It is imperative to examine three fundamentals before understanding the current economic crisis. Firstly, the current state represents the disintegration of the interlocking arrangements on which the world economy operates on since the eighties. These include the provisional solution to the capital problem that arose a decade earlier. Secondly, the crisis in the seventies and the measures to resolve them of the 1980s arose from a basic contradiction inside capitalism in the pursuit of profits in the sphere of production and the realization of such profits in a cyclical exchange. Thirdly the overall weak position of capital, capital left countries making them even more venerable. This crisis has some underlying reasons but the crucial ones are the building up of debt, both corporate related and personal. This eventually will result in international monetary instability and the refusal of the rest of the world to fund the US and the UK deficits, the third and determining factor is the ecological crisis of the economy. A Marxist analysis of the crisis must be based on an analysis that can seize these structural factors being at the base, see how those are played outside in the external phenomena and also include/understand the strategies of competition of the capital while it tries to control the crisis. (Kilmister, 1)
The Recent Financial Turmoil
The principal development of the second half of 2008 was a dramatic deterioration of the first of dimensions mentioned above; the financial crisis based on the accumulation of the debt. One previously thought the main cause of this had raised the identification that the quantity of bad debt in the system was much larger than. This has in their turn led to confusion among the leading class of the USA about the manner of answering the number in rising of defects of loan. Unwillingly forced to nationalize the companies of mortgage deed Fannie Mae and Freddie Mac (mainly because of the pressure of the Chinese and Japanese investors to these companies) they then abruptly commutated to allow principal bank businesses, Lehman Brothers, to yield.
This threw the banking system into a major crisis in three manners. Initially, the increasing tide of the bad debt threatened the solvency of the banks. In the second place, the apparent change of the policy of federal reservation of the delivery first of the poops of bear created a panic on the inter-bank market of loan, dubious whose banks would survive banks ceased to lend to no matter whom of the whole on this market making seize the system as a whole upwards. Thirdly, the investors of stock market also panicked sending banking actions in the freefall. Since the payment of bank is based on the idea that the loans can only be one certain capital multiple of bank and since the decline in shares wrote-off the capital significantly, this probably looked at to lead to a massive decline in the bank credit, which would have further threatened the stability of the system. While these problems were initially obvious in the USA and the RU, where the housing of the poles and the deregulation of banks had been particularly extreme, it quickly appeared clearly that the banks of much of the country, in particular continental Europe, had also made loans on these markets so that the banking crisis has affected the principal industrialized countries in general. The result of this was an abrupt change of policy towards bailing out the banks. The form of this varied through countries. The answer of the USA, carried out by Minister for Finance Henry Paulson, who is placed in Wall Street, was particularly without scruple (the original proposal by Paulson was simply that the government of the USA, financed by taxpayers, immersed the debt without value of the banks – a frank subsidy without the control of the future behavior of bank some). The BRITISH plan of government, which was adopted by the EU, provides potential power for the political discussion because it implies buying shares at the banks. This takes account of the discussion about the nature of the control of the State above the banking system and about which should pay the crisis. But the initial goal of the government was to have the minimum quantity of participation of state in the financial sector and to provide the funds which would then be employed to reconstitute the banks with profitability in the hope of a fast sale of the stake of the governments. The model was the Scandinavian reorganization of the banks there according to the financial crisis with beginning of the year 90. (Heinrich, 1)
Who Pays for the Crisis?
The starting point for Marxists by including/understanding these developments must be in terms of valorization of capital. The immediate effect of the identification of the bad debt on the market of housing is that a great number of capital which was evaluated with a certain quantity, on the basis which the loans of housing would be entirely refunded. More in value what in the beginning was considered. This capital lines up in two categories. Firstly, there is the capital directly attached upwards by providing housing-related to the mortgages the secondary-principal, all two capital-obligations employed to provide the mortgages and the capital used in the construction industry and the private real unit. Secondly, there is the capital in other industries which was invested in the hope of the request coming from a market of bright housing; in particular, that which depends on the elevated levels of the request resulting from the owners from a house borrowing against the stockholders’ equity in their houses – something now not very likely to occur in the future. (Stiglitz, 272-280)
Any of valorization of capital of this kind the question raises of which will pay the loss – capital or will work, the financial sector was completely bronze about the test to shift the cost of the crisis on work – even until the degree to formulate plans to employ the money of the taxpayers to maintain payments of allowance. The mechanisms to ensure this shift include the following:
- Taxpayer-funded subsidies for the bank.
- Rebuilding of the base of benefit while refusing to transmit cuts of interest rate to the borrowers. This can be well facilitated by fusions like the fusion of Lloyds-HBOS, which will reduce competition and will increase the dependence of the households to the regard a restricted number of great establishments
- An attack on the job security, the wages and the states of the bank provide of personnel to reduce costs. Still, the fusions supported by the State can help this process by providing the means of closing branches.
- The reduction of interest rate paid outside the savers and the depositors
Insofar as the state tried to act as something other than an agent of capital and to impose limits on the banks, the banks answered while threatening to reduce the system if they do not obtain their manner. This led to a certain conflict between the government and the banks, in particular with regard to the application of cut inside of interest rates. However, the cuts which were built here came at the expense still of larger cut evaluates inside paid with the savers who have serious implications for the current and future pensioners. Moreover, the inflation as a whole had as consequence a considerable ideological cost in terms of reputation of the financial sector in the company as a whole (which is probably now with a whole the bottom of time) and in terms of greater legitimacy of lawful and even of property of state. (Stiglitz 272-280)
Recession and the financial crisis
The most significant development running following the banking crisis is the transmission of this crisis to the remainder of the economy and its interaction with the more general economic crisis emerging now. The most obvious exit here is the beginning of the recession. The central reason for the recession is the dependence of the request of the consumers in particular but also productive investment with regard to the elevated levels of debt during the two last decades. Now that the loan contracts this expansion debt-filled of fuel is not more possible and strong to seem of economic deceleration inevitable. The fall of the prices of residences also worsens the deceleration in the consumer expenditure while the households can more not borrow against stock exchanges of rising. There are two fundamental reasons for confidence in debt. Consumption came to depend on the debt because of contradiction between leading wages downwards to produce benefit in the production and to have to ensure the request to sell the produced goods and to carry out these benefits. The most obvious demonstration of this raises the inequality of income and it is not an accident which the preparation of the debt was worst in the countries with the greatest disparity in the incomes, in the particular UK and the United States. (Brockman, 1)
Bound to this is how the production generally but particularly investment, came to be based on the debt because of the weakness from profitability in the productive sector. As Robert Wade puts it that the rate of benefit of the companies not – financial fell fast inclined between 1950-73 and 2000-06 – at the USA, by harshly a quarter. In the answer, they invested more and more in the speculation financier strengthens, consequently, without debt being available to place the recession of expansion seems inevitable.
The response of the governments to the recession was first to increase their loan and to secondly encourage the central banks to cut interest rates. But both create their problems. The loan of the government is limited by the cost of the abandonment of the apparatus of bank. The elevated levels of the loan can also raise interest rates or reduce values of currency as discussed above. All the two effects lower the real incomes of households and decrease the expenditure frustrating the original goal of the loan. The strategy adopted by the British government in answer to this is to return reductions of the explicitly provisional taxes. But this is likely to make them ineffective since the households will save simply any additional income in preparation for future rises in taxes. Interest rates of cutting are also difficult. The central banks order short-term interest rates only directly and the private banking simply refused to cut long rates in answer to the policies of central bank. Cutting interest rates inside also have the effect to lower the real returns of the current pensioners living in addition to saving and the possible returns of the future pensioners who can lower consumption. More basically, the room so that the policy of government amplifies the economy is limited provided that the expenditure depends on the debt because of the weak wages and the inequality and provided that the new debt is not received. Consequently, the deceleration is likely to be prolonged and serious. (Brockman, 1)
What the investors should they demand?
While increasing requires an answer to crisis that the investors must underline the nature of the crisis like general crisis of the capitalism, which has its roots in contradictions of the productive capital as much as in the financial sector and which is caused by total factors, not the economic policies followed by a particular national capital. In this context, the following requests seem particularly important: (Heinrich, 1)
- Nationalization of the banks added to the popular control of the assignment of the credit and the use of the saving.
- A massive program of public works to fight the recession with the particular emphasis on the ecological production and a variation in the economy towards technologies of green of investment in the alternative forms of transport and energy.
- Imposition on the income and the richness of the rich person and limits on higher incomes to remove confidence in the debt to maintain consumption.
- Opening of the financial books of the institutions and the industrial companies to the open vote to prevent any use of the crisis like excuses to force by the reduction of the costs and the redundancies.
- Indexing of the wages, the pensions and the advantages to protect from the workmen against rises in food and price of energy.
- A program-wide of the public building and financed house to avoid another bubble of housing, moratorium on all seizure of property for arrears of mortgage.
- A guarantee of government for pensions. Future pensions to pay imposition on the rich person and not to be dependent on returns on the shares and bonds, current pensioners with being loss of income compensated resulting from the reductions of interest rate.
- Order above the international financial speculation by orders on movements of the capital of capital and by the imposition.
The current crisis internationally represents the most significant whole of economic events since the decade spanning the middle of the Seventies and the middle of the Eighties. The economic order created to follow that the turbulent decade breaks up now. What replaces it will not depend simply on the circumstances on objective of but on the capacity of the left to rather propose its vision of an economy based on the need than profit like replacement for accumulation finance-control twenty last years.
Brockman, Joshua. “With Shaken Confidence, Investors Look to Future.” NPR: National Public Radio: News and Analysis, World, US, Music & Arts. 2008. Web.
Heinrich, Michael. “The Current Financial Crisis and the Future of Global Capitalism.” An Independent Socialist Magazine. 2008. Web.
Herman, Steve. “US Financial Crisis Expected to Affect Foreign Investment.” VOA News- Voice of America. 2008. Web.
Kilmister, Andy. “The Economic Crisis and its Effects.” International Viewpoint Online magazine IV407. 2008. Web.
Stiglitz, Joseph. Globalization and Its Discontents. W.W. Norton, 2002.