continued form previous page 9 ..denied it would happen

Defining a recession

The Treasury and Bank of England (along with their counter-parts in the United States) officially define a recession as ‘two consecutive negative quarters of economic growth’. By this they mean half a year of economic contraction. The way that statistics are necessarily compiled (especially considering the time-lag factor) it is not always evident that a recession has been happening until after the event. In 2001 it was assumed that the United States was in a recession, but after the event it turned out that this wasn’t (quite) so based on this definition.

Marx claimed that for a recession (depression or slump – depending on your preferred terminology) to occur, overproduction for particular markets had to spread and ‘grip the principal articles of trade’ (Theories of Surplus Value, p.393). In practice, sometimes this generalisation of overproduction will occur through a ‘knock-on’ effect when there is clearly disproportionate growth and overproduction in some industries that spreads more widely, but at other times it doesn’t spread sufficiently to cause a noticeably wider downturn. Furthermore, even when it does spread there are usually industries that do well in an otherwise declining economy, as was the case in the major 1930s slump when motor car manufacturing, for instance, continued to grow while other industries contracted.

There is little doubt that capitalism in most industrialised nations is long overdue a recession of sorts – the last widespread one was in 1990-92 and the boom since then has been far longer than the historic average. In this period capitalism has survived the Asian crisis of 1997, the collapse of the world’s biggest hedge fund a year later (the ironically named Long Term Capital Management), the spectacular bursting of the dot-com bubble with its various corporate scandals, the attacks on the World Trade Centre and other major political crises, and the massive 2000-2003 bear market in equities, all without officially entering recession in either the US or UK.

This time there are two significant forces propelling it in the direction of recession, however: the aforementioned property market crash which has seen the biggest monthly house price falls in both the US and UK in history, and the serious ‘credit crunch’ that has developed from it. The latter has occurred because so many investment products have been based on low-grade (‘sub-prime’) housing debt and as the housing market falls and people cannot pay their mortgages much of this debt has to be written off. It was recently enough to turn what would have been a six monthly profit for the Royal Bank of Scotland of in excess of £5 billion into a loss of £691 million instead, and has led RBS and many other banks to re-capitalise themselves through issuing more shares; in the US it nearly led to the complete collapse of one of the largest investment banks, Bear Stearns.

The main problem is that no-one, sometimes not even the banks themselves, know where all of these problematic sub-prime investments are or how much needs to be written off. It is this that famously led to an almost unprecedented reluctance among the banks to lend to one another last year as they did not trust what was on (or rather not on) each other’s balance sheets. Irrespective of what central banks have done with base interest rates, it has led to inter-bank lending rates being pushed up to comparative historic highs (the spike in LIBOR – the London Inter-bank Offered Rate – is what put paid to Northern Rock’s meteoric rise as it was hugely dependent on borrowing on the money-markets).

The credit system and the money markets associated with it are what oil capitalism’s financial machine. When they become dysfunctional the entire system can suffer; banks are reluctant to lend either to industry or to individuals, lines of credit dry up and companies getting into difficulty find that their one possible lifeline has been cut off. Indeed, it is the credit system that tends to act as a key transmission mechanism spreading problems in some sectors of the economy to others. continue to next page 11