IN A WEEK when billions were wiped off share prices in New York, Tokyo and London, on Friday both United States President George Bush and Ben Bernanke, the Chairman of the Federal Reserve Board (FRB), were forced to speak about the huge debt crisis that has hit banks, other financial institutions and stock markets.
The FRB, Germany’s Bundesbank, Bank of Japan (BoJ) and the Bank of England (BoE) were forced to lend cash to banks last week. Barclays Bank had to borrow £1.6bn from the BoE at the interbank rate that has leapt to 6.75 per cent.
The present debt crisis first surfaced with US sub-prime mortgage defaults and loan companies weighed down with bad debts at the beginning of this year as rising interest rates began to bite. It is estimated that two million people in the US face foreclosure on their loans and the repossession of their homes.
The US President said the Federal Housing Administration would help refinance more sub-prime mortgages and he will introduce changes in the tax laws that will make it more difficult for poorer people to get home loans in the first place.
Bush’s response was clearly too little too late, because bad debts of the sub-prime mortgage loan companies have been sold on to major financial institutions worldwide.
These banks and investment funds are already weighed down by debts as a result of buying US government bonds (funding the budget deficit), financing hedge funds and supplying credit to so-called ‘leveraged buy-outs’ by private equity groups.
The FRB Chairman was forced to address this wider situation. Bernanke said that global financial losses had ‘far exceeded even the most pessimistic projections of credit losses’ on sub-prime loans.
He added that ‘if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy’. ‘Other factors’ included selling financial instruments (debt packages), the contents of which were unclear.
He said that there would be no cut in the FRB interest rate merely to assist the financiers, but as far as the economy as a whole was concerned, ‘we are following these developments closely’. This led to speculation that there will be a rate cut when the FRB meets on September 18.
His speech will not halt the abrupt ups and downs of share prices, with their overall sharp drop, or the major financial crises hitting banks and major corporations, like General Motors and Ford, that have debts running into billions.
Bernanke’s prescription is more of the same. The cause of the present debt crisis has been historically low interest rates set by the central banks since 2001, so a further cut in the US rate will not have even a short-term effect and will make the overall debt crisis worse.
Bush’s and Bernanke’s quackery has nothing in common with the science of political economy. Karl Marx, in his work Capital, examined scientifically the ‘economic law of motion’ of capitalist society.
Recently the financial press has reported that banks and finance houses are holding vast ‘commercial paper assets’, that is promissory notes to repay debts.
Concerning this phenomenon, Marx wrote: ‘The greater part of bankers’ capital is purely fictitious, and consists of debt claims (bills of exchange), State securities (representing former capital) and shares (drafts drawn on future increments.’ This exacerbated commercial crises. (Capital, Volume III, Part I)
Capital is not a thing, but a social relation, that between the buyer and seller of labour power, the capitalist and the worker.
The bankers and company bosses are forced to get bigger profits to pay back their debts, or go bust. They will do this in the only way possible, by driving up the exploitation of the working class.
The deepening debt crisis heralds an escalation of the class struggle, the fight to defend jobs, living standards and essential public services.
This crisis brings home to millions of workers worldwide that the only way they can have a decent future life is through the revolutionary overthrow of capitalism to replace it with socialism.
So build parties of the Fourth International, the World Party of Socialist Revolution, in every country!