It is now "arguably the worst financial crisis in seven decades", according to Gillian Tett in the Financial Times (18 March).
On 17 March the US investment bank Bear Stearns went under. It had been credited as worth $18 billion only months ago. Right up to the collapse its bosses claimed it had plenty of cash to meet its commitments.
Actually, the banking business was worth much less than nothing. J P Morgan paid $230 million - petty cash in bankers' terms - to take it over, about $800 million less than the physical value of Bear Stearns' offices, and that only after getting a $30 billion credit guarantee from the US central bank, the Federal Reserve.
The question now is, who else has gone bust behind public assurances that all is fine? Who else may go bust as impressive-looking bits of financial paper turn out to be worthless? And how far will the ripples spread into trade and production?
As the Financial Times puts it: "What we are witnessing right now is not just a collapse of faith in one single institution (namely Bear Stearns), or even an asset class (those dodgy subprime mortgage bonds). Instead... a loss of trust in the whole style of modern finance, with all its complex slicing and dicing of risk into ever-more opaque forms".
The boss of Deutsche Bank, Josef Ackermann, is quoted by the FT as putting it more pithily: "I don't believe in markets' self-healing powers any more".
On one level, this crisis exhibits the basic DNA-coding of capitalism: the fact that economic life is dominated by the feverish quest for ever-higher profits by a few brings "bubbles", over-extension of credit, speculation shading over into downright swindles, and eventual crashes.
In several ways, it is also something new in the history of capitalism.
One: all capitalist crises involve the unexpected. But this one is qualitatively more opaque. Gillian Tett in the FT again: "Banking has become so complex and opaque in recent years... that when shocks occur in one obscure corner of finance this creates all manner of unexpected chain reactions".
Capitalist corporations trading internationally in a world of sharply-shifting exchange rates and interest rates do financial deals to lay off the financial risks. On the other side of those transactions, financiers make profits by taking on the risks and charging commission.
Financial capital has come to feed much more off consumers, rather than industry, than ever before. Even quite poor people have credit cards and mortgages; in fact, many poor people depend on their credit cards to buy essentials.
The finance companies that issue the "risky" credit cards and mortgages then do further financial deals to "sell on" the risks; and again, financial whizzkids who fancy themselves at high-wire walking make profits by "buying" the risks. In the USA last year, 19.3% of household income went to interest payments on consumer debt. That's a lot of money for financiers to feed on. The risk spreads through the system, opaquely.
Two: one measure of the opacity is that the capitalist authorities, although very alarmed, cannot agree on what to be alarmed about.
The US Federal Reserve, cutting interest rates ultra-low and shovelling bucketloads of credit into the banks, plainly thinks that inflation and the relative decline of the dollar are secondary problems, and the chief danger to address is that of credit implosion and "deflation" (falling prices) such as prostrated previously ultra-successful Japanese capitalism for the whole of the 1990s.
The European Central Bank, and others, think inflation is a real danger.
Some experts (and the Federal Reserve would seem to agree) regard the decline of the dollar as benign (helping US exports).
US economist Fred Bergsten tells the Financial Times (19 March) that "there are no signs of significant spillover [of trouble] from the United States to China, India..." and "their continued strength" will limit the US slowdown. On a different page of the same FT (19 March) China's prime minister is reported as saying that he is "deeply worried" and that "2008 might be the most difficult year for China's economy".
China keeps its currency not exactly tied to the dollar, but relatively close to it. The decline of the dollar has thus generated 8.7% inflation in China. If China loosens its link with the dollar, however, Chinese exports will become more expensive in a US economy already weakening...
The Chinese government continues to pump its spare cash into New York, although it loses by holding wealth in declining dollars rather than other currency. If it stops pumping, then the dollar will decline faster, and the Chinese government loses further on wealth it already holds in dollars. Is that motive sufficient to keep it pumping?
Three: a moderate slowdown of profits or even of production, and a general increase in the debt burden of non-financial businesses, usually precedes any serious crisis. This time it's different.
The last four years have seen faster capitalist growth, worldwide, than any similar period in the last 30 years. Even for 2007, with the credit crisis which is now exploding already well under way, growth was relatively good.
Profit rates are fairly high; most, though not all, non-financial businesses have debt burdens which are low relative to revenues.
The usual first stage of crisis - non-financial businesses finding it difficult or expensive to get credit for new investments, so cutting back and sending the investment-goods industries into a tailspin - as yet looks remote.
But the financial implosion could well hit at industry by another route, historically unusual. So far the tightening of consumer credit has been minor. It could become major, and sharply cut consumer spending. Consumer-goods industries could drag down investment-goods industries, rather than vice versa.
Whatever the future in detail - and Marxist theory allows no better short-term predictions than ordinary academic economics - the crisis will shine a spotlight on some basic features of capitalism.
On the irrationality of a system which puts the broad economic decisions in the hands of a gang of speculators focused on short-term gain. On the contradiction between production being through ever-wider networks of social cooperation, and the gain and the decision-making power going to thos speculators. On the flagrant inequality which the system generates when in expansion, and the equally flagrant inequality of "rescue" moves in crisis ($30 billion credit to help out J P Morgan, but nothing for people in the US losing their houses, or Northern Rock workers losing their jobs).
There will also be other lessons. To help us learn them, with this issue Solidarity is starting a series of interviews with Marxist economists on their assessment of the crisis and their broader understanding of the current stage of world capitalism.
