The recession's recovery

"Permanent crises do not exist" Marx wrote

He meant that the slump itself would create the conditions for capital accumulation to resume. For Marx the accumulation of capital, which is the engine of economic growth, proceeded in fits and starts, a series of cycles of moderate activity, boom, crisis, slump, recovery, moderate activity, boom, crisis, etc. Booms eventually created the conditions for the next following slump while slumps created those for recovery.

“This fall in the purely nominal capital,” Marx explained “State bonds, shares etc....amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

The financial world has been gripped by the recession. Yet one cabal of investors, bankers and lawyers found plenty to toast at London’s opulent Claridge’s hotel last month. One fund manager enthused “There’s a tidal wave of opportunities coming now.”

A German minister once called them “locusts”. Other choice descriptions are “corporate raiders”, “predators”, “vultures” and “asset strippers”. Socialists apply some of these descriptions to all capitalists, but what have these particular kind of capitalists done to earn such epithets even from non-socialists?

This is the sector which seeks to take advantage of stressed and dislocated financial markets. It typically comprises hedge funds or private equity firms that acquire at a discount fundamentally sound or defaulted loans, bonds or entire portfolios of debt from banks and other investors under duress, and attempt to squeeze out a profit. Alternatively, they may try to seize control of struggling companies by buying their loans and bonds, and converting this debt into equity ownership – a strategy known as “loan to own”.

European companies have to repay more than $4,000bn of loans and bonds in the next four years, according to credit rating agency Standard & Poor’s – a formidable sum at a time when the continent faces unprecedented pressure. Most are expected to manage to repay or roll over these debts, but some are expected to founder and could be taken over by distressed debt investors. Europe’s banks, normally a ready source of funding for many of these companies, are themselves struggling. Banks in France, the UK, Ireland, Germany and Spain have unveiled plans to slash a total of €775bn ($1,065bn) of assets, according to data collected by Bloomberg. Leon Black of Apollo Global Management, a leading investor in distressed debt, recently estimated this sum could increase to €1,500bn in coming years. It will provide investors with opportunities to cherry-pick assets, financiers say. Many are eyeing Ireland, where loans and property worth a nominal €72bn have been taken over by the National Asset Management Agency, a state-run “bad bank”, and will gradually be sold off.

Most investment banks are rebuilding or beefing up distressed debt desks, expecting the sector to provide a rich vein of lucrative business in the coming years. “We’re just in the first innings,” says the European head of a major US firm. “We have already bought quite a bit already, and the market is going to be huge over the next few years.”

From capitalism’s point of view, they are not doing anything wrong. In fact, they are only doing what comes naturally to capitalists: trying to make the biggest profit they can. The parvenus are buying up failed and failing business at bargain prices. As well as laughing all the way to the bank they can justify their unpopular activity as performing a necessary function in capitalism’s business cycle. As indeed they are.

What shape will the recovery turn out to have. The optimists are hoping that it will be V-shaped (i.e. a fairly rapid return to pre-recession levels). Others see it as being more like a tick (i.e. a slower recovery). The pessimists see it like a W (i.e. a double dip, a initial small recovery followed by second fall).

The only solution to the problems of a depression is the depression itself. If capitalism is to return to profitability, unprofitable concerns must be closed, workers laid off, wages suppressed, and capital devalued. This restores profitability and lays the basis for a new round of capitalist prosperity.Unprofitable firms must be eliminated, their capital destroyed or devalued, and real wages must fall, so as to restore the rate of profit. That means more company failures and more unemployment. In short, more misery. This tells us nothing about how long this might take. Could the present slump really last for a decade or more? The truth is we don’t know and can’t know. The future course of capitalism is largely unpredictable.Economic forecasting is no more reliable than an astrological horoscope. All we can say with certainty is that it is an irrational system.

A number of quite distinct and separate things need to happen before a slump can run its course. Firstly, capital has to be wiped out if excess productive capacity is to be tackled with devalued capital being bought cheaply by those enterprises in the best position to survive the slump. Secondly, de-stocking needs to take place, with overproduced commodities bought up cheaply or written off entirely. Investment will not resume if overproduction still exists. Thirdly, after this has occurred there needs to be an increase in the rate of industrial profit helped both by real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump). This will help renew investment and increase accumulation. Also, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated, if it is not to act as a drag on future accumulation. Through these mechanisms a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production. When these processes have run their course, accumulation and growth can begin once more with capitalism again creating a boom situation, which will be inevitably followed by a crisis and slump. This has been the history of capitalism ever since it first developed. Far from being an aberration, this cycle of misery is the natural cycle of capitalism.

Workers cannot be indifferent to a crisis, no matter how much we are disgusted by the predictable pendulum swing between “boom” and “bust” , because our lives can be directly influenced by today’s financial turbulence. But at the same time, we have no interest whatsoever in thinking up ways to put capitalism “back on track” or make it “healthy” again. Even when the system is in tip-top shape it works directly counter to the interests of workers. The crisis will not miraculously or mechanically turn every worker into a socialist, as some hope, but it does at least create a situation where socialists may find workers more willing to consider an alternative to capitalism. It is up to us, as socialists, to present that alternative in a convincing way based on our understanding of the essential nature and limitations of the capitalist system.