This is not the Crash of 1929 revisited, and we are not heading into a second Great Depression. No developed country this time round is going to face the 25-percent unemployment rate that the United States experienced in the 1930s. “Capitalists can buy themselves out of any crisis, so long as they make the workers pay,” Lenin said, but it’s more complicated than that.
They didn’t manage to buy themselves out of the Depression, mainly because they didn’t know how to use the government (i.e. the taxpayers) to restore credit and confidence. They know now, however, and they can still buy themselves out of this crisis despite the hitch in the U.S. House of Representatives on Monday.
President George W. Bush’s radio talk last week was all about getting the workers to pay: “When the government asks you to pay for mistakes on Wall Street, it does not seem fair, and I understand that. And if it were possible to let every irresponsible firm on Wall Street fail without affecting you and your family, I would do it. But that is not possible.” So we’re going to bail out Wall Street with $700 billion of your money.
The bail-out legislation was negotiated with bi-partisan support — and then the people’s elected representatives balked. Two-thirds of the Republicans in the House voted against it, but the Democrats had the majority to pass it with no Republican support whatsoever. It failed because 94 out of 235 Democrats voted against it too.
Some Republicans argued that they could not support “socialistic” measures like nationalizing banks and capping executive salaries, but in most cases that was not their real problem, and it can hardly have been the Democrats’ problem. What really drove the House’s rejection of the bill was the fact that every member faces re-election in five weeks’ time, and the workers (sorry, I mean the voters) don’t want to wind up paying for the mistakes of Wall Street’s capitalists.
They will be forced to pay in the end, because there’s nobody else who can, but the timing is bad right now. All 435 Representatives have their jobs on the line in the elections on November 4, and those in marginal constituencies know that they will be severely punished at the polls if they use the taxpayers’ money to bail out Wall Street now. A deluge of emails, letters and calls from outraged voters has made that very clear to them.
After the election will be a different matter, and a bill quite similar to the one that failed this week will probably pass the House then without too much difficulty. There really is a financial crisis, and as soon as their own jobs are safe the politicians will deal with it. Or rather, they will arrange for the “workers” to deal with it.
In the meantime there will probably be further bank failures and piecemeal government bail-outs in many countries, for the “toxic” financial instruments based on sub-prime mortgages are widely held by banks and other financial institutions around the world. This does not add up to an economic Armageddon, although strenuous efforts are being made in the media to portray it as exactly that.
The stock market can crash (as it did in 1987) without having much effect on the real economy. Bank failures are more serious, but they do not have to entail wider economic disaster either. The business cycle was overdue for a recession anyway, and there is certainly going to be one now, but despite all the apocalyptic talk it hasn’t arrived yet.
Even the countries where the housing bubble was biggest and the mortgage lending most reckless, the United States and Great Britain, are not yet technically in a recession. When it does arrive, it will probably be worse than the mild recession of the early 2000s, but maybe not as bad as the recessions of the early 1980s and the early 1990s. It will almost certainly not be as bad as the economic stagnation and runaway inflation of the 1970s, and it will be less bad in the big developing economies than in the developed ones.
As for a rerun of the Dirty Thirties, that is not on the table even in the United States, where deregulation was most extreme and the creation of impenetrably complex financial “derivatives” of doubtful value was most enthusiastic. So you might as well take what entertainment you can from this spectacle of mass folly among the high and the mighty.
The Masters of the Universe have been revealed as naive speculators who believed that property values could only go up. The journalists who preached the blessings of unregulated free markets have been unveiled as blind ideologues at best, and at worst paid propagandists. The response of American politicians at all levels has been pathetic.
It will be unpunished mass folly, of course: These people are not going to lose their homes and end up poor. Most won’t even lose their jobs. It takes another old Commie (a pre-Commie, actually) to sum it up. In 1852 Karl Marx wrote: “Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce.”
Not the Great Depression, but the Reign of Folly.
Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.