Saving Capitalism from Capitalists; for Capitalists

The explosion of the crisis in world capitalism has engulfed all countries, and its tremors are being felt throughout the world. Developing and developed; America, West and East Europe, Russia, China, India - all the economies have been severely shaken.

This explosion of the crisis is being termed ‘systemic meltdown’, ‘financial tsunami’ and cries are being heard starting from ‘end of finance capital’ to ‘end of Americam capitalism’ and also ‘end of capitalism.’ Neoliberal economists advocating ‘market knows the best’ are out of market, and the ink of neoliberal writers has dried. Fukuyama, who termed the end of the Cold war as the final victory of capitalism and declared the ‘end of history’, has once again started writing on history. The claims of the end of the challenge of socialism and of the unbridled continuing of capitalism are on their way to the grave even before reaching the age of majority. Entire world capitalism is going through violent turbulence. The campaign of sole superpower America to secure world hegemony is stuck in deep morass.

 About this crisis the IMF has said in the World Economic Outlook, "The current financial crisis erupting in August 2007" is "the longest financial shock since the Great Depression inflicting heavy damage on markets and institutions at the core of the financial system." The President of the American Federal Reserve, Bernanke, who is considered an expert on the Great Depression, is as clueless about the current crisis as were the bourgeois economists of the boom period of 1920-29 about the Great Depression which began in 1929. Just like Irving Fisher who advocated development in the world under capitalism through ‘trickle down’, bourgeois economists of today trained in the school of  Friedmann and Washington Consensus are paralyzed at this explosion of  the economic crisis. Those who shouted themselves hoarse over the past two decades that the state should be kept away from economic life are today loudly demanding intervention by govts. Rulers of America and other western imperialist powers who had been preaching end of govt. intervention, ‘privatization’ and ‘Market Economy’ to third world countries, are pouring trillions of dollars to save the capitalist financial institutions. The place of ‘Govt is the problem’ (Reagen 1980) and ‘The era of big govts is over’ (Clinton 1996) has been taken in a big way by advocates of govt. intervention. Just as Herbert Hoover, supporter of letting the market decide and an advocate of ‘trickle down’ had become an ardent follower of govt. intervention after the Great Depression, the poster boy of neoliberal economists, George Bush, is the vehicle of govt. intervention in today’s America.

The current explosion of the economic crisis started from America and spread to the whole world. The policies of globalization being implemented since over the past about two decades have a big role in the effect of this explosion being worldwide. Under globalization the loot and exploitation of world markets, natural resources and labour power by imperialist capital was made impediment free. Removing all thorns from the path for finance capital of imperialist countries was its main aspect. That is why the financial meltdown beginning from America has taken  the markets of the whole world in its grip.

An estimate of this explosion of the financial crisis can be made from the fact that in the past one year ending the first week of October 2008, the value of shares in America has fallen by 42%. In Japan, the second biggest economy of the world, the Nikki Index has declined by 30% i.e. almost one third, in one month. Russia’s share market has lost 70% of its value. The loss in European markets is also around 50%. In China and India in the past six months ending mid October, the share markets lost 51% value.

 This explosion of the economic crisis took place due to financial crisis in America. Its first victims were investment banks. The bursting of the 7 year old bubble of housing construction in America and Europe, began this crisis. Actually, since 2001 there was massive increase in the prices of residential accomodation and the housing construction industry had a big role in the economic growth in this period. In 2005 The Economist had given a warning regarding the housing bubble, "The total value of residential property in developed countries rose by more than 30 trillion dollars (1 dollar approx Rs. 50) over the past five years  to over 70 trillion dollars, an increae equivalent to the 100% of these countries' combined GDP. ........ This is the biggest bubble in history’.

This bubble did not emerge spontaneously. The Federal Reserve of America had a big role to play in making it. With the bursting of the bubble of new technology industry in 2000-01, with the down fall of Enron and world.com, under the leadership of Greenspan the Federal Reserve created this new bubble. The interest rate was decreased till it was one percent. A vast amount of money was provided for this new bubble at this minimal interest rate.

It is necessary to know some other important facts regarding the building of this bubble and its worldwide effects as well as about its relationship with America’s world strategy. Realizing the role of investment banks in the Great Depression of 1929, the American Congress had  enacted the Glass-Steagall Act in 1933 of banking reforms separating the investment banks from the commercial banks so that depositers could be protected from the speculative activities of investment banks. This law was repealed in 1999 through Gramm-Leach-Bliley Act signed into law by the then President Bill Clinton. Since then investment banks could again use the capital of commercial banks. Investment banks have a very small capital base, but make very big investments. For this they use the capital of commercial banks and by risky investments try to earn maximum profits in the shortest possible time. Their leverage with the commercial banks is the key to their profits and also to the crisis of banks.

In the greed to earn more and more profits, the leaders of the banks led by JP Morgan Chase, made one more unique invention. Earlier a  guarantee scheme (swap) was in place in international markets to safeguard against the effects of changes in value between different currencies and changes in interest rates of different countries. Taking this forward, banks started a guarantee scheme to cover non-repayment of loans (credit default swap) which in a way amounts to insurance of loans; that is the loan given by banks is insured. This way banks tried to safeguard themselves from risky loans. Govt rules do not apply to the insurance of these loans and this became a sort of dark matter in the financial system. The laws of general insurance have been applied to loan repayments also. Whereas one accident does not influence the probability of another such, but the non-repayment of one loan increases the probability of non-repayment of others. But the advocates of finance capital sitting in govt. and the banks had nothing to do with this; they were engrossed in creating bubbles by using the same money repeatedly. No govt. regulation applied to this accumulating dark matter.

Alongwith, the banks started selling these loans by making them agents of capital investment. The loans were sold as securities. These loans were sliced and also mixed with other investments and sold world wide as investments. In this manner these loans went from investment banks via commercial banks and entered the entire financial system. Banks all over the world including investment banks and financial institutions bought these securities and investment instruments and included it in their assets. In 1997, J.P. Morgan divided loans of 9.7 billion dollars into smaller parts and sold them at the rate of 10%. Mathew Phillips wrote in Newsweek, "We made it possible for the banks to get their credit risk off their books and into non-financial institutions like insurance companies and pension funds." Insurance of loans, opaque dark matter, whose value was around 100 billion dollars in 2000, increased in value to 64 trillion dollars in 2007, almost equal to the size of the world economy.

Alongwith this ‘dark matter’ being accumulated in banks and other financial institutions, a ‘derivative’ market developed on a large scale in which trade began on profits anticipated in the future. This market increased to 596 trillion dollars. Here trade occurs on speculated rates of the future - for example, the delivery of a given amount of oil at a fixed time in future at a given rate. This is the most distorted form of speculative trade termed by Warren Buffet as a ‘financial weapon for mass destruction’.

Armed with these weapons, investment banks and financial institutions created the bubble of housing construction and sold it worldwide as an investment. Two fifths of new employment created in America in the past five years is linked to construction industry. This bubble was based on the continually rising costs of residential houses. But neither was this possible and nor did it happen. With the fall in the cost of these houses the payments of mortgages began stopping. The value of the houses became less than the amount of mortgages. The total value of mortgages of houses in America is 10.6 trillion dollars, in which approximately half is in the hands of two companies, Fannie Mae and Freddie Mac. The bubble burst. The investment banks began failing one after another. Due to their nonrepayment of loans, threat loomed over the banks. Bear Stearns was the first to go. Lehman Bros, Goldman Sachs, Morgan Stanley, Fannie Mae and Freddie Mac all failed. Insurance companies who had insured the loans collapsed under this weight. Amongst them the biggest is American International Group (AIG). These insurance companies were themselves uninsured. The crisis reached the banks. Washington Mutual, established in 1889, collapsed, and one of the big banks Wachovia was sold. The balance sheets of big banks began to be pressed under the weight of these papers which no longer had value in the market. Banks stopped giving loans, and the exchange rate of banks (the interest rate  for giving each other loans) went skyward. The financial crisis changed into a currency crisis. Banks, suspicious of each other, started shying away from advancing loans and began asking for repayments in cash. At the time of crisis the reliance on ‘imaginary capital’ evaporated. "This fictitious money capital is enormously  reduced in times of crisis, and with it the ability of its owners to borrow money on it on the market." (Karl Marx, Capital, Vol III,  Page 493). At the time of crisis the credit system suddenly changes into monetary system. (ibid, Page 536)

The effect of this explosion of the financial crisis, the effect of banks not giving loans was bound to fall on the real economy. Loans are like blood permeating through the body of capitalist production, the effect of whose drying up can be easily understood. The crisis of real economy i.e. production of goods and services started further deepening. During the past nine months over seven lakhs have been rendered unemployed in the US and worse is anticipated. Industrial production has fallen and alongwith retail sales also (Paul Krugman). The rate of inflation reached 6% and the real wages of workers fell. Construction of new housing decreased by one third (30%). 36 lakh people lost their homes (Stiglitz). The rates of houses fell widely in England and Germany also.

With this explosion of the financial crisis the American rulers came into action. Bernanke, the President of the Federal Reserve, who was denying the possibility of any financial crisis, along with Treasury Secretary Paulson and President Bush moved from ‘govt is the problem’ to ‘govt alone can solve the problem.’ When 40 billion dollars to JP Morgan to buy Bear Stearns, 200 billion dollars for Freddie Mac and Fannie Mae and 85 billion dollars to American International Group proved to be a grain in the camel’s mouth, Bush administration  proposed a bail out plan of 700 billion dollars. Its main aspect was buying of the toxic mortgage papers. But this also has a catch. If these are bought at market value the crisis would further deepen and if they are bought at their face value the money of the people would have to be given to the profit mongerers. What the representatives of the profit mongerers decided is not hard to guess. The size of this bailout can be estimated from the fact that since its establishment in 1947 to date the International Monetary Fund (IMF) has given loans totalling 506.7 billion dollars. The total bailout announced by the US Administration till now has reached 1100 billion dollars though the entire amount is estimated to be many times this. If the bailouts of European countries are also included (Germany 695 billion dollars, France 490 billion dollars etc.) the entire amount has crossed 3000 billion dollars in which concessions given on govt loans are not included.

The 700 billion dollar package proposed by American Administration met with widespread opposition among American people and it was termed as saving ‘Wall Street’ at the cost of ‘Main Street’. Noriel Roubini called it ‘socialism for the rich’, Ben Tanosborn termed it ‘economic terrorism’, Schiller called it ‘financial socialism’ (Washington Post), Paul Sweeny of AFL-CIO said the ordinary workers are thinking that, “big guys bailing out their friends", Caprio called it "There is a lot of outright looting going on". The vast majority of American people were against this bailout. Timoty Garten Ash called it the clash between democracy and capitalism. It is easy to guess who won this clash. The first vote in the House of Representatives rejected the bailout. Later some superficial changes were made. The insurance limits of depositors was increased from one lakh dollars to 2.5 lakh dollars and to give this insurance, provision was made for the Federal Deposit Insurance Agency to be given money from the Govt. Treasury. Provision was added to continue the loan free scheme which was due to expire and to postpone the alternative minimum tax for one year. Alongwith the money to be spent by Members of House of Representatives was increased to gain additional votes. In the end, the proposal was carried. For sale and purchase of parliamentarians American rulers can still learn from our rulers.

To reconcile the dispute between Wall Street and Main Street, the American rulers revealed the fact that the question is not only of big capitalists, even people’s money is involved. The govt. had given money of pension funds, saving schemes and other welfare funds to speculators via the banks and this money had also sunk. The unprecedented unity of  America’s rulers was also on display with President Bush and the two main contenders for the post of President - Obama and MacCain - standing on the same side just few weeks before the Election.

This explosion of the financial crisis and the attempts by rulers of imperialist countries to overcome this crisis through governmental intervention has exposed the real character of the present imperialist economic system i.e. the system of finance capital. The initiative of govts of capitalist countries (the boards of directors of financial capital) to resolve this crisis is to place the people's money at the service of the capitalists. Like American Congressman Barney Frank said, “The private sector got us into this mess. The Govt has to get us out of it." Kenyes is once more being remembered in order to get out of the crisis. Kenyes, exiled from offical economics in the era of Friedmann and Washington Consensus, is being reinstated for saving capitalism. The “new deal’ of FD Roosevelt is being remembered.  American followers of Keynes are supporting government bailout calling it as essential. Not only for banks, but even to revive the markets they are eager on spending the people's money. Once again capitalists want to solve their crisis by making the workers pay for it.

The neoliberal economists who were dazed by the financial crisis are once again trying to enter the field. They are blaming not the markets (capitalism) but distortion of markets (capitalism) for the crisis. Even for the mortgage crisis they are blaming the govt. for schemes for making housing available to those with less incomes. However the creation of this bubble accelerated after 2000 when the neoliberals themselves had the total control. They ignore the role of financial institutions in this. They also advocate the use of govt. money as  a solution, but oppose the buying of shares of banks by govts calling this ‘nationalization’ and labelling it as ‘socialism’. However, right now the field is in the hands of the Kenyesians. Milton Friedmann who died in Nov. 2006, should have lived a bit longer to not only see the demise of his theory but also its destructive potential.

Though the explosion of the financial crisis is massive, but it is neither unexpected nor without reason. Imperalism (rule of finance capital) was born out of the crisis of capitalism. It has continually moved from one crisis to another. Today the economy of America, the leader of the imperialist camp, is in bad shape. It has a foreign loan of 10.2 trillion dollars and so the bailout plan includes raising the statutory limit of govt. loan from 10.6 trillion dollars to 11.3 trillion dollars. The household loans in America, which were 50% of the GDP in 1980, increased and equalled the GDP in 2007. Alongwith, the loan of the financial sector, which was 21% of GDP in 1980, increased to 116% in 2007. The housing construction bubble is not alone, rather several bubbles are there ready to burst in the American economy; car loans, credit card, student loans etc. According to Paul Voicker, former President of Federal Reserve, there have been five major breakdowns over the past 25 years and American economy has been lurching from one crisis to another. The point to remark on is that this time the crisis has taken on explosive dimensions which the American administration is not able to stem.

If despite such a big loan, despite such major crisis in its economic system, America is not only  the richest imperialist country, but is also pouring money like water into wars, one big reason for this is that its currency, the dollar, is the international currency. According to the provisions in America the Federal Reserve prints dollars in exchange for bonds issued by the Treasury Dept. of the American Administration. But these additional dollars, instead of increasing the circulation of currency in America, are used up in the international market and bought up by govts of different countries. In this manner govts of different countries are making good the deficits of the American Govt. Even the massive expenditure on wars being incurred by America are coming from China, Japan and oil producing countries of Middle East. That is why people like Paul Voicker insist that America must use it political and military  power to keep the dollar strong at all costs.

The current economic crisis is not going to pass off soon because its causes are deep seated. It is not due to any sudden event, but has come to the point of explosion as a logical result of capitalism. It has happened at a time when the entire world is under one capitalist market and the external situation has been favourable to it. It has occured due to its internal contradictions. This crisis has also raised questions about the international organization of capitalism.

According to the Finance Minister of Germany, Peer Steinbrueck, as a result of this explosion, America’s status of sole superpower is under threat. Within America also, voices are becoming louder against Bush’s unilateralism. This unprecedented financial crisis is raising questions about America’s economic capacity. They are having to face the consequences of not learning the correct lessons from the collapse of the soviet social imperialist superpower.

(Translated from Pratirodh Ka Swar, October 2008)