[Marxism] A crash course in capitalism
lnp3 at panix.com
Mon Dec 8 12:01:52 MST 2008
A crash course in capitalism
The seism on Wall Street has surprised the world Establishment. At the
summits of power, panic and alarmist declarations dominate. Everyone is
absorbing an event which could be the beginning of a change of epoch.
The comparison with the fall of the Berlin Wall gives some indication of
this historical dimension.
The present crisis started to incubate in June 2007, with the collapse
of the insurance funds managed by Bear Stearns, and demonstrated its
force with the nationalization of the British bank Northern Rock. From
this gestation we moved on to events the profundity of which is obvious
Dimension and costs
The rapid conversion of problems of liquidity into insolvent deficits
illustrated from the beginning the enormous dimension of a crisis which
could not be contained by partial patching up. The reduction of interest
rates proved to be useless, just like the attempt to form rescue funds
managed by the banks. Nor was making large sums of money available or
the assistance of the external sovereign funds sufficient.
The government of the United States undertook several contradictory
initiatives to attenuate the explosion. By allowing Lehman Brothers to
go bankrupt it opened up the possibility of a brutal cleansing of the
banks which were failing and tried to place certain limits on rescue
operations. It thus granted the Federal Reserve full powers to judge who
should be saved and who could drown. But since that sowed terror among
financiers, it quickly backtracked.
The opposite alternative, aiming at nationalizing all the losses, was
consolidated by the nationalization of AIG. The official support granted
to the largest world insurer (and to its gigantic portfolio of pension
funds) thus supplemented the previous rescue of Fannie Mae and Freddie
Mac, which finance half of housing in the United States. The fact that
these semi-public institutions were contaminated indicates to what point
the initial problems of bad quality debts (subprimes) had already been
The new series of nationalisations came to the aid of the latest victims
of the hurricane: hedge funds, venture capital funds(which operate with
highly speculative financial products) and money market funds (which
accumulate investments that are less audacious and not without
government guarantee). But in fact the it was the commercial banks that
constituted the critical point.
The bankruptcy of Washington Mutual inaugurated the collapse which
threatens to extend to 117 minor entities surveyed by the FDIC (the
official guaranteeing body). Certain estimates forecast that the last
rites will be said over half of the 8,500 US banks. In any case, the
crisis has already reached the investment banks (which raise money
directly in the financial circuits) and is affecting the entire system,
with interbank operations becoming paralysed and insinuations of
deposits being in danger.
We are also seeing a vertiginous wave of acquisitions within this
framework. Merrill Lynch was captured by Bank of America, Bear Stearns
was taken over by Morgan Stanley, Wachovia passed into the hands of
Citigroup (or Wells Fargo) and Goldman Sachs put its package of shares
up for sale. This virulent change of owners extended on an international
scale, with the acquisition of Britain’s HBOS by Lloyds and the
absorption of subsidiaries of Bradford and Bingley by the Spanish bank
Some buyers (Barclays) are pocketing the small change of their old
competitors (Lehman) or foraging among their leftovers. The result of
all that will be a new level of banking concentration. Those who will
survive their gambles (possibly the trio JP Morgan Chase, Bank of
America and Citigroup) will take the leadership of the whole of the
American financial system. This centralization is being preceded by a
furious devaluation of the capital concerned, handled up until now in
the financial sphere.
Another option underway is that of the nationalization of toxic
mortgages, an option that Congress is examining in a climate of
blackmail by the Stock Exchange. The financiers (presented as “the
market”) demanded government aid to stop the economy going under
(“restoring confidence”). They asked the government to purchase the
depreciated securities in order to revalorize them before reselling them.
This rescue resembles that obtained by Mexican financiers in 1995. There
too the state bought the devalued securities, thus cleansing companies’
balance sheets, and marketed bonds at a pure loss for the state budget.
The speculators had created a climate of panic so that this new swindle
would come as a blessed relief.
But this time the shameless aid brought by the state to those
responsible for the collapse produced an indignation against the bankers
which called into question their sacrosanct rules of the free market.
This rejection of Wall Street - which had not been seen since
Roosevelt’s time - obliged the legislators to incorporate some
restrictions on the blank cheque initially asked for by the Federal
Reserve. The amendments thus include tax reductions of various kinds, to
create the illusion of a more equitable distribution of the load.
The widespread malaise expresses, moreover, a massive intuition that
there has been a useless waste of resources. If the future confirms that
two thirds of mortgage credits are completely irrecoverable, a mountain
of money will have been frittered away. It is obvious that no financial
engineering can resist the continuing collapse of property prices, nor
the unending deterioration of the income of house-buyers.
For this reason Congress is also sponsoring a certain form of
renegotiation of mortgages between those in debt and the banks, with the
mediation of the state. But only a context of economic recovery - which
appears distant - could provide support for such an initiative.
For the moment, what predominates is a crisis without an foreseeable
solution, which has put into question all the neo-liberal principles. In
a climate of state intervention and subsidies, the regulator is welcome
and the market is challenged. But as the rescue is not free, it will be
necessary to resort to an operation whose cost is unknown. The emission
of securities on securities was so sophisticated that nobody is in a
position to calculate the amount concerned. In July 2007 the Federal
Reserve estimated the losses at around 50 billion dollars. At the
beginning of the year 2008 the figure leapt to 512 billion dollars and
current evaluations turn around 1,000 to 2,000 billion dollars. How will
such a bill be paid?
The great banking crises of recent decades had colossal costs for the
underdeveloped countries. They represented 55.1 per cent of the Gross
Domestic Product (GDP) of Argentina (1980-1987), 55 per cent of that of
Indonesia (1997-2004) and 34 per cent of that of Thailand (1997-2004).
But this percentage hardly reached 3.2 per cent of GDP at the time of
the last great financial rescue operation in the United States
(1981-1991). This is the first time in decade that the leading world
power will have to face a full-scale financial loss.
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