08.10.2008
The loan comes due
We must categorically reject any attempt to use the spectre of hard times to convince workers that restoring the profits of finance capital is the only answer, writes US communist Jim Creegan
The United States is now in the throes of the steepest economic plunge since 1929, combined with the biggest crisis in ruling class political and ideological legitimacy since Watergate.
These developments completely dominate the presidential election campaign, pushing Iraq and Afghanistan into the background. Events are unfolding at such vertiginous speed that almost anything one writes is out of date by the following day. Let us attempt, however, to summarise the major developments as of this moment.
Ever since the leading investment house, Bear Stearns, was forced into a government-orchestrated fire sale to the JPMorgan Chase bank in March, it became clear that the assets of many of the country’s largest financial corporations were based upon sub-prime mortgages of dubious value. Simply put, the banks had made mortgage loans to millions of home-buyers who were now, or would soon be, unable to meet their payments. These mortgages had been bundled into securities by the banks that originally issued them, and sold off to other financial institutions, which in turn used them as collateral for various bonds and loans. Bad debt, in other words, was omnipresent throughout the financial system.
A couple months after the Bear Stearns buyout, the government was forced to acquire the assets of the two giant real estate lending firms, Fannie Mae and Freddie Mac. The treasury secretary, Henry Paulson, thought these purchases had steadied the markets sufficiently to allow Lehman Brothers, one of the oldest and most reputable investment houses, to go bankrupt. He was wrong. The stock market continued to gyrate, as commercial interest rates rose. At the same time as Lehman went belly up, Merrill Lynch, a huge financial services firm whose name had been a household word for the middle class, was acquired by Bank of America.
A week later came the turn of the American International Group (AIG), the country’s largest insurance company, to receive a federal bailout, this time the biggest in US history. AIG had engaged in ‘credit-default swaps’ - a form of insurance for the now depreciated mortgage-based assets of lending institutions; these ‘swaps’ were not called insurance in order to avoid the regulatory requirement for the seller to keep a certain percentage of their value in reserve. Small surprise, then, that AIG could no longer stand behind a rising number of claims, as mortgage defaults soared. It was the 18th largest corporation in the world, with tentacles in many foreign countries (its difficulties, in fact, began at its London branch). Its bankruptcy would have had international as well as national repercussions, and so it was effectively nationalised rather than allowed to go under. The Fed paid AIG $85 billion in exchange for its equity.
Yet none of these emergency measures succeeded in reviving the financial markets. By this point, banks, doubtful of the value of one another’s assets, were raising the interest rates on commercial loans to such high levels that the entire financial system was imperilled, and with it the larger economy. The Federal Reserve was also running low on bailout money. Thus George Bush, Henry Paulson and Ben Bernanke, the chairman of the Federal Reserve, decided the time had come to go to the legislative branch.
On September 20 the administration came before Congress with a gargantuan emergency appropriations request of $700 billion. The proposal submitted by Paulson was a mere three pages long. It said the funds were to be used to buy up the distressed assets of financial corporations, but specified little else. Whose assets were to be purchased, at what prices and under what terms - all were left to the discretion of the secretary of the treasury. There were no provisions for the relief of homeowners. The clearest part of the proposal was a clause saying that Paulson’s decisions could not be subjected to review by any government agency or court of law. The proposal was instantly dubbed an economic version of the Patriot Act, the infamous legislation under which George Bush, taking advantage of the panic that followed 9/11, arrogated sweeping powers to himself. In this case as well, fear - although based upon reality this time - was used to extort public funds.
The request in its original form was too outrageous for even a normally compliant Congress to swallow, despite a television address by Bush to promote the measure, and his summons of McCain and Obama to the White House. Everyone understood that modifications would be necessary. So, in the week that followed, Paulson and Bernanke huddled with Congressional leaders.
What emerged on September 29 was a touched-up version of the original Paulson proposal. It stipulated that the $700 billion be released to the treasury secretary in instalments rather than all at once, with $250 billion in the first tranche. It provided for a special Congressional committee to oversee the disbursement process. There was a provision for the government to acquire equity stakes in the firms it bails out, as well as non-binding clauses about reducing executive compensation in bailed-out companies and renegotiating easier terms on the mortgages the government would take over from them. But the essence of the Paulson proposal - $700 billion, in the expenditure of which the treasury secretary would exercise wide latitude - remained intact. With the support of the two presidential candidates and the leaders of both parties in the Senate and House of Representatives, the bill’s passage was deemed certain.
In the event, the legislation was defeated in the House the next day by a vote of 228 to 205, as the nation looked on in amazement. Forty percent of Democratic Congresspersons opposed the bill. But, more unexpectedly, 67% of House Republicans balked despite the urgings of their president and presidential candidate. As this crisis of leadership erupted, the stock market plunged by 778 points, the largest single-day point drop (though not percentage drop) in the history of the exchange, while the financial markets remained in a state of paralysis. Amid the tumult of the last week of September, the fact that Washington Mutual, the country’s largest savings and loan association, was seized by the government and, like Bear Stearns, sold to JPMorgan Chase, went almost unnoticed in the mainstream media.
Thus in a matter of weeks, the government, led by former champions of the free market, had for the first time become the owner or part-owner of several major financial firms and presided over about 10 years’ worth of industry consolidation . Only the two biggest investment houses -Goldman Sachs and Morgan Stanley - were left standing, while the biggest bank - JPMorgan Chase - swallowed a major investment house and another huge bank.
In the end, the administration invoked what is fast becoming a tacit new rule of bourgeois democracy: if you don’t vote the way we want the first time, vote again until you get it right. Bush and Paulson went with a slightly tweaked version of the bill to the Senate, where it passed handily. The bill then went back to the House for a second vote. It carried this time by 263 to 171. Much arm-twisting had taken place in the interval between the two votes. The bill also contained legislative bribes to the tune of $140 billion in additional monies, some of which went to support Congresspersons’ local paymasters, such as rum producers, race track administrators and the makers of wooden arrows for children.
Throughout this whole process, Democrats were more solidly committed to doing Bush’s bidding than Republicans.
Fictitious capital’s final frontier?
The global aspects of this crisis have already been ably dealt with by Hillel Ticktin in this paper (‘Drip-feed capitalism’, September 25), so let us concentrate more on its domestic origins and effects.
Marx wrote: “The ultimate reason for all real crises always remains 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” (K Marx Capital Vol 3, New York 1967, p484). Although the majority of Americans do not live in poverty, the unfolding crisis can be at least partly understood in terms of the disparity between an ever-growing mass of capital looking for a profitable outlet and the increasingly diminishing consumption capacity of the mass of the population. (The explanation that follows is not based on any detailed study of economic data; it represents the impressions of a layman attempting to make sense of a complicated situation, and is open to the criticism of others more knowledgeable about economics.)
Since the mid-1970s, American workers have experienced a general stagnation of wages, with only a brief rise from the late 90s to 2001. This decline is partly the result of de-industrialisation. Well paid manufacturing jobs have either fled to other parts of the globe, where labour is cheap and plentiful, or been rendered redundant by advances in labour productivity. Along with jobs went the power of the unions, who experienced heavy membership losses and a reduced ability to strike and bargain for higher pay. This general route of the labour movement was helped by the union-busting tactics of employers and the state, which held the whip hand over an industrial working class that was declining in numbers. The offensive was enabled by the cowardice of the trade union bureaucracy. Millions of industrial jobs were replaced, if at all, by lower-paying ‘McJobs’ in various service industries.
One fact, however, appears to be incongruous with this trend. Mass consumption, instead of falling in tandem with wages over this same 35-year period, seems to have increased. Part of the explanation no doubt lies in the fact that many families, to maintain accustomed consumption levels, added a second wage-earner, while the main breadwinner took a second job. But some of the answer has to do with an enormous explosion of debt.
The war capital had waged against workers resulted in higher profits. There was thus more capital looking for a lucrative outlet, but constrained by the decreased purchasing power of the majority. The answer was to lend the money. During the 70s and 80s credit became available to ordinary Americans on a previously undreamt-of scale. Moreover, the advantages of the dollar as an international medium of exchange, combined with the perceived strength of the American economy as a whole, allowed (and allows) the US to play the role of banker to the world, drawing in billions from abroad.
Interest-bearing capital thus found its way to the level of individual consumers, to the point where going into debt became as natural as walking or breathing. The average American household now carries about $10,000 in credit-card obligations. This powerful, debt-fuelled consumption engine pulled not only the US economy, but that of the world, as other regions and countries, especially China, relied on the American market to absorb their exports. If this engine breaks down, and markets in other areas fail to grow in corresponding degree, the result will be a worldwide crisis of overproduction.
The financial turmoil engulfing the US economy could well represent the initial stage of such a global contraction. For the past quarter-century, the US economy has been sustained by a series of debt-inflated bubbles: junk bonds in the 80s; the dot-com boom of the 90s; and, perhaps finally, the housing mania now come a cropper. Each of these crises has been characterised by a large discrepancy between real capital (the value of actual assets) and fictitious capital (the book value of assets over and above their actual value).
Such discrepancies are a feature of nearly every capitalist crisis. The difference this time is that, when each bubble burst, economic catastrophe was averted less by an intervening renewal of real value creation than by the inflation of yet another bubble. During these years a series of scandals erupted (Enron being only the most infamous), in which top executives employed accounting tricks to maintain the value of company stock. Throughout this period as well, the US government - including American capitalism’s grand exalted shaman, then Federal Reserve chairman Alan Greenspan - had little to offer in the way of economic strategy apart from the easing of government regulations and lowering interest rates to promote serial bubble expansion. As George Bush, in the wake of 9/11, proclaimed a holy war against terror, he exhorted Americans not to shirk their supreme patriotic duty: shopping.
To avert fallout from the bursting of the dot-com bubble in 2001, the Federal Reserve deliberately pumped up the housing market, making mortgages available on easy terms. As long as housing prices continued to rise, homeowners who found themselves short of cash could always refinance their mortgages (ie, borrow more against the rising value of their homes). Home-buyers took out unaffordable mortgages on the assumption that enhanced property values would enable them to meet their obligations at some future point. Bank officers, with the aid of ‘liar loans’ containing numerous unpleasant details in the fine print, could count on a healthy commission for each mortgage signed. Bank executives would also receive bonuses on the securitised mortgages sold to investment houses, which could in turn use these as collateral for further loans.
As in all capitalist binges, no-one liked to think about the impermanence of the conditions sustaining it: that interest rates might one day go up or the housing market become oversupplied.
Then the inevitable occurred: housing prices began to tumble, and millions of mortgage-holders found themselves unable to pay off their debts. The economy, having run up against the barrier of restricted consumption, resembled the old Warner Brothers cartoon character, Bugs Bunny, dashing forward so fast that he fails to notice he has gone off the edge of a cliff, and then finds himself suspended in mid-air just long enough to comprehend that there is nothing between him and the ground.
The extent of the losses from this crisis are difficult to appraise, since it is far from over. But the bailout has failed as yet to stabilise the stock market (which has just lost seven percent on the day I write) or prevent the financial panic from metastasising to the larger economy - of the country and the world. Its effects are already being registered in multiple indices, from drastically lower spending on key consumer durables like cars, to rising unemployment numbers. The housing mania could also have represented the final frontier of fictitious capital, since there is no other readily inflatable bubble in sight. If this is the case, it can only mean the further reduction, more drastic than before, of the vaunted American standard of living (long surpassed by other countries, anyway). But how will the sacrifice be shared out? Here we pass from economics to politics.
Who pays?
The onset of the crisis knocked the ground from under the feet of the two major presidential candidates. Especially comical were the antics of John McCain, who, in accents reminiscent of Herbert Hoover in 1929, first responded by saying that the fundamentals of the economy remained sound. Then, as Armageddon drew nigh the same afternoon, McCain said that by ‘economic fundamentals’ he was referring to American workers. This pathetic fudge provoked the derision of the usually sympathetic media.
McCain next announced that he would temporarily suspend his presidential campaign and rush to Washington - like Superman to the rescue - to help Congress solve the financial mess. He called for a postponement of his scheduled television debate with Barack Obama. He then did little in Washington besides listening to Bush at a White House meeting, and showed up for the debate anyway.
In the debate and on the campaign trail, both candidates are sounding the same faux-populist notes, blaming “Wall Street greed” and calling for tighter regulation (McCain prefers “oversight”) of bankers and investment houses, without becoming overly specific. Their insincerity is evident from their instant support for Bush’s bailout of the very ‘fat cats’ they inveigh against.
In this support, Obama and McCain are at loggerheads with perhaps the majority of the American people. Part of the initial Republican opposition to the Bush-Paulson plan in the House of Representatives sprung from free-market-fundamentalist opposition to the wider role the government will now surely play in the economy. But Congresspersons could hardly ignore the emails that inundated their offices immediately before the vote, running nine to one against the administration proposal. This opposition contains more than a hint of class anger.
For decades the entire political establishment, Republicans and Democrats alike, had been incanting, ‘Free markets good, government interference bad!’ They had also told the people that the market rewarded the industrious, punished the lazy, and valued both people and things at their true worth. Although the left correctly pegged such preachings as ideological deception, many Americans took the rhetoric seriously. Now they are being forced to put up $700 billion to rescue a pack of swindlers.
Hillel Ticktin is right to point out that the bailout is designed not to salvage individual companies, but the entire financial system - whose breakdown, proponents of the bailout point out, would mean dire consequences not only for financiers, but for large numbers of ordinary people. The system, however, revolves around Wall Street behemoths, and is most easily propped up, if it can be propped up at all, by coming to their aid at public expense.
The people are justified in their anger. Socialists must categorically reject any attempt to use the spectre of hard times to convince them that restoring the profits of finance capital is the only answer. The immediate demand should be direct government relief for homeowners in the form of bankruptcy protection, emergency loans, direct subsidies or some combination thereof. The wider demand for nationalisation of the banks, long derided by liberals as unrealistic, may seem a little less so today in light of the fact that a partial nationalisation has already taken place on behalf of the oligarchs. It can also be carried out to save their victims from ruin. In contradistinction to left liberals, socialists must demand these things regardless of their acceptability to capital.
It would be pointless to become fixated on the scholastic question of whether the above demands are achievable under capitalism or transitional in character. Some demands that Trotsky assured us in 1938 could never be realised this side of revolution were in fact achieved, at least temporarily, without threatening the rule of capital (eg, the indexing of wages to inflation). It is also true that, under Roosevelt’s ‘new deal’, the Home Owners Loan Corporation did provide relief to many distressed mortgage-holders by granting credit on easy terms. But that took place in another era.
We can be certain that such measures are far from the minds of those who preside over currently existing American capitalism, and that, whoever becomes the next president in January (Obama, as it now looks) will be in for a bumpy ride - along with those in power all over the world.
