“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 worst 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 pressurised 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 worst 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.”
- Socialism for the rich, capitalism for the poor! by Michael Roberts (September 26, 2008)
- The credit crunch – one year on by Michael Roberts (September 16, 2008)
- Why you should worry about Fannie and Freddie by Mick Brooks (July 15, 2008)
- Hedge funds, speculation and capitalism by Mick Brooks (July 14, 2008)
- The dollar down the pan – monetary chaos to follow? by Mick Brooks (May 1, 2008)
- Capitalism beared by Michael Roberts (March 27, 2008)
- US slides into recession - who's next? by Mick Brooks (March 17, 2008)
- Financial meltdown: another day, another finance house bites the dust by Mick Brooks (March 17, 2008)
- 1929: Can it happen again? by Mick Brooks (March 17, 2008)