Workers Vanguard No. 921
26 September 2008
Wall Street Nightmare Stalks Working People
Break with the Democrats, Republicans—For a Revolutionary Workers Party!
For a Socialist Planned Economy!
“Robbing a bank’s no crime compared to owning one!”
—Bertolt Brecht, Happy End
SEPTEMBER 22—The mushrooming economic crisis that exploded on Wall Street this month, triggered by the collapse of the housing price bubble last year, reduced some of the country’s, indeed the world’s, most powerful financial institutions to twisted wreckage. On September 7, the Bush administration nationalized the two home finance giants, Fannie Mae and Freddie Mac—which hold or guarantee half of all U.S. residential mortgages—pledging a bailout of up to $200 billion. One week later, Lehman Brothers, an investment bank with assets greater than the gross domestic product of Argentina, abruptly filed for bankruptcy. Meanwhile, Wall Street colossus Merrill Lynch (“We’re bullish on America”) averted collapse by selling itself at a fire-sale price to Bank of America. Fearing a worldwide financial panic, the Federal Reserve (the U.S. central bank) arranged an $85 billion bailout for the American International Group (A.I.G.), one of the world’s biggest insurance companies, with the government taking over an 80 percent share of the firm’s ownership.
For years, Wall Street fat cats raked in multimillion-dollar salaries and bonuses as they gambled their banks’ money on various speculative schemes, most recently on the U.S. housing market. Now that the housing bubble has burst, it is not enough that millions are in danger of losing their homes; working people are now forced to watch as their tax dollars are spent on bailouts to replenish the coffers of those responsible for their ruin. Both presidential candidates, Democrat Barack Obama and Republican John McCain, have only minor objections to the bailout plans. Now the Bush administration is proposing an even vaster bailout—the largest in U.S. history—in which the government would buy banks’ troubled mortgage-related assets to the tune of up to $700 billion! New York Times business columnist Joe Nocera likened the proposal to a Hail Mary pass in football, remarking that “most of the time they fail.” Many working people are rightly furious that more than a half-trillion dollars were found to bail out Wall Street while millions are without jobs and health care and face the threat of losing their homes.
With the economy already sliding into recession, the financial meltdown threatens a much deeper economic crisis. Credit markets internationally froze up quickly last week as fearful bankers hesitated to lend—even to each other—and investors shifted their money into the safest havens, like U.S. Treasury bills and gold. Even money market funds, which have long been regarded as just as secure as T-bills, are in trouble. After the oldest such fund, the Reserve Primary Fund, redeemed its investors’ deposits by paying only 97 cents on the dollar, the government rushed to commit up to $50 billion to stanch a wave of withdrawals from money market funds that resembled a classic bank run.
The choking off of credit means that businesses will slash investment plans while consumer spending—which accounts for two-thirds of the country’s economic activity—will take yet another hit. At the same time, the living standards of working people are being driven down by a sharp increase in the inflation rate, especially for food, gasoline and utilities. The Wall Street Journal (18 September) titled a front-page article: “Worst Crisis Since ’30s, With No End Yet in Sight.”
It could scarcely be clearer that working people need a party that fights for their class interests, a workers party committed to sweeping away the capitalist system through socialist revolution. We stand for the political independence of the working class from the capitalist class enemy. We are opposed to any political support to any capitalist politician—Democrat, Republican, Green or “Independent.” A vote for any bourgeois candidate is a vote of confidence in the reformability of capitalism and a vote against the need for socialist revolution.
The burgeoning financial crisis highlights the destructive irrationality of the capitalist system. Since last August, when nearly the entire spectrum of credit markets first seized up, the U.S. and other central banks have provided hundreds of billions of dollars in short-term loans to large banks—in addition to pledging hundreds of billions more in bailouts. Yet the highest pinnacles of finance capital continue to totter as major financial institutions such as Washington Mutual, the country’s largest savings and loan, scramble to stave off bankruptcy.
Like all the inevitable economic crises that occur periodically under capitalism, the current crisis reflects at bottom a key contradiction in capitalism identified by Karl Marx and Friedrich Engels: Under capitalism production is socialized, that is, concentrated and organized in vast corporations, but the means of production—and the appropriated, socially produced wealth—remain the private property of a few. V.I. Lenin, leader of the 1917 Russian Revolution, in his 1916 study Imperialism, the Highest Stage of Capitalism, described how imperialism, the system of modern, decaying capitalism, “leads directly to the most comprehensive socialisation of production” under capitalism. Lenin emphasized that the monopolization of production and the dominant role of finance capital impel the imperialist powers to divide the world as they strive for markets and spheres of exploitation in more backward capitalist countries. He explained:
“The development of capitalism has arrived at a stage when, although commodity production still ‘reigns’ and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the ‘geniuses’ of financial manipulation. At the basis of these manipulations and swindles lies socialised production; but the immense progress of mankind, which achieved this socialisation, goes to benefit...the speculators.”
Socialized production must be extended to socialized ownership through the producers taking control of society. The way out of the endless cycle of capitalist economic crises and imperialist wars was shown by the Bolshevik Revolution, when the Russian workers took power in their own hands, expropriating the bourgeoisie and establishing a workers state. We fight for international socialist revolution, for the collectivization of the means of production and for economic planning on an international scale.
Financial Crises and the Anarchy of Capitalist Production
In a recent three-part series, “Capitalism U.S.A.,” we called the U.S. economy “a rickety financial house of cards” in which there has been an enormous expansion of debt by households, corporations and the federal government (WV Nos. 910-912, 14 and 28 March and 11 April). Real earnings for most U.S. households are lower today than they were at the end of the 1990s. To make ends meet, working people have borrowed against equity in their homes, maxed out their credit cards or otherwise had recourse to the loan sharks of Wall Street, with many working additional shifts or even two or more jobs. Between 2002 and 2006, household borrowing grew at an average annual rate of 11 percent, while borrowing by financial institutions grew by 10 percent per year.
The deterioration in the condition of the working class is directly related to the deindustrialization of America. Since 1979 the share of the labor force employed in the goods-producing sector has fallen steadily from almost 28 percent to under 15 percent. Meanwhile, the U.S. trade deficit, which is equal to more than 5 percent of the gross domestic product, is far higher, in absolute terms and in proportion to GDP, than in any other major capitalist country. The result is an historical anomaly in which the world’s most powerful capitalist power is also the world’s leading debtor.
Consequently, Asian countries and the Persian Gulf states are accumulating an ever larger stock of U.S. Treasury bonds and bills as a major component of their foreign-exchange reserves. With financial crisis in the U.S. and a steadily declining dollar, this state of affairs is a potential source of enormous instability for the world economy. Should central banks change their minds about parking their capital in U.S. government debt and begin to diversify quickly out of dollars, it could trigger a quantum leap in interest rates and precipitate a world economic downturn. Meanwhile, the flight of money capital into commodities—combined with increasing biofuel production—has helped drive up world food prices, threatening tens of millions with starvation (see “Imperialism Starves World’s Poor,” WV Nos. 919 and 920, 29 August and 12 September).
Shunning investment to expand and modernize industrial capacity and to repair the country’s crumbling infrastructure, such as bridges, roads, power grids and levees, American capitalists have expended the economic surplus they appropriate through the exploitation of labor on a succession of speculative binges. First came the stock market boom driven by the supposed “revolution” in information technology (the IT/dot-com hoopla) in the mid-late 1990s. This was followed by the housing bubble—subprime mortgages and all that—in the early-mid 2000s.
Today, we are witnessing a classic financial crisis such as described by Marx in Capital (Volume III):
“This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction.”
The current crisis was conditioned by a broad transformation of the U.S. financial industry since the late 1980s that was exemplified by the repeal, under the Clinton administration, of the Glass-Steagall Act, a Depression-era law that sought to limit speculation by commercial banks. A component of that transformation was the explosive development of derivatives and other forms of “financial engineering.” A major attraction of entering into derivatives contracts for the purpose of speculation is that often very little money needs to be spent up front. In such highly “leveraged” investments, both the risks and the possible payout can be astronomical. “Financial engineering” also allows large banks to offload risk onto others. For example, when a bank issues bonds using mortgages as collateral, the buyers of those bonds take on the risk that the mortgages will default.
The enormous expansion in the volume of mortgage-backed securities is what Marx called fictitious capital. This is an increase in paper wealth that is not based on an increase in productive capacity (e.g., in factories, electric-power plants, transport systems, communications networks) or in this case even by an increase in the quantity and quality of consumer goods. The same house that would have sold for, say, $400,000 in 2002 was selling for $600,000 in 2006.
As the bottom fell out of the U.S. housing market and mortgage defaults began to soar, the value of mortgage-backed securities went into free fall. As the financial crisis broke out last fall, the Washington Post (1 August 2007) explained:
“In the simple model of yesteryear, a bank would essentially borrow money from its depositors and lend it to households or businesses that needed loans. For every dollar it lent out, however, the bank was required to set aside some of its own money in reserve to cover losses it might suffer if some loans were not repaid.
“But all that went out with deregulation and the rise of financial engineering .
“Financial engineering has encouraged debt to be piled on debt, making the system more susceptible to a meltdown if credit suddenly becomes more expensive or unavailable. And that’s precisely what’s been developing over the past several weeks.”
Government Bails Out Wall Street: “Socialism for the Rich”
And so they have fallen, the titans of Wall Street, one by one. The first to go was the major investment bank Bear Stearns. Last March, the Federal Reserve arranged a fire sale and the firm was effectively liquidated into the bigger and wealthier JPMorgan Chase. To do so, the Fed had to guarantee $30 billion of Bear’s most “toxic” mortgage-backed securities. This kind of government bailout is a form of “socialism for the rich,” with public money being used to pay off financiers who made bad investments.
A prime example of the capitalist scam of privatizing profits while socializing debts is Fannie Mae and Freddie Mac. Fannie was set up as a government agency in the late 1930s and Freddie in 1970 to promote home ownership by increasing the pool of mortgage money. The former was privatized by Democratic president Lyndon Johnson in 1968 to help pay for the Vietnam War; the latter was created as a private corporation. Until the collapse of the housing-price bubble last year, the two financial giants generally made healthy profits that were distributed to shareholders via dividends and capital gains while the top executives took their own generous share in salaries and other perks.
Financiers throughout the world assumed that if Fannie and Freddie ever got into serious trouble the government would bail them out. The implicit government guarantee gave them a competitive advantage in borrowing at lower interest rates than banks and other financial institutions. And borrow they did. At the end of last year, the two had amassed $65 in debt for every dollar of their own capital!
When the subprime mortgage market went south last year, banks and other financial outfits cut way back on lending for residential mortgages. So Fannie and Freddie became lenders of last resort, financing 80 percent of all home loans this year. At the same time, the collapsing housing market caused huge losses in their holdings of mortgages and mortgage-backed securities. Last month, one independent analyst calculated that Freddie had a negative balance sheet of at least $20 billion and Fannie of $3 billion if their portfolio of securities were valued at current market prices. Their shares plummeted on the stock market while investors pulled back from buying their bonds. An important reason that the Bush gang, spearheaded by Treasury Secretary Henry Paulson, a former top Wall Street executive, decided to take over Fannie and Freddie was that 35-40 percent of the mortgage giants’ bonds were held abroad, mainly by Asian central banks and funds. If Washington allowed them to default on these debts, Asian governments and financiers could respond by dumping their U.S. Treasury bonds.
The main political champions of Fannie and Freddie have been Congressional Democrats, while the Bush regime took a jaundiced view of them. Liberal Democrat Barney Frank, chairman of the House Financial Services Committee, has staunchly defended the right of the government-sponsored enterprises to make a profit for their shareholders while urging them to divert some of that profit to finance housing for low-income families. This is a liberal version of trickle-down economics.
A week after the government bailout/takeover of Fannie/Freddie, Lehman Brothers declared bankruptcy. One of the most venerable institutions on the Street—it originated in the 1850s as a cotton exchange in Alabama—Lehman survived the Great Depression and several subsequent financial crises. But not this time. When mortgage-backed securities began their downward slide last summer, Lehman head Richard Fuld judged this to be a short-term blip in the market. He not only refused to sell off part of the firm’s securities portfolio, he even bought more. A fatal mistake. When Lehman announced a few weeks ago the biggest quarterly loss in its 158-year history, the already sharp decline in the price of its shares turned into a death spiral.
Fuld desperately tried to find a buyer for the firm, to no avail. As a last resort, he turned to a government bailout à la Bear Stearns, but this time the Treasury and Federal Reserve said no. The semi-official explanation is that Lehman’s demise had been anticipated for months by other major financial players who had presumably adjusted their policies to that eventuality. In effect, Paulson and Federal Reserve chief Ben Bernanke gambled that Lehman’s bankruptcy would not unduly roil financial markets. They lost that gamble big time. The next day, panic seized stock markets throughout the world, motivated in large measure by fear that A.I.G. would be the next to go.
A.I.G. is the central player in the estimated $60 trillion global market for credit default swaps. This is a form of insurance that investors buy to cover losses suffered by defaults on the securities they have purchased. (But the companies that issue such insurance do not have to keep reserves to cover the possibility of a payout!) If A.I.G. went bankrupt or failed to meet its insurance claims, financiers around the world would have to devalue the hundreds of billions of dollars in their security portfolios. Furthermore, banks, suddenly deprived of default insurance on their loans, would be forced by government regulations to immediately raise large sums of additional capital. While the effective government takeover of A.I.G. did little to lessen the panicky conditions on Wall Street and in financial centers from London to Tokyo, Bush’s proposed mega-bailout of U.S. banks holding mortgage-backed securities has halted the downslide, for the moment. A day before the government bailout of A.I.G., the head of a money management firm warned: “Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression” (New York Times, 16 September).
The Liberal Nostrum of Financial Regulation
An interesting piece in a South African bourgeois newspaper, The Star (10 September), blamed the current financial crisis on the ideological triumphalism of the American ruling class following the counterrevolutionary destruction of the Soviet Union in 1991-92:
“In the absence of the restraining influence that an alternative system’s presence offered, however feebly, US-style capitalism moved into extreme mode . For market players much of the past 18 years has been rather like a drunk being encouraged to drink his way out of a hangover. Instead of acting as a restraining influence, the regulators seemed intent on accommodating each new session of binge drinking.”
This piece contains both an important component of truth and a fundamental falsehood. It is true that American bourgeois triumphalism over “the death of communism” was an important factor contributing to the deregulation of financial markets in the post-Soviet period. Here we should emphasize that the main steps of that program were carried out by the Democratic administration of Bill Clinton and spearheaded by his Treasury secretary, Robert Rubin, a Wall Street heavyweight who is now a top man at Citigroup. But it is a liberal illusion that a financial crisis of the current magnitude could have been prevented if only the old financial regulations had been maintained and strengthened. What we are now seeing is a consequence of the fundamental workings of the capitalist system, not an accidental occurrence caused by excessive financial deregulation.
Within just the last two decades, major financial crises have occurred throughout the capitalist world every few years. In 1990-91, a frenzied stock market and real estate boom in Japan collapsed, leading to more than a decade of economic stagnation in the world’s second biggest capitalist economy. In the late 1990s, a sudden outflow of speculative money capital wreaked havoc in the capitalist economies of East and Southeast Asia, from South Korea to Thailand to Indonesia. A few years ago the dot-com stock market boom in the U.S. went bust, ushering in a recession.
The need to restore and strengthen government regulation of financial markets is now the order of the day in Washington. In reality, at the core of the crisis are the big banks (which, despite the scrapping of Glass-Steagall, are still regulated) rather than the effectively unregulated hedge funds and similar financial operators. However, the government authorities pretty much let the banks do whatever they wanted as long as they were making money. But now they are regulating with a vengeance, this time to minimize the banks’ losses.
Thus, the Securities and Exchange Commission (SEC) has just banned the short selling of almost 800 financial stocks in an effort to prevent speculators from further depressing their prices. When a financial operator sells short, he typically borrows corporate stocks or other securities from a broker and sells them at the current price while agreeing to buy them back later (at an expectedly lower price) and return them to the broker. The difference is pocketed as profit. The intent and effect of the SEC ban on short selling is to strengthen the financial condition of the large banks at the expense of, for example, hedge funds, for whom the practice is their very life’s blood. One irate hedge fund manager exclaimed that the government is “turning a football game into badminton” (New York Times, 20 September).
The utter disarray of the captains of finance, central bankers and government officials charged with overseeing the economy has demonstrated the fallaciousness of monetarism, the dominant economic doctrine of the bourgeois right since the ascendancy of Ronald Reagan and Britain’s Margaret Thatcher in the 1980s. The ideologues of monetarism confidently maintained that economic crises could be minimized, if not eliminated, by adjusting the amount of money in the banking system along with interest rates. Today, that notion stands exposed as a myth.
Republican McCain has indulged in impassioned, pseudo-populist rhetoric usually associated with the left-liberal wing of the Democratic Party, ranting against “the greed and corruption that some engaged in on Wall Street” (New York Times, 16 September). Needless to say, Democrat Obama has blamed the current crisis on the Republicans’ “economic philosophy” that the market is always right. He should talk! One of his main economic advisers is Robert Rubin who as Clinton’s Treasury secretary was centrally responsible for scrapping key regulations governing banking practices that were established during the 1930s. The reality is, as the Wall Street Journal (17 September) clearly stated: “Despite the rhetoric, both candidates are looking at generally similar solutions.” That is, “solutions” to protect the interests of the capitalist class at the expense of working people.
Toward a Class-Struggle Labor Movement
That the highly despised Bush administration, backed up by the Democrats, has a free hand to unabashedly write billion-dollar checks to Washington’s cronies on Wall Street speaks to the low level of class struggle in this country. The increasing disappearance of good jobs and their replacement by McJobs, the slashing of pensions and health care benefits, the enormous weakening of the unions—all this and more takes place with the acquiescence of the pro-capitalist trade-union bureaucracy. Instead of mobilizing in struggle, they tie working people and the oppressed to the capitalist system, especially through support to the Democratic Party, the other party of American capitalism, racism and war. Every election year, millions upon millions of dollars of union members’ dues are wasted on backing one capitalist politician or another as a “friend” of labor, as is happening this election year with the unions’ support to Obama.
This bureaucracy, which parasitically sits atop the unions, is on the one hand susceptible to the demands of its working-class base. At times, it is pressured both by labor’s ranks and by the provocations of the bosses into strikes and other labor action. On the other hand, they have often thrown in the towel or signed egregious give-back contracts. But unions will not get anywhere playing by the bosses’ rules.
It is necessary to forge a new leadership of the unions based on the understanding that there are two decisive classes in capitalist society, the proletariat and the bourgeoisie, whose interests are irreconcilably opposed. A class-struggle leadership of the unions would fight for a series of transitional demands, which start from the current consciousness of wide layers of the working class and their daily struggles against the capitalists and lead to the program of proletarian revolution. The fight to mobilize labor in struggle for its class interests must include the fight against all forms of discrimination and for full citizenship rights for immigrants; for a shorter workweek with no loss in pay in order to fight unemployment; against the bosses’ union-busting “two tier” contracts; for union defense guards against the scabherders; for mass picketing and plant occupations to win strikes instead of bowing to the bosses’ laws.
To forge such a leadership requires a political fight within the labor movement to sweep away all wings of the pro-capitalist labor bureaucracy. This is integrally linked to the fight for a workers party—like Lenin and Trotsky’s Bolshevik Party—to provide revolutionary leadership to the struggles of the workers in the fight for socialist revolution and the building of a workers state where those who labor rule.
Expropriate the Exploiters! For a Workers Government!
The reformists of the International Socialist Organization (ISO) provide a classic social-democratic take on the financial crisis (Socialist Worker, 19 September):
“Now that they have bailed out the mortgage giants Fannie Mae and Freddie Mac, shouldn’t U.S. taxpayers have a say in the companies’ operations? Why shouldn’t the public owners of these companies insist on a moratorium on foreclosures on the loans owned or guaranteed by Fannie and Freddie....
“Now that the federal government has gotten into the insurance business with the takeover of the largest insurance company in the world, is there any justification for anyone in the U.S. going without health care coverage, much less 45 million people?
“And when the objection comes that the U.S. government will have to cut spending to pay for the Wall Street rescues, there should be no question about where the money should come from. The federal government could get the whole sum for the AIG takeover from the Pentagon budget and still leave the U.S. military with more money—many times over—than any other country in the world.”
Such a statement—including the ISO’s backhanded support to a (scaled-down) imperialist military force—could have been issued by such European “socialist” parties as the French Socialist Party or the Left Party in Germany. The ISO protests that its demands are not put forward by “either of the mainstream parties” because that “would strain at the boundaries of the profit system.” But their statement is intended to reinforce the reformist myth that one can smoothly make the transformation to “more butter, less guns” by taking over management of the bourgeois state.
As Karl Marx and Friedrich Engels taught long ago, the courts, cops, prisons and armed forces are core components of the capitalist state—a machinery of organized violence to protect the rule and profits of the exploiting class. An old socialist noted some years back, on behalf of the working people, that everything the bourgeoisie doesn’t have nailed down we are going to steal, and what is nailed down we are going to nationalize. Another, Sidney Hook, before he became a raving right-winger, used to worry whether expropriation should be with or without compensation. Hell, the Emancipation Proclamation was a gigantic expropriation without compensation: by freeing black people from chattel slavery most of the capital of the rulers of the Confederacy was taken away from its owners.
It’s a political question at bottom. You can solve a lot of problems with “domestic cash transfers”—make life livable for workers, blacks, Latinos, jobless, homeless, welfare mothers, drug users, etc. And we communists intend to do so. But you have to first smash the power of the bourgeoisie. For that you need to build a workers party, one that doesn’t “respect” the property values of the bourgeoisie, a party that says to the exploited and oppressed: we want more, we want all of it, it ought to be ours, so take it. And when we have the wealth of this country, we will begin to build a planned socialist economy on an international scale. Then we can right some historical wrongs and crimes and pay off some debts left over by our rulers, like some tens of billions of dollars to the Vietnamese and others whose countries have been maimed under the passing treads of American tanks. As for “compensation” to the people who have driven the United States to ruin, we can offer to those who don’t get in our way that they will live to see their grandchildren prosper in a truly humane society.
We need a workers party to grab the vanishing wealth of America before the bourgeoisie squanders it all. Fight, don’t starve—for class struggle against the U.S. capitalist rulers!