A decade of shallow economic recovery looks like it is coming to a messy end, as the cheap credit that fuelled an international housing boom dries up.

Weakness in the US economy has become obvious as a record number of homeowners faced foreclosure on their properties in May. To make things Foreclosure - house for sale

worse, food prices around the world have increased drastically.
In New Zealand, companies are closing factories. Dunedin-based PPCS Ltd., the nation's biggest meat processor, said in April it would shut two abattoirs and fire 604 workers. Fisher & Paykel Appliances Ltd. announced at the same time it was closing its Mosgiel dishwasher manufacturing plant, with the loss of 430 jobs. Dunedin’s Tamahine Knitwear sacked a further 50 workers when it shut down in April.
In June, Reserve Bank chairman Alan Bollard warned economic activity was weakening.
“The global economy is currently experiencing significant increases in oil and food prices. These price increases are occurring at the same time as activity is weakening in many economies in response to the global credit crisis and slowing housing markets. In New Zealand, this confluence of factors is producing a challenging environment of weak activity and high inflation,” Bollard said.
“We project little GDP growth over 2008 and only a modest recovery thereafter, largely reflecting a weaker household sector.”
What he's saying is that economic growth in New Zealand is basically at a standstill, and will only marginally recover over the next few years.
Other economic commentators are pretty much saying the same thing now – the OECD boffins are reported in the Herald this week as predicting that economic growth will slow “from 3.4per cent last year to 1.3 per cent in 2008 before picking up to 2.1 per cent in 2009”.
Of course at the beginning of the year, economists were pretty much saying the same thing – there would be an “easing” in the short term, followed by a slow recovery.

29,000 jobs lost

That easing turned out to be the above-mentioned contraction, and the 29,000 less jobs the country lost over the same period doesn't include those PPCS and Fisher and Paykel workers facing redundancy – nor the thousands of other workers who've lost their livelihood in the last couple of months of this so called “easing”.
So while bourgeois economists around the world are desperately trying to paint a rosy picture for the future, a number of prominent Marxist economists are predicting worse outcomes. For example Fred Moseley writes in the International Socialist Review that:
“A comparison with 1929 is alarming. In 1929, there was very little household debt. Business debt in relation to profit was about half as high as today... The US was a net creditor and yet the defaults and bankruptcies resulting from these lower levels of debt were so bad that one-third of banks failed and the Great Depression lasted for more than a decade. What catastrophe would happen with the current levels of debt, one can hardly even imagine.”
This sentiment has been reinforced by the collapse of investment bank Bear Stearns. Although we should be cautious about making predictions it's Black Tuesday - crowds gather on wall st

Black Tuesday - crowds gather on wall st

going to be a few more months before we know the full extent of the crisis.

‘Financial folly’

As far as many bourgeois economists are concerned, the easiest explanation for the crisis is to blame the bankers. The crisis “follows a well-trodden path laid down by centuries of financial folly”, says Ken Rogoff, former chief economist at the International Monetary Fund.
Raghuram Rajan, another former IMF chief economist, thinks the problem is the vast bonuses bankers receive when they lend and borrow. Billionaire financier George Soros blames “the financial authorities” for “injecting liquidity…to stimulate the economy”. This “encouraged ever greater credit expansion”.
Even the French president, Nicolas Sarkozy, has joined the chorus, declaring that “something seems out of control” with the financial system. He should know, since his half-brother heads the European wing of the Carlisle Group, whose hedge fund has gone bust.
Simply blaming the avarice and short-sightedness of bankers does not explain how they found it so easy to get the funds that they gambled so heavily. It also avoids asking what shape the world economy would have been in without such lending.
In 2001, the then head of the US Federal Reserve Alan Greenspan encouraged the financial market to let rip and provide for such borrowing when panic over the 9/11 attacks threatened to exacerbate an already deepening recession.
The Italian Marxist Riccardo Bellofiore has aptly called this reaction “privatised Keynesianism”.
It was not just a question of a central banker doing favours for his friends who ran big private banks. As Financial Times editor Martin Wolf said: “Surplus savings” created “a need to generate high levels of offsetting demand”, and lending to poor people provided it.
“US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something changes elsewhere”.
“The Fed could have avoided pursuing what seem like excessively expansionary monetary policies only if it had been willing to accept a prolonged recession, possibly a slump”.
The consequence of this cheap credit was an international housing bubble that was responsible for 40 percent of growth and job creation in the US and giving the appearance of a stronger recovery.

Sub-prime mortgage scandal

Housing prices soared on the basis of low mortgage rates, producing large profits for builders, developers, mortgage brokers, and banks. To keep production up, “exotic” mortgages were invented, with no down-payments, and low-monthly contributions based on inexpensive “teaser” rates for an initial period of two years that were then offset by drastically higher rates of 9 to11 percent for the remaining twenty-eight years. Buyers were assured they could avoid these higher rates. Since home prices were rising rapidly, they would acquire tremendous value in their houses and with good credit derived from their monthly payments, they would be able to refinance at lower rates.
And if the mortgages could not be repaid, the bankers reasoned, the rising value of houses made foreclosure a favourable option.
The enormous profits from this arrangement produced the typical capitalist cyclical outcome—an overproduction of houses, which could not be sold at the usual profit.
People found that with falling home prices they could not refinance, and were now stuck with these higher, unaffordable rates. Within a few months, half a million families couldn’t make their mortgage payments and lost their homes. It is estimated that if the economy doesn’t get worse (which no one now believes) an additional two million families in the US alone will lose their homes in the next two years as mortgage rates rise beyond their ability to pay.
Beyond the human tragedy, this will add to the large inventory of unsold houses, further depressing prices. Many mortgages will be greater than the house is worth, which in turn will lead more people to walk away from homes with inflated prices, producing even more forecloses, and further price declines. And of course the banks are now refusing to make mortgages in declining or unstable markets, narrowing the pool of potential buyers. It is the mad logic of the capitalist market in crisis spiralling downward and producing the worst housing depression since the 1930s.
As the housing industry contracts there is less demand for furniture, appliances, home decorating and improvement goods, etc. Manufacturing orders are falling. Construction, financial, and industrial workers are starting to be laid off.

International credit crunch

These are the conditions that are producing an international credit crunch, in which banks are reluctant to lend money to corporations or other banks because they are afraid they will not be repaid, or because of the necessity to preserve capital to deal with the bad debts on their books.
It is estimated that the sub-prime crisis alone may cause a contraction of the banks’ ability to lend US$2 trillion, further deepening a recession. Already, a few banks in Germany and England have had to be rescued from bankruptcy by state bailouts. Many of the large European and Asian banks have suffered substantial losses from the US mortgage meltdown.
And that is before the bursting of the housing bubbles in other countries like New Zealand, where housing prices were even more inflated than in the United States. The Swiss bank UBS was forced to take a US$10 billion writedown in December, and it also received an US$11.5 billion capital infusion from Singapore’s state investment arm and a Middle East investor.
The financial bust in the US threatens to produce massive international crises as it finally bursts the limits of the long, unsustainable, structural imbalances of the global trading system.
As far as New Zealand is concerned, there is some talk that the economic boom in China, along with our recent free trade agreement will keep us out of crisis. The problem with this scenario is that these economies are dependent on exports to the US, Europe, and Japan for their booms. If countries like China, India, and other developing nations are dependent on the most advanced countries for their markets, then a recession in the US, Japan, and Europe will also drag them down.
The real casualties of the economic turmoil will not be the billionaire financial speculators. Already on the outskirts of Los Angeles shanty towns are springing up. Bank seizures of US homes almost doubled in January. Repossessions rose 90 per cent to 45,327.
The collapse of Bear Stearns means half of its 14,000 employees will lose their jobs and their life savings which were tied up in company stock. A recently imposed pay cut in the US car industry means newly hired workers will be paid half what workers earned previously.
Locally, we've had announcements of the closure of the Wickliffe printery, the Sealords plant, Fisher and Paykel and the PPCS meat processing plant - resulting in the loss of almost a thousand jobs in Dunedin.

Bosses on the rampage

So far the measures taken to deal with the prospect of a long, deep recession have been ineffectual—flooding the banks with money, cutting interest rates, freezing mortgage rates for a limited number of mortgages. While American capital’s options have become limited, we should not preclude stronger, so far unforeseen, measures to contain the damage. But no matter what policies are finally adopted, we can be sure there will be a ruling-class attempt to make the working class pay for the mess that capital has created. The enormous pay cut recently established in the auto industry, in which new hires will make half what workers made before, should be a warning of how capital will try to solve its crisis.
All of the policies producing this crisis come out of neoliberal free-market measures; deregulation of banking, cheap credit as the way to fight recession, and the “supply side” shift of wealth using tax policies favouring the wealthy as the means to stimulate the economy—all at the expense of working-class living standards and consumer demand. They are the grand results of the “triumph of the free market,” and “there is no alternative”—the neoliberal policies that emerged out of the last deep capitalist crisis, which blamed the welfare state, trade unions, and high wages for the system’s woes. These policies, which have had hegemony in both capitalist parties since then, are responsible for the looming disaster today.

Fighting back

As a result, the coming crisis will lead to a questioning of the free market. The response to the coming recession has to challenge these policies, asking how and for whom the really existing “free market” functions. We will have to prepare for a dramatic rise in economic and political instability—and sharper class attacks by the employers. There will have to be organized efforts to defend workers against layoffs, evictions, wage and benefit cuts, deportations of immigrant workers, and the rest of the reactionary program that capital will attempt to use to solve its crisis.
No matter how much economic stress it is under, the capitalist system will not simply collapse. The ruling class can survive any economic crisis, no matter how severe, if workers don't fight back and overthrow capitalism.
It remains our task to build a socialist movement that will lead such a fightback.

Chris B

Zanaon workers strike

In the 1990s, Argentina followed all of the structural adjustment policies advocated by international financial institutions, making it a model of neoliberal reform. The result was skyrocketing debt, unemployment and poverty that plunged the country into financial and economic crisis, which exploded in the popular uprising of December 2001. Workers, like those from Zanon Ceramics, resisted by occupying their factories and workplaces, to prevent employers from stripping them and leaving with the country’s wealth (From the Centre for Research on Latin America and the Carribean - http://www.yorku.ca/cerlac/).

International Socialists