Capitalist economic crisis

RSP Direct Action Forum (24/10/08)
By Doug Lorimer

Since the September 15 failure of Wall Street-based Lehman Brothers, the fourth largest investment bank in the US, the world’s capitalist governments have been scrambling to keep the worst financial crisis since the Great Depression of the 1930s from turning into a total collapse of the global capitalist financial system.

What had been a year-old credit squeeze, precipitated by the deflation of US housing market bubble since late 2005, was turned into a potentially catastrophic credit freeze, by the decision by US Treasury Secretary Henry Paulson, a former CEO of Goldman Sachs, the largest Wall Street investment bank, to allow Lehman Brothers to go into bankruptcy. Banks refused to lend to one another, and short-term loans for big corporations, known as the commercial paper market, ceased to function.

Paulson’s first response to the credit freeze was to commit the US government to provide $700 billion to buy up the so called toxic debts, mostly fraudulently created “sub-prime” mortgage-backed securities, of the big US banks, at the original massively inflated prices the banks paid for them. When this announcement failed to end the credit freeze, Paulson, followed the lead of the British government, which had announced that it would spend $700 billion to buy stock in the eight largest British banks, effectively nationalising them. On October 14, Paulson announced that the US Treasury Department spend $250 billion buying non-voting stock in the country’s nine biggest banks, partially nationalising them. The same day, the giant Bank of New York Mellon Corporation, owned by the financial dynasty founded by Andrew Mellon, announced it would immediately sell $3 billion worth of shares to the Treasury Department.

Nationalisation or partial nationalization – that is socialization of the corporate elite’s losses or “socialism for the rich” as some commentators have called it - has end up being the capitalist financial oligarchy’s preferred way of bailing itself out of the financial crisis, and protecting itself from the accompanying economic downturn. Since the end of August, the US government has nationalised Fannie Mae and Freddie Mac, the companies that own or guarantee nearly half of the $12 trillion in US mortgage loans, injecting $200 billion into these companies, and nationalised the American International Group, the world’s biggest insurance company.

These nationalizations, which have been duplicated in Europe, demonstrate that capitalism is a bankrupt economic system, that without huge levels of state intervention its so called free market profit system would stop functioning. The situation in Iceland shows how disastrous the economic situation can become for ordinary people. Its currency has become effectively worthless for international transactions by ordinary citizens. Savings and pension funds are in limbo following the collapse of the country’s largest banks. The government is restricting the use of foreign currency by Icelandic firms to essential purchases such as food, fuel and medicine.

Little or nothing is being offered to the real victims of the crisis — working people facing the loss of their jobs, homes, life savings or pensions. The US congressional Democrats, including Democrat presidential candidate Senator Barrack Obama, for example, while voting to spend $2.5 trillion of public funds to bailout the Wall Street banks, have proposed to spend only $150 billion, 6% as much, to address the social crisis that is likely to surpass any economic slump since the Great Depression. The immense disparity illuminates the pro-capitalist class character of the response of both of the major US political parties to an economic crisis that has exposed the bankruptcy of the socio-economic system they defend.

Millions of poor Americans face homelessness due to bank foreclosures. The 26.4 percent of U.S. workers who were already on poverty wages before the crisis began will soon have to choose between paying for food, rent or health care. The poor and the elderly will likely see cuts in the government services they depend on most, such as Medicaid and Medicare, as the US government prioritises paying interests to bondholders over social spending.

If Barack Obama becomes president, as seems likely, his administration will try to sugarcoat some of these austerity measures. But Obama's economic policy team is made up of the pro-business economic advisers from the Clinton administration, including Robert Rubin, who was Treasury Secretary between stints as a Wall Street banking executive.

There are some frightening parallels between today's financial crisis and the one that followed the Wall Street stockmarket crash of 1929. Then, as now, major banks failed under the weight of a chain of bad debt. A bank failure in one country spread the crisis to the next. But unlike today, capitalist governments did practically nothing to intervene, believing that the free market would drive out inefficient companies and open the way to renewed growth. Andrew Mellon, the US Treasury Secretary of the time, infamously declared "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate," adding, "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." As a result of this attitude, 25% US workers became unemployed.

While the bank bailouts may keep the financial system functioning, they can't prevent a slump in what’s misleadingly called the “real economy”. The massive government bailouts will likely prevent a replay of 1931, when the international capitalist banking system collapsed - though there's no guarantee. That's because neither the capitalist financial oligarchy nor its governments can control a shadow banking system worth $10 trillion - the same size as the traditional system. It's impossible to be certain that another failure of a financial institution won't trigger an even greater financial panic, whether year or next week.

What is certain is that the economic downturn that the capitalist world is now entering will be the worst since the Second World War and perhaps the longest as well. “Frankly, (the notion that) there is going to be a short and shallow recession, six to eight months, is out of the window”, New York University economics professor Nouriel Roubini told NBC yesterday, adding: “The last two recessions lasted only eight months each ... This time around this is going to be three times as long, three times as deep.”

The very existence of some major corporations is now in peril, because their profits were already in sharp decline before the financial crisis exploded. The three big US auto companies – General Motors, Ford and Chrysler – have been losing money for several years now. Over the last few weeks there have been reported reports that to avoid bankruptcy, GM and Chrysler will merge, shedding 40,000 jobs.

Another notion that is rapidly being discredited is the idea that China’s continued economic growth will insulate Australia from a recession. Yesterday Stephen Walters, JPMorganChase's Sydney-based chief economist, warned that Australia's official jobless rate will more than double to at least one million people over the next two years as economic growth in China declines under the impact of declining demand for its cheap manufactures in the US and Europe.

The latest official statistics show that China's gross domestic product (GDP) growth dropped back in the third quarter to 9 percent—worse than the expected 9.7 percent and well below the 2007 figure of 11.9 percent. China’s economy must grow by more than 8% a year to avoid being in a recession, because of its need to create 24 million jobs each year to avoid a rise in the total number of unemployed persons. Currently, there are officially 71 million unemployed workers in China.

Not only are China’s export markets contracting, it is also undergoing its financial crisis due to the simultaneous bursting of financial bubbles in its stock market and property sector. “The slowdown in the Chinese economy so far is unexpectedly serious,” Li Wei, an economist with the Standard Chartered Bank told the October 14 China Daily. Li's team forecast it would grow by 7.9% in 2009 and by 7% in 2010, leading to massive increases in unemployment.

The economic crisis that is now unfolding is global and is shattering longstanding economic relationships in which China played a central role. Over the past two decades, China emerged as the preeminent cheap labour platform to boost the flagging profit rates of corporations around the world. China, Japan and other Asian countries recycled their huge export earnings back into the US, keeping the value of their currencies low—a process that helped fund massive US trade and budget deficits. The influx of money enabled the US Federal Reserve to maintain a cheap credit policy, fuelling the housing market bubble and debt-driven consumption in the US, which in turn maintained the market for Chinese goods. But the economic downturn in the US is now feeding back into an economic downturn in China.

In short, we're seeing a classic capitalist crisis of the sort analysed 150 years ago by Karl Marx. At bottom, it is a crisis of overproduction - there are too many goods to be sold at a profit, not just in the US, but worldwide. In recent years, demand could be stimulated by massive increases in debt, but the bursting of the US housing bubble means that this is no longer possible.

The financial crisis was triggered by the collapse of the real estate bubble in the United States, which had an immediate world-wide impact, bringing the world capitalist financial system to the brink of collapse.

But the root cause of the crisis is not a lack of bank regulation or out-of-control capitalists, as the capitalist media and politicians claim. The problem is the capitalist system itself. The current crisis is rooted in halving from 1967 to 1972 in the average rate of industrial profit, due to the downward pressure on the rate of profit caused by the huge growth in the organic composition of capital during the previous 20-year capitalist economic expansion. (OCC is the ratio of capital spent on “dead labour” – machinery, fuel and raw materials – compared with the amount of capital spent on “living labour”, which is the source of capitalist profit.) This has made investments in new factories and capacity-expanding equipment less profitable for the capitalists. Instead, the big capitalists placed more and more of their funds into financial markets, to reap higher speculative profits derived from the massive inflation of bank credit over the last 50 years, but particularly since the early 1980s when the Reagan administration pulled the US out of recession by turning the US from the world’s biggest creditor country into its biggest debtor.

In 2007 dollars, US government debt rose from $42 billion in 1940 to almost $3 trillion in 1945, and remained at around $2 trillion from 1950 to 1980. By 1990, it had more than doubled to $5 trillion. By 2000, it had increased to around $7 trillion. Under the Bush administration, it has grown to just over $10.5 trillion, only $4 trillion less than the total value of goods and services produced in the US last year.

In all the developed capitalist countries, since the Second World War, which end the Great Depression, greater and greater sums of credit, of debt, has had to be injected into the economy to halt each periodic crisis of overproduction of commodities accelerating into a severe and prolonged recessions. The capitalist rulers have starved these off credit massive mountain of debt, which has fuelled repeated financial asset bubbles.

The objective function of a capitalist economic downturn is to eliminate the “deadwood”, the less profitable, less efficient companies, thus providing a bigger potential market for the remaining more companies. But the effect of starving off the depression with debt expansion, is to enable the “deadwood” to survive the overproduction crisis. Further, a large part of the “deadwood” is made up of corporations that are too big to be allowed to fail. Hence the continuous need for the financial oligarchy to use their state to socialise corporate losses, to bail them out of insolvency. But this has increasingly pushed the developed capitalist economies toward stagnation. The real growth rate of the world capitalist economy fell from an average 4.9% per year in the 1960s to 3.8% in the 1970s, to 2.7% in the 1980s, and to just 1.2% in the 1990s.

What will come after the current severe and prolonged recession? New York University economist Nouriel Roubini predicts at least a decade of stagnation, that is, the recession will be followed by at least 10 years of anaemic growth.

Working people will suffer not only from persistent high levels of unemployment, but from the waves of inflation that will flow from the capitalist governments’ current massive expansion of the money supply to bail out the financial oligarchs from the mess they have made.

The financial and economic collapse will also lead to increased demands by the capitalists to abandon any pretence of concern to combat global warming. The relentless build-up of greenhouse gases in the atmosphere will continue as the corporations place making profits before the needs of humanity.

Most vulnerable of all are the billions of people who live in underdeveloped capitalist countries. The economic downturn will to push them deeper into the abyss as exports dry up and jobs disappear. The head of the International Monetary Fund has already warned that the current crisis could trigger famines across Africa and Latin America.

The only way out of this for working people is to organise themselves into a mass movement to take political power out of the hands of the capitalist financial oligarchy and to reorganise the economy along socialist lines. If you want proof of this you only have to read the October 8 Reuters analysis of the impact of the crisis on Venezuela. This imperialist news agency noted that “Venezuela has suffered little direct effect from the market chaos because Chavez nationalized the most important companies that once traded on the minuscule Caracas stock exchange and because its currency is fixed by exchange controls.”


Similarly there will be no home foreclosures or starving pensioners in Cuba. The government of that country represents the interests of working people. Its socialised, planned economy is organised to meet human needs, not corporate profits. These were the key elements that enabled Cuba to survive the economic collapse brought on by the sudden rupture of trading ties with the Soviet Union in early 1990s.

Already, "socialism" is being discussed in the corporate media--in a highly distorted and often ridiculous way to describe capitalist state nationalisation of capitalist financial institutions. Simply nationalising capitalist businesses industries isn't equivalent to socialism. After the conservative German Chancellor Otto von Bismarck "went in for state ownership of industrial establishments, a kind of spurious socialism has arisen, degenerating, now and again, into something of flunkyism, that without more ado declares all state ownership, even of the Bismarckian sort, to be socialistic", Frederick Engels complained in the late 1870s.

“The modern state, no matter what its form”, Engels explained, “is essentially a capitalist machine -- the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit.

Socialism, the reorganisation of the economy to serve working people’s needs, requires as its precondition, the organisation of the working class as the ruling class, that is, the replacement through the revolutionary action of the masses of the capitalist state machine by a working people’s government, as has occurred in Cuba and Venezuela. This is the fundamental lessons that socialists need to take to working people in the harsh times that are ahead of us.