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Monday, October 6, 2008

Alan Wood on Financial Crisis

This is a Marxist analysis of the recent financial crisis. It is from marxist.com. Wood's view that since the government has to take over or bailout the big financial institutions people may begin to wonder why they should ever be paying for big profits for the private banks and may opt for outright ownership by the government seems mistaken. This is the common practice under capitalism of hospitalisation in which private institutions are nationalised injected with taxpayer money and when they get well privatised again.
Wood makes a good point that the increased debt load will force government, states, and municipalities to cut out programs as their budgets will be stretched. Already there are signs of this in the U.S.


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.

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