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Title: Capitalism in Crisis Author: Workers Solidarity Movement Date: 2009 Language: en Topics: financial crisis, capitalism, Red & Black Revolution, neoliberalism Source: Retrieved on 15th November 2021 from http://www.wsm.ie/c/neoliberal-origin-global-capitalist-crisis Notes: Published in Red & Black Revolution No. 15 â Spring 2009.
The neoliberal model that global capitalism has depended upon for its
growth over the last three decades has collapsed in spectacular fashion.
The collapse has been remarkable for the astonishing speed with which it
has spread all over the world and into every corner of the global
economy.
The roots of this crisis are found in the basic structure of the
neoliberal economic system. Neoliberal economics first came into vogue
in the late 1970s. They represented a reaction by the powerful against
social democracy and the wave of radical social movements â anti-
colonial, civil-rights, feminist, socialist â that flourished in the
post-war period. At its essence neoliberalism amounted to a very simple
strategy â to remove as many constraints as possible governing how
capital could be employed. To this end, from the 1980s onwards, having
gained ideological control of the political systems of the major
economies, neoliberal financial, legal and diplomatic measures were
introduced to progressively facilitate the free movement of capital
around the globe. The mobility and freedom from regulation and oversight
that such reforms allowed effectively removed any prospect of democratic
forces influencing the running of the economy.
If any population even looked like they might have the temerity to
impose restrictions on capital movements, the markets would move and
capital would leave, destroying the economy in the process, long before
the local population could act. If any workforce became too assertive
and started organising to achieve better pay and conditions, production
could move overseas, closing their factories and eliminating the
workersâ jobs. Thus, the basic neoliberal principles, when translated
into policies, were very effective in increasing the power of those who
owned significant capital and, conversely, decreasing the power of the
masses who did not. For example, the rising tide of Third World
nationalism and anti-colonialism was militarily impossible to defeat in
the 1960s and 70s. However, the Third World debt crisis of the early
1980s managed to quash the threat, with an effect that lasted for
decades. Similarly, neoliberal deregulation allowed the industrial
barons of the US auto-industry to move production away from the
heavily-unionised and militant cities of Detroit and Pittsburgh. The
economic dereliction that they left behind still serves as a potent
warning against any would be imitators of the militant Detroit workers.
The major problem, however, for the ruling class with this strategy is
that the regulations that neoliberalism tore up were put there for a
reason and they were largely put in place by the ruling class in their
own interests. During the 19^(th) century â the era of classic
liberalism â âlaissez faireâ economic ideas were in vogue. The
unregulated economy experienced regular, cataclysmic crises, frequent
cycles of boom and bust, social upheavals, resource wars and even
revolutions. That economic period culminated in the apocalypse of the
First World War and the Russian revolution. The economic mess that
ensued led to the Second World War and another surge of social upheaval.
The economic regulations, put in place as part of the post-war
settlement â which neoliberalism shredded were put in place for a
reason.
There are various different theories that explain why markets are prone
to cycles of boom and bust. Regardless of the ultimate cause, however,
what is clear is that, when people interact through markets, crises
invariably occur. The severity and disruption caused by these crises
depends on the presence of regulations and mechanisms for preventing
them and counter-acting them when they occur. Without any regulation or
oversight, markets will frequently collapse completely and will simply
cease functioning. In general, regulations that have been put in place
exist because, without them, significant problems may occur that
threaten the survival of the system. The neoliberal crusaders who
constructed the financial infrastructure of the modern economy were
presumably at least vaguely aware of the structural problems inherent in
deregulated markets. However, they were able to delude themselves into
imagining that modern fiscal and monetary policy mechanisms were of such
sophistication and power that the government would be able to prevent
the system from ever descending into crisis. This belief was seductive
too. Neoliberalism delivered almost three decades of solid growth in
profits. The frequent crises that appeared, in accordance with their
fears, were managed, contained and isolated from the rest of the global
economy by the International Financial Institutions. The major economies
were largely able to avoid recessions â they were contained within
developing regions such as East Asia or Latin America.
However, this apparent success in staving off busts in the major
economies was based on a serious dose of both voodoo economics and
wishful thinking. Every time that the markets got into trouble, central
banks would lower interest rates, making it easier for people to borrow
money to keep investments flowing. While it might have looked like it
was working at the time, this simply amounted to moving bubbles around
and keeping on inflating them whenever they looked like bursting. The
dotcom bubble was moved into housing and financial services and, all the
while, underlying debt was building up. The entire financial system
eventually became little more than a massive pyramid scheme. What made
the problem worse was that neoliberalism attacked workersâ incomes and
conditions as part of its drive to deliver profits to capitalists. Since
modern economies such as that of the US are heavily reliant on consumer
spending by workers, this creates a basic contradiction. Thus, during
the neoliberal era, a large proportion of consumption as well as
investment was fuelled by credit. Low interest rates allowed this
dependence on credit to mushroom into a huge bubble.
Credit bubbles can only grow so large. At some stage, debt grows to such
a stage that the debtors canât afford to service their debt. Thus, when
interest rates increased in 2007, a chain reaction of debt-defaults was
set in motion all across the global economy. It became clear that,
rather than having conquered the boom- bust cycle, neoliberalism had
simply managed to build up the greatest boom of all time, and its
unwinding would be similarly the greatest bust. The immediate factor
that triggered the rise in interest rates and the onset of the bust was
the increase in commodity prices in 2007 (food, energy, minerals...).
This represented a new, underlying and extremely serious long term
threat to capitalist growth â the supply of commodities is inherently
finite, but capitalist growth demands ever more resources as time goes
on. At some stage the raw materials available from the earth will fall
below demand. The commodity price bubble of 2007 represented the
marketâs opinion that the rates of growth were not sustainable in the
long term due to the finite nature of supply.
Although the prices of commodities collapsed along with the credit
bubble, the spectre of resource shortages hangs over the system. Any
recovery of capitalist growth is likely to lead to another explosion in
commodity prices.Thus, overall, it is fair to say that the crisis of
2007/2008 represents an enormous and unprecedented challenge to the
worldâs economic order. As of March 2009, there is no prospect of
recovery on the horizon and the pace of the crisis is, if anything,
increasing over time, despite the best efforts of bankers and
politicians.
Despite the fact that the crisis has and will continue to cause great
suffering for ordinary people all over the world, this is a good time to
be a revolutionary. The neoliberal capitalist ideological orthodoxy,
which reigned supreme for over three decades has been smashed to
smithereens and will never return. Suddenly, there is space for new
economic visions that are not based upon capitalist greed and growth.
Ordinary people are willing to consider different ideas as to how we
should run our economy and in many cases, the impossible circumstances
that they find themselves in will force them to seek out such
answers.Nobody can be sure exactly how the current crisis will play out.
We know that it will be severe and prolonged, but exactly what will
happen is impossible to know. However, it is obvious that the crisis
represents a real opportunity for anarchists and other socialists to
rebuild support for alternative economic visions.
A new era of revolutionary possibilities lies before us.
The first 18 months of the crash from the Credit Crunch to the spread to
the âreal economy.
In August 2007 the worldâs financial systems started grinding to a halt
as financial institutions began to realise that they had no real idea of
the risks that were contained within the complex financial instruments
that they owned. Since the bankers couldnât work out exactly how risky
their own securities were, they certainly werenât going to trust the
assurances of other institutions. Due to the complexity of the
inter-relationsshps within the financial sector, this resulted in the
credit market basically shutting down. The financial institutions were
no longer willing to lend money to any of their peers as they thought it
was far too risky. This was known as the Credit Crunch.
As 2008 progressed, the credit market remained closed and it became ever
more apparent that the reluctance of the bankers tomake loans to one
another was well-founded.
In March 2008, Bear Stearns, one of the worldâs largest investment
banks, collapsed under the weight of its bad loans. Then, in September
2008, another Wall Street bank, Lehman Brothers, collapsed. Rather than
bailing it out, or transferring its assets elsewhere, the US government
allowed it to declare bankruptcy. This almost led to a total collapse of
the global financial system, as Lehmanâs bad debts rippled through it.
Lehmanâs bankruptcy shone a light on the vast web of deals between banks
which meant that the entire system was dependent on the value of assets
that were known to be âtoxicâ. As of March 2009, the financial system
continues on a downward spiral â the injection of trillions of dollars
of public money has merely slowed the collapse. The basic problem is
that almost all of the banks are insolvent. The financial system is dead
and will not be revived in the same form ever again.
Although world stock-markets had been in retreat since November 2007, it
wasnât until September 2008 that the full effects of the crisis started
to be felt in the real economy. There were two basic reasons for this
spread. Firstly, it became more difficult for businesses to access
credit. This was particularly problematic as, during the era of
neoliberalism, it became standard practice for companies to borrow
heavily in order to minimise the tax liabilities of their owners. Many
businesses were heavily dependent on cheap credit and when it
disappeared, they faced an immediate crisis and had to close or downsize
to survive.
Secondly, the crisis was ultimately triggered by the fact that workers
were unable to service their debts. This meant that there was going to
be less consumer spending and companies were going to sell less
products. This caused share prices to collapse and companies to cut back
even further. These effects combined in a negative feedback loop â
rising unemployment and less credit caused companies to cut back even
further as spending collapsed, leading to a runaway economic crisis.
As soon as the scale of the crisis became clear, all rhetoric about
free-markets and competition vanished. Bankers, capitalists and right
wing politicians were all suddenly huge believers in the role of the
state and the importance of regulation.
It took no time at all for the bankers and various other troubled
industries to start demanding public money to bail them out. This showed
just how thin capitalismâs ideological layer is â they will believe
anything and say anything as long as it is in their own immediate
interests to do so. Thus far, the neoliberal governments of the world,
with their hatred for government interference have poured more than $10
trillion into bailing out their banks. However, the chain reaction of
the collapse in the real economy has caused even more fundamental shifts
in economic policy.
The U.S. government amongst many others has responded to the crisis by
adopting programs of economic stimulus. This amounts to a re-birth of
the economic thinking of John Maynard Keynes, whereby countries spend
their way out of recessions by borrowing heavily and using the money to
provide jobs and capital to âstimulateâ the economy, in order to
counteract the negative feedback loops that recessions cause.
Keynsianism was traditionally associated with Social Democratic policies
and the welfare state, so its new popularity marks a fundamental shift
from neoliberalism. However, the scale of the crisis and the fact that
it is occurring on a global level means that such responses, alongside
the cost of the bank bailouts, have caused an explosion in demand for
international credit at precisely the time when it is least available.
Due to its large export sector, China is one of the principal creditors
between states. However, the slow-down in the Chinese economy is likely
to cause unrest amongst the huge and volatile Chinese working class.
Whether China can continue to serve as a major international creditor in
the long term is uncertain.
The massive cost of the crisis will put pressure on the imperial role of
the US. Their public finances will increasingly constrain their ability
to serve as the âworldâs policeman.â Significant changes are in motion,
exactly how they will turn out is impossible to say, but the world will
be different.