Oct 9, 2008
The following article has been translated from Issue 115 of Lutte de Classe (Class Struggle), October 2008, a political journal by Lutte Ouvrière (Workers' Struggle), a revolutionary Trotskyist organization of that name active in France
Since September, the crisis of the capitalist economy has spread and accelerated. It has become increasingly obvious that the scope of the crisis is comparable to that of the crisis that began in October 1929.
The financial tempest spreads at a dizzying speed. Whatever panic-stricken government leaders do, the crisis continues to get worse. As soon as a government puts out a fire at one bank, another fire breaks out at another bank. When no big bank is collapsing, the stock market collapses. In early October, the stock market indexes in Tokyo, Paris, New York and everywhere else collapsed, one after the other, despite the myriad efforts of governments to stem the panic by "investors," that is all the owners of capital who fuel the financial fire by moving around their capital.
Perhaps Wednesday, September 8 will be remembered by History as the day the crisis erupted. On that day, what had appeared to be a simple crisis in the U.S. housing market was transformed into a financial crisis, international in scope.
We are not going to discuss how a crisis in one sector – a crisis similar to many others over the last 30 years – spread to the entire world. Neither will we discuss the workings of the now-famous securitization process that mixed risky U.S. mortgages with other loans, creating securities which banks, insurance companies and non-financial companies coveted because of their high profit yields, and then how they suddenly lost their value and poisoned the whole banking system.
We will only recall that mistrust between banks increased greatly because so many of the mortgaged-based securities they held contained toxic loans. This mistrust spread to all securities and resulted in a generalized crisis of confidence between the banks.
Every day the banks carry out thousands of transactions between each other in which money circulates in the form of securities. The sudden distrust of securities led to the aberration of a liquidity crisis amidst a world overflowing with money. Starting a year ago, banks began refusing to accept securities as collateral for loans, or they charged prohibitively high interest rates for those loans. Only the injection of money by the central banks kept the banking system going.
From this beginning, the crisis has spread, from the housing crisis and the financial crisis to the oil crisis and the more general crisis in raw material prices, to the food crisis and the recession in the productive economy. All this is the same crisis, running through various channels that sometimes merge and sometimes diverge, but always have an impact on each other.
Thus, for example, the original U.S. housing crisis directly fostered the oil crisis, the crisis in raw material prices and even the food crisis. Since investment in the housing sector was no longer profitable, capital sought other arenas. It flooded into raw materials, including food, thus brutally pushing up their prices. (The price of oil, for example, has gone up and down since then, in relation to the other jolts of the crisis, or according to the maneuvers of speculators.)
Now, October 2008, it seems obvious that this is all part of one and the same crisis, a general crisis of the capitalist economy. As opposed to what they did in 1929, the big imperialist states jumped to the rescue of their financiers and more broadly to the rescue of their capitalist class. But, for the moment at least, they have not succeeded.
The crisis appeared to get a lot worse on September 7, when the U.S. government seized two financial institutions, Fannie Mae and Freddie Mac, a de facto nationalization. On September 15, one of the biggest investment banks on Wall Street, Lehman Brothers, went bankrupt. Then the government saved AIG, the insurance company, at the last minute. This led many governments, starting with the U.S. government, to pour huge amounts of money into the economy.
The first interventions by the U.S. government cost the U.S. Treasury 1.05 trillion dollars, including the 700 billion dollars spent on the Paulson plan. Compare that to 800 billion dollars in cash and securities that the Federal Reserve has on hand.
The central banks of the other imperialist powers did the same. The European and Japanese central banks carried out aid programs costing the equivalent of 170 billions dollars each. And the meter is still running. On the very day the business press was summing up the previous expenditures of the central banks and of the government budgets, the Bank of England announced that it was going to spend 250 billion pounds sterling on its own bailout (about 425 billion dollars).
It is a brutal and cynical class policy. The only "way out" of the crisis proposed by the bourgeoisie will cost the laboring classes as much as the crisis itself. The money that the governments are forking over to those who are responsible for the crisis will come from the laboring classes. All the governments are trying desperately to try to stop the generalized crisis of confidence. In the business world, companies don't trust each other. The banks no longer lend money to each other, and that drives the stock markets crazy. The collapse of the stock markets is added to the freezing up of credit markets. This then has an impact on the financial operations of the companies themselves.
To break this vicious circle, the leaders of the various countries try to convince the financial markets, i.e. the owners of capital, that they run no risks when they deal with other banks because the governments will take the place of any bank that does default. Yet, this is still not enough to restore confidence between the banks.
The central banks are pouring more and more money into the financial system, which appears to be a bottomless pit.
Up to now, nothing has worked. The stock market, which is a good thermometer of the capitalist economy, continues to fall. As opposed to what happened in 1929, there is no "Black Thursday," when the stock markets plunged by 40% in a matter of days. Instead, there is what they call "a creeping collapse." At the beginning of October, the Dow Jones had lost 39.4% from its peak a year before. On October 7, Paris's stock market index lost 9%, which was the biggest loss in the Paris stock market's history. The day after, the Paris stock exchange lost another 6%. There were losses of around 7% in London and Frankfurt. And while the Tokyo stock market was lucky enough to lose "only" 3% the first day, it lost 9% the day after!
It can get a lot worse. Up to now, the panic has been limited to the financial sphere, that is, to the bankers and the managers of hedge funds who do not know what securities to worship. But what would happen if the panic became generalized ?
The political leaders issue increasing numbers of reassuring statements. They pledge to protect "savers." But they really are only trying to protect the banks and other savings institutions from a run on the banks by depositors.
The basic cause of the financial crisis is no mystery. Financial products – shares, bonds, securities, and all sort of sophisticated securities mixing them together – are products like any other. They have their own markets. They are sold and bought, if possible at a profit. In spite of their ethereal characteristic – the more sophisticated they become, the more remote from reality they are – the financial markets regulate their supply and demand. As in any other market, regulation takes place afterward, that is, through crises. Crises are not an aberration of the capitalist economy; they are its only true form of regulation. In a way, crises impose some order on a chaotic economy, in which each capitalist pursues his own interests and his own individual profit.
To put it another way, during the normal functioning of the capitalist economy, periods of crisis are not irrational and blind. No, it is the very capitalist economy which is irrational in relation to the needs and possibilities of society and to its degree of development.
Financial products are used for speculative purposes even more than are material products. Pascal Lamy, the president of the World Trade Organization, whose Social Democratic label makes him a very useful servant of big capital, contradicted both French President Sarkozy and U.S. President Bush when they attacked speculators for being responsible for the crisis. In an interview in the French newspaper Le Parisien on October 9, Lamy defended speculators, saying:"Let us not behave as if the concept of speculation was a sort of moral infamy." Lamy is actually more truthful than the others, since speculation is an inherent part of the capitalist functioning of the economy.
Nonetheless Lamy did find it necessary to add, "Speculation is part of human nature." Other servants and defenders of capitalism have said the same thing. In fact, the functioning of the economy has nothing to do with human nature, nor with any eternal laws. Competition, the drive for profit, and speculation are inherent in a given form of economic organization, that is capitalism. Capitalism had its period of glory more than two centuries ago, when it allowed humanity to make enormous progress. But since then, it has become a permanent source of waste and social disintegration.
Today the amplitude of the financial crisis is due to the domination of finance over production, the enormity of financial instruments in circulation throughout the economy.
The domination of the financial sector may not be new – Lenin considered it to be one of the basic features of imperialism. But the bubble in financial instruments and the financialization of the economy are inseparable from the economic history of the decades of economic slow growth that followed the "30 Glorious Years' of the so-called post-World War II boom.
In the late 1960s and 1970s, financialization took the form of "Eurodollars," those dollars which corresponded to loans in dollars issued by banks outside the U.S. that were not under the control of the U.S. government. Then, during the energy crisis of the 1970s, there were "petro-dollars' i.e. the dollars not invested in production that were accumulated by the big oil companies and by the oil-producing countries' potentates.
The coincidence between the end of the relative post-war boom and the beginning of the financialization of the economy was not an accident.
Because markets were becoming saturated and the rate of profit was falling, big capital launched a multi-pronged offensive to restore the rate of profit at the expense of the working class.
Over roughly the last three decades, the financial sector never stopped growing in relation to productive activity. Local crises or sectoral crises followed one after the other more and more frequently, each time disrupting the ongoing financial boom. As soon as the crisis ended, the boom would start up all over again.
The rapid expansion of finance picked up speed once again in 2000-2001.
The business press now accuses the lax policy of easy credit set by Alan Greenspan, the Chairman of the Federal Reserve at the time, for being responsible for the financial explosion. Certainly, Greenspan's policy of easy credit let banks and financial institutions lend money all the more easily since the very low interest rates set by the Federal Reserve allowed them to borrow more easily and cheaply.
But Greenspan doesn't deserve all the blame. Most of the American bourgeoisie approved of his monetary policy. Before 2001, this easy credit policy helped finance the "New Economy," computers, mobile phones, the internet and all the "start up" companies. Then came the crash. This "New Economy," which was presented by some people as the beginning of a new era of prosperity, turned out to be only the old capitalist economy applied to new products. As with so many other products, productive capacity turned out to be much greater than the ability of the market to absorb them.
The so-called "New Economy" went through its crisis of production. And after all the financial speculation on the computer industry had inflated the "internet bubble," it was hit by the "internet crash."
And then a coincidence: the crash of the "New Economy" took place at the same time as another crash, the September 11, 2001 destruction of the World Trade Center twin towers by Bin Laden terrorists. Either event could have precipitated the U.S. economy into recession.
Given the risk of a recession and the political consequences of the 9/11 attacks, the Fed rushed to rescue the economy. This was what was behind the easy credit policy. But while easy credit facilitated a weak recovery, it facilitated much greater finance and speculation. Like so many times in the past, the medicine to cure the economy of a disease produced an even more serious disease.
In some way, the "crash of the New Economy" was the first phase of today's financial crisis, or else its dress rehearsal. Proceeding from that, the "financial industry" accelerated the creation and accumulation of financial instruments, taking advantage of easy money from the central bank.
But why did easy credit from the Fed result in this speculative spree?
What happened in the housing sector, where the current crisis started, illustrates how this mechanism worked. At the beginning of this decade, the construction industry began to revive. Construction sites multiplied, houses popped up, apartment buildings were built, i.e. material assets were created. But while construction did well, the speculation on construction did even better.
For a while, the issuing of subprime mortgages contributed to the production of real goods. But then the creation of virtual assets, of securities based on toxic loans, greatly exceeded the creation of material assets.
The policy of easy credit boosted speculation on the housing market much more than actual construction and production.
In September 2008, as the financial crisis in the U.S. accelerated, European government officials and commentators took turns explaining that it was unlikely the crisis would cross the Atlantic Ocean, given how different the U.S. banking system is from the one in Europe.
Those speeches soon proved to be idiotic lies. One of the first banks hit by the banking crisis, whose depositors panicked and stood in line to withdraw their money, was a British bank, Northern Rock. Given the globally interconnected banking systems, it was impossible that the European banks could avoid the financial crisis.
During the first days of September, the crisis of confidence hit several European banks. Fortis, Dexia, Bradfort & Bingey, Hypo Real Estate, and Glitnir were saved only thanks to public money: a French-Belgium-Dutch-Luxemburg bank, a Franco-Belgian one, a British one, a German one and the Icelandic bank.
Following a few days after the U.S., agitation spread through Europe for political leaders to save banks threatened by bankruptcy. In the U.S. there is a single government, able immediately to make the decisions it wants to try to reinforce the banks and avoid panic. But the European Union is only a juxtaposition of different state apparatuses that serve divergent interests. The assertion that Europe tried to arrive at a common response to the situation does not correspond to reality. Only the leaders of the four biggest imperialist powers which dominate the European Union met, posing as the leadership for all 27 countries that make up the EU, claiming that what is good for their own bourgeoisies is good for the 23 others (including their Spanish, Belgium or Dutch imperialist partners).
But even the four big powers could not reach agreement. They have no European version of a Paulson plan. European unity may sound beautiful in speeches, but the richest European powers, starting with Germany, do not want to pay for the others.
In fact, each government, each national bank started to help their own banks, their own financial institutions. Germany is spending 50 billion euros (about 65 billion dollars) to bail out only one big bank! Great Britain is spending 250 billion pounds sterling its version of the Paulson plan! Of course, it is limited only to Great Britain.
While the European leaders repeatedly say that a common response is indispensable, the European Union is incapable of achieving it, thus demonstrating its limits.
It is not even clear that the euro – which is the common currency of a part of the European Union – will survive the crisis. It is "every man for himself." Each government bails out its own banks and bourgeoisie. This not only costs each government more, but there is also a big difference in how much the different governments spend. The European leaders are beginning to talk about loosening the rules that govern the euro. However none of the governments will pay for the inflation of the euro caused by the policies of another country. There will be a great deal of temptation for the more powerful countries to withdraw from the Euro Zone and swing back to a national currency which is easier to control and relate to the interests of the national bourgeoisie.
"Keep up your spirits!" exclaimed Jean-Claude Trichet, the president of the European Central Bank, when stock markets fell even after the seven central banks decided jointly on October 8 to lower interest rates. They continued to fall because stock prices had been exceedingly overvalued in the previous period. So they were only falling to more realistic levels.
There is a link – or at least there is supposed to be a link – between the price of stocks and the dividends they yield. The coming recession will push down the rate of profit, as well as dividends. So it is normal that stock prices would fall. As the financiers and commentators say, "it's a market correction." Of course, as always, this correction takes place afterward, that is through the violence of a crisis. After the boom and overvaluation when prices go up, comes the descent.
Speculation is grafted onto these movements, amplifying them and giving them a chaotic character. Speculation occurs during the boom periods, when everybody wants to buy, and during the bust periods when more people are selling than buying.
The massive sale of stocks that drive down stock prices is not caused only by the panic of stock traders. Prices are also driven down by concerted massive stock selling. What appears to be a disorderly movement of stock prices is actually the result of the concerted actions of big financial sharks. Not only are they able to protect themselves from the fall of the stock market, but at certain moments they even provoke the fall in stock prices and take advantage of it.
The media described how Warren Buffett, already the richest man on earth, is increasing his fortune by speculating on the falling prices. But there is something else. After Lehman Brothers went bankrupt, the big banks knew that not all of them would survive the crisis. They also knew, from experience, that periods of crisis offer extraordinary opportunities. Speculation can drive the price of bank stocks well below the real value of the bank, its networks, deposits, clientele, etc. That is the right moment for the financial jackal to pounce on the corpse and sometimes even provoke a premature death.
The press revealed that Lehman Brothers, a venerable Wall Street institution founded a century and a half ago, did not die of natural causes but because one of its rivals held Lehman's head under water when it had problems.
Many years ago, George Soros carried out one of the biggest speculative coups, making several billion dollars in profits by betting on the fall of the British pound sterling. In fact, Soros speculated with such huge amounts of money, that by betting on the fall, he provoked it.
Today this happens a lot on financial markets. Sometimes stock prices fall when many people panic and unload their shares all at once. But often, it comes out of the fight to the death between the mastodons of the financial sector who provoke enormous sales of stocks in order to weaken or destroy a rival.
Is this irresponsible from the point of view of the bourgeoisie as a whole? Of course it is. But capitalists are always eager to sell the rope that will be used to hang them – as Lenin put it so well.
Almost half the major Wall Street investment banks have disappeared, either through bankruptcy, like Lehman, or when a bigger company took them over, generally for a small part of the value of their assets, like Bear Stearns. Exit Wachovia, Washington Mutual, Merrill Lynch. Goldman Sachs is saved temporarily only thanks to an injection of cash by billionaire Warren Buffet – potentially garnering him a big profit.
Remarkably, the shark often owes its victory to the government's help. When a bank is threatened with bankruptcy, the government could nationalize it, i.e. buy it itself when there is no other solution. But when there is a choice, the government takes a stake in the bank and helps a more powerful bank to take it over. Thus the government uses public money to participate in the fight to the death between the big banks.
This produces greater concentration in the banking sector. Ultimately, one of the main functions of the crisis is clearing the way, getting rid of redundant financial institutions and achieving even greater concentration.
In the early days of October, the business press in describing the ongoing failures and mergers predicted the rise of three very big U.S. banks: J.P. Morgan, Citigroup and Bank of America. But no one knows how long they will exist under their current form.
It goes without saying that verbal admonitions from government officials are worthless. Those officials are not the ones who are deciding. Their role is limited to filling in the breaches, reassuring small deposit holders, and pretending that what is going on is not as serious as it might appear. That is, they are doing the political job that the bourgeoisie is paying them to do.
The activities of the big banks and the owners of big capital, who are behind this speculation, will not be stopped until the most powerful financial interests achieve their goals.
In the U.S., the financial crisis has pushed the economy into recession. On October 8, the French paper Le Figaro ran an article entitled, "The Fed Rushes in to Rescue Companies," asserting the financial tempest had struck the productive economy. Big companies issue short-term debt to meet their daily expenditures, to pay wages and their bills. But, according to the article, "the crisis in confidence has reached such a point that it has become too difficult or too expensive to provide necessary financing by issuing short-term debt, as they usually do. These financial assets now total an estimated 1.6 trillion dollars." Since nobody wants to buy short-term debt, companies lack liquidity. So, for the first time, the U.S. central bank started buying short-term debt from non-financial companies. Thus, the central bank is replacing and taking on the role of regular banks, by lending money directly to companies. The Fed is playing exactly the same role in the financial markets as the banks themselves.
The crisis is spreading from the financial sector to the productive economy. It already struck the construction and auto industries, and it is having an increasing impact on the textile industry. The difficulty in borrowing is one more factor adding to the contraction of the market already set in motion by the decrease in the purchasing power of the working population.
The chief of the IMF and his soothsayers no longer utter their earlier optimistic forecasts. Now they predict zero growth and perhaps even a fall in economic activity. But they still assert that"there is no chance there will be another depression like the one in the 1930s." Since the crisis first began, these soothsayers have predicted at each successive stage that the crisis was over or almost over... until they were forced to eat their hat!
Even if the IMF is right this time, the waste created by the present crisis is already enormous. Construction has stopped, plants have slowed production or shut down entirely and workers have lost their jobs.
Add to that everything that has already happened. Profits have gone up in smoke, profits that were a product of exploitation which is quite real: wage freezes, speed-up, lay-offs, the push to get the same amount of production with fewer workers, flexibility and outsourcing – all this carried out in the name of becoming "competitive," in order only to accumulate more profit. We went through all that in order to arrive at THIS!!!!
Humanity is paying a huge price because an economic system based on the market and the drive for profit continues to survive.
It is impossible to predict how the crisis will develop. One can only see how fast the capitalist class and its representatives at the head of the governments threw away all their old speeches about "laissez faire." The most reactionary governments use public money left, right and center. They buy stock of banks and financial institutions, when they don't nationalize them completely. This is certainly not new in the history of the capitalist economy. When confronted by the chaos produced by their own management of the economy, private capital generally seeks protection from the government.
This is how the U.S. government and Nazi Germany tried to overcome the Great Depression which followed the 1929 crisis. Governments played the same role after World War II.
Even if nationalization of the entire banking sector is not on the agenda – except in tiny Iceland – government interventions are already extremely costly. The huge expenditures by the central banks and the governments will increase their debt and/or push them to print more money or issue money using all the other ways they do it today.
First of all, in the U.S., the policy of the Department of the Treasury will inevitably lead to a depreciation of the dollar. Nonetheless, the dollar, without a competitor, will continue to keep its place as the favored reserve currency. This will allow the U.S. to generously share its inflation with all those who keep their reserves in dollars! We can expect a worsening of inflation, with rates varying from country to country, thus leading to turbulence in currency exchange rates and perhaps monetary crises, with the consequences this would have on international trade.
There seems to be a growing consensus in all the big imperialist countries that there must be state intervention in the banking system. In the U.S., the Democratic Party as well as the Republican Party aligned themselves behind Bush. In France the only small differences in the speeches of the left-wing Socialist Party and the right-wing UMP are in the mean-spirited political attacks they hurled at each other.
The anti-globalization activists and the dignitaries of the Social Democracy who propose nationalizations and regulation join with the holy alliance of Bush and Sarkozy.
The different forms of state intervention, including up to nationalizations, are just a way to hand public money over to private capitalists. Not only will those financiers get the money, they won't even be required to rescue the banking system from the chaos that they caused. Of course, once the crisis will be resolved, once the banks become profitable again, they will be privatized, just like the French government did with the steel industry and many other industries 20 years ago.
The only demand for nationalization that the workers can take as their own is nationalization without compensation. Such a nationalization could be carried out only under the powerful pressure of the working class. Even the most zealous servants of capitalism now talk about "control" and "regulation." But from the point of view of the interests of the workers and all the laboring classes, the only valid goal is the expropriation of all banks and their consolidation into a single bank, under the control of its workforce and the entire community.
There is nothing to change in what Trotsky proposed to the workers in the "Transitional Program," written in 1938, in the epoch when capitalism was plunging headlong into war in order to pull out of the long depression that followed the crash of 1929 :
"Imperialism means the domination of finance capital. Side by side with the trusts and syndicates, and very frequently rising above them, the banks concentrate in their hands the actual command over the economy. In their structure the banks express in a concentrated form the entire structure of modern capital: they combine tendencies of monopoly with tendencies of anarchy. They organize the miracles of technology, giant enterprises, mighty trusts; and they also organize high prices, crises and unemployment. It is impossible to take a single serious step in the struggle against monopolistic despotism and capitalistic anarchy – which supplement one another in their work of destruction – if the commanding posts of banks are left in the hands of predatory capitalists. In order to create a unified system of investments and credits, along a rational plan corresponding to the interests of the entire people, it is necessary to merge all the banks into a single national institution. Only the expropriation of the private banks and the concentration of the entire credit system in the hands of the state will provide the latter with the necessary actual, i.e., material resources – and not merely paper and bureaucratic resources – for economic planning.
The expropriation of the banks in no case implies the expropriation of bank deposits. On the contrary, the single state bank will be able to create much more favorable conditions for the small depositors than could the private banks. In the same way, only the state bank can establish for farmers, tradesmen and small merchants conditions of favorable, that is, cheap credit. Even more important, however, is the circumstance that the entire economy – first and foremost large-scale industry and transport directed by a single financial staff, will serve the vital interests of the workers and all other toilers.
However, the state-ization of the banks will produce these favorable results only if the state power itself passes completely from the hands of the exploiters into the hands of the toilers."