“I like
thieves. Some of my best friends are thieves. Why, just last week we had the
president of the bank over for dinner.” W.C. Fields.
The
capitalist system is in the throes of the worse financial crisis since the
Great Depression. This is the view not only of the billionaire George Soros,
but also of the International Monetary Fund, the custodian of the capitalist
system, and all the serious capitalist commentators.
The
hurricane sweeping the credit markets, stock markets and banking system last
week was a consequence of all the contradiction that had built up in the
foundations of capitalism over the previous 20 years. This is no temporary economic
blip, but the precursor of an impending world slump. The headline in the
‘Financial Times’ said it all: ‘Capitalism in convulsion’. The storm is far
from over, despite the announcement of an unprecedented bail-out by the
American Treasury, the Federal Reserve and the Washington establishment.
As the
popular children’s rhyme goes:
Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
All the King’s horses and all the King’s men
Could not put Humpty together again.
The King’s
men at the Fed rushed to put the credit system together again, in the biggest
bail-out in the history of world capitalism. But as with Humpty Dumpty, the
fragmentation caused by the financial crisis will be difficult to put back
together, and the crisis will reverberate throughout the world in the coming
months and longer.
This is how the
‘Financial Times’ described the events of the past week:
“Financial
market conditions have now descended to the lowest point since the banking
shutdown of 1932. In one 96-hour period, we saw three nearly unimaginable
events. Lehman Brothers, America’s fourth-largest securities firm, filed for
bankruptcy. Merrill Lynch, the best-known firm, was forced overnight to sell
itself to Bank of America. And market pressures forced the Federal Reserve
into a huge $85bn takeover of AIG, our largest insurer, to avert its
bankruptcy.” Added to this is the nationalisation of Freddie Mac and Fannie
Mae, the US giant mortgage companies. (FT, 18/9/08) The article concluded: “We
will be climbing out of this financial hole for a long time to come.”
The
capitalist guru, Alan Greenspan, the former chairman of the Federal Reserve,
came to London in 2002 to pick up his knighthood as ‘The Man Who Saved the
World’. His handling of the internet bubble was seen as miraculous, especially
by his biggest fan, Gordon Brown, the then British Chancellor.
While he was
here, Greenspan paid a visit to the Bank of England’s monetary policy
committee. In typical upbeat fashion, he told them that the US economy was
resilient following the bursting of the internet bubble. Shares had halved in
value and there had been bond defaults, but no big bank had collapsed. The
reason? Well according to Greenspan risk had been cleverly spread through the
use of complex derivative instruments.
Greenspan’s
“economic stability” was achieved by poisoning the capitalist system by the
injection of billions of dollars of dodgy derivatives, described aptly by
Warren Buffet as “financial weapons of mass destruction”. These derivatives,
which are fictitious capital to use Marx’s words, are part and parcel of the modern
market capitalist casino. As with all forms of credit, they can propel
capitalism beyond its limits. However, in times of retrenchment, they provide a
toxic mix. For every bank that announced huge profits on derivatives, there
must eventually be losses elsewhere.
For
instance, the collapse of AIG had come about by the insurance giant’s ledger of
$60bn worth of derivatives written on other derivatives based upon bad
mortgages.
Greenspan
had not solved the crisis, but simply postponed it with an extra large dose of fictitious
capital pumped into the system. The inevitable consequence would be a future
crisis of much deeper proportions. This is what is happening today before our
very eyes.
AIG, the
collapsed insurance conglomerate, had been up to its neck in writing credit
default swaps, which were a form of derivative allowing one financial
institution to pass on the risk of a bond defaulting on to another. It sold
them to banks wanting to protect themselves against defaults from sub-prime
mortgages.
Few people
outside or inside the financial industry ever understood how the new complex
derivatives work. Teams of financial whiz-kids at AIG could not calculate how
much their credit-default swaps were actually worth, with estimates varying
between $20bn to $85bn!
The notional
value of these derivatives in global markets rose to $60,000bn at the end of
last year from $15,000bn in 2005. Such staggering figures are eye-watering.
They inject colossal instability into the capitalist system, with dire consequences.
Everything is fine as long as the merry-go-round keeps going. Like the
children’s game, pass the parcel, everything is great – until the music stops!
Another type
of derivatives is ‘over-the-counter derivatives’, which have the added
attraction that they are not regulated. Their deregulation was forced through
by Mr. Greenspan, a great champion of these pieces of paper, too complicated to
even place a value on.
The
capitalists are no longer interested in making money through production, the
only real source of wealth, but through gambling and speculation. This shows
how degenerate the capitalist class has become. It has become totally parasitic
in its epoch of senile decay.
But they were
not concerned with the consequences. They were making billions and billions.
They were unconcerned with the contradictions they were piling up, with bubbles
in property, credit, shares, derivatives and other assets. They were on a
merry-go-round of ever spiralling wealth. All they demanded was free markets
and no regulation that would hinder their exploits. In this carnival of
money-making, the banks lent vast sums of money as if there was no tomorrow.
They were allowed to vastly over extend their loans to the tune of 30 to 1,
especially in the property market. But boom turned inevitably to bust,
threatening to bring down all in its wake.
Although
this behaviour of the banks goes far beyond all such activities, it is not
unique. In a book published in 1974, called ‘The Bankers’ by Martin Mayer, the
author criticised the banks for over-extending themselves. “There are billions
of dollars in potentially lost loans in the system; we are coming closer and
closer to an explosion. The present banking structure can collapse. And the more the regulatory apparatus allows it to
grow, the more catastrophic the collapse will be.” What a familiar ring!
But inherent
in any capitalist boom is endemic speculation. The banks, as with the rest of
finance capital, were eager to seek out lucrative speculative investments,
including in property. For them, house prices could never fall, so they engaged
in reckless lending to people who had little hope of paying it back. The
sub-prime mortgage crisis was maturing. They were all caught up in this
speculative syndrome. House prices went up as people were buying them. People
bought them as prices were going up. It was a typical bubble. Credit allowed
the capitalist system to go beyond its limits. Today, credit plays a far more
important role than in 1929.
Now, the
sense of panic was very real in the echelons of world capitalism. “We are now,
unquestionably, in the worse financial crisis since 1929. We do not know how
many more banks and institutions will fail – Washington Mutual, the US
counterpart of HBOS, is under severe pressure – but Bear Stearns, Fannie Mae
and Freddie Mac, Lehman and AIG are plenty.” (FT, 19/9/08)
Emma Jacobs
in the ‘Financial Times’ interestingly noted how times had changed: “Just a few
weeks ago everyone told me spiralling inflation, surging oil prices and strikes
meant I was reliving the 1970s. Now it is the 1930s.”
The FT
editorial (19/9/08) was desperate for the central banks and government to
intervene to save the capitalist system: “This is not a time for niceties…
Today is about survival.”
They were
forced to realise that capitalism had failed. This was not a failure, as some
apologists say, a failure of regulation, but of the system itself. The market economy
could not restore the equilibrium needed. The banks and credit institutions
were paralysed, like rabbits caught in headlights. Boom has turned to bust.
However, as
these paper prices are written-off, there will be a knock-on effect to the rest
of the economy. The example of Japan is a case in point. The Japanese banks
bought huge swathes of property in the bubble of the 1980s. When the bubble
collapsed, the banks were saddled with enormous bad debts. This resulted in a
recession in the world’s second largest economy that lasted more than a decade.
The ruling class is terrified that that could be repeated in the United States
and the rest of the world.
The present
crisis is a damning indictment of capitalism. Those who preached the virtues of
the free market had to swallow their words and were forced to turn to the state
– namely tax-payers’ money – to bail them out.
All those apologists of capitalism who said profits were a reward for
risk-taking were silent as the state stepped into rescue the system from
collapse. They had no money for welfare or health, but when needed, they had
plenty of money to bail-out Wall Street. “It [the US government] has begun a
programme of economic interventionism more typical of socialist governments in
moments of utopian zeal”, commented an article in the FT. It is certainly the
most extensive peacetime of government intervention in the economy since the
Great Depression, which shows how dangerous the crisis has become for
capitalism.
The western corporate
institutions had written down $500bn-odd of credit assets in the past year. They
have been forced to right-off billions of paper wealth. They also raised
between $200bn and $360bn new capital to plug their depreciating assets. But
they are trapped in a vicious circle, as they are unable to estimate their real
losses as more and more houses are repossessed and property prices continue to
collapse.
The proposed
bail-out by the US government is said to be around 700bn to begin with. They
are talking about buying bad debt in order to remove them from the company’s books.
Something similar was done in the Savings and Loans crisis of two decades ago.
However, this time, the sums are truly staggering, which will have to be picked
up by the American tax payer. The plan is to create a ‘bad bank’ to take
possession of all the toxic assets in the financial system. However, placing in
effect bad debts in a deep freeze, will leave a massive burden over the US
economy for years to come. In reality, the US government head by George Bush is
promising to nationalise all the bad debts.
The failed
policy of individual fire-fighting of failed companies has given way to “a
comprehensive approach to relieving the stresses on our financial institutions
and markets”, to quote Paulson. But what happens if this fails too? The
contradictions are immense. The chaos in the financial sector is spilling over
into the other sectors of the economy. The Detroit-based car industry, for
instance, has itself lobbied the government for $25bn in loans and loan
guarantees to allow it to function. The construction industry is already in a
slump. In America and elsewhere unemployment has jumped. We are at the
beginning of a new world recession which can be far deeper than anything we
have witnessed in the post-war period. It is this that terrifies the
strategists of capital. A new slump will mean drastic cuts in living standards
and political turmoil worldwide.
As one senior
Wall Street banker commented: “The crisis is far from over, the government
action will buy banks some time but they will have to act decisively otherwise
they will find themselves in an even worse situation in a few months’ time.”
This is correct as throwing billions of dollars at the credit markets will not
resolve the underlying problems. In fact, it was the excess credit that fuelled
the artificial boom and all the excesses that have accompanied it – giving rise
to the present crisis, the greatest credit bubble in history.
People are
having to rethink their views about capitalism. There has been a shift in the
public mood everywhere, a realisation that something big has gone wrong. There
is anger with the bankers. There is a growing questioning. As one newspaper
commented: “Social historians will record this week as one when unhappy
shoppers began discussing the potential collapse of western capitalism in the
same breath as butter prices.”
In a Waitrose
supermarket car park in Harborne, Birmingham, Kate Organ, 53, a freelance arts
manager, described her mood as “wretched and disempowered”. She expected here
income, currently at £30,000 a year, to dwindle. She said: “When I was at
University, the Workers’ Revolutionary Party harangued me that capitalism would
collapse. Now I know what they were on about.”
