We have seen the sharpest falls in stock markets around the
world for almost a decade. Billions have been wiped off share prices worldwide.
As we have predicted, fear mounted among the financial authorities that the
panic could lead to a full-blown recession.
See Panic! https://communist.red/world-s-stock-markets-sharpest-fall-since-9-11-2.htm
So on Tuesday January 22nd Ben Bernanke, Chair of
the Fed (the US Central Bank) called an emergency meeting only eight days before
the Fed’s regular meeting. There he pushed through an unprecedented 0.75 %
interest rate cut, the biggest for 25 years. Usually the Fed fine-tunes the
economy with 0.25 % or even smaller rate adjustments. Panic indeed!
Bernanke is behaving like a wastrel who, having lost his
fortune at the tables, in desperation bets his fur coat in a last throw to get
all his money back. This is ironic, for Bernanke made his reputation as an
academic critical of his predecessor Greenspan. Greenspan was well aware that
much of the boom in the USA since the 2001 was froth, based on the housing
bubble. He spoke of ‘irrational exuberance’. But he kept the party supplied
with booze for years, in the form of interest rates below the rate of
inflation. Now Bernanke has decided to join that party.
Not surprisingly shares climbed on the news. But it’s not
all over, not by a long shot. Like Satan in Paradise
Lost, capitalism is going “down to bottomless perdition.” Unlike Satan, it
won’t be a straight drop. The system will plateau and stage partial recoveries,
even though the general direction is down. In fact the bounce after the Fed’s
announcement shows the markets’ hysteria and the underlying weakness of the
real economy.
Yesterday’s article by Michael Roberts outlined the causes
of the panic:
- The banks have already written off $120bn in bad debts.
That figure could rise to $500bn. Bad debts remain bad debts. They remain
written off. - Profits are down across the board. They stay down.
- House prices are falling. They have further to fall.
None of the fundamental weaknesses have been changed by the
Fed’s announcement. It is ironic that the panic began when Bush announced a
rescue package to deal with the threat of recession, ‘the markets’ (the rich)
realised they had a problem. Bush proposed tax cuts of nearly $150bn to
stimulate the economy. That’s 1% of American GDP. The markets reacted – they didn’t
think it was enough. So they panicked.
Then Bernanke rode to the rescue. He has cut interest rates
to 3½%. Now inflation in the USA is about 4%, about the same as in the UK. In
effect they are paying you to borrow money! That should stimulate the economy
and keep the party going – if it works.
The problem with easy money is it’s likely to stoke up
inflationary pressures in the US. Bernanke’s idea is that Americans will borrow
like there’s no tomorrow. So prices are likely to climb. Also the dollar is
only held up at its present level by foreigners (particularly the Chinese)
buying US government securities. If interest rates fall, they don’t get as much
bang for their bucks. They’re likely to pull their money out. If the dollar
crashes, import prices will go up and US living standards will be hit that way.
The European Central Bank and the Bank of England are making
cautious noises. Sometimes whatever the authorities do is wrong. There are
limits as to how far they can fine-tune and manipulate an essentially unplanned
system.
Whatever
happens on stock markets over the next few days, capitalism has a great ability
to make working people’s lives a misery. Let’s make sure they pay for their
crisis, not us.
