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What caused the economic crisis?

In the first two years of the Global Financial Crisis, everyone seemed to know where the blame lay – with the huge banks that pushed the international system of borrowing and lending into chaos.
Yet slowly but surely the politicians regrouped and shifted the debate away from criticism of the bankers, blaming the crisis on spending on public services, pensions and pay.

How did they manage it? Well, in late 2008 and early 2009, as the financial crisis turned to global recession, governments around the world ran up massive debts – which everyone now calls ‘the deficit’.
By the UK election of May 2010, Tories David Cameron and George Osborne said Gordon Brown had caused the crisis by ‘spending too much’. The Coalition uses that argument to justify its programme of huge spending cuts.

But this claim doesn’t make sense. The deficit was not caused by having too many university places, or people claiming Education Maintenance Allowance, or schools or hospitals, or by giving workers too much pensions or pay.

It was caused by three things. The first was the £1.3 trillion bailout of the banks, which all three capitalist parties backed to the hilt. The second was the collapse in state revenues in the recession, because lower corporate profits meant companies paying less tax. And the third was the massive rise in the benefit bill because of job losses all over the country. As a result the government spent more than came in, and in just 18 months the deficit jumped from 3 to 10 percent of UK output.

In short, the deficit didn’t cause the crisis – it was caused by the credit crunch and the recession. So when the Tories say the deficit was caused by years of ‘overspending’ they are lying through their teeth.

The credit crunch
In 2007, the US economy began to slow down and house prices started to fall after decades of steady rises. This was because even at the height of the 2004-06 boom, real wages were falling across America, and manufacturing jobs disappearing. Hundreds of thousands of people could no longer afford their mortgage payments. Their homes were repossessed, flooding the market with vacant properties.

Meanwhile financiers all over the world had packaged up these mortgage debts and sold them on to other lenders. A huge amount of investment all over the world was in the final analysis based on American home loans – and hundreds of billions of dollars were simply never going to be repaid. A massive quantity of the world’s lending – to individuals and companies alike – was suddenly revealed to be bad debt. The foundations of the world’s great citadels of financial power were riddled with holes.

So banks stopped lending and the world was plunged into a great economic crisis. The credit crunch was like a heart attack for global capitalism – the lifeblood of bank lending came to a sudden halt, causing economic destruction everywhere.

An orgy of capital destruction
Karl Marx explained in his book Capital that capitalism goes through cycles that last around 7 to 10 years, starting with slow recovery from stagnation, building up steam as credit expands, and then ending in a crisis.

Through the course of these cycles the rate of profit, the return capitalists get for what they invest, has a tendency to decline. This can be offset by a range of factors, but cannot indefinitely be postponed, and ultimately creates a fall in the overall mass of profit earned.

At this point investment will not generate enough profit to make it worthwhile. Investment dries up as the bosses convert assets into cash and sit on it.

From their point of view there is suddenly “too much” capital, more than they can invest for a sufficient return. The way they restore profitability is to destroy (or ‘devalue’) this excess capital.

And that is what happened in 2008 and 2009. Stock markets crashed; banks went bust or were bailed out to the tune of trillions; jobs were axed as firms collapsed; trade was paralysed; and the value of key world currencies dived.

Crisis-free capitalism?
The banks aggravated the crisis by expanding complicated new forms of credit in the years before the crunch. Some Labour Party and trade union reformists claim that the crisis could have been avoided if the banks had been regulated more. They say that the bankers got a bit too greedy by lending to people who couldn’t pay it back, but if they just behaved more sensibly we could have a crisis free system.

At best this argument is naive; at worst it is an apology for capitalism itself. In this market system banks lend in return for interest, which is no more than a deduction from a company’s future profits or an individual’s future earnings. Every loan is either a promise of capital still to come, or a memento of capital long since destroyed – what Marx called fictitious capital.

A bank that doesn’t maximise its profit would be driven out of business by competitors. So when profits are high credit will always expand – and then when the crunch comes credit will suddenly contract.

The joke is that the same reformists who argue that the banks caused the crisis by lending too much, are now arguing for measures to force them to start lending again – to people and companies who probably still can’t pay it back! The absurdity of this underlines not just their failure to understand and address the crisis – it also reveals that the bankers’ actions were an expression of the causes of the crisis, but were not its cause.

If Marx was right, then the cause of the crisis is not workers’ wages and pensions, not spending on hospitals and education. Nor is it the banks, despicable parasites as they are. It is the whole system of capitalism itself. Marx showed that profit is ultimately nothing more than the unpaid part of every worker’s working day. As technology rises so the mass of profit rises, but the proportion of the capitalist’s investment that goes to fresh living human labour falls in proportion. It is this deep trend that gives rise to the tendency of profit rates to fall.

That is how Marx s able to predict that as capitalism expands we would see every greater and more global crises, and how he was able to show that each crisis would be followed by a massive attack on the working class by the capitalists, as they try to force us to bear the brunt of the destruction of capital they need to restore their profit rates.

The drive to crisis is based not in the policies of this or that bank, this or that company or this or that government. It is inherent in capitalist production. The way to end the crisis is to resist every attempt of the capitalists to make the working class pay its price – and to create a political party that can direct the resistance towards the overthrow of capitalism itself, the confiscation of the assets of the banks and corporations, and the establishment of a rational democratic plan of production for public need not private greed.

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