As Solidarity goes to print, many mainstream economists are claiming the worst of the banking crisis is over.
Governments worldwide have adopted a whatever it takes strategy aimed at avoiding further bank collapses.
But economic turmoil has continued to spread across the globe. Stockmarkets are continuing to plunge amid fears that the crisis in world financial markets will lead to deep recessions in the US and other economies.
Despite the rhetoric about the need for co-ordinated global action, major nation states have been scrambling to protect their own sectional interests.
European leaders initially failed to agree on a co-ordinated bailout plan. Their decision to pump money into the banks came only after Britain declared it would go it alone to guarantee its banking sector.
This forced European governments as well as the US government to take similar measures to guarantee their own banks, in order to avoid a flight of capital to the safety of guaranteed overseas banks.
In mid-October, Germany, France and the Netherlands announced €1 trillion to prop up their banks, guaranteeing bad debts and providing funds to allow them to keep operating. In doing so they have effectively nationalised huge chunks of the banking system.
But in keeping with their usual pro-business policies, they have made no attempt to exert public control over banks profits.
There is nothing to force banks to begin loaning again so that there are funds for productive investment.
Across Europe, governments are slashing public services to pay for these bailouts. On October 30 one million teachers and students went on strike in Rome, protesting the Italian government’s €6.4 billion cut to the education budget. Similar protests have taken place in Greece and Ireland.
Problems not over
The global bailout will likely mean there will be no repeat of the bank collapses following the crash of 1929, triggering the great depression.
But this does not mean the credit crunch is over. The high cost of borrowing for businesses across the world, job losses and a huge contraction in consumer demand will continue to dampen economic growth.
The US economy contracted 0.3 per cent in the July to September quarter, the worst contraction since 2001. Around 200,000 people were expected to lose their jobs during October alone.
As the New York Times wrote “the list of companies announcing their intention to cut workers reads like a Who’s Who of corporate America.”
Key European economies including the UK, Germany, France and Italy all shrank in the three months to June this year, signalling that they are likely all in recession–technically defined as two quarters of negative growth.
This means the prospect of synchronised recessions in the world’s two biggest economies–the US and the EU.
As Martin Wolf wrote in the Financial Times: “the US and European Union generate 54 per cent of world output, at market prices. With Japan, they generate 62 per cent. A sharp slowdown in these countries is bound to have a big impact on the rest of the world.”
Some smaller economies risk total collapse. Their governments are facing bankruptcy due to the costs of bailing out troubled banks and the difficulty of securing loans to cover government debt.
The IMF has been forced to bail out the governments of Iceland, Pakistan, Hungary, Ukraine and Belarus. Iceland’s government needs to borrow US$6 billion after it was forced to take over the country’s three biggest banks.
Ukraine accepted US$16.5 billion, after the price of its main export, steel, slumped and its stockmarket fell by 80 per cent.
But in exchange for loans the IMF has imposed conditions, as it did to disastrous effect during the Asian economic crisis in 1997, by demanding cuts to government spending on subsidising basic foods for the poor and privatisation.
Pakistan has already announced an end to fuel subsidies and caps on electricity prices. This will means millions will not be able to afford to cook food.
Iceland was forced to increase interest rates to 18 per cent, reversing cuts to rates it made just two weeks before. The IMF has demanded it put reducing inflation ahead of protecting jobs and living standards.
As Brian Coulton, managing director at Fitch Ratings credit rating agency commented, “Putting up interest rates means they are going to go through the mother of all recessions.”
By James Supple