. Rather than condemning Labour for mismanagement and economic wrecking, as is the normal approach for the opposition in New Zealand politics, National’s approach has been to characterise Labour’s term as a period of missed opportunity. The country could have been even better, they say. Yet for many workers struggling to get by from week to week, such talk of good times seems a long way from reality. How can this be?
Partly, this is due to the fact that the growth has been limited to only a few sectors of the economy. The dairy industry is the one that has been most publicly successful with continuous reports in the media updating the growing size of the Fonterra payout to farmers. While the country is expected to share the warm glow of pride in the success of the world’s largest dairy exporter, for most New Zealanders this has only meant higher prices for milk. Now it transpires that it is possible to buy New Zealand cheese in London more cheaply than we can buy it here. If New Zealand’s dairy production is so efficient, why are we paying so much to buy dairy products here?
Unfortunately for us, in an international market, prices are not determined by local conditions. If world demand for dairy produce is high, the price will rise here, even if the costs of production here are low. Fonterra is able to sell milk at a price based on the world average productivity for the industry, meaning that local retailers must buy based on global conditions and local consumers pay the increased price.
Meanwhile, across the New Zealand economy as a whole, productivity growth has been poor. Ever since the 1980s adoption of neo-liberalism, the tendency in New Zealand has been to move investment out of the productive sphere and into sectors of the economy where immediate returns are higher. Within what remains of the productive economy, there has been little investment in plant and technology to enhance productivity. Statistics New Zealand figures reveal that while labour productivity grew by 3.2% for the period 1988-93, when industry layoffs were resulting in the intensification of work for those remaining in employment; for the following period 1993 -2005, productivity growth fell to 2.4%. New Zealand business has been decidedly reluctant to invest heavily in new technology wherever the option to simply drive down real wages or intensify work rates exist instead.
Making workers work longer, harder and faster for relatively less pay increases the wear and tear on workers and makes family and social life more difficult. But NZ capitalists currently prefer this method of expanding their profits over the alternative of massive new investment in plant, machinery, technology, research and development because it gives them greater short-term profits without a massive outlay of capital. Under capitalism, this is now as good as it gets. And this is what it’s like when the economy is “working well”. If this is as good as it gets, imagine what it’s going to be like when the next recession comes.
In face of recurring capitalist attacks, we need fighting unions – unions which put workers’ rights and interests first. This means, for instance, opposing layoffs and fighting them with occupations rather than meekly negotiating redundancy deals. It means fighting for wage rises above the rate of inflation, so workers start to claw back some of what we’ve lost over the past 20 years in particular. It means fighting against Labour and National’s anti-union laws and for the unfettered right to strike.
We need a political movement that does the same because unions by themselves are essentially defensive organizations and represent a wide range of political views within the working class. A real workers’ political movement is able to challenge the system as a whole.