One reason why the Great Crash of 2007-08, whose worst fortnight thus far was earlier this month, is developing differently from the double-humped Great Depression of 1929-33/37-38 is simply that much has been learnt from the mistakes made in handling the latter. The US government, the Fed, foreign governments and central banks, and private financial institutions are doing things differently; especially, unlike last time, they are not playing hands-off. The hurrying and scurrying hither and thither, plummeting interest rates, the bail out measures, opening of special lines of support for distressed institutions, rescues, nationalisation of two mortgage behemoths (Fannie and Freddie) and insurance giant AIG, and the good behaviour of the dollar fattened Chinese, all amount to a fleet of lifeboats plucking out the drowning and the dead. The other important reason why the Great Crash is developing differently from the Great Depression is that the design and nature of the financial structures and instruments at the root of the rot are different.

Dig deeper to understand capitalism

Fundamentally, the core issues in all the great crises of capitalism are the same. It is organic and natural to that system that cyclically the rate of profit will fall, fall gradually or fall dramatically. The tendency for the rate of profit to fall cyclically is built into capitalism’s structure, its laws of natural development. Events can hasten or postpone crisis; splendid innovations, new breakthroughs in productivity, or the discovery of new lands and markets, can lend capitalism a new lease of life. The wrong wars, savage competition from foreign nations, and policy folly, can hasten decline. One way or the other the tendency of the rate of profit to fall will have its say; ‘the moving finger writes, and having writ moves on, nor all thy piety nor wit, shall lure it back to cancel half a line’.

During the last two decades American capitalism has, Janus faced, displayed both the clever and the foolish. One time demigod and former Fed chairman Allan Greenspan is now reviled as the culprit who expedited capitalism’s fall is 2007-8 (and 09, and who knows, 10?). He held interest rates far too low for far too long and went along with the Bush Administration’s deficit and tax cut maladies. The dot-com crash of the late 1990s was his son but worse was to come. On his watch mindless mortgage schemes were born and dervish securitisation instruments hatched. The housing bubble whose explosion sparked the collapse of the edifice was his bastard child – he failed to employ mandatory protective gear. But then, be fair, the man was only trying to stem, to conjure away the unavoidable, the fated fall in the rate of profit; he was only ministering to a system whose inescapable logic would overpower Congress, the Fed and the White House

Actually the methods used by the global financial industry to stem the fall in the rate of profit were quite successful for a long time. Imagined asset prices, securitisation measures and derivative instruments, created fictitious money out of thin air. The financial industry danced with the devil like one possessed and produced frenzied profits, puffed up stock prices, and bloated asset values, in a fantastic delirium of artifice. But this giant stood on feet of clay; the real economy had simply melted away. The real rate of profit was not sustainable; it was long gone in the direction of Shanghai, only a mirage fantastic danced in its place, in a trance, on Wall Street’s pavements and in the City by the Thames. I offer you a rather extended quotation from a September 16 article entitled Lehman and the end of the era of leverage by a columnist who uses the pseudonym Spengler.

"Lehman Brothers survived the American Civil War, two world wars and the Great Depression, but today, Monday (15 Sept), the firm that set the standard in fixed income markets will be liquidated. Potential losses are so toxic that none of the major financial institutions was willing to acquire it. Lehman’s demise follows the failure last week of the two American mortgage guarantee agencies, Fannie Mae and Freddie Mac. It is remarkable that the US authorities, exhausted from their efforts to bail out the mortgage guarantors and other firms, have left Lehman to its fate.

An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage. The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability. (Emphasis added)

Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It only could be allowed to collapse.

The Great Crash of 2008 has entered a new phase, judging from the market opening in Europe and US equity futures prices. Lehman’s failure and the sharp decline at other financial firms, notably American International Group (AIG), the world’s largest insurer, have pushed equity values down to their lost levels of the year".

The striking thing about this comment is that it identifies the falling rate of profit as the core issue and points out that, unlike 1929, it was shored up for a period by using financial instruments such as leverage, and let me add, opaque securitisation, dicey derivatives and perforated hedges. In the end the fundamental chickens came home to roost and the "enormous hoax" had to come tumbling down. I don’t think this mainstream financial commentator is a Marxist by any stretch, but the analysis bears an affinity. CNN, I am told, now hosts debates on whether Marx was right – tut-tut, what’s the world coming to?

Still a long way to the bottom

My reading of events is that there is still a long way to go before we reach the bottom. The fall in US housing prices has not bottomed and foreclosures are at 15% of outstanding mortgages and still rising. Instead of trying to answer the ‘how far to the bottom’ question myself, let me give you a sampling of what the pundits say (all except the final quote are from Al Jazeera’s English website).

Max Keiser, Paris based market analyst: "There’s a decoupling in the wind, America is essentially finished as a global economic power. The US dollar is now finished as the world’s reserve currency and we are going to see now some other country rise up and take its place, most probably China".

Allister Heath, editor City AM financial newspaper, London: "People’s pensions get hammered, so everybody loses. When big banks like Lehman go under the housing market is going to suffer again, house prices are going to fall in America, Britain and Europe. That’s going to hit millions of ordinary people and of course you have got thousands of job losses".

Andrew Critchlow, managing director Dow Jones Middle East: "I think this a defining moment for world economies, it’s a defining moment for the US, it’s a defining moment for all of us to remember for the rest of our lives. People who were around in the 1920s at the time of the Great Depression – that experience stuck with them for an awful long time. In my career I have seen nothing that compares to this; it is difficult to quantify where all this is going to lead".

James Galbraith economics professor, University of Texas: "I do think this was a revolution which has now run its course. It’s a revolution which is now eating its children and a very big change in mindset has to be underway".

Finally, the aforementioned Spengler: "Market participants are responding by running away from risk, as well they should. That is the stuff out of which great crashes are made. The bouncing-ball pattern of declining stock markets was marked by bear market rallies each time the American and other governments stepped in to bail out the latest victim. The US government’s ability to influence events, however, seems exhausted. The Treasury and Federal Reserve can’t bail out everyone. After Lehman, the insurer AIG and Washington Mutual may be next to fail, followed by several regional banks. I see no solution except to allow American households to begin the painful process of rebuilding their balance sheets, which implies a slowing economy for the next two years. It is too late to stop the Great Crash of 2008. The question remaining is how best to pick up the pieces".

Only Galbraith thinks that the crash has run its course. Those of you who do me the kindness of glancing at my weekly columns in the Sunday Island and LakbimaNews may have noticed that I am flogging a thesis called decoupled-depression which asserts a deep crisis in the US and West while some Asian countries, especially China, while battered, could still pull through in tolerable shape. This, of course, is only if China turns towards its potentially gigantic domestic market, raises wages and living standards to create internal demand, allows the Yuan to appreciate and moderates its export oriented madness. This will be a painful readjustment for the export oriented sector – capitalists and workers. India could attempt something similar, but neither the Sonia-Singh nor Advani-BJP bandwagons, having hitched their star to neo-con economics, have the intellectual wherewithal or political will to make this turn. Globally connected Indian industrial capital will also obstruct a policy turn.