The ultra free market model of the Bush administration and governments around the world has revealed itself not just to be a disaster for the poor, which was always evident, but also a deadly threat to their own profit-crazy system.
By Vincent Kolo, CWI

The significance of events in September 2008, when the global banking crisis entered a new critical phase, should not be underestimated. In recent days, the entire US financial system, and therefore also the global financial system for which it is the ‘nerve centre’, has teetered on the brink of collapse. Bush himself described the mighty US economy as a house of cards: “The house of cards was much bigger and started to stretch beyond Wall Street. When one card started to go, we worried about the whole deck going down.”

These turbulent events represent a seminal moment in the history of capitalism, comparable to the Wall Street crash of 1929, the rise of US financial power during and after the Second World War, or the collapse of the Stalinist states in 1989-90. This coincides with a shift in world relations as the military power of US capitalism has also run up against its limits and entered a period of decline. The two processes reinforce each other.

In the space of ten days, the US Treasury and Federal Reserve (central bank) have mounted a series of unprecedented state interventions – the biggest in the history of any capitalist country – to pull the financial system back from the brink. This began on 7 September with the nationalisation (officially described as ‘conservatorship’) of the two biggest financial institutions in the world, Fannie Mae and Freddie Mac. Together, these two companies are involved in nearly $6 trillion worth of home loans. Their collapse would have meant by far the biggest default in history – sixty times larger than Argentina’s debt default in 2002.

The blowout in the US housing sector which began in late 2006 and then spread to the banking sector has been the trigger for this crisis. But the crisis is rooted in the capitalist mode of production for profit rather than need, which strives in a million different ways to drive down the share of society’s wealth that goes to wages in order to maximise profits for a small super-rich minority. To maintain consumption – i.e. ‘the market’ – despite falling real wages, capitalist governments have been forced to resort to bubble economics and an unrestrained expansion of credit. For a time this provided huge, but ultimately illusory, profits for Wall Street and the oligarchs of finance capital. Inevitably, as socialists warned all along, there has been a recoil, a return to economic ‘reality’. Now this process is in full swing and it is proving to be rapid, unpredictable, and hugely destructive. This destructive power was seen in recent days, with one shock announcement following another, roiling financial markets, and forcing the US government to step in with new gigantic bailouts (the $85 billion state takeover of insurer AIG for example).

“Massive failures…”

After days of turmoil, on Thursday 18 September, Treasury Secretary Hank Paulson unveiled a mega $700 billion bailout plan for Wall Street, which aims to recapitalise the US banking system by transferring its mountain of ‘toxic’ debt to the public sector. At the same time, central banks around the world, led by the US Federal Reserve, injected yet another $180 billion of liquidity into money markets to crack open a worsening credit freeze. “The credit lines in the American financial system, the lifeblood of the economy, are completely frozen,” Fed chairman Ben Bernanke told politicians of both US parties last week. Banks had stopped lending to each other overnight, Bernanke said. “You could have massive failures within days,” he warned, saying this would extend beyond the banking system to “large name-brand companies.” The politicians left their meeting with Bernanke in a state of shock – this was “as sobering a meeting as any of us have ever attended in our careers,” said Christopher Dodd, a Democrat and chairman of the Senate Banking Committee. [Bloomberg, 22 September] Last week’s Fed-led action was the fourth such coordinated mega-dollar central bank intervention in a year. This can be likened to a paramedic using defibrillators to shoot electricity into the heart of a patient suffering a cardiac arrest. After four major ‘heart attacks’ in 12 months, the global financial system is clearly not in good shape!

Following these – in dollar terms – unprecedented interventions, some capitalist commentators claim the corner has now been turned. Stock markets staged a rally on 19 September, the likes of which we have hardly seen before. Many bourses broke one-day records on the upside (Moscow’s exchange shot up 22 percent after being closed for two days because of heavy losses). But this is not the end of the crisis, far from it.

The political effects could still be drawn out, especially the all-important process of ‘catch-up’ in popular consciousness: the need for a clear alternative to capitalism and the organisational means to achieve it – real socialist parties and fighting trade unions. But there should be no doubt that the dire state of global capitalism and the record-breaking scale of government and central bank ‘life support’, especially in the US, is going to have a huge impact on future economic and political developments.

Of course, the aim of Washington’s policy shift is to save their capitalist friends – to bailout the rich not the poor. Bush and Paulson are urging a “quick” solution, hoping the Democrats who control Congress will sign up for the new bailout package in its present form, which effectively cushions Wall Street’s rogue banks from the effects of their actions. But political resistance can intensify as the implications of this deal sink in – above all the massive cost to the public who under this plan gain no additional control or insight into the cash-strapped companies.

Desperate policy swings

The Fanny-Freddie nationalisation – a landmark event from such a die-hard neo-liberal administration – was followed by even more extraordinary policy swings as the crisis headed into an even more dangerous phase. One week after this bailout, 15 September, Paulson and Bernanke rejected a similar rescue for the investment bank Lehman Brothers, judging its collapse to be ‘containable’. This proved to be a serious misjudgement, partly born of political considerations to be seen ‘drawing a line’ after the Fannie-Freddie deal (that not all troubled companies can expect to be saved by the government). But the decision to let Lehman’s fold also revealed the gaps in the Treasury-Fed team’s overview – modern finance capital is so esoteric and non-transparent that nobody has a full picture of the risks involved.

In ‘normal’ times, Washington’s blunder would not necessarily be revealed for weeks or months, but in today’s supercharged crisis the denouement came immediately. Lehman’s collapse sent shockwaves around the world and, most seriously, paralysed credit markets that were already under massive strain. Banks refused to lend to each other or anyone else, suspecting a new Lehman Brothers on the opposite end of every deal. The Lehman debacle increased the pressure on the two remaining Wall Street investment banks, Goldman Sachs and Morgan Stanley. A takeover of the latter may be imminent, its share value having plummeted by 57% this year. US bank Wachovia, China’s sovereign wealth fund, CIC, which already owns ten percent of Morgan Stanley, and Japan’s Mitsubishi UFJ are all tipped as possible buyers.

On Sunday 21 September, Goldman Sachs and Morgan Stanley were converted into bank holding companies under a state-led deal that brought them under Federal supervision for the first time. “They were afraid they’d get killed if they didn’t [convert],” one Wall Street analyst told CNN. “The Fed is scrambling to take the remaining targets off the radar,” he said, referring to the possibility of renewed panic selling and/or a takeover of both banks. For Bloomberg News (22 September) this signified that, “The Wall Street that shaped the financial world for two decades ended last night.”

Recent weeks have seen a worldwide ‘unwinding of positions’ as speculators flee from all forms of risk and especially highly leveraged (debt-driven) deals. Company stocks, especially in the banking sector, have been in free-fall across the capitalist world, while a frantic search is on for ‘safe’ bets. Government-backed assets such as bonds are suddenly in huge demand despite the low returns they offer, with the market for government securities in some countries completely seizing up. Lehman’s collapse also proved to be the tipping point for a much bigger financial corporation, the insurance company AIG, which was left holding billions of dollars’ worth of insurance for Lehman’s – now worthless – securities.

AIG is a Goliath in financial terms – the sixth largest corporation in the world by assets. As of last week it is an 80 percent state-owned company. Its boss was removed, but otherwise the change of ownership has not altered much. Like many of its financial peers, AIG has morphed from an insurance company into a massive hedge fund dealing in complex (read: unfathomable) financial products, as well as traditional insurance and pension funds. Due to its huge global presence, the collapse of AIG could have brought down banks and financial companies in a number of countries, escalating the crisis to a new and higher level.

The features of a 1930s-style depression are present in the current situation. Despite the unprecedented scale of the recent state interventions this danger remains given the scale of the mess created by the financial witchdoctors of capitalism. As capitalist governments warm to greater state intervention as the only way out for their system, some of the more destabilising (but lucrative) speculative practises such as ‘short-selling’ face a ban, at least temporarily. The practise of ‘shorting’ is when speculators, often hedge funds, borrow shares they calculate will fall in price and sell them, in order to buy them back later at a lower price, returning the shares to the original lender, while keeping the profit. The new ban imposed by regulators in New York, London and some other financial centres is because ‘short-selling’ can exacerbate already sharp falls for many stocks – banking stocks for example, thus deepening the crisis. However, the new measures only tackle some symptoms of the disease, rather than the disease itself, which is capitalism.

Rise and fall of the investment banks

The Bush, Clinton and other US administrations since the time of Reagan have been engaged in a crusade against state intervention, using the Washington debt collecting agencies (World Bank and IMF) and the trade ‘mafia’ of the WTO to browbeat governments in the neo-colonial world into letting go of state-controlled industries as well as trade controls and other regulatory regimes. The current situation is overloaded with irony. The investment banks that are now being bailed out or collapsing, have been at the forefront of the privatisation tsunami of the last two-and-a-half decades. Morgan Stanley and Goldman Sachs, for example, are on the payroll of the German state, overseeing the part-privatisation of its rail system, one of the biggest state sell-offs ever in Europe. Merrill Lynch, which last week collapsed into Bank of America, masterminded privatisations in South Africa and China, among others. Now, the privatisers are being kept alive by state programmes.

All these companies have played a highly political role, as evangels of neo-liberal economics. They have been vocal lobbyists in Washington, showering donations upon politicians in return for radical deregulation measures in the banking sector. They were lauded as innovators and financial geniuses by the same politicians who now attack them for their greed and corruption. It is hard to take seriously the – very recent – anti-Wall Street rhetoric of John McCain, who as a senator has a consistent record of opposing tighter finance sector regulation. But the Democrats, when in power, have pursued similar policies to the Bush Republicans. It was president Clinton who in 1999, under pressure from Wall Street lobbyists, repealed the Glass-Steagall Act of 1933, which placed limits on the role of investment banks. Today, history has come full circle, with the last two investment banks themselves voting to come under Federal ‘protection’. A similar fate probably awaits the hedge funds, secretive and wholly unregulated financial companies that account for a big part of all stock market trades.

But unfortunately the demise of these institutions does not spell the end of capitalism’s parasitic speculative excesses. Speculation is part and parcel of the system – the forms of speculation become more outlandish the more incapable capitalism is of organising production in a rational way. New laws and regulation can have an effect, short-term, especially when business conditions are so bad that the main financial institutions are dependent on state support. But inevitably, unless the capitalist system is overthrown, new and even more fiendish forms of financial trickery will be invented.

$700bn bank rescue plan

The capitalists are pinning all their hopes on Paulson’s $700 billion scheme to ‘clean up’ the banking system. The sums of money now involved are mind-boggling. This latest plan, not yet endorsed by Congress, caps an unprecedented spending spree by Washington in recent months. Prior to this plan the Treasury and Federal Reserve have spent around $900bn on crisis measures. This includes $29bn for JP Morgan’s takeover of Bear Stearns in March, $100bn each to rescue Fannie Mae and Freddie Mac, up to $300bn for the Federal Housing Authority, and last week’s $85bn bailout of AIG.

The new $700bn scheme is modelled on similar interventions in Japan, Sweden and other countries that suffered banking meltdowns in the 1990s. It means that taxpayers’ money will be spent not to develop infrastructure or improve vital public services, but in the largest ever purchase of financial junk. The alternative – to let more banks go to the wall – would threaten the very foundations of US and global capitalism. What the Bush Administration has not yet explained to people, however, is how this is going to be paid for. In the film ‘Superman’, Lois Lane is caught by the hero as she falls from a building: “You’re holding me,” she says, “but who’s holding you?”

The huge additional liabilities that the Federal Reserve and US government are taking on will inevitably effect the credit-rating of these institutions, forcing up borrowing costs, with the bill being sent to the US taxpayer. Paulson’s plan requires the ceiling on the US national debt to be raised from $10.6 trillion to $11.3 trillion. The cost is as much as the combined annual budgets of the Departments of Defence, Education and Health and Human Services [Bloomberg 21 September]. The burden of this rescue plan will inevitably fall on working class and middle class Americans, not just in the form of higher taxes and charges, but also cuts in government spending elsewhere. As even the New York Times asked, “How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation’s health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system?”

”Nationalisation of losses…”

Even capitalist critics of the Paulson plan are quick to point out that this is yet another example of “nationalisation of losses, privatisation of profits”. Most of the initial $30bn of state funding paid out to AIG last week for example, to avert bankruptcy, went straight into the pockets of its creditors – the investment banks. Ordinary working class people will ask why they are subsidising the rogue companies that created the crisis. Meanwhile, for working people what is being offered is higher unemployment, home foreclosures and an incomes squeeze.
The Treasury team are anxious to deflect such criticism, adding clauses to their plan that will allow for the removal of directors, trimming of executive bonuses, and limit compensation to shareholders. But these are cosmetic measures. Socialists say state funding must be tied to full public ownership and democratic control – today’s corrupt bosses should be swept out and replaced by elected representatives of the workforce and the wider community, through the building of strong workers’ organisations.

No one really knows how much will have to be spent on recapitalising the US banking system. The figure of $700 billion is pure guesswork by Treasury officials, with more pessimistic predictions of $1 trillion being floated. Even this figure may be too low – banks have so far reported more than $514 billion in losses and writedowns and still the bottom is not in sight. Some are already warning that the Fannie-Freddie deal, barely a fortnight old, can cost significantly more than the $200bn earmarked. At the same time, what alternative do the capitalist politicians have? Commentators from all sides are warning that not intervening threatens a “depression” and the deepest economic crisis for the US since the 1930s. More and more people will be asking how this is possible, when only 18 months ago the same politicians were telling us we lived in the best of times due to the wonders of capitalist globalisation and ‘efficient financial markets’.

This crisis, which started in the finance sector that dominates and directs capitalism today, but is rapidly spreading throughout the economic system, represents an enormous challenge for the working class globally. Only the workers, supported by the other exploited layers of society, have the collective strength to put an end to the capitalist system and create its replacement – democratic socialism. For socialists, the crisis signals the urgent need for fighting and democratic workers’ parties with a clear socialist programme.

This entry was posted on Tuesday, September 23rd, 2008 at 11:46 am and is filed under World news and analysis. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.