We live in exceptional times. The financial panic in the USA is
creating waves that are threatening to engulf the whole world. This is rapidly
transforming the consciousness of millions. Yesterday a demonstration called by the New York Central Labor Council mobilized about a
thousand workers, including a large number of construction workers ‑
ironworkers, labourers, plumbers and steamfitters ‑ as well as teachers, city
workers and others. The aim of the demonstration, called at less than two days’
notice, was to protest against the President’s plan to bail out Wall Street
with a massive donation of 700 billion dollars of public money. Here is the Reuters report of the protest:
“Hard hats, transit workers, machinists, teachers and other
labor unionists railed against the U.S. government’s proposed bailout of Wall
Street on Thursday in a protest steps from the New York Stock Exchange. Several
hundred protesters yelled their enthusiastic support as union leaders decried a
proposed $700 billion plan aimed at reinvigorating the credit markets by
relieving financial institutions of distressed debt.
"The Bush administration wants us to pay the freight
for a Wall Street bailout that does not even begin to address the roots of our
crisis," said AFL-CIO National President John Sweeney. We want our tax
dollars used to provide a hand up for the millions of working people who live
on Main Street and not a handout to a privileged band of overpaid
executives."
“Signs read ‘No Blank Checks For Wall Street’ and ‘Our
Hard-Earned Pensions Are Not Up For Grabs.’ Protesters cheered repeated calls
for the government to spend money on education, health care and housing as
freely and readily as it was proposing to do for Wall Street. ‘We know that the
economic situation has to be solved. But we want a responsible rescue, not an opportunistic
bailout," said United Federation of Teachers President Randi Weingarten.
‘And that means, just like every single boss says to me, that there should be
accountability for the teachers, then there should be accountability for Wall
Street," he said.
The
mood of the demonstrators was angry. One line that drew a lot of positive
reaction was a call for a general strike if the bailout only benefits the rich. This represents the beginning of a sea change
in the consciousness of the working class, and not only in the USA.
“A once-in-a-century event”
What has happened to financial markets in recent months is without
precedent in the history of recent times. The same bourgeois economists who
previously denied the possibility of a slump are now talking about the most
serious crisis for sixty years. Alan Greenspan, former chairman of the US
Federal Reserve, has described the current financial crisis as “probably a
once-in-a-century event”.
They actually mean 79 years, since there was no crisis at all in 1948.
But economists are superstitious people and are afraid to mention 1929, just as
the ancient Israelites were afraid to mention the name of their god, in case
something unpleasant were to occur. They are all worried about confidence in
the markets, since they all fervently believe that it is confidence (or the
lack of it) that is the real cause of booms and slumps. In reality, however,
booms and slumps are rooted in objective conditions. The rise and fall of
confidence reflects actual conditions, although it can then itself become part
of these conditions, helping to drive the market up – or, as in this case,
down.
In the last few months AIG, Bear Stearns, Fannie Mae, Freddie Mac,
Lehman Brothers and Merrill Lynch, companies that were thought to be too big to
fail, have all either filed for bankruptcy, been “bailed out” by the
government, or been nationalized. As the seriousness of the economic crisis
begins to dawn on people, a mood is being prepared in society the like of which
has not been seen for many years. This morning (September 26) came the news of
the collapse yet another US bank, Washington
Mutual, which was closed by the US government. This was by far the largest
failure of an American bank, and its banking assets were sold to J. P. Morgan
Chase for $1.9bn (£1bn). This is the
financial equivalent of a devastating Tsunami, and it is not yet over.
The estimates of the economists are constantly being revised downwards.
Six months ago the International Monetary Fund estimated more than $1,000bn (€691bn,
£546bn) in financial sector losses and predicted a sharp slowdown in the global
economy. Most economists criticized this for being too pessimistic. Now they
are singing a different song. Dominique Strauss-Kahn writes in the FT:
“But with much of the losses yet to be realized, and with the financial
crisis now acute, it has become clear that nothing short of a systemic solution
– comprehensive in tackling the immediate fallout and comprehensive in
addressing the root causes – will permit the broader economy, in the US and
globally, to function with any semblance of normality.” (Financial Times,
September 22 2008)
Yes, indeed, the US economy no longer functions with any “semblance of
normality”. In fact, it is grinding to a halt, at least as far as Wall Street
is concerned. As I write these lines the financial markets in the USA are
virtually paralysed as they wait for confirmation of a huge outlay of
government money that the authorities hope will “restore confidence”. The very
fact that the “free market” must depend for its very survivals on huge
donations from the US taxpayer is sufficient proof of its complete bankruptcy –
in the most literal sense of the word. Here is the final answer to all the
rhetoric about the “invisible hand of the market”, the spirit of private
enterprise and all the rest of it. In the moment of truth, the bold, brave
entrepreneurs of Wall Street and the City of London must go like beggars, cap
in hand, to the government and ask for social security. Only these beggars are
billionaires and they demand money with menaces.
What remains of any “semblance of normality” when a Republican
administration led by a fanatical free marketeer nationalizes major US
investment banks? Or when the US Treasury hands over a gigantic subsidy of around
$1 trillion to the same? On Sunday, Morgan Stanley and Goldman Sachs gave up on
attempts to remain as the only two independent investment banks and became
“bank holding” companies to gain expanded access to bank deposits and permanent
access to Federal Reserve liquidity support. The elimination of the two most
prestigious institutions on Wall Street was an indication of the extreme
seriousness of the crisis. The speed with which Morgan Stanley went to
Asia in search of capital underlined how quickly the world’s wealth was
moving away from the US.
Congress dithers and US Treasury Secretary Henry Paulson (who, in the
opinion of some commentators, is now the de facto President of the USA)
rages. Meanwhile, the markets are continuing to fall and nobody can halt them.
This is another argument one hears repeatedly in Congress: You are asking us to
hand over all these billions with no checks or guarantees. Apart from the fact
that this is rewarding the bankers for their gross mismanagement, who says that
this will have any effect in halting the fall of the market?
This is an excellent question, to which neither Paulson nor Bush or
anybody else has any answer. It is quite amusing to see the erstwhile advocates
of the sanctity of the free market now braying for government intervention to
save the market from itself. But they are condemned by their own logic, which
is only the insane logic of the free market economy. The present financial
crisis, which was predicted by the Marxists long ago, is the direct result of a
long period of uncontrolled speculation, which produced the biggest bubble in
history.
When on Friday the US government announced its $700bn bailout plan for
the financial sector, markets rejoiced. But then the mood changed into its
opposite, when Congress delayed its approval of this massive handout. Until
Monday, the US dollar had held up surprisingly well in the face of the turmoil
on Wall Street. But it finally fell back in the face of concern over the cost
of the bail-out and the fragile state of the US banking system, sending the
price of commodities priced in the US currency soaring. The dollar lost 2 per
cent against a basket of major currencies, with the euro rising 2.6 per cent to
above $1.48.
The price of oil has acquired a feverish character, with wild swings up
and down. As the dollar fell, stocks tumbled and the price of oil jumped again
after the previous steep fall. A 17 per cent increase on Monday, September 22,
was the biggest daily price rise ever, and larger even than during the invasion
of Iraq. By Tuesday the oil price had dropped again by $3 to $106 a barrel and
there are good reasons to expect energy prices to continue falling. These
violent swings undoubtedly reflect, on the one hand the movement of the dollar,
on the other, the activity of those involved in commodity speculation. Until
recently, the capitalists speculated in the housing market. When that
collapsed, they looked for other fields to exploit, anything else that seemed
likely to be profitable: oil, works of art, food. Despite all the complaints
and demands for regulation, this speculation cannot be controlled. It is like a
hydra: once you cut off one head, another dozen heads appear.
Socialism – for
the rich
As a result of the
economic and social convulsions, many people are beginning to question the
nature of an economic system that could produce such abominations. When the
capitalist state itself is compelled to nationalize financial institutions, the
idea will gradually become generalized: why do we need private bankers and
capitalists at all? For this reason, the politicians avoid the word
nationalization as the devil avoids holy water. At all costs they seek to find
ways in which the state can provide capital to banks in ways that do not imply
nationalization. They struggle to invent forms of capital that leave ownership
and control in private hands. But in the end, they are compelled against their
will to take over the ailing banks to prevent them from collapsing. This is a
damning indictment of private ownership of a key sector of the economy.
Although it would appear a paradox, it is no coincidence that the
country where politicians are shouting most loudly against the sins of the
market and the greed of the financiers is precisely the United States. The land
of free enterprise, the country where the psychology of capitalism has sunk its
deepest roots in the population, is the land where there is probably the
sharpest reaction against Big Business. This fact is reflected in the speeches
of the politicians, notably the candidates in the Presidential election. And
the Republican candidate is even more vocal in his rhetoric than the Democrat.
This is because he would like to win. McCain sees that there is a backlash
against the exorbitant pay in the boardrooms of big corporations and the
scandalous speculation on Wall Street and he says what most people want to
hear.
Is it not grotesque that bosses at defunct Bear Stearns were amassing
fortunes while pursuing reckless business strategies that led to the collapse?
And why should the American taxpayers, most of who are not well off, foot the
bill for $700 billion to bail out the big financial institutions? As of
September 30, 2007 the federal government was in a $53,000bn dollar fiscal
hole, equal to $455,000 per household and $175,000 per person. This burden is
rising every year by $6,600-$9,900 per American. Medicare represents $34,000bn
of this deficit and the related Medicare trust fund is set to run out of money
within 10 years. The Social Security programme is projected to have negative
cash flow within about 10 years. Whoever wins the presidential election and
whoever controls Congress will have to preside over deep cuts in living
standards. The same capitalists who have taken billions from the government and
the Federal Reserve are demanding tough budget controls, cuts in federal
spending, a comprehensive reform (read reduction) of entitlement to healthcare.
There is no money for Medicare, or for schools or pensions for the old.
But there is plenty of money for the big banks and the fat cats. This glaring
contradiction is burning itself into the consciousness of millions of ordinary
Americans and will have enormous consequences in the future. The heavy burden
of debt will have to be placed on the shoulder of the coming generations, who
will have to pay a heavy price for it in falling living standards and cuts in
social spending. This will inevitably lead to a profound change in
consciousness.
The lesson is not lost on the US public. There is no money for
schoolchildren or the sick or the old but when it comes to Big Business (and no
business is bigger than banking) the state comes running with an open
chequebook. For the plight of the poor the Bush administration has only
contempt. In the land of the free, every citizen has the right to become rich.
If people insist on being poor, that is their own fault! Let them show a bit of
initiative or else crawl into a ditch and die. That is the stern message of the
Republican Messiahs of the Free Market. But when it comes to the super-rich,
George W Bush shows the tenderest concern. For verily it is written: "For
whoever has, to him more shall be given, and he will have
an abundance; but whoever does not have, even what he has shall be taken
away from him.”
As we know, President Bush is a firm believer in the Good Book. But one
suspects that his motives for intervening in the financial crisis were not
entirely connected with Christian charity. It had more to do with desperation.
The ruling class in the USA saw an abyss opening up under their feet and was
forced to take panic measures in a frantic effort to stave off a global slump.
That is why a fanatical free market President was compelled to throw seven
hundred billion dollars of taxpayer’s money at the banks.
This remarkable initiative immediately received the plaudits of the
Market, nationally and internationally. The Group of Seven industrialized
nations said its members “strongly welcome the extraordinary actions taken by
the US”. However, other nations said they saw no immediate need to create their
own funds to buy distressed assets. The capitalists of Europe and elsewhere
were content to sit back and let the Americans take the strain. After all, were
they not responsible for creating this mess in the first place? The same
question is being asked in the United States, on every street corner – and on
Capitol Hill.
The President immediately hit a problem in the form of the US Congress.
It is not that the congressmen and congresswomen are any less dedicated to the
survival of capitalism than the present incumbent of the White House. But they
are even more dedicated to their own survival. They sense the gathering
backlash against capitalism, the Market, bankers, Wall Street and all their
works. The immensity of the donation (for that is what it is) is self-evident.
It signifies that the equivalent of 9400 dollars will be taken from the pockets
of every American taxpayer and deposited in the accounts of the very people who
caused the financial crisis in the first place. This fact serves to concentrate
the minds of Congress wonderfully, especially as elections are not far away.
The Democrats have been asking for a second round of measures to revive
the US economy, centred around a boost to infrastructure spending, home heating
assistance, and possibly more rebate cheques to consumers. But the
administration and many Republicans are resisting. Money for the bankers? Of
course! But money for the ordinary Americans? Sorry – the cupboard is bare!
This was all too much for the gentle souls on Capitol Hill who spend all their
time looking after the interests of the Nation.
As one might expect, Barack Obama, the Democratic presidential nominee,
set out his concerns in a speech that called for a modernization of
financial regulation based on institutions’ activities rather than on their
identification as banks or mortgage brokers. “We cannot give a blank cheque to
Washington with no oversight and accountability when no oversight and
accountability is what got us into this mess in the first place,” he said.
More surprising perhaps was the reaction of the Republican candidate,
who clearly did not want to be left behind by his rival (after all, words are
cheap and it is election year): “This arrangement makes me deeply
uncomfortable,” said John McCain. “Never before in the history of our nation
has so much power and money been concentrated in one person. When we’re talking
about a trillion dollars of taxpayer money, ‘trust me’ just isn’t good enough.”
Mr. McCain even voiced support for Democratic calls for an annual pay cap of
about $400,000 for executives at companies bailed out with public funds. This
is in complete contradiction to the position of the Bush administration, which
insists that a pay cap would discourage banks from taking part.
Senior Democrats in the House and Senate circulated proposals involving
tighter oversight, various proposals to allow or require the government to take
stakes in companies taking part in the scheme, allow bankruptcy judges to write
down mortgages and curb executive pay at banks selling assets to the government
fund. Mr Paulson is resisting making pay or the transfer of equity to the
government a precondition for selling assets to the fund, arguing this would
ensure that only banks on the brink of failure take part.
This conflict, and the demands by the Democrats for more control over
the money handed over to the banks, produced deadlock and a delay that upset
the markets once again. After all, when the Market requests, it is used
to being obeyed. The elected representatives of the Nation are not
supposed to ask any questions! President Bush called on Congress to “keep the
rescue bill focused on solving the crisis in our financial markets”.
But Congress is under the pressure of public opinion, which, as we have
seen, is reaching boiling point. Congressmen are being bombarded with telephone
calls and emails, in which their constituents vent their rage against this
scandalous handout to the rich. They ignore this mood at their peril!
Therefore, they have hesitated to sign the deal. Congress blames the
Administration for getting them into this mess. The President blames the
Congress for holding up a deal that is supposed to save the US economy from
collapse (Bush used precisely those words in an unprecedented television
message to the nation).
Tempers flare on the floor of the House: Congressmen shout at each
other and nearly come to blows. When can anybody remember such scenes on
Capitol Hill? But then, when did anybody see the USA in a state of economic
meltdown? And when can anyone remember the American people in such a rebellious
and angry state of mind? The reason for the conduct of the Congressmen is that
they can feel a fire under their backsides.
Whatever they do now will be wrong. If they sign the deal, they will
earn the hatred of millions of ordinary Americans. One woman, interviewed last
night on British television, when asked what she thought of the proposed
bail-out, answered bitterly: “I have just come off an eleven hour shift and I
work 60 hours a week. Now they want to take $2,300 off my pay to give to the
bankers!” This must be typical of the attitude of millions of ordinary people
in the USA. But if they refuse to sign, it will cause further sharp falls on
the stock markets in the USA, posing the threat of a complete collapse on the
lines of 1929. In other words, they are caught between a rock and a very hard
place.
Pessimism of the bourgeoisie
The bourgeoisie suffers from periodic bouts of manic depression,
passing rapidly from extreme optimism to the depths of despair. On both sides
of the Atlantic, where previously there was “irrational exuberance”, now there
is gloom and doom. It was ever thus: the bourgeoisie always sways between the
two extremes of manic depression. One minute the party is in full swing and
vast fortunes are being made; the next, the whole thing is deflated and misery
abounds. When the collapse finally arrives it is like the morning after a wild
party. The night before, people were happily inebriated with not a care in the
world. Now, in the cold light of morning it is a very different story. Men and
women are painfully aware of the excesses of the night before. They solemnly
swear that they will never touch strong drink again, and they are quite sincere
– until the next party.
The ignominious collapse of the latest speculative boom is no exception
to the general rule. It is remarkable only in the depth of the gloom, which is
only a reflection of the dizzying heights from which they are now plunging.
This was simply the biggest speculative boom (or bubble) in history. It was far
bigger than the boom that preceded the Wall Street collapse. Yet despite the
obvious severity of the crisis the bourgeois economists still try to comfort
themselves with the thought that things could have been much worse. The
Financial Times recently commented:
“The Great Depression began less than 80 years ago but, then again, we
are in a different century. Whether or not this will be the worst such upheaval
the world has to face between now and 2099, the fact that nothing as bad as the
Depression occurred between the 1930s and now is in itself remarkable.” This
comment is interesting on two counts: the same people who for years have been
denying that there was any possibility of a repeat of 1929 and the Great
Depression now, without blinking an eyelid, say that it is not only possible,
but that it is remarkable that it has not happened – yet.
Dominique Strauss-Kahn writes: “[…] and for what has not
happened, at least not yet, to the broader economy – the onset of a severe
recession. Perhaps it was the absence of the latter that lulled too many into
viewing the bursting of the housing bubble merely as a correction, the defaults
in US subprime mortgages just as misfortune and the failure of important financial
institutions as collateral damage.” (Ibid.)
The fall in prices during a crisis merely balances out their earlier
inflation. In that sense one can speak of a “correction”. However, we pointed
out long ago how the bourgeois economists have repeatedly changed the
terminology describing an economic slump in order to make it appear less
serious than it is. At one time they used the word panic, then slump,
then depression, then recession, until now they have finally
arrived at correction. After all, if we accept the miraculous healing
powers of the market, which by art of magic regulates itself without any
conscious human involvement, how can we object to the market “correcting”
itself?
On this subject we wrote in World
Perspectives 2008:
“An earthquake can also be presented as a necessary ‘correction’, which
merely re-adjusts the earth’s crust. Eventually, it all settles down and life
goes on as before. But this comforting analysis leaves out of account the
terrible trail of damage caused by the earthquake: the villages wiped off the
face of the earth, the trees uprooted, the crops destroyed, the thousands
killed and injured. Moreover, normal life is not so easily restored after every
earthquake. Some can be so devastating and leave such a trail of destruction
that the effects can be felt for many years.”
These lines accurately describe the consequences of this “correction”.
The dictatorship of finance capital
Our epoch is the epoch of monopoly capitalism. One of the features of
this is the complete domination of finance capital. This domination has gone
further in the USA and Britain than in any other major country. Britain, the
former workshop of the world, has become transformed into a parasitic rentier
economy, which produces very little and is dominated by finance and services.
Up until recently this was presented as something positive, which would protect
Britain against the turbulence of the world economy. But the opposite is the
case. By slavishly following the American model, Britain is being dragged
towards recession following the USA and will most likely be the worst affected.
Like a parasitic worm, growing fat at the expense of the rest of the host organism,
the financial sector has grown too large relative to the economy, sapping its
strength and threatening to undermine it entirely.
It is an elementary proposition that what goes up must come down. For
years the USA economy appeared to be defying the laws of economic gravity. Now
the price must be paid. The fall, now it has arrived, is all the steeper
because of the dizzying heights reached by speculation in the housing sector in
the period that preceded it. Already it is far steeper than the fall in house
prices in the Great Depression, In the first quarter of 2008 house prices in
the USA fell officially by 14.1 percent. By contrast, in 1932, at the low point
of the Depression, house prices fell by 10.5 percent. Moreover, these figures
do not convey the real seriousness of the position. Some economists put the
figure of the fall in house prices during the first quarter at 16 percent in
real terms. And the fall in house prices is far from over.
This means that the huge sums of money being thrown at the bankers will
have no effect in detaining the fall, or at best the effect will only be a
temporary respite before new and even steeper falls. This is the logic of the
market, which obeys no laws but its own. The so-called stabilization plans are
nothing of the kind. All talk of regulating the markets is just so much
nonsense. The capitalist system is anarchic by its very nature. It can neither
be planned nor regulated. The attempt to stabilize the financial sector by
pumping in huge amounts of cash will only succeed in making the already
super-rich richer still. But it will have no lasting effect on the market.
The insolence of the bankers is quite astonishing. They demand the
government to buy their bad debts, while they hang onto their profitable
assets. Nobody knows what the real value of these assets is. An old proverb
tells us never to buy a pig in a poke (sack). This is sensible advice, but the
government is just expected to hand over vast quantities of money to the
bourgeois without looking inside the sack. The crisis of the banking system is
the result of a massive swindle that all the bankers merrily participated in
for the last two decades. It made them fabulously rich but now has left a
massive amount of debt and fictitious capital on the balance sheets of
financial institutions. How to solve this little problem? Easy! Pass the bill
to the taxpayer. Get the government to set up an agency to buy these assets and
hold them until they “mature” and can be sold back to the private sector. This
means nationalizing the losses and privatising the profits, or, to use the
wonderful expression of Gore Vidal, socialism for the rich and free market
economics for the poor.
The capitalists claim they are also making sacrifices, but what they
mean is that they sacrifice a little of their bloated profits, whereas the
workers sacrifice their livelihoods and houses. The bankers scream with pain
and the governments come running with an open chequebook in their hands. The
bankers demand a large transfusion of cash to heal their ailment. This is known
as “liquidity provision”. The problem is that the state does not possess any
liquidity. It can only raise cash from taxes. But taxation reduces demand,
which is already falling in the USA. This may temporarily alleviate the “suffering”
of the super rich, but only at the cost of increasing the suffering of millions
of ordinary Americans. That, in itself, would be nothing to worry about, of
course, since it is the lot of all patriotic Americans to suffer in the greater
cause of the Market. Unfortunately, this will have more serious effects on the
economy.
A further cut in demand will increase unemployment. Firms will go
bankrupt. More people will default on their mortgages and credit card debts. In
other words, it will deepen the crisis and make it harder to resolve. Moreover,
the USA in recent years has been transformed from the world’s biggest creditor
nation to the world’s biggest debtor. The government’s purchase of distressed
assets and injections of capital into financial institutions will enormously
increase this collective indebtedness. This must produce a further fall in the
value of the dollar relative to other currencies. This will cause further
convulsions in world money markets.
Central banks are supposed to prevent runs on banks and financial
institutions by reassuring depositors that bank deposits are safe and by
providing liquidity to financial institutions against good collateral. But
there is a limit to the resources of central banks, and this is being rapidly
reached. They have probably done by now most of what they could do. In the
event of new banking crises, they will be powerless to act. Since nobody has
the slightest idea of how much bad debt is still poisoning the world financial
system, such crises are inevitable in the next period. Sooner or later they
must end in the collapse of one or another of the major banks, which can send a
fatal shock through the world economy, like the collapse of the largest
Austrian bank, the Kredit-Anstalt in May 1931. This occurred two and a half
years after the Wall Street Crash in the USA and marked the beginning of the
financial collapse in Central Europe and further afield. It is entirely
possible that we will see something similar in the next period.
Marx on fictitious capital
It is not a lack of
money that causes a crisis, but on the contrary, it is the crisis that causes a
lack of money. The bourgeois economists, with their banker’s mentality, confuse
cause with effect, appearance with essence. When the economy enters into crisis,
credit dries up and people demand hard cash instead. This is the effect of the
crisis, but in turn it becomes cause, pushing down demand and creating a
downward spiral.
The bankers and their friends in government insist that the cause of
the crisis is the fact that the financial system has too little capital. This
is an astonishing statement to make. For the last two decades there was a vast
moneymaking carnival in which the banks made huge profits. Now they claim they
do not have enough capital! Actually, there was a huge amount of loan capital
in circulation during the boom and this superabundance of capital itself showed
the limitations of capitalist production. These were vast sums of capital
available for speculation that could not find an outlet and the bourgeois had
to find other ways of using it.
Marx pointed out long ago that the ideal of the bourgeois was to make
money out of money, without going through the painful process of production. In
the last period they appeared to have achieved this idea (except in China where
there has been a real development of the productive forces). In the USA,
Britain, Spain, Ireland and many other countries, the banks invested trillions
in speculation, especially in the housing sector. This was the basis upon which
the sub prime mortgage scandal arose and flourished, generating unimaginable
amounts of fictitious capital.
Already in Marx’s day there were huge amounts of circulating capital;
this is capital which forms the basis of fictitious capital. In those days
there were credit swindles – the equivalent of derivatives today. However, when
compared to the position today, all the speculation in the past pales into
insignificance. The total amount of speculation on a global scale is
staggering. Let us take just one example: the credit default swap industry.
This market allows two parties to bet on the likelihood of a company defaulting
on its debt. It has grown to about $90 trillion in notional amounts
insured. That is to say, probably more than double the total
outstanding credit in the world. But contracts are registered nowhere but
in the books of the partners. Nobody knows the real volume of trading, which
therefore exposes the world economy to a huge risk. That explains the panic on
Wall Street and in the White House. They fear – correctly – that any severe
shock can bring the whole unstable edifice of international finance crashing
down, with unforeseen consequences.
Even in the 19th century, at the height of the boom, when
credit was easy and confidence was growing, most transactions were done without
any real money. There is an abundance of capital at the beginning of the cycle
and the rate of interest is low. The low rate of interest boosts the profits of
enterprises early on in the cycle and stimulates growth. Later on the rate of
interest reaches its average level during the height of prosperity. There is an
increased demand for credit and therefore interest rates ought to rise at the
peak of the boom. But in the last boom this did not occur.
In recent years the Federal Reserve pursued a policy of deliberately
keeping interest rates low (they were even negative in real terms at one stage,
considering the level of inflation). This was irresponsible from an orthodox
capitalist point of view. It created the housing bubble and thus laid the basis
for the present crisis. But as long as vast profits were being made and
investors were happy, nobody cared. They all merrily joined in this mad
carnival of moneymaking. The most respectable bankers and the most learned
economists joined hands and danced to the chorus of: “Eat, drink and be merry,
for tomorrow we die!”
The reason why they now complain they have insufficient capital is that
a large part of their assets are fictitious – the result of unprecedented swindling
throughout the financial sector. As long as the boom continued, nobody minded.
But now that boom has turned to bust, all these assets come under scrutiny. The
bankers, who yesterday were prepared to buy large amounts of debt from each
other, are no longer prepared to do so. Distrust and suspicion has become
general. The old easy-going optimism has been replaced by a miserly attitude to
borrowing and lending. The entire banking system, upon which the circulation of
capital depends, is grinding to a halt.
Unless and until all the bad assets are removed, many institutions will
still lack sufficient capital to extend fresh credit to the economy. Marx
described this stage in the economic cycle long ago:
“It is clear that there is a shortage of means of payment during a
period of crisis. The convertibility of bills of exchange replaces the
metamorphosis of commodities themselves, and so much more so exactly at such
times the more a portion of the firms operates on pure credit. Ignorant and
mistaken bank legislation, such as that of 1844-45, can intensify this money
crisis. But no kind of bank legislation can eliminate a crisis.
“In a system of production, where
the entire continuity of the reproduction process rests upon credit, a crisis
must obviously occur — a tremendous rush for means of payment — when credit
suddenly ceases and only cash payments have validity. At first glance,
therefore, the whole crisis seems to be merely a credit and money crisis. And
in fact it is only a question of the convertibility of bills of exchange into
money. But the majority of these bills represent actual sales and purchases,
whose extension far beyond the needs of society is, after all, the basis of the
whole crisis. At the same time, an enormous quantity of these bills of exchange
represents plain swindle, which now reaches the light of day and collapses;
furthermore, unsuccessful speculation with the capital of other people;
finally, commodity-capital which has depreciated or is completely unsaleable,
or returns that can never more be realized again. The entire artificial system
of forced expansion of the reproduction process cannot, of course, be remedied
by having some bank, like the Bank of England, give to all the swindlers the
deficient capital by means of its paper and having it buy up all the
depreciated commodities at their old nominal values. Incidentally, everything
here appears distorted, since in this paper world, the real price and its real
basis appear nowhere, but only bullion, metal coin, notes, bills of exchange,
securities. Particularly in centres where the entire money business of the
country is concentrated, like London, does this distortion become apparent; the
entire process becomes incomprehensible; it is less so in centres of
production.” (Capital, Volume 3, Chapter
30, Money-Capital and Real Capital, I. pp. 478-9, my emphasis, AW)
The capitalists must now squeeze all this fictitious capital out of the
system. Like a man whose body has been poisoned, or a drug addict who is
struggling against the ill effects of his addiction, they must expel the poison
from the organism or perish. But this is a painful process and creates new
dangers to the organism. As the system shrinks and credit dries up, the
capitalists call in their debts. Those who cannot pay will go bankrupt.
Unemployment grows as a result, and this in turn reduces demand, causing new
bankruptcies and new debts that cannot be paid. In this way, all the factors
that pushed the economy upwards in the last period turn into their opposite.
Bankruptcy of bourgeois economics
The economists persistently clung to the old illusion that a worldwide
slump was impossible, that they had learned the lessons of the past (as a
drunken man learns his lesson after every hangover). They argued that the
financial crisis would be confined to the USA, that the US economy would be somehow
“decoupled” from the rest of the world (thus contradicting everything they had
previously said about globalisation); that Europe and China would become the
new motor forces of the world economy and so on.
How hollow these arguments sound today! Real estate prices are falling
globally. The global economy is slowing. European economies are already slowing
markedly and, with the inevitability of further bank failures and a shortage of
available capital and credit, this process will continue. It is true that so
far the so-called emerging-market countries have continued to grow, but it is
unthinkable that they can remain aloof from the general crisis as capital flows
dry up and commodity prices recede. Of course, this process will take place
over time and will be uneven. Some countries will enter into crisis sooner,
others later. But in the end, they will all be drawn in.
It is a matter of indifference in which country the crisis begins. The
main thing is that under modern conditions it will inevitably pass from one
county and continent to another. In this case it began in the USA, which is the
country that had carried the mania of speculation to the furthest extreme. But
soon after, and against all the prognostications of the economists, it spread
to Ireland, Spain, Britain, and the whole of Europe. Its repercussions will
reach Latin America, Asia and Africa. One country after another will fall like
dominoes. China will not escape, although for the moment it is still going
forward.
In a crisis the capitalists are compelled to resort to extraordinary
measures to corner a share of a decreased market. They resort to discount
selling, dumping and other methods to undercut their competitors. By so doing,
they aggravate the crisis by fomenting a deflationary downward spiral. People
delay their purchases in the expectation of lower prices, and thus push prices
lower still. We see this phenomenon most clearly in the housing market.
The contagion spreads like an uncontrollable epidemic from one country
to another. It will become evident that every country has over-exported (that
is, over-produced) and also over-imported (over-traded). (See Capital, Volume
3, p. 481) It will be evident that every one of them had stretched credit too
far and stoked the fires of inflation and speculation, which now must be
extinguished, no matter what the pain. That is to say, it is not a question of
this country or that, of this bank or this individual speculator or that, but
of the system itself. It is true that no downturn lasts forever. In the long
run a new equilibrium is reached, prices stabilize, profitability is restored
and a new cycle commences. But this is nowhere in sight as yet. The downturn
has not ended. It has barely begun. Nobody knows how long it will last. And
anyway, as Keynes once put it: “In the long run we are all dead.”
It is easy to be wise after the event.
The bourgeois economists are excellent at predicting things that have already
occurred. In this respect they are similar to the authors of the Old Testament,
who with unerring accuracy predicted historical events that had occurred
several hundred years earlier. Gullible folk like the Jehovah’s witnesses are
greatly impressed by this, citing it as proof of Divine Inspiration of the
Bible. Others, of a more sceptical and scientific persuasion, greet such
“predictions” with loud guffaws. The same people who ridiculed the Marxists and
assured us that there would be no crises are now wailing and wringing their
hands. They inform us that we are in the deepest crisis since the Thirties, and
hope that nobody will notice the glaring contradiction between this and what
they were saying only yesterday.
The simple fact is this: that for
the last twenty or thirty years the bourgeois economists have understood
nothing, anticipated nothing and foreseen nothing. They have been unable to
predict either booms or slumps. They have spent decades trying to persuade us
that the economic cycle had been abolished, that mass unemployment was a thing
of the past, that the monster pf inflation had been tamed, and so on and so
forth. All the reformist politicians naturally accepted this nonsense as good
coin. In Britain, Gordon Brown boasted: “the cycle of boom-and-bust has been
abolished.” Now he is left rubbing his backside as the British economy slides
into recession. All this shows that bourgeois economics is fit for nothing
except to justify a degenerate and bankrupt system.
What we predicted
Let us compare the perspectives of the Marxists with those of the
bourgeois. In contrast to the bourgeois economists who committed the grave
error of believing their own propaganda, the Marxist tendency explained the
reality of the situation. In the Document On a Knife’s Edge: Perspectives
for the world economy written
in 1999 we wrote the following:
“In the past it was said that the role of the Fed
was to take away the punch bowl just when the party was getting into its swing.
But this is no longer the case. While publicly paying lip service to financial
probity and austerity, Alan Greenspan has been prepared to tolerate the
creation of the biggest orgy of financial speculation in history, although he
must realise the dangers involved. He is like the emperor Nero fiddling while Rome
burned. In fact, by raising interest rates by a paltry quarter of a percent, he
has poured petrol on the flames. Thus the old motto is shown to be true: ‘Whom
the gods wish to destroy, they first make mad.’"
In the same document we read:
“The fundamental barriers to the
development of the productive forces in the modern epoch are private ownership
of the means of production and the nation state. However, for a time,
capitalism can partially get round these barriers by a series of means, such as
the development of world trade and the expansion of credit. Marx long ago
explained the role of credit in the capitalist system. It is a means whereby
the market can be taken beyond its normal limits. In the same way, the
expansion of world trade can provide a way out for a time, but only at the cost
of preparing even more catastrophic crises in the future:
“ ‘Capitalist production is
continually engaged in the attempt to overcome these immanent barriers, but it
overcomes them only by means which again place the same barriers in its way in
a more formidable size.
“ ‘The real barrier of capitalist
production is capital itself’. (Marx, Capital, vol. 3, 15; 2-3.)
“The circuit of capitalist production
depends, among other things, on credit. The solvency of one link in the chain
depends upon the solvency of another. The chain can be broken at numerous
points. Sooner or later, credit must be paid off in cash. This fact is all too
frequently forgotten by those who become indebted during the process of
capitalist upswing. In the first phase of capitalist expansion, credit acts as
a spur to production: ‘the development of the productive process extends the
credit, and credit leads to an extension of industrial and commercial
operations.’ (Marx,
Capital, vol. 3, p. 470.)
“This, however, is only one side of
the coin. The rapid expansion of credit and debt pushes the market beyond its
normal limits, but at a certain point this must turn into its opposite. During
the boom, credit appears to be limitless, like the Horn of Plenty in ancient
Greek mythology. But as soon as a crisis appears, the illusion is shattered.
Returns are delayed, commodities are unsaleable in glutted markets, and prices
fall. The development of the world market does not alter this fundamental
process, but merely gives it a vastly greater scope in which to manifest
itself. The accumulation of debt in the last analysis makes the crisis even
deeper and more prolonged than what it would otherwise have been. The recent
history of Japan is more than sufficient to confirm this. After a decade of
boom characterised by rapidly increasing assets and share prices, the bubble
was finally burst by a sharp increase in interest rates. The situation was very
similar to that of the USA at the present time. On December 25th, 1989 the Bank
of Japan raised interest rates, caused the sharp fall in the Stock Exchange,
but since land prices still continued to rise, a new interest rate rise was
necessary. Finally interest rates were raised to six per cent and by the end of
the year share prices had fallen sharply by 40 per cent. Thereafter, the Bank
of Japan kept interest rates high. At that time the Bank of Japan was praised
by economists for its prudent handling of the economy. But the result was to
prolong the recession for a decade.
“With globalisation, and the abolition
of the restraints on credit and financial transactions, the scope for expansion
has never been greater, but neither has the potential for a worldwide crash.
However, it is not the case that crises are caused by fictitious capital, stock
exchange swindles and excessive use of credit. Marx explains this in the third
volume of capital:
“ ‘Let us also disregard these sham
transactions and speculations, which the credit system favours. Then, a crisis
could only be explained as the result of a disproportion of production between
the consumption of the capitalists and their accumulation. But as matters
stand, the replacement of the capital invested in production depends largely
upon the consuming power of the non-producing classes; while the consuming
power of the workers is limited partly by the laws of wages, partly by the fact
that they are used only as long as they can be profitably employed by the
capitalist class. The ultimate reason for all real crises always have remained
the poverty and restricted consumption of the masses as opposed to the drive of
capitalist production to develop the productive forces as though only the
absolute consuming power of society constituted their limit.’ (Marx, Capital, vol. 3,
p. 472.)
“The expansion of world trade and the
opening up of new markets in Asia also provided a temporary boost, but only at
the cost of provoking an even bigger collapse. This is the shape of things to
come.”
These lines were written almost a
decade ago, when the overwhelming majority of bourgeois economists were still
denying the possibility of a world slump. We are entitled to ask: who
understood the processes of the world economy better, and who made the correct
predictions – the bourgeois economists or the Marxists?
Can China save the world?
The old proverb says that a drowning man will clutch at a straw. The
bourgeoisie and its apologists, alarmed at the depth of the crisis, are looking
around for a straw to save them from going under. Until recently, their hopes
were resting on Asia, and China in particular. But China’s economy is now
firmly embedded in the world market and will reflect all its volatility. A
recent article by Geoff Dyer in the Financial Times carried the
instructive title Beijing’s burden: A slowing China bodes ill for the world economy.
Despite the US downturn, exports have continued to grow strongly,
expanding 22 per cent in the first eight months of 2008. Part of the
explanation is that Chinese companies have continued to find new markets for
their products in other booming developing economies. But this is only delaying
the inevitable. After the crisis on Wall Street and stagnation in Europe and
Japan, investors are beginning to ask if China too might enter into crisis.
After five years of rapid growth, the Chinese economy is clearly slowing even
now. A growth rate of anything less than eight per cent would have big
implications for China and the global economy. The economists are also worried
about the banking sector in China.
There are already symptoms of problems in the export market. The
garment industry in Guangdong is experiencing severe stress. According to
provincial statistics, January-July exports of garments and accessories fell 31
per cent from the same period last year to $13.3bn (£7.2bn, €9.1bn). Exports of
plastic goods, toys and lamps are also stagnant or falling. This has coincided
with weak demand from the US, where retail sales fell in July and again in
August. Guangdong’s overall export growth to the US slowed to 6.3 per cent over
the first seven months of this year. That cannot be a coincidence.
A strong euro and a 27 per cent increase in Guangdong’s exports to
Europe have compensated for a weak dollar and a shrinking US market. But there
is growing evidence of a sharp contraction in Europe, which is also one of
China’s biggest markets. This will eventually start to impact on Chinese
exports. “This could be the calm before the storm,” says Stephen Green, an
economist at Standard Chartered in Shanghai.
There are even bigger concerns about the property market, which has
been one of the principal components of the investment boom driving the Chinese
economy in recent years. Sales have declined and floor area under construction
fell in August, while production of steel, cement and air conditioners was flat
or down in the month – another sign of weak activity. Analysts say that
mortgage approvals have also dropped sharply in recent months. “We believe the
likelihood of a property sector meltdown in China is high,” says Jerry Lou, an
analyst at Morgan Stanley in Shanghai.
If the property market falls sharply over the next year, that will have
serious consequences for the banking sector. If the growth in gross domestic
product falls much below 8 per cent next year, that would cause an even sharper
fall in house prices, accompanied by a collapse in private sector investment.
The social and political consequences would be considerable.
There are warning signs in other parts of the economy. The crash in the
stock market has had a negative effect on consumer confidence. The rate of
increase in urban incomes has dropped sharply this year. Sales of cars have
fallen in the past month by 6 per cent and airline travel has been sharply
lower this summer. Gome, the country’s biggest electronics retailer, said that
sales per square metre in its shops fell by 3 per cent in the second quarter.
The government has cut the rate of interest, which indicates that it
fears a crisis. However, its scope for manoeuvre in monetary policy is limited
by the fear of reigniting inflation. That peaked at 8.7 per cent in February
before falling to 4.9 per cent in August. Zhou Xiaochuan, head of the central
bank, said this month: “Inflation has indeed slowed over the past several
months, but we cannot relax because the rate may rebound.”
A slump in China, or even a serious slowdown in growth would have a
very serious effect on the world market, starting with the commodity producing
countries in Africa, the Middle East and Latin America. Copper prices, for
example, have fallen 23 per cent in the past two months, partly due to fears
over Chinese consumption of the metal, which has fallen by more than half this
year.
On spivs and speculators
There is a mood of growing anger and hostility towards “the market”,
that is to say, towards capitalism. Reacting to this mood, bourgeois
politicians like Alec Salmond of the Scottish National Party tries to draw the
anger of the public away from capitalism itself and towards a specific sector
of the capitalist class – the “spivs and speculators” of high finance.
Suddenly it has become fashionable among politicians to condemn these
mysterious individuals who have laid low venerable institutions such as The
Bank of Scotland. This respectable old lady, we are informed, has been around
for three hundred years and has survived the Napoleonic Wars, the Wall Street
Crash and the First and Second World Wars, only to be destroyed by a gang of
greedy sharks in designer suits and dark glasses. This kind of “explanation”
explains nothing at all. How does it come about that a small number of greedy
individuals possess such phenomenal power? Who are these people? What are their
names? Where do they live? Nobody knows. But it is always useful in a crisis to
have somebody to blame, and if this somebody happens to be perfectly anonymous
and untraceable, so much the better.
Suddenly, these “spivs and speculators” begin to play the same role in
economics that Al-Qaeda plays in international politics. In reality, all
bankers and capitalists are spivs and speculators. They must be because the
capitalist system is based on spivvery and speculation. It is also based upon
greed. To deny greed is to deny the workings of the market economy, which is
based on the profit motive, that is, greed. Greed for profit is what ultimately
drives the capitalist system and has been driving it ever since it was born. Ah
yes, but they have become too greedy and they are earning too much! This is
what David Walker, the president and chief executive of the Peter G. Peterson Foundation
and former Comptroller General of the United States has to say:
“Are there lessons from the sub-prime crisis? The answer is yes. The
recent actions had to be taken because the government failed to establish an
effective regulatory structure in connection with mortgages, derivatives and
other securities. Greed was rampant. Fannie Mae and Freddie Mac strayed from
their original mission, becoming too focused on profit and personal gain rather
than their public purpose. Lax oversight was facilitated by powerful Wall
Street lobbies and the lobbying of Fannie Mae and Freddie Mac.” (The
Financial Times, September 22, 2008)
This is perfectly true. Whereas workers are paid a bonus according to
results, the bosses pay themselves obscene amounts whether they get results or
not. When a company is doing well the workers may get a little more in wages or
bonuses, but the bosses pay themselves millions in handouts. When the company
is doing badly, the workers are paid nothing, but the bosses still pay themselves
lavishly. And when the company reaches the point of bankruptcy, the workers are
sacked with little or no compensation (often without even a pension), whereas
the bosses who have ruined the company walk away with extravagant golden
handshakes.
These facts are well known. For years the workers have been muttering
under their breath about the injustice and inequality. But since the economy
was going forward, and since the market appeared to be delivering results for
everybody (albeit very unequal results), and since the public was subjected to
a deafening chorus in the newspapers and on television, and since the
politicians of every party were unanimous, they accepted as good coin the
argument that “what was good for the ‘wealth creators’ (i.e. the bosses) is
good for me.”
Brown’s stupidity
On this side of the Atlantic the processes we see in the USA are
reproduced, but only in the form of a clumsy and pathetic caricature. At the
Labour Party conference Gordon Brown moaned about the City’s “irresponsibility”
and said bonuses were, in some respects, “unacceptable”. Alistair Darling,
Chancellor of the Exchequer, echoed the prime minister’s comments. But their
“attacks” resembled a man hitting a rhinoceros with a feather duster. Compared
with John McCain and Barack Obama’s scathing comments about Wall Street they
were as weak as dishwater.
The mealy-mouthed bowing and scraping of Brown and Darling at the Labour
Party congress indicates that they have spent so much time grovelling before
the City of London that they are no longer able to straighten their backs. In a
situation where hundreds of thousands of workers are suddenly threatened with
losing their jobs, their homes and their savings, even the most dim-witted
reformist ought to be able to realize that a denunciation of the swindles and
profiteering of the bankers would be immensely popular. It is a proof of the
complete bankruptcy and stupidity of these so-called Labour leaders that that
they are not even capable of adopting the demagogic attacks on Big Business
that have been made by Obama and McCain.
They are not even as radical as the Church of England, the two most
senior figures of which have condemned the corrupt practices of the financial
traders. In an article in The Spectator, Archbishop of Canterbury Dr.
Rowan Williams attacked "paper transactions with no concrete outcome
beyond profit for traders". When such trading went badly, it caused
"real and crippling damage", he said.
Dr. Williams drew attention to the financial industry’s trading of
debts, which he said had "without accountability… been the motor of
astronomical financial gain for many in recent years". He said the current
financial crisis "exposes the element of basic unreality in the situation
– the truth that almost unimaginable wealth has been generated by equally
unimaginable levels of fiction, paper transactions with no concrete outcome
beyond profit for traders". The archbishop continued: "Given that
the risk to social stability overall in these processes has been shown to be so
enormous, it is no use pretending that the financial world can maintain
indefinitely the degree of exemption from scrutiny and regulation that it has
got used to." (My emphasis, AW)
Here we have the essence of the matter. The representatives of
capitalism (including the religious ones) can feel the ground trembling under
their feet. They fear the social and political consequences of the crisis,
which poses an enormous risk to social stability, and appeal to
the government and the bosses to do something about it before it is too late.
But what does Dr. Williams propose? He says only that "loosening up a
financial regime" is sometimes needed to foster enterprise and create
wealth to "draw whole populations out of poverty". That is a noble aspiration
– and one that is entirely impossible to realize on this sinful earth.
Even more scathing was his colleague, Dr Sentamu, the Archbishop of
York. Lloyds TSB, a major British bank, had announced the previous week that it
had agreed a £12.2bn takeover of HBOS after shares in the latter plummeted.
Since the takeover, many commentators have criticised traders who sold borrowed
shares below their current price, betting that prices would fall further before
they bought them back.
Dr Sentamu told the annual dinner of the Worshipful Company of
International Bankers: "We find ourselves in a market system which seems
to have taken its rules of trade from Alice in Wonderland." And he went
on: "To a bystander like me, those who made £190m deliberately
underselling the shares of HBOS, in spite of a very strong capital base, and
drove it into the arms of Lloyds TSB, are clearly bank robbers and asset
strippers."
Such strong language from a man of God was most unexpected and doubtless
had an unfortunate effect on the digestion of the Worshipful Company. The
assembled bankers were also not very happy to hear the Archbishop’s comments on
the plan of the US Treasury to set up a fund worth up to $700bn (£382bn) to buy
back much of the bad debt held by banks and other financial institutions.
The archbishop acknowledged the need for stable financial systems if
poverty was to be eradicated, but added: "One of the ironies about this
financial crisis is that it makes action on poverty look utterly achievable.
It would cost $5bn (£2.7bn) to save six million children’s lives. World
leaders could find 140 times that amount for the banking system in a week. How
can they tell us that action for the poorest is too expensive?"
As I write this article, world
leaders will be meeting in the US to mark progress in the Millennium
Development Goals, a set of targets to reduce global poverty and improve living
standards by 2015. We may place our trust in the Lord and hope that
