THE US SUB-PRIME CRISIS

By the beginning of 2008, an estimated 8.8 million households in the US, or a tenth of the total, had experienced negative equity. Real estate prices fell on average by 10.2 per cent between January 2007 and February 2008. Defaults on mortgages increased from early 2007 onwards and, by February 2008, more than 24 per cent of sub-prime mortgages were in foreclosure. This represented more than 1.3 million households which were facing foreclosure, an increase of 79 per cent from the previous year. By mid-2008, the number of monthly foreclosures reached levels not witnessed since 1929, on the eve of the Great Depression. The inevitable retrenchment of household wealth will doubtless lead to cascading declines in consumer spending and a dampening of the level of effective demand.

If the crisis spreads to defaults in other debt markets, the entire US banking system could be imperilled. By mid-2008, these sub-prime defaults have threatened the very citadels of US capitalism as the spectre of a severe credit crunch began to reverberate in Wall Street itself. The emergence of a pervasive credit crunch signifies an evaporation of bank lending to the private sector, which is also accompanied by a deterioration of the balance sheet of banks as the rate of non-performing loans skyrockets. As the corporate sector experiences a falling rate of profit, the ability to service previous debts creates widespread and pervasive financial distress and a rising tide of bankruptcies. It can be surmised that the harbinger of a global financial crisis is emerging as the fall-out from the sub-prime crisis begins to engulf global markets.

A deflationary process of internal adjustment will occur as the fall-out from the vast accumulation of private debt could precipitate a phase of quite severe debt-deflation, similar to the Japanese experience in the 1990s. The logic of capitalist crises is precisely what Marx describes as ‘the slaughtering of capital values’.

Bill Lucarelli is senior lecturer in the School of Economics and Finance at the University of Western Sydney.
b.lucarelli@uws.edu.au