Sep 23, 2011
The following article was translated from an article in Issue #138 of Lutte de Classe [Class Struggle], a journal of French comrades in Lutte Ouvrière.
History is not repeating itself, it is stuttering. Three years after Lehman Brothers went bankrupt and set off a severe banking crisis, a new banking crisis is threatening the economy. The threat today is even worse than in September-October 2008. At that time, the banks lost confidence in each other because of the huge amount of toxic debt on their books. The myriad forms of lending carried out between the banks came to a halt, risking almost a complete paralysis of the economy. The governments and central banks had to intervene, opening up their credit windows, backing toxic securities, flooding the financial system with money, until these bankers were assured they would not lose money. They even made money off the bailouts. Only then did the bankers agree to start doing what they are supposed to do: keep credit, the lifeblood of the capitalist economy, circulating.
Today, the lack of confidence is not between the banks, or, more exactly, it is not only between the banks – it is also toward the governments themselves. The Greek government is no longer the only one being blamed. The banks know that Spain, Portugal and Italy may not be able to meet their obligations. And a credit rating agency even downgraded U.S. government debt.
It would be pointless to ask how credit rating agencies arrive at their ratings. They are like the official astrologers of a chaotic world.
Do they reflect the suspicions of the owners of capital who are seeking profitable investments? Are the credit rating agencies themselves a cause for suspicion? When even the slightest rumor of an economic leader’s most trivial declaration generates considerable buying and selling of securities, such questions bypass the main problem.
The cause of this mistrust is the same for the United States as it is for Greece, even if the consequences are not. Because the United States remains the world’s most powerful economy, it still appears as the safest place to park capital in critical periods – even if its debt has been downgraded.
In 2008, to save the banking system from bankruptcy and to stop credit from drying up, every government with the means to do so resorted to the same remedies. They handed over huge amounts of money to the banks, emptying their treasuries in the process. They also borrowed colossal sums from the very banking system they had just rescued.
Government debts literally skyrocketed after the 2008 banking crisis. The level of this debt is comparable only to periods of war when the whole economy, concentrated around the arms industry, is operating on credit. Today, interest swells the debt.
There are big differences in the interest rates for the debts of different governments, depending on how powerful the economy is or even the political situation. Rumors also play a role.
Governments are caught in the same trap, but to differing degrees. The more doubts that exist about their ability to service their debt, the more they are charged high interest rates, even usurious rates. But the ballooning interest rates increase their debt, making it harder to pay them back.
For a while, the bankers had good reason to like the mechanism put in place after the 2008 crisis. It seemed to be working. Banks were able to make a lot of money from government debts, and the big banks’ profits began to attain pre-crisis levels.
But the economic engine was running on empty. The banks were making high profits out of very low economic activity. This fact was also hidden by something else: the profits of the big industrial and commercial companies. The banks, which were getting cheap money from the central banks, assumed they could get high interest rates not only on loans they extend to governments, but also on loans to the productive sector, since it was also yielding high profits.
But the banks, as well as all the capitalist companies for whom they act, are shooting themselves in the foot. In order to finance the bigger and bigger sums of money they give to the banking system every day, governments are imposing austerity plans on their populations. As different as these austerity plans may be from one country to another, as fertile as the bourgeois government officials’ imagination may be for cooking up measures aimed at emptying the pockets of the different laboring classes, they are all reducing consumption by the population.
Consumption is also reduced when the government downsizes its own workforce, cuts public services, drains social welfare, and imposes scores of other measures which go unnoticed because they target people not in a position to defend themselves, such as the disabled.
Behind modern financial capital with its very sophisticated financial products, the capitalist economy is sinking deeper and deeper under the same fundamental contradiction: between the limited ability of the laboring classes to consume and capital’s need to constantly grow. This contradiction is the fundamental cause of capitalist economic crises.
There is another mechanism produced by capitalism in crisis that produced the same result: companies make high profits to the detriment of the entire economy. The high profits of industrial companies came, first of all, from the super-exploitation of the working class. These companies squeezed more profits from fewer, more poorly-paid workers. They did this in many different ways, through lay-offs, downsizing, reducing wages. But this constantly restricts the consumer market.
The biggest companies also increase their profits at the expense of smaller companies, by pressuring providers and sub-contractors, etc. So the high profits of the most powerful companies come not only at the expense of the standard of living of the working class, but also from the weakening of the economic fabric itself.
The daily news programs highlight still another “collateral damage” from the 2008 financial crisis: the surge in local and regional government debts. An article from the newspaper Liberation, September 21, 2011 – “Dexia: the Bank Which Ruined 5,000 Cities” – describes a kind of financial time bomb for local government. This bank, along with a few others, sold financial products that were supposed to have better interest rates to different local authorities (cities, regions, departments, hospitals). But the rates on these obscure and sophisticated financial schemes were indexed to other financial products or currencies, with the result that rates and payments skyrocketed. The Loire had to pay 22 million euros in interest on a 96 million euro loan. A hospital in Dijon had to pay 31 million in interest on a 111 million euro loan. Dexia sold more than 25 billion euros in “toxic securities.” Deeply indebted local institutions are drained by the banks. They raise local taxes, while public services collapse because of a lack of funding. All of that weighs on the working population – and it also undermines the ability of the population to buy things, which is the only thing that counts for private capital.
The capitalist system, in the context of ultra-modern capitalism, is today illustrating Lenin’s apt expression: “The capitalist is ready to sell us the rope with which we will hang them.” Good old rope is now out of date. The capitalists have created something better: a multitude of financial products with innocent or exotic names, representing a multitude of types of credits or of insurance to guarantee these credits, which are being bought, sold, and moved from one side of the globe to the other.
Among them are pieces of paper that represent government debt – so-called “sovereign debt” – loans for ten years, one year, one month, or even one day.
The markets, that is the departments of banks that specialize in financial investments, marveled for a time at what wonderful instruments sovereign debts were for accumulating wealth. They were supposed to be safer than private debts. Then doubts materialized over governments’ ability to repay their debts. That caused a panic in the financial system. Huge amounts of capital were transferred from the pieces of paper of one government to the pieces of paper of another government. The doubts about whether governments would be able to honor their debts then boomeranged against the banks themselves. In 2008, the banks’ lack of confidence in each other had been fueled by pieces of paper representing American mortgages, which they all held. Today, securities representing the sovereign debts of certain governments are raising the same suspicion.
The stock market prices for the shares of French banks have been dropping one after the other for a reason. Société Générale and Crédit Agricole had been the first to pounce on Greek government debt, which had very high yields. Today, the market capitalization, that is, the total value of the shares of some of these banks, has lost more than what they earned from the Greek debt.
Even the stock market prices of European banks considered the safest, like BNP-Paribas, are “yo-yoing.” The newspaper Le Monde (September 18-19) proclaims: “Upward or downward, markets have obviously no need of performance enhancing drugs to transcend themselves. A drop of 12.4% on Monday, September 12, an increase of 7.2% on the following day, a drop of 3.9% on Wednesday, an increase of 13.4% on Thursday and a drop of 7.6% on Friday – this is what is happening to the BNP-Paribas stock price.” Each time the stock went up or down it made some speculators happy.
But one consequence is that confidence in the European banks is falling. According to news reports, Siemens withdrew part of the funds that Société Générale manages for it – 500 million euros – fearing that the bank owned a lot of Greek debt. Siemens then resorted to something that more companies are doing. Siemens, which is an accredited German bank as well as being an industrial company, wired the money it withdrew from Société Générale, sending it to the European Central Bank (ECB), which is obviously more reliable.
The European banks are increasingly depositing their liquid assets at the end of each business day in the ECB rather than entrusting them to another private bank.
With lots of loans on their books that can turn out to be worthless, the European banks face the threat of bankruptcy. So there is a lot of pressure for them to recapitalize from the bourgeoisie’s international institutions, especially the IMF (International Monetary Fund). That means they must increase the amount of their own capital, compared to the amount of capital that is on deposit with them. But how is it possible to encourage the financial markets, that is, the owners of capital, to purchase shares in a big bank that doesn’t appear safe?
More and more spokespersons for the bourgeoisie are proposing that if “the markets” don’t put money in these banks, the governments should. The CEO of a hedge fund declared, “The banks need to be recapitalized and only the government can help.” He then spelled out what he meant: “...the government must buy up around 30% of the capital of the French banks.”
To speak of “nationalizing” the banks had been taboo for a long time, but it has become fashionable again among the politicians. Francois Hollande, the Socialist party candidate for the next presidential election, said, “If Greece were to default, and banks suffered record losses, the government would have to intervene like it did during the subprime crisis. In this case, contrary to 2008, I would recommend that instead of lending the money to the banks, the government should buy a portion of their capital.”
This statement was published in a French weekly that also published the statement of the national secretary of the right-wing party, the UMP, Francois Cope, opposing this, claiming that it is outdated. “There are sophisticated methods that can prevent nationalization.”
They approach the question differently, but both completely agree that the government should serve as a crutch for big capital, just as it has in the recent past.
If the state does inject massive amounts of capital into the banks, it is a good bet that the left-wing politicians will embrace it by claiming the nationalizations are a “socialist” response to the destruction caused by the crisis. If the left-wing parties win the election, the Communist Party, the Left Front and many others will try to make the government bailout of financial capital appear more palatable.
Faced with the anarchy of the banking system and the various proposals to nationalize parts of it, it is necessary to say that the interests of the whole society demand that the bankers be expropriated, without any indemnity or compensation, and that the banks, today in competition with each other, must be unified into one bank under the control of the population.
Just as in 2008, all the discussion in leading circles is about how to best bail out the banking system. The bailout operations are discussed under various deceptive pretexts: “rescue Greece” is the most common one. There is also “save the Euro,” “save the European Union,” “prevent the explosion of the international monetary system.” But behind these various expressions lies the same concern.
For several weeks, the U.S. Federal Reserve has been buying up worthless securities from private banks, just as it did in 2008. The French newspaper “le Monde de l’Economie” in its September 6, 2011 issue reckoned that “since the beginning of the crisis, the Fed, the American central bank, has bought up about one trillion dollars in American public debt, after it had bought up even more private debt.” This amounts to printing up more money, thus threatening to foster and aggravate inflation of that currency.
During the meeting of the Euro Zone finance ministers, U.S. Treasury Secretary Geithner vigorously scolded his colleagues, criticizing them for not allowing the European Central Bank to do the same thing as the U.S. Federal Reserve, that is, to provide huge amounts of credit to the private banks. In fact, the ECB is buying up an increasing amount of the toxic securities that weigh on the banks’ books, just not as fast as in the U.S.
In the U.S. such a move requires only a decision by the government – which is not always very simple, gauging by the sort of guerilla warfare carried out against Obama by the Republicans. But in the Euro Zone, it is much more complicated because it requires approval from each of the 16 governments and sometimes even of their respective parliaments.
It needs to be said: a new period of inflation is unavoidable. And the current price increases are a sign of it. It is important for workers to be prepared for worsening inflation. The capitalists can more or less control the price of the goods they sell and they know how to peg those prices to those of the raw materials they use, the price increases of oil or electricity, etc. It is vital for wage earners to impose the automatic indexing of their wages to the increase of prices, that is, the sliding scale of wages.
The long period of stagnation or weak growth of the world economy has led to the monstrous swelling of finance and the multiplication of more or less severe financial crises that have punctuated the economic history of the past decades (the Enron affair, the collapse of the American savings and loans, the collapse of the internet bubble, the subprime crisis, etc.). But the multiple developments of the financial crisis, in turn, weigh on the economy, which is unable to break out of a situation marked by high unemployment, little investment in production and the global stagnation of industrial production.
The Organization for Economic Co-Operation and Development (OECD) is starting to employ the expression “The Great Recession.” This expression has been used in the economic press when referring to the crisis of the past four years. The official statistics of the OECD are, like other official statistics, somewhat manipulated. Nonetheless, their estimate of the number of unemployed in the industrial countries of the OECD reached 44 million in July 2011 or 8.2% of the active workforce, which is similar to what it was in October 2009. These are the highest unemployment rates since World War II.
But this is an average figure and the situation varies from country to country, from one social category to another. Unemployment among the 15 to 24 age-group is estimated at 23.4% in France, and 20.5% on average in the Euro Zone. And it escalates to 46.2% in Spain.
A new banking crisis, which reduces or even halts lending to companies, will only worsen the situation.
Many smaller and medium sized companies already complain about the increasing difficulty of obtaining a bank loan. But the consequences of a liquidity crisis in which credit dries up will not be limited to small and medium-sized enterprises alone. “French Banks’ Difficulties Weakens Airplane Lending” was the headline on September 22 in Les Échos, the French business daily. “The difficulty in obtaining dollars has already led the Société Générale and BNP-Paribas banks to stop lending dollars for companies to buy airplanes. Yet French banks play a very important role in these kinds of loans.” The newspaper insists:”The financial crisis may well have collateral impact on the delivery of planes. And on the sales of Airbus in particular.” Airbus is not a small or medium sized company!
If Airbus is the first to be affected, Boeing or Bombardier run the same risk. The U.S. Federal Reserve obviously has no reason to favor Airbus over Boeing, which are global business rivals. But it nonetheless agreed to assist French banks and, in collaboration with the ECB, to release a certain amount of credit in dollars.
Markets may be blind and stupid. But the owners of capital are fully aware that the economic crisis, in which they play the leading role, will eventually dry up the sources of their wealth. As an editor of Le Monde summed up on September 10, 2011, “The jolts in the stock market and other financial markets in July and August, in which positions dropped by 20 to 25%, proved that cutting budgets too severely directly intensifies the recession. This terrorizes investors as much as the possibility of a default on Greek debt or the fragility of European banks in the event.” Basically, those who demand that governments impose ever increasingly severe austerity measures that impoverish the working classes and in particular wage earners, also demand programs capable of boosting their consumption. But this is to square the circle!
During the crisis which began in 1929, the only means the bourgeoisie found to overcome this contradiction was to replace waning consumption of the population by artificial government intervention: first, large construction projects, and then, in Germany and later in other countries, a policy of rearmament, boosting war production and finally the war itself.
We have not yet reached this situation. But its mechanism is in place.
Les Échos of September 8 states that “dividends remain high despite the crisis. Analysts do not expect dividends to decrease in 2011. They even predict a new record of almost 42 billion euros for the largest companies.”
The capitalist economy is a machine for producing surplus value and therefore dividends even during the worst periods of the crisis. But at the same time, the accumulated money is not invested in production. Other than speculation in its various forms, the height of fashion is for large enterprises to use their own substantial funds to buy back their own shares. This means a future increase in the value of shareholders’ dividends; but also a large amount of money is not invested in production. The increasing exploitation of workers, the increasing sacrifices demanded of the laboring classes by austerity plans, offer no perspective to overcome the crisis. In fact, they actually render it impossible.
Illustrating the madness of the system and the ignominy of those who pretend to run it, French Prime Minister Fillon declared that the retirement age must be increased and workers must be legally forced to work longer in a situation when there is not enough work for everyone and three million are already officially unemployed. In reality, there are six million unemployed if all the different types of unemployment are taken into account! This means that the workers not only have the moral right to protect their jobs and wages, but that it is in the vital interests of the whole of society to end the crazy dynamics of the capitalist economy.
Destroying the living conditions of the working class in order to increase dividends is not only vile, it also pushes the economy into an abyss and society into decline.
This is what explains the panic in the financial markets and political leaders’ fear. The entire capitalist class has no faith in its own economy.
The bourgeoisie itself says that many states could go bankrupt, not only Greece. The euro and the Euro Zone, which were so difficult to set up and so useful for big capital and the promotion of intra-European trade, could explode.
In this climate of general panic, the bourgeoisie’s “wise men” tear one another apart over many questions. They ask, should we help the Greek state to repay its debts – which is a hypocritical way of asking, should we help prevent banks from losing on their investments? If so, how much money should it cost? Should government debts be pooled so that the richest governments pay off some of the weaker governments’ debts? If so, how should they do it? Should it be through the European financial stability fund? Should the money be supplied by the European governments, meaning first and foremost the German government? Should European bonds be issued, that is, “Eurobonds” as some have suggested?
But for any of these proposals, it is necessary to get approval from all the European Union governments, or at least the main ones, powerful enough to impose it on the smaller ones.
In addition to the contradictions inherent in the capitalist economic system, there are the contradictions between the interests of all the different governments. They all agree that they have to save the banks, but each government wants its neighbor to bear the brunt of the expense.
The development of finance is not only the expression of the increasing parasitism of the capitalist class. It has pushed to the limit of absurdity an already absurd economic system. The savage rivalry and the blind and stupid character of the marketplace as a regulator of the economy are exacerbated in the sphere of finance.
Due to the private character of the means of production and capital, it has always been impossible to regulate the capitalist economy, even in the days of the railroads, the era of mass production, or of Fordism or of the struggle between imperialist powers to increase their spheres of influence.
But certain aspects of economic life could be supervised, if not fully controlled. The circulation of goods could be slowed by borders, quotas, paperwork, all of which are still a part of today’s capitalist society, despite globalization.
The elusive character of “financial products” today, the speed with which they can be put one place and then another, the progressive disappearance of a difference between productive investments and financial investments have given rise to unlimited perspectives in the sphere of the most harmful domain of the laws of the capitalist economy.
It has become commonplace to assert that no one can control financial markets, as this is so blatantly obvious. This absence of control by the bourgeoisie over the functioning of its own economy is not only apparent in the obvious inability of the showmen who lead the states. The G7, G20 meetings or meetings between finance ministers are like soap operas in which the plot never changes. But this inability is that of an entire social class, including the most competent “wise men” among them.
Jean-Pierre Jouyet is president of the French AMF (Authority of Financial Markets), which is supposed to be a regulatory body. In a recent radio broadcast describing the powerlessness to which the system has reduced him, he spoke briefly of two significant indications. He talked about the reluctance of the main American banks to lend to the main European ones, which risked a new liquidity crisis. He then raised his arms to the heavens in a sign of powerlessness, and insisted upon the total opacity of cash transfers between the two sides of the Atlantic. However, he added, more than half of these transactions go through five or six of the main American banks! Insisting upon the impossibility of all control, he reiterated that three-quarters of the transactions in the stock exchange are carried out by computers and are automated. The aim of this automation is obviously to make a profit off the tiny differences in stock prices in the different stock exchanges and therefore be able to play with large sums in the shortest possible time. He recalled a suggestion that he had made in a recent report, to regulate computers so that a trading transaction takes no less than a second! That was his most audacious proposal to regulate the financial markets he is in charge of!
This economy is really and truly in a crisis of sheer madness.
The “great recession,” for which there is no end in sight, already represents an enormous waste. There are 44 million officially unemployed in just the OECD countries. This is the equivalent of the active population of a large country. These are productive forces society deprives itself of, while continually impoverishing those still employed.
Yet more waste is represented by the billions lost in financial operations. And it is of no consolation knowing that part of the 5.5 trillion dollars lost in the most recent stock market collapses is fictitious. The billions that disappeared, like the billions earned by some – for one must never forget that even a stock market collapse may be a source of riches for those capitalists who speculated and won – are the result of human labor, of exploitation, as well of unsatisfied needs. For those who could satisfy them are left without work.
For workers, the problem is not to come up with solutions which allow the capitalist economy to shake off stagnation – solutions the brains of the privileged class itself are incapable of coming up with. It is to protect their living conditions from the material and moral destruction visited on them by the crisis, without concerning themselves with the multitude of “solutions” proposed by the bourgeoisie according to the circumstances.
The crisis itself and all its consequences for the world of labor, as well as all the austerity policies implemented by the states, are part of the class struggle. But at present it is a class struggle carried out solely by the privileged class in order to save their own privileges. The situation can be resolved only by a class struggle led, this time, by the exploited against their exploiters.
No one can predict how the mobilization of the working class will begin. All we can say is that it is necessary and this necessity will become more and more acute as the crisis worsens.
And it is through this struggle to defend their living conditions that the working class can gain the consciousness of the necessity to totally overturn capitalism, that the bourgeoisie must be expropriated and that the economy must be reorganized on a more rational basis. That it must be planned under the democratic control of the population.
During periods like these, not only does the capitalist economy show its injustice, which is permanent, but also its irrationality and its material and human cost to society. It is especially now that communist ideas must be defended and spread so that, when the moment comes – to paraphrase Marx – the masses seize them and transform them into a driving force.