Desperate debates over desperate measures

Issue: 122

The United States is witnessing the “worst downturn in post-war history”;1 German engineering’s foreign orders are down 50 percent on a year ago, Japanese Industrial production down 30.8 percent;2 world trade has fallen 31 percent; 20 million Chinese workers have returned unemployed to their villages;3 392 million Africans living on less than $1 a day face a 20 percent cut in living standards.4 The global economy “has fallen off the cliff”, laments Warren Buffet, reputed to be the richest man in the US.5

The financial tremor of August 2007 has turned into an earthquake that has brought down the world’s mightiest banks and now threatens some of its mightiest industrial corporations. We wrote a month before the tremor that “things will seem to be going very well until overnight it is discovered they are going badly. And, as they say, when the US gets a cold, the UK can easily catch influenza”.6 We were right, except that it is the US that has got influenza, of a particularly virulent variety, and Britain is in danger of getting double pneumonia.

There is complete confusion as to what do about the earthquake at its American epicentre. The Troubled Asset Relief Programme (Tarp), the mega bank bail-out of six months ago, failed to prevent CitiBank and Bank of America from coming close to collapse within weeks. Its successor, Tarp II,
has been no more successful. One indication of the scale of the problem is the lack of effectiveness of rocketing federal spending, which has reached an unprecedented peacetime level of 27.7 percent of GDP (compared to revenues of just 15.4 percent).7 During the New Deal of the 1930s the high point was 8 percent of GDP.

The situation is no better in other major parts of the system. Successive stimulus packages in Britain, Germany, France, Italy and Japan have not stopped the slide in their economies, while China, seen as the saviour of the world system only a year ago, has been hit by collapsing exports and the deflating of its own real estate bubble. It has undertaken “one of the world’s largest fiscal stimulus packages (roughly double America’s as a percentage of gross domestic product, taken at face value)”.8

Thieves fall out

The desperation of those who would manage the system grows by the day. Back in September they believed that a turn to limited Keynesian measures would be enough to deal with the crisis. Now full nationalisation of the banking system to get credit moving again has moved from the fringes to the centre of debate. This is producing strange political alignments. In the US, “Lindsey Graham, the Republican senator, Alan Greenspan, the former chairman of the US Federal Reserve, and James Baker, Ronald Reagan’s second Treasury Secretary, are in favour. Bernanke, current Fed chairman, and an administration of liberal Democrats are against”.9

The issues are in part ideological. The Democrats do not want to be seen as in any way “anti-capitalist”, while the Republicans run no such risk. But there is a more profound division over the perceived depth of the crisis. The prevalent view until recently was that there was a liquidity crisis in the banking system—that is, the banks have made misjudgments and lost lots of money but they would be able to survive if only they trusted each other sufficiently to start lending again. The problem, according to this view, is essentially a monetary one and can be solved by monetary solutions—first by lowering interest rates to near zero and then by “quantitative easing”, the equivalent of “printing money” to hand over to the banks to lend.10

The more pessimistic view is that the problem is not liquidity but “solvency”: the banks have lost so much that were all the figures to come to light most would go out of business immediately. The far from radical Financial Times columnists John Kay and Martin Wolf (see Alex Callinicos’s review of Wolf’s recent book in this journal) have been edging towards this position—along with an important part of the US establishment. James Baker, who was in both Ronald Reagan and George Bush Senior’s cabinets, argues:

The US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover. But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.11

This viewpoint is put well in a recent book recommended by Wolf, The Holy Grail of Macroeconomics by the economist Richard Koo.12 Koo argues that depressions like of that of the 1930s and of Japan in the 1990s differ from ordinary recessions because they arise after big firms have lost money but dare not admit it. As a result instead of investing they hoard money until they have restored their financial situation—which can take years—and managements try to keep the scale of their indebtedness secret right up to the moment they go bust. Citibank’s claim that it made $19 billion in the first two months of this year, achieved through the simple expedient of excluding from its calculations write-downs of unrecoverable loans, suggests he is correct on this score.13

Koo wrote his book as the present crisis was just starting to unfold. But the implications are clear. If the crisis arose from the banks (and firms such as Ford, General Motors and General Electric that relied on finance for much of their profits in recent years) owing more than they could pay back, it will not be solved by central banks giving them more to lend.

The money being poured in by quantitative easing will simply disappear into a huge hole. While it does so, investment will dry up; more firms will cut production, sack workers and sometimes go out of business; the recession will deepen and the banks’ balance sheets will deteriorate further. The only way to get out of the crisis would, according to this argument, be massive state intervention involving both the nationalisation of the banks and huge budget deficits as governments undertake the investment that private firms will not and give money, directly or indirectly, to consumers to spend.

Immediate political problems for those presiding over the system will flow from their economic troubles. Not all capitals suffer equally from the crisis. Those that suffer least object to the state intervening, and threatening to tax them for doing so, in order to help the capitals suffering most. So sections of the Republican establishment in the US may accept bank nationalisation and huge fiscal packages, but not the party’s congressmen. And even those who are beginning to see nationalisation as the only way out are doing so reluctantly. Their great fear is that once the state has control of major chunks of the economy it will face pressures to run the economy in the interests of the mass of people.

States and tensions

There is an even more fundamental problem. For more than 30 years capitalist expansion and restructuring have taken place across national boundaries, even if this has not gone as far as some theorists of globalisation claim. But the states that must try to deal with the crisis are, by definition, geographically limited entities. They are trying to apply national remedies to multinational problems. Nationalisation is one such national solution, but it immediately raises the question of what happens to the foreign holdings of multinationals. Does the national state bail out foreigners or buy up their stakes? If it does so, it is opening itself and its national tax base to massively greater bills. If it does not, it might keep one part of a multinational enterprise going, while forcing the rest to sink—as seems possible with General Motors and its European subsidiaries Opel and Vauxhall.

This goes back to another argument we have long made in this journal. The units of capital worldwide have reached such a size and become so interconnected that the old capitalist solutions to crisis cannot fully work. Letting some firms go bust so that “creating destruction” gives new life to the survivors risks opening up a black hole as healthy firms are pulled down by the unhealthy ones—as happened when the bankruptcy of Lehman Brothers on 15 September 2008 tore holes in the balance sheets of banks thousands of miles ways. But Keynesian remedies of state capitalist intervention are just as problematic. For instance, White House officials are “concerned that the US stimulus spending will leak out of the economy to support growth elsewhere”.14 In other words, the point is being reached where the giant corporations are not only too big to fail, but are also too big to save without disrupting the networks of trade and investment on which profit making increasingly depends. That leaves governments and capitalists alike wandering around in the dark as they try one scheme after another in the hope that somehow they will stumble upon economic revival. Some commentators even dread that revival, were it to come quickly, would merely take the form of another bubble and then another horrific crash.15

These problems are bound to increase tensions between states. It is not just a question of capitals trying to exploit domestic stimulus programmes through “buy American” (or French, or British, etc) clauses. It is built into the fact that national states are the agencies for attempting to limit the impact of the crisis. This is the key to explaining the sudden flare ups between governments over alleged protectionism. The fine words of national political leaders calling for common solutions to the crisis do not translate into a single coherent project for dealing with the problems of the world economy as a whole. That has already been shown by the polemics between Chinese and American officials, by the wrangling of the different states that make up the EU, and by US complaints that European stimulus packages are too miserly. It will almost certainly be shown by the outcome of the G20 meeting in London, set to take place while this journal was being printed, whatever is said in its official statements.

The weaker states

The problems with the Keynesian attempts to deal with the crisis are bad enough for the big economies. They are devastating for the smaller ones. Within the Eurozone those most affected are the group sometimes referred to as the PIGS—Portugal, Ireland, Italy, Greece and Spain. Doubts about their capacity to afford stimulus packages are raising the level of interest to be paid on state debt, and producing speculation that they will break with the euro so they can devalue their currency to make their exports more competitive.

Even worse hit are the former Communist states of Eastern Europe. Their economies were boosted in the first half of the current decade by euro loans for mortgages to a total value of $1,500 billion—and now the fall in the value of local currencies means people cannot afford to repay these debts. Commentators are comparing the crisis they face to that of the East Asian tigers in 1997-8 and Argentina in 2001-2.16

The terms attached to loans offered to Eastern Europe by the IMF and the EU do not make provision for any stimulus at all but are just like the deflationary packages imposed on Latin America in the 1980s and East Asia in the late 1990s. Just 20 years ago the people of Eastern Europe were told they could find a way out of the terminal crisis of the old Soviet bloc through military integration with the US and economic integration with the EU. Now the hollowness of such promises is laid bare as they are left to sink or swim in the new crisis.

But there are worries even closer to the centre of Europe. “American officials worry that many European countries, such as Switzerland and the Netherlands, are host to banks that have assets larger than their home country gross domestic product. Iceland, in other words, may only be the thin end”.17 Meanwhile in Britain “something close to desperation is starting to develop inside government”, according to one well-placed commentator. “After watching the slide in bank shares, one cabinet minister did not altogether joke when he said, ‘The banks are fucked, we’re fucked, the country’s fucked’.”18

The politics of bitterness

The result of the economic crisis everywhere is bitterness mixed with fear. The bitterness is palpable in demonstrations in Greece, the Baltic states and Ireland, in the one-day strikes in France and in the media interviews with those suddenly sent back to the countryside in China. It has already brought down the government in Iceland and is shaking the one in Ireland (see Kieran Allen’s article in this issue).

Governmental circles elsewhere dread that what is happening can open up the way for political forces outside the comfortable consensus of establishment politics. The Chinese government is frightened that the mass sackings of workers in its export industries can lead to unrest. In Russia one government adviser is “warning of a ‘remake’ of the street protests that helped to bring down the Soviet Union” 20 years ago.19 In Britain, Howard Davies, now director of the London School of Economics, but previously head of the employers’ organisation the CBI and of the Financial Services Authority, writes, “Our politics, for now, is being played out in an ideological vacuum. That could be dangerous: it is an invitation to the far left and right to peddle their beguiling certainties”.20

Who fills the vacuum will not be determined by the course of the crisis alone. There is a vivid contrast in Europe between the role of the left in channelling discontent in, say, Greece (see our interview with Panos Garganas) and the way the right have had a clear field in Hungary21 and are making the running in Italy (see Megan Trudell’s article). Traditions from past struggles play a role but so too does the presence of a left able and willing to take a lead in directing the bitterness.

Britain’s vacuum on the left

The record of most of the British left since the collapse of Lehman Brothers is very poor indeed. As we wrote in our previous issue, left leaning commentators, such as Polly Toynbee, Seamus Milne or Ken Livingstone, and the leaders of the big manual unions all told people to rely on Gordon Brown. At Labour’s conference in September Derek Simpson, joint general secretary of the biggest union, Unite, described Brown’s speech as “a welcome warm up after 30 years of inaction and neoliberal economics”.

For a few weeks it did seem that, even if Brown had no solution to the crisis, he could fill the ideological vacuum by appearing to have one. That was until the onslaught of redundancies and closures began. When Woolworths shut, closing hundreds of stores and destroying 30,000 jobs, the unions and established left had nothing to say to those suffering as a result. In the following weeks a third of manufacturing firms made redundancies, nearly a quarter introduced short-time working and a 7 percent cut in wages22—and the main union leaders did nothing but beg the government to provide handouts to the employers, while negotiating pay cuts and lamenting that they were not consulted enough before the sackings.

Discontent abhors a vacuum. There was always the danger that without a lead from the left it would be filled by the right. A Socialist Worker pamphlet published in October warned:

Supporters of the existing system believe they can survive any crisis through a mixture of lies, minuscule bribes and threats. The lies will be that someone other than capitalism is responsible for the loss of jobs—the worker in a Chinese sweatshop, the Polish plumber, and the refugees from a war instigated by the US.23

Sometimes one wishes one’s prophesies were wrong. We certainly did as we watched videos of construction workers marching through the streets of Staythorpe, Nottinghamshire, chanting “Foreigners out” as part of a series of strikes around the slogan “British jobs for British workers”.24

A minority of British workers have always digested wholesale the racist and nationalist ideas pumped out by the gutter press—a third have historically voted Tory. What we saw at Staythorpe and elsewhere was this minority providing an ideological lead to many others who wanted to express their discontent, something which the Nazi British National Party (BNP) were hoping to take advantage of in June’s European elections.

But in this case the nationalist xenophobia did not originate on the right. It was Gordon Brown who raised the slogan “British jobs for British workers” at the TUC two years ago—with the only dissenting voice that of Mark Serwotka, leader of the PCS civil service union. A key role in carrying the slogan into construction was played by the same Derek Simpson who praised Brown in September, assisted by another Unite official, Charlie Whelan, who happens to be Brown’s former press secretary. Simpson went so far as to pose with a Union Jack and a poster that read “British jobs for British workers” between two models from the Daily Star newspaper—a publication that runs articles attacking immigrants and asylum seekers day after day.

Sections of the left seemed incapable of distinguishing between workers’ legitimate bitterness at what the crisis is doing to them and the reactionary direction in which they were being led. Seamus Milne quoted approvingly Simpson’s view of what was happening: “In reality, as Derek Simpson…said, the campaign of strikes ‘is not about race or immigration, it’s about class’… The strikers haven’t scapegoated the non-union Italian, Portuguese, Spanish and Polish workers”.25

Supposedly further to the left, the Socialist Party was enthusiastic about what was happening, boasting of its role in the first strike at the Lindsey oil refinery, denouncing those supposedly “taken in by the headlines in the capitalist press which highlighted the ‘British jobs for British workers’ element in the struggle”, and urging support for the Staythorpe protest.26

It is true that the workers who took part in the strike and protests had reason to be bitter. The big construction firms have for decades used contractors and subcontractors to try to divide the workforce. It is also true that the solidity of the workers’ action pointed to the possibility of a class response to the crisis. But that does not make what actually happened into such a response. The slogan of the strike was not against subcontracting in general or for jobs for all workers wherever they were born. It was “British jobs for British workers”. It did easily transmute into “Foreigners out”. It has given a boost to the BNP. They have seized on the slogan to advance their own position in a number of council by-elections and hoped to gain from it in European elections in June.

Fortunately, there are many thousands of militant trade unionists with better instincts than Seamus Milne or the Socialist Party, who see the need for a struggle with the potential to unite all workers. This is shown by the 1,800 trade unionist activists, ranging from ordinary shop stewards to union executive members and even general secretaries, who signed the statement denouncing the “British jobs” slogan.

The problem remains, however, of filling the industrial and political vacuum. Faced with an avalanche of redundancies it is no good waiting to act since once redundancy takes effect the collective spirit built by years of trade union struggle can be very quickly dissipated as workers find themselves queuing at the job centres. The example to follow, as Charlie Kimber argues in this journal, is that of the Waterford Glass workers in Ireland, who rushed to occupy their factory the moment they heard it was going to close. The urgent need in Britain is to pull together the networks of militants prepared to take such initiatives in each locality around a politics that is socialist and internationalist.

Anger over Gaza

The wave of protests against Israel’s onslaught on Gaza in January made the creation of such networks at least a little easier. They had fourfold significance. First, they showed how much Israel’s actions have shifted the popular perception of the state. Acceptance of attempts to justify its actions in terms of self-defence has waned and so has the liberal assumption that the Israelis and Palestinians are equally to blame. Even the mainstream media are having difficult maintaining their crude equation of anti-Zionism with anti-Semitism. The new Israeli government’s dependence for its parliamentary majority on a party led by a Russian immigrant who wants to drive all Arabs out of the state will add to such difficulties.

Second, in Britain at least, the large numbers of workers and students involved in the demonstrations, the 30 university occupations and the scores of public meetings showed the persistence of a strand of anti_imperialist consciousness created by the movement against the Iraq war. This feeling can explode onto the streets—as it did during the Israeli attack on Lebanon two and half years ago—even if, in between explosions, demonstrations and meetings are relatively low key.

Third, large numbers of Muslims took to the streets for the first time in four years. This is welcome evidence of a decline in the intimidatory impact of the wave of Islamophobia and police repression—although, unfortunately, not of the wave itself. Fourth, the mood in the demonstrations and occupations was often not just anti-Zionist and anti-imperialist, but also anti-capitalist—reflecting the fact that the movement this time erupted with the global system in crisis and much of its ideological justification discredited.

All these points are important for the future. It is possible to take up old arguments about the character of the Israeli settler state, and its connections with imperialism’s drive to control Middle Eastern oil, with much wider audiences than in the past. This is the key to breaking apart the Zionist argument that equates attacks on Israel with attacks on Jews generally. It is also the key for dealing with the view, encouraged by the Western media, that Palestine is a religious question. Unsurprisingly, this view can be widespread among young Muslims who have just become involved again in protests alongside non-Muslims. Challenging it means pointing out that the same US interests backing Israel, and the wars in Iraq and Afghanistan, have in the past sponsored death squads in non-Muslim countries such as those of Latin America. It should be added that this argument will never be won by those on the left who have anti-Islamic prejudices of their own, over issues such as women wearing headscarves or veils.

The anti-capitalist element to the protests is incredibly important. It represents one way of drawing together forces that can begin to fill the vacuum on the left, just as the forces produced by the wave of student and anti-Vietnam war protests did in the late 1960s.

Finally, it must be stressed that the economic crisis and the replacement of George Bush by Barack Obama do not mean the “war on terror” has gone away. The Obama victory, as we pointed out in our previous issue, represents a coincidence of two completely different sets of forces. There are those who made up the rank and file of the election campaign and want some sort of deep seated change in society. But there is also a section of the US ruling class that sees the Bush years as disastrous for US capitalism. The two groups are by no means ideologically distinct. The term “liberalism” in the US covers both, harking back to the notion from the 1930s that policies for rescuing US capitalism can provide positive reforms for the mass of people.

This was not even true in the 1930s, as John Newsinger shows in this journal with his account of workers’ struggles in 1934, and it is certainly not true today. On certain specifics there can be a degree of coincidence: tens of millions of workers want a state organised health service, and so do firms weighed down by the cost of heath insurance; Ford, General Motors and Chrysler want government aid and their workers want to keep their jobs; a big chunk of the political establishment want to put Iraq behind them, and the anti-war protesters want the troops home. But when it comes to implementing the policies a gulf opens. So one aim of health reform for US capitalism is to cut the cost of provision to those who already have coverage, and the schemes to rescue Detroit have involved the demand that the workers accept lower wages and reduced health provision for retirees.

The divide is shown most clearly in foreign policy. The Iraq withdrawal schedule leaves 135,000 troops in place until later this year and another 50,000 supposedly non-combat troops “to train the Iraqi security forces and conduct anti-terrorism missions” even after the end of next year. Meanwhile troops withdrawn from Iraq are to go to Afghanistan and military spending will continue to rise over the next year.

All wings of US capitalism, the liberal Democrats as much as the neocons, are agreed on one thing. They have to limit as much as possible the impact on US global standing of the retreat from Iraq. That means showing that the US still has the military might to lay down the parameters within which politics operates in the region from the Nile to the Indus, even if this now involves negotiations with Iran or with sections of the Taliban.

Just as the death of half a million Iraqis from sanctions was a “price worth paying” for the Democrat Madeleine Albright a decade ago, so the bombing of Afghan and Pakistani villages is a price worth paying for her successors in Obama’s administration. They will exact an even higher, and even more gruesome, price if that does not achieve their goal. The focus of the “war on terror” may have changed but the war goes on. And so must the campaign against it.


1: Financial Times, 28 February 2009.

2: Financial Times, 27 February 2009.

3: Financial Times, 9 March 2009.

4: Unesco’s figures, cited in Financial Times, 11 March 2009.

5: Quoted in Financial Times, 10 March 2009.

6: Harman, 2007, p158.

7: Financial Times, 28 February 2009.

8: Financial Times, 5 March 2009.

9: Martin Wolf, “To Nationalise Or Not To Nationalise Is The Question”, Financial Times, 4 March 2009.

10: In Britian the most forceful argument for quantitative easing has come from left wing commentator Graham Turner, although he is critical of the way it is taking place.

11: Financial Times, 1 March 2009.

12: Koo, 2008. The title echoes Ben Bernanke’s description of the explanation for the great slump of the 1930s as the “Holy Grail of economics”.

13: Financial Times, 11 March 2009.

14: Financial Times, 4 March 2009.

15: Stephen Roach, one of the handful of mainstream commentators to foresee the present crisis, warns of this in a column in the Financial Times, 10 March 2009.

16: Financial Times, 18 February 2009.

17: Financial Times, 4 March 2009.

18: “Labour Stakes Its Reputation On Second Gamble”, Guardian, 19 January 2009.

19: Irish Times, 10 March 2009.

20: Financial Times, 4 March 2009.

21: Tamás, 2009.

22: Financial Times, 9 March 2009.

23: Harman, 2008.

24: The video in available on the Lenin’s Tomb blog,

25: Guardian, 5 February 2009.

26: The Socialist, 11 February 2009.


Harman, Chris, 2007, “The Rate of Profit and the World Today”, International Socialism 115 (summer 2007),

Harman, Chris, 2008, Capitalism’s New Crisis: What do Socialists Say? (SWP).

Koo, Richard, 2008, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Wiley).

Tamás, G M, 2009, “Letter From Hungary”, Socialist Review, March 2009,