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A contradiction at the heart of Chaos: Regulation of global financial markets to solve boom and bust is a non-starter

It appears the world’s governments have stopped capitalism going into total meltdown. But even if it recovers the cost of saving it will be massive and we, the working class, will pay for years to come through job losses, cuts in pay and reductions in public services. Nor is that our only worry. There is every likelihood capitalism will nose dive back into recession at some future point.

The current crisis is portrayed as the fault of greedy bankers, just as the “dot com crisis” was portrayed as the fault of greedy investors. However, the failure is a symptom of a deeper problem in a system that has become more volatile and prone to crisis in the last 30 years. If the problem can’t be fixed, it is only a matter of time be-fore another crisis. All governments seem aware of this and seem to accept the world economy cannot continue staggering from one debt induced crisis to the next. There’s also broad consensus that the markets cannot be left to their own devices and that the solution is greater regulation.

But here lie the problems. Capital-ism is a global system, so avoiding instability requires proper international financial management and a common currency. However, the world’s nation states are anxious to protect their own interests which often run counter to those of global capitalism. Britain is a good example; its economy is heavily dependent on the financial sector, itself heavily dependent on deregulated international financial markets. So the UK government, acting in the interests of the financial sector, will resist any meaningful international regulation.

This contradiction isn’t new though. It’s one reason why capitalism is so unstable and why there’s never been sustainable international financial management. Indeed, one of the most stable periods of capitalism, the post world war two boom, only came about partly because the dominance of the USA allowed it to impose global financial regulation. A system of fixed exchange rates, the Bretton Woods system, made the US dollar a de facto global currency. All world trade was denoted in dollars, so each country had to buy dollars in order to trade. As US economic power waned it became harder to defend the price of the dollar. In 1973 it was floated on the international money markets and Bretton Woods collapsed.

The roots of the current crisis lie in this collapse as it opened the way for greater currency speculation. After all, you can’t bet on fluctuations in currency prices if those prices are fixed. Currency trading increased dramatically leading to today’s situation with vast sums of money constantly moving between currencies chasing ever higher returns.

The collapse of Bretton Woods had other effects. Companies trading internationally had to operate with currency fluctuations which could wipe out profits. Desperately they turned to derivatives as a means to “hedge” against future currency fluctuations. In effect, they could trade safe in the knowledge that they were insured against profits being eaten up by future currency movements. The problem with derivatives was that they allowed speculators to bet on future currency fluctuations. Soon the money made from currency futures led to new forms of derivatives. The launch in 1973 of a formula allowing speculators to bet on the future prices of assets was followed in 1975 by trading in interest rate futures. Under Bretton Woods trade in derivatives was almost non-existent; by 2006 the global trade had reached a staggering $700 trillion per year.

So the collapse of Bretton Woods led to today’s casino culture, a culture that dominates world financial markets, but one that is only a symptom of capitalism’s slack international regulation. Yet, when they talk of more regulation, politicians confine themselves only to dealing with the system rather than with the cause. This is precisely because they know that any attempt to set up a common international regulatory system would soon fall foul of the competing needs of national governments.

Attempts to regulate the derivatives trade proves the point. Just about everyone agrees that the way they are traded is crazy, yet nothing is ever done about it. As mentioned, this trade insures companies against future risk, otherwise they couldn’t operate. So how do you regulate against speculators without damaging companies’ ability to trade? You can’t. The real solution would be to regulate the risk out of the system. For example, a fixed exchange rate system would mean there’s no need for companies to trade in financial derivatives.

There’s another obstacle to any meaningful regulation – the rise of China. The Chinese state exploits its workers to produce vast amounts of cheap exports. It then lends huge sums of money to the west, particularly to the USA and Britain, to buy these goods. Cheap Chinese imports have helped hold down inflation in the west, which in turn has kept interest rates low. On top of this, these low interest rates coupled with the loans from China have kept the price of credit down. And it was the availability of this cheap credit that caused the speculative bubble that brought on the current crisis.

Logic dictates that measures be taken to prevent this happening again. But it is in the national interests of both China and the USA that business as usual is restored as soon as possible. So they will both resist any international regulation that limits the flow of global credit.

More regulation, then, is not the easy solution it seems. Tough regulation of global financial markets would mean countries putting aside national interests for the greater good of the world economy. And that’s not about to happen. The only possibility would be for a country to achieve the economic and military power to impose it, as the USA did after world war two. But even this would only be temporary and, in any case, is unlikely in the foreseeable future.

What will happen, then? There’s still a chance the current measures to rescue national financial systems will fail and the world will slide into a long, deep depression. However, what seems more likely is that the massive injection of public funds will slowly pull the global economy out of recession. This will be followed by a prolonged period of public spending cuts as the money borrowed is paid back. However, as public spending is scaled back, the pressure will be on to boost private consumption to fill the gap. At this point all talk of regulation will increasingly be seen for what it is – just talk. In the absence of meaningful regulation it’s likely that the credit tap will be opened again to fund consumer spending, in turn fuelling debt, in turn leading to a speculative bubble and in the long run ending in the tears of another financial crisis.

What can we do as workers? Well, we need to forget about placing our faith in regulation, in politicians or, for that matter, in getting worker directors on to the boards of nationalised banks, as some on the left advocate. Such approaches won’t work. The instability stems from the contradiction between the interests of capitalism as a global system and the interests of nation states. This could only be overcome if nation states were to disappear – don’t hold your breath on that one.

We also have to recognise that the period of social democratic consensus, based on the idea of full employment and economic stability, has gone. Capitalism, due to its many contradictions, is returning to type – a system prone to boom and bust with all of the consequences that this holds for the working class. In the short term we have to fight for every job and against every threat to cut pay and public services. This day to day struggle has to be linked to the idea of defeating capitalism and replacing it with a system based on workers’ control and human liberation.

Make capitalism history

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