FRFI 201 February / March 2008


‘In the new era in which we live, capitalism is not even a useful instrument. It is like a tree with rotten roots, from whence only the worst forms of individualism, corruption and inequality spread.’ Fidel Castro 14 January 2008

The latest global financial crisis, triggered by the rapid downturn in the US housing market, threatens to halt the relentless expansion of credit that has been the driving force behind economic growth in the major capitalist countries over the last 60 years. It took the largest cut in interest rates in the US for 25 years, a $150bn tax-cutting fiscal stimulus and the news of a possible rescue plan for the major bond insurers, for the dramatic falls on the stock market on Monday 21 January to be halted and partially reversed. The rumour that it could have been a lone rogue trader, causing a record £3.6bn loss at a French investment bank, who precipitated the fall, has further aided the recovery of the stock markets. Confidence, whatever the source, is everything when the foundations are so rotten.

The British government, directing the major capitalist economy most vulnerable to external fin an cial shocks,1 trotted out the usual ministers to offer reassurance that the British economy could withstand global turbulence. Low interest rates, low inflation and a forecast to be the fastest growing economy in the G7 this year would provide insulation against problems anywhere in the world (The Guardian 23 January 2008). There will be a payback for this wishful thinking.

A housing bubble
The British economy suffers from a housing bubble even bigger than that in the US. Over the period 1996-2006 US real house prices rose by 127% while in the UK they rose by 144% and have continued rising. Out standing mortgage debt in the UK at £1.17 trillion is around 130% of disposable income, far higher than in the US at about 104%.2 House prices are now starting to fall in the UK removing a significant stimulus to economic growth.

The debacle at Northern Rock was inevitable given its business model of borrowing short-term to lend long-term. It was responsible for 20% of the UK home loan market in 2007. Once the fall-out from the sub-prime mortgage crisis hit the financial markets, Northern Rock could no longer raise funds from the capital markets and Britain suffered the spectacle of the first run on a British bank since 1866. To stop the rot the government was forced to give an extraordinary guarantee of 100% backing to savings deposited at the bank, and the Bank of England stepped in as lender of last resort to keep the bank afloat. More than four months later the government, desperate to attract a private buyer and avoid nationalising the bank, has said it will subsidise shareholders by turning the Bank of England's £28bn loan to Northern Rock into bonds guaranteed by the government and backed by Northern Rock's mortgages and other loans. On this news, share prices of Northern Rock rose 46% to 94.25p. This shambles will turn to catastrophe if the economy seriously deteriorates and defaults on mortgages rise substantially. According to the Royal Institute of Chartered Surveyors, 123 people could lose their homes every day - nearly 45,000 in a year - as the credit crunch feeds through the British economy. New mortgage lending is 8% lower than a year ago. Three insurers, Norwich Union, Aegon (Scottish Equitable) and Friends Provident, have already put a freeze on withdrawals from their commercial property funds by investors and small savers.

Debts all round At the end of 2006 Britain had a balance of payment deficit of £50.2bn, a 60% rise on 2005. The country spent nearly 4% of GDP more than it earned. By the third quarter of 2007 this had dramatically worsened reaching a record 5.7% of GDP. A year ago we said:

'Without the surplus on services trade of £23.8bn and the net income flow on the international investment account of £29.8bn sucked in from surplus-value produced in every corner of the world, the standard of living of British people would have significantly fallen.' (FRFI 194)

In 2007, while the surplus on services trade increased, the net income flow on the international investment account turned negative and by the third quarter there was a deficit of £3.75bn or 1.1% of GDP. At the end of 2006 Britain had a net external debt of £338.1bn, 26% of GDP, an increase in the external debt of nearly 90% on 2005.3 This is no longer sustainable. Between April and December 2007 the public sector current deficit, which excludes investment spending, was £28.1bn, an increase of £9.6bn on the deficit over the same period in the last financial year. The government has had to borrow £43.6bn so far to finance public spending, up from £32.3bn in the previous financial year. This brought the government's net debt at the end of December 2007 to £536.5bn, equivalent to 37.7% of GDP. It will get worse as tax revenues from the City and financial sector, hit by the global financial crisis, rapidly decline. Growth in the City accounted for more than half the growth in the economy in the last financial year. But over the last six months business volume in the financial sector was falling at its fastest rate since the early 1990s' recession. Given the government's neo-liberal spending restraints - the so-called 'golden rule' that net debt is below 40% of GDP - there is little leeway for a US-style fiscal stimulus to limit the downturn in the British economy. In addition it is likely that the loan and guarantees given to Northern Rock will have to be brought on to the public accounts. So, whether it is sold to a private bidder or nationalised as a last resort, it is almost certain that the 'golden rule' will be breached.

Finally, personal debt in the UK at the end of November 2007 reached a staggering £1.4 trillion, greater than the GDP, a rise of 9.5% on the previous 12 months. Bankruptcies and bailiffs are future growth areas of the British economy.

Who will be made to pay?
Writing in the Financial Times (25 January 2008) Prime Minister Gordon Brown called for a 'manifesto for successful globalisation'. 'That manifesto needs to stand behind free trade, open markets, flexible economies and investment in people as the only way forward for rich and poor alike.' That means more of the same. It won't be his rich friends in the City who will be made to pay for this. On 23 January 2008 he announced that Jeremy Heywood, a former managing director at investment bank Morgan Stanley and aide to Tony Blair, will become his chief of staff at Downing Street. City bonuses increased by 30% in the last financial year to a record £14bn. Bonuses throughout the economy rose 24% to £26.4bn. The rich have prospered under Labour with the top 10% taking home 40% of all income earned in Britain. Britain acts as an offshore banking centre for a large proportion of the world's capital. It borrows short and lends long and massive funds pass through the City making lots of bankers, traders, accountants, lawyers and various types of spiv and rogue very rich. This is not about to change. In January 2008 Brown visited China and urged China's new £100bn sovereign wealth fund to use London as a hub for its international operations. He contrasted Britain's 'open door' policy with protectionist attitudes in the US, France and Germany. Labour will not make the rich and powerful pay more tax. One third of the 700 largest corporations in Britain pay no tax at all, while another third pay less than £10m each. Chancellor Darling has already backed down, in the face of corporate lobbying, on his proposals to increase the capital gains tax on 'entrepreneurs' selling business assets or holding a substantial stake in a company. So who will be made to pay?

Peter Hain, who obscenely found it necessary to raise around £200,000 for his spectacularly unsuccessful campaign to become deputy leader of the Labour Party, was recently forced to resign his cabinet post as Work and Pensions Secretary for failing to publicly declare some £100,000 of it. While in office he attacked those who already live on the bread line and toughened even further Labour's brutal reactionary 'welfare to work' regime. Under the guise of 'reigniting the jobs campaign', Hain announced last July that those on 'inactive' benefits - lone parents with children over seven, those on incapacity benefit, the unemployed 16-24 year olds not in education - will be cajoled, bullied and starved into what are essentially jobs which pay poverty wages. No wonder that nearly six in ten (57%) officially poor households actually have someone in work, up by 10 percentage points since Labour came into office.

The government has announced that public sector pay will increase by less than the rise in the cost of living over the next few years. So while Northern Rock shareholders and depositors are subsidised, millions of public sector workers will have their pay cut. That is Britain under a Labour government and it is going to get worse.

'Recession in the developed world is inevitable' says the multi-millionaire, international financier George Soros. It's a warning we should heed. The British working class will soon be made to pay for this state of affairs by a Labour government whose first commitment is defending British imperialist interests in every part of the world. The capitalist system is not a useful instrument - it's time to get rid of it and the real parasites that live well off it.

David Yaffe

1 See 'Britain: parasitic and decaying capitalism' in FRFI 194 December 2006/January 2007 for details on the state of British capitalism. Available online: www.revolutionarycommunist. org/frfipages/194.html
2 Martin Wolf, Financial Times (FT) 5 October 2007 and later articles. In his articles he gave the debt statistics incorrectly as a percentage of GDP instead of disposable income. A correction was made in the FT on 15 January 2008.
3 All these statistics are provisional and tend to be constantly revised over time. Nevertheless the trend is very clear and that is what is important for our analysis.