Shifting sands of the crisis

Issue: 125

Despite the euphoria that gripped the financial markets in the second half of 2009, the world economy continues to be hit by severe shocks. Another hit it in late November. The most surprising thing about the announcement that Dubai World had defaulted on $26 billion of its total $59 billion debt was that it had taken more than two years for the Gulf city state to become a casualty of the global economic and financial crisis. For if there was any single symbol of the overblown financial bubbles that have driven global capitalism for the past 15 years, it was Dubai.

In a brilliant portrait published just over three years ago, Mike Davis wrote:

The coastal desert has become a huge circuit board upon which the elite of transnational engineering firms and retail developers are invited to plug in high-tech clusters, entertainment zones, artificial islands, glass-domed “snow mountains”, Truman Show suburbs, cities within cities—whatever is big enough to be seen from space and bursting with architectural steroids…Although compared variously to Las Vegas, Manhattan, Orlando, Monaco and Singapore, the sheikhdom is more like their collective summation and mythologisation: a hallucinatory pastiche of the big, the bad and the ugly.1

Dubai’s ascension during the credit boom of the mid-2000s depended on the strategic positioning pursued by its autocratic ruler, Sheikh Mohammed al-Maktoum—and on the super-exploited labour of the emirate’s predominantly South Asian migrant workforce. To quote Davis again:

With a tiny hinterland lacking the geological wealth of Kuwait or Abu Dhabi, Dubai has escaped poverty by a Singaporean strategy of becoming the key commercial, financial and recreational hub of the Gulf. It is a postmodern “city of nets”—as Brecht called “Mahagonny”—where the super-profits of the international oil trade are intercepted and then reinvested in Arabia’s one truly inexhaustible natural resource: sand.2

Symbolic of Dubai’s ascension was the 2006 takeover by Dubai Port World—a subsidiary of the state-owned Dubai World—of P&O, once one of the greatest of British imperial companies (the takeover provoked a huge row in the US Congress over an Arab firm running six American ports). But—like the boom itself—the Dubai bubble floated on a vast pool of cheap credit. As the Financial Times put it, the sheikhdom became “something resembling a highly-leveraged private equity firm sinking money into fanciful real estate projects and questionably valued assets abroad”.3 It is this frenzied borrowing spree that has now brought Dubai World to its knees under a debt burden estimated at $100 billion and forced al-Maktoum to turn to his oil-rich neighbour and rival Abu Dhabi for help.

Contradictions of the bailouts

Abu Dhabi has twisted the knife in the wound by refusing to bail out Dubai World. But more important than the fate of the bloated sheikhdom is what its collapse signifies for the broader economic crisis. After the very sharp slump that hit the world economy in the winter of 2008-9, a degree of stability returned in the summer and autumn of last year. Driving this have been the massive state rescues of the banks and the government fiscal stimuli that have been pumped into national economies.

A recent Bank of England study estimates that “intervention to support the banks in the UK, US and the euro area during the current crisis…totals over $14 trillion or almost a quarter of global GDP. It dwarfs any previous state support of the banking system”.4 China has also played a major role in the state-directed efforts to stave off global depression. On government instructions, the Chinese banks have behaved very differently from their Western counterparts, lending a mammoth $1,080 billion in the first half of 2009.5

State intervention has thus brought the sharp contraction of output and international trade to a halt, for the time being at least. China’s return to the high growth rates of the past few decades has also revived the economies that supply it with complex manufactures and raw materials (notably Japan, Germany, South Korea, Taiwan and Brazil). In the US and Britain, the most striking result of this stabilisation has been the renaissance enjoyed by those banks that survived the financial crash in the autumn of 2008. As the New York Times explains, the boosted profits—and hence bigger bonus pools—announced by the strongest American banks last autumn are a direct result of state support:

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder—a benefit of less competition after the failure of some investment firms last year.

So even as big banks fight efforts in Congress to subject their industry to greater regulation—and to impose some restrictions on executive pay—Wall Street has Washington to thank in part for its latest bonanza… the decline of certain institutions, along with the outright collapse of once-vigorous competitors like Lehman Brothers, has consolidated the nation’s financial power in fewer hands. The strong are now able to wring more profits from the financial markets and charge higher fees for a wide range of banking services…

A year after the crisis struck, many of the industry’s behemoths—those institutions deemed too big to fail—are, in fact, getting bigger, not smaller. For many of them, it is business as usual. Over the last decade the financial sector was the fastest-growing part of the economy, with two-thirds of growth in gross domestic product attributable to incomes of workers in finance.

Now, the industry has new tools at its disposal, courtesy of the government… With interest rates so low, banks can borrow money cheaply and put those funds to work in lucrative ways, whether using the money to make loans to companies at higher rates, or to speculate in the markets. Fixed-income trading—an area that includes bonds and currencies—has been particularly profitable… To prevent a catastrophic financial collapse that would have sent shock waves through the economy, the government injected billions of dollars into banks. Some large institutions, like Goldman and Morgan, have since repaid their bailout money. But most of the industry still enjoys other forms of government support, which is helping to stoke profits.

Goldman Sachs and its perennial rival Morgan Stanley were allowed to transform themselves into old-fashioned bank holding companies. That switch gave them access to cheap funding from the Federal Reserve, which had been unavailable to them.

Those two banks and others like JPMorgan were also allowed to issue tens of billions of dollars of bonds that are guaranteed by the Federal Deposit Insurance Corporation, which insures bank deposits. With the FDIC standing behind them, the banks could borrow the money on highly advantageous terms. While some have since issued bonds on their own, they nonetheless enjoy the benefits of their cheap financing.6

No wonder that George Soros described the banks’ profits as “gifts…from the government”.7 The problem of how to deal with financial institutions that, because they are deemed “too big to fail”, are effectively being allowed to gamble with very cheap government money, confident in the knowledge that they will be rescued by the state if their bets go bad, has caused much agonising in ruling class circles. From the free-market right Niall Ferguson has denounced the rise of “State Monopoly Capitalism”.8

The problem (often described by bourgeois economists as one of “moral hazard”) illustrates one of the main themes of Chris Harman’s political economy, which is explored elsewhere in this issue by Joseph Choonara and Guglielmo Carchedi. As capitalism ages, the size of individual units rises thanks to the growing concentration and centralisation of capital. This means that the impact of the bankruptcy of particular firms can be very severe. Thus the collapse of Lehman Brothers in September 2008 precipitated the worst global financial crash since October 1929 and helped to pitch the world economy into the sharp slump of last winter. But when, as they have, states step in to prevent such catastrophic bankruptcies, they let the overaccumulation of unprofitable capital continue, imposing a heavy burden on any economic recovery.9

In trying to negotiate this deep contradiction, the leading capitalist classes must confront a number of specific problems. The first is simply how broken the global financial system remains despite the bailouts. The Dubai default detonated an exploded bomb left behind by the wild borrowing that both firms and states undertook during the credit boom. But how many other unexploded bombs are there? “After Dubai, will Greece be next?” asked Financial Times columnist Wolfgang Munchau following Dubai World’s default.10

According to Deutsche Bank, the Greek state has run up debt equivalent to 135 percent of national income. Financial markets reacted to the Dubai crisis by pushing up the interest rate on Greek government bonds and the price of Credit Default Swops (CDSs) insuring against Greece defaulting on its debt. Complicating matters is the fact that Greece is a member of the euro-zone. But neoliberals in Brussels and the main European capitals may decide to make an example of Greece, whose recently ousted Tory government had concealed the scale of the debt crisis. According to Daniel Gros of the Centre for European Policy Studies, “It is one thing if you are in the middle of a systemic crisis. Then you can’t allow anyone to fail and don’t worry about moral hazard. Now we are out of the woods and it may be a good time to reduce moral hazard”.11

This kind of reasoning begs the question of whether or not the world economy really is “out of the woods”. Letting Greece go bust is a dangerous game. It might further undermine confidence in the European Union, whose response to the crisis has been shambolic. Other member states that enthusiastically helped blow up the housing bubble—from Britain and southern Ireland to Hungary and Latvia—are also struggling with huge debt burdens. Gillian Tett, the Financial Times journalist who was one of the first to blow the whistle on the dangerous levels of debt (or leverage) the banks were building up through credit derivatives during the bubble years, argues:

The events in Dubai—and the Greek CDS price…[are] a welcome wake-up call. In recent months, a sense of stabilisation has returned to the financial system as a whole, as central banks have poured in vast quantities of support. A striking liquidity-fuelled asset price rally has also got under way.

But the grim truth is that many of the fundamental imbalances that created the crisis in the first place—such as excess leverage—have not yet disappeared. Beneath any aura of stability huge potential vulnerabilities remain.12

Secondly, as Tett points out, the state rescue of the banking system has been followed by marked rises in the price of shares and corporate bonds, especially in the big “emergent market” economies of the Global South. For apologists and boosters, who have now recovered their nerve after the terrible fright they suffered during the crash in autumn 2008, this is a sign of the intrinsic strength of global capitalism and especially of the much-feted BRICs (Brazil, Russia, India and China).

But Nouriel Roubini, another of the handful of establishment commentators who warned against the dangers of the last financial bubble, argues that a new one is emerging, fuelled by “the mother of all carry trades”. A carry trade is when someone borrows in one currency, where interest rates are low, to invest in another, where interest rates are higher, thereby making a profit. In this case, the US Federal Reserve Board’s policy of flooding the financial system with ultra-cheap money and letting the dollar fall against other currencies to cheapen American exports is encouraging investors to borrow in dollars to buy shares and bonds, particularly in those Asian and Latin American economies where the recovery is strongest. The resulting bubble, Roubini argues, is creating the conditions for the next crash:

This unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.13

The response by an ex-governor of the Fed, Frederic Mishkin, that the new bubble was a benign one was greeted with widespread derision.14 Washington’s easy money policy is also a source of tension with China, whose status as America’s most important economic partner and rival has been confirmed by the crisis. The conflict is partly because the Chinese state continues to use many of the dollars earned by its exports of manufactured goods to buy US Treasury bonds, thereby lending Washington the money it needs to continue spending.

But the decline of the dollar that is being tacitly encouraged by both the Fed and Barrack Obama’s administration to boost American competitiveness reduces the value of Chinese investments in the US. When Tim Geithner, Obama’s Treasury Secretary, told an audience of students at Beijing University that these investments were safe, they roared with laughter. But the Chinese government’s policy of pegging its currency, the renminbi, against the dollar is also a source of tension. Western manufacturing firms complain that this policy keeps China’s exports artificially cheap. But when both Obama and an EU delegation pleaded for a revaluation of the renminbi on recent visits to Beijing, they were given the brush-off by President Hu Jintao.

China’s economic trajectory is another area of uncertainty. It has become a platitude among global elites that the world economy must be “rebalanced”, crucially by the US saving more and consuming less and by China consuming more and exporting less. But the nexus that binds the two economies together, with China supplying both the cheap exports and the capital that the US requires for its current accumulation path, fits the interests of both ruling classes, despite the tensions outlined above.

The giant state rescue of the Chinese economy has concentrated on building up yet more productive capacity in export industries. According to Hung Ho-fung:

Nearly 90 percent of GDP growth in the first seven months of 2009 was driven solely by fixed-asset investments fuelled by a loan explosion and increased government spending. Many of these investments are inefficient and generally unprofitable… If the turnaround of the export market does not come in time, the fiscal deficit, non-performing loans and the exacerbation of overcapacity will generate a deeper downturn in the medium term. In the words of a prominent Chinese economist, this mega-stimulus programme is like “drinking poison to quench a thirst”.15

Against this background, it’s hardly surprised that policy-makers are divided over how to deal with yet another problem, namely when to end the government stimuli that, in the form of extra spending, have been holding up the world economy. All are agreed that the state interventions are temporary measures that must, sooner or later, be ended to allow a return to neoliberal normality. But when? If the stimulus is withdrawn too soon, this might push the world back into slump, producing a “double-dip” recession. But if state support remains in place for too long, then the new asset bubble may become unmanageable and another bout of higher inflation may be ignited.

Representing one horn of this dilemma, International Monetary Fund Managing Director Dominique Strauss-Kahn said last November, “It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.” He was countered by Jean-Claude Trichet, President of the European Central Bank, embodying the other horn: “There is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation”.16 In early December Trichet announced that the ECB would soon start withdrawing the emergency measures providing extra liquidity to banks.

Accordingly, what Chris Harman wrote in our previous issue still stands:

There are two conclusions to draw from all this. First, the crisis, in the sense of the global economy being in a mess, is far from over. Second, the attempts by governments to find an “exit strategy” will lead to continued tensions within and between states and to a concomitant weakening of the ideological messages that capital as a whole would like to convey.17

Obama’s war

Everyone agrees that one of the major questions posed by the crisis is its impact on the position of the US as the dominant capitalist power. Many have concluded, much too quickly, that the era of American hegemony is over. Obama’s administration has been marked, as Megan Trudell shows in her article in this issue, by extreme caution, not to say conservatism, disappointing his supporters and giving the initiative to the Republican right. But Obama’s aim externally is not to abandon US primacy, but to maintain it, in particular by distancing himself from George Bush’s unilateralism. His strategy is well explained by Zaki Laïdi:

The US does understand that it can no longer dominate the world as it pleases, and that the gap that separates it from the rest has shrunk. As a result, the US needs the rest of the world to maintain its pre-eminence, not to dissolve it. The objective is to select privileged partners for international action, to better maintain leadership in all domains.18

One of the biggest problems that Obama faces in pursuing this objective lies in the wars in southern and western Asia he inherited from his predecessor. While seeking withdrawal from one, in Iraq, he is escalating the other, in Afghanistan. His announcement on 1 December that he is sending another 30,000 troops to Afghanistan will bring the total US force in Afghanistan to over 100,000, more than double the number when he took the oath of office at the start of 2009. The Washington Post website now headlines its coverage of Afghanistan “Obama’s War”.

Obama hasn’t just caved in to the public campaign mounted by General Stanley McChrystal, American commander of the Nato forces in Afghanistan, for 40,000 extra troops. The prolonged debate within the administration over Afghan strategy produced a compromise reflecting pressure from opponents to a military surge, such as Vice-President Joe Biden, as well as Obama’s own demands for a rapid build-up.19 The reinforcements are to be sent in mostly in the next six months, more quickly than McChrystal had planned, and a deadline has been set for July 2011, when US troops will begin to be withdrawn. Moreover, the objective, reaffirmed as recently as March, of defeating the Taliban has been dropped in favour of the more modest goals of containing and splitting them and achieving a degree of political stability. These changes reflect both worries about the unpopularity of the war (especially in Obama’s own Democratic Party and among its supporters) and the desire not to give a blank cheque to the corrupt and ineffectual regime of Hamid Karzai (elements of which General David Petraeus, Chief of US Central Command, compared to “a crime syndicate”).20

The shortfall between the US reinforcements and McChrystal’s request for 40,000 extra troops is supposed to be made up by Nato and other American allies. But, as Edward Luce pointed out in the Financial Times:

Nato foreign ministers have cobbled together another 5,000 troops to add to the 37,000 already in place… Mr Obama’s new troops will be standing shoulder-to-shoulder with their comrades from Finland (165), Bosnia and Herzegovina (460) and Iceland (2). All told the coalition amounts to 43 countries, of which only two, the US and the UK, have more than 5,000. And even the UK, where the war is even more unpopular than it is in the US, could only muster another 500 troops to supplement Mr Obama’s undeclared “surge”.

Mr Obama’s troop escalation will thus catapult the US into an overwhelmingly dominant presence in Afghanistan with almost three-quarters of the boots on the ground by the time it is complete next summer. So much for the “Obama dividend” that supporters were hoping to reap from the rest of the world when the president took his oath of office nine long months ago.

All of which provides Mr Obama another sobering tutorial in the much-diminished status in which the US finds itself. Since taking office, Mr Obama has been feted and cheered around the world. But he has precious little to show for it other than vague sentiments of goodwill.21

One state whose cooperation is indispensable to the Obama administration is Pakistan. A senior American official told the Washington Post that without “changing the nature of US-Pakistan relations in a new direction, you’re not going to win in Afghanistan. And if you don’t win in Afghanistan, then Pakistan will automatically be imperilled, and that will make Afghanistan look like child’s play”. During visits to Islamabad in advance of the troop announcement, secretary of state Hillary Clinton and General James E Jones, Obama’s national security adviser, offered President Asif Ali Zardari a new strategic partnership with the US, backed up by economic and military aid, in exchange for a clampdown on jihadi groups. Jones hinted that if Pakistan didn’t cooperate, US troops might mount cross-border raids against Taliban bases in Pakistan.22

This pressure may, however, backfire. Obama’s announcement of a July 2011 deadline for US troop withdrawal from Afghanistan to begin “fed longstanding fears that America would abruptly withdraw, leaving Pakistan to fend for itself”, the New York Times reported. “Many in Islamabad…argued that the short timetable diminished any incentive for Pakistan to cut ties to Taliban militants who were its allies in the past, and whom Pakistan might want to use to shape a friendly government in Afghanistan after the American withdrawal”.23 As it is, the Pakistani military offensive against the Taliban in the Swat valley has provoked a wave of devastating terrorist attacks in the main cities.

Obama’s timetable in part reflects his awareness that, as he acknowledged in his speech, a country where at least one worker in ten is unemployed can ill-afford the additional $30 billion annual cost of the troop surge. The cost of the Afghanistan war will rise to over $100 billion in the 2010 fiscal year, five times its level five years earlier.24 But the administration’s efforts to avoid sinking into a quagmire like those in Vietnam and Iraq will probably not succeed. No doubt reflecting reservations in the military, defense secretary Robert Gates told a Senate committee that the July 2011 deadline could be adjusted if necessary. In all likelihood, the US will remain bogged down in Asia for years to come.

Varieties of resistance

This conclusion underlines that resisting the projects of US imperialism will remain one of the most important tasks of revolutionary socialists in the years ahead. But the context is very different from that in 2001 or 2003, because of the scale and severity of the economic crisis. The efforts of the different ruling classes to displace the costs of the crisis onto working people by cuts in public spending, jobs and wages, increased pension contributions and the like are set to dominate politics for years to come. The New Labour government in Britain is grappling with an economy that continued to contract in the third quarter of 2009: economic growth in 2010-1 is likely to be 10 percent lower than the Treasury projected in autumn 2007.25 Alastair Darling’s pre-budget report in December laid down devastating real cuts in public spending in most areas of 14 percent in 2011-4 (though they are carefully timed to kick in after the general election, most probably in May).

As we saw in our previous issue, in Britain, despite a sharp rise in unemployment, 2009 was marked by a wave of strikes and occupations representing a significant increase in militancy and thereby producing, as Charlie Kimber puts it, a situation in which “The elements of old and new confront one another in the class struggle”.26 The outcome of last November’s national postal strike shows how the old can temporarily overwhelm the new, but it also saw the New Labour government backing away from an all-out confrontation with the most militant group of workers in Britain.

The present issue supplements that analysis with a series of snapshots of the struggles provoked by the recession in a number of European countries. The widely varying levels of workers’ resistance in different countries are striking. Nor can these variations be read off from differences in the economic situation in the countries in question. It’s not surprising, for example, that Greece and southern Ireland should have seen perhaps the largest fight-backs, given the severity of the crisis there, but Spain, also badly hit, has seen comparatively little resistance.

This points to the facilitating (or obstructing) role played by the political configuration of forces. Thus it may be that in Greece the relative strength of the radical left (itself reflecting the most intense social struggles in Europe, almost unbroken since the 1970s) and in southern Ireland the weakness of social democracy and the decline of the old Fianna Fáil machine have helped the anger provoked by the crisis to burst onto the streets. The three European elections that took place in October did not support the fashionable media image of a left in disarray, unable to respond to the crisis. In Greece, the social-democratic party Pasok dissociated itself from the Third Way politics of its previous leader, Costas Simitis, and tacked left, winning a healthy parliamentary majority. Further to the left, Die Linke in Germany and the Left Bloc in Portugal made significant advances.

It is the parties of the mainstream neoliberal centre, whether social-liberal or conservative, that have suffered the greatest setbacks. The situation in Britain is not that different, as moribund New Labour sleepwalks towards defeat, while a lacklustre Tory opposition may not generate enough popular enthusiasm to win a parliamentary majority. But the radical left in Britain has yet to recover from the self-destruction of both the Scottish Socialist Party and Respect. Overcoming these divisions (some pre-dating these splits, others caused by them) sufficiently to offer a united left alternative to New Labour in the general election is now a matter of some urgency. But the decisive test for the revolutionary and radical left, regrouped or divided, will lie in its ability to support and strengthen workers’ resistance to the developing bosses’ offensive.


1: Davis, Mike, 2006, “Fear and Money in Dubai”, New Left Review 41.

2: Davis, Mike, 2006, “Fear and Money in Dubai”, New Left Review 41.

3: Financial Times, 1 December 2009.

4: From a Bank of England presentation by Piergiorgio Alessandri and Andrew Haldane, available online at

5: Financial Times, 10 August 2009.

6: New York Times, 17 October 2009.

7: Financial Times, 23 October 2009.

8: Niall Fergusson, 2009, Too Big to Live (Centre for Policy Studies), available from

9: Alongside Chris’s work, see Alex Callinicos’s Bonfire of Illusions, forthcoming from Polity.

10: Financial Times, 29 November 2009.

11: Quoted in Financial Times, 2 December 2009.

12: Financial Times, 27 November 2009. Another unexploded bomb is commercial property, where borrowers have effectively defaulted on much of their debt-$3,000 billion property debt is outstanding the in US and Europe-but are being kept afloat by the banks in the hope of better times-Financial Times, 6 December 2009 .

13: Financial Times, 1 November 2009.

14: Financial Times, 10 November 2009. See the letters page in subsequent days.

15: Hung Ho-fung, 2009, “America’s Head Servant?”, New Left Review 60, p23. Despite the silly title, this is a useful analysis of some main features of China’s political economy.

16: Financial Times, 23 November 2009.

17: Chris Harman, “Wishful Thinking”, International Socialism 124 (autumn 2009),

18: Financial Times, 3 December 2009.

19: Washington Post, 3 December 2009.

20: Washington Post, 6 December 2009; New York Times, 5 December 2009.

21: Financial Times, 3 December 2009.

22: Washington Post, 30 November 2009.

23: New York Times, 3 December 2009.

24: Financial Times, 2 December 2009.

25: Financial Times, 8 December 2009.

26: Michael Bradley and Charlie Kimber, “Will the Sparks Flare Up?”, International Socialism 124 (autumn 2009),