Oct 29, 2015
The Federal Reserve continues to hesitate to raise interest rates, even though Fed officials have talked about doing it since May 2013. Just the possibility that the Fed might raise interest rates has caused a panic in stock and bond markets several times in the past year. The economy itself and the financial sector particularly are extremely fragile. There’s more debt of all kinds – corporate debt, car loan debt, student debt and above all government debt – 13% more total private and public U.S. debt than before the collapse of 2007-08, according to the Federal Reserve (“Flow of Funds,” September 18, 2015).
To reduce the panic of the big speculators, the Fed has made it clear that in the event it does carry out a rate increase, it will increase its support for the financial sector at the same time. It has promised to quadruple the interest rate that it pays the banks on the trillions of dollars that they keep on reserve with the Fed. And for other financial institutions, like money market funds and mutual funds, which don’t have reserves with the Fed, the Fed has another gimmick. It will hand them interest payments by borrowing money from them.
This is simply the latest development in a long-term economic crisis. Financial crises have been breaking out on a regular basis, including the stock market crash of 1987, the savings and loan debacle in 1989, the crash of a major hedge fund (LTCM) in 1998, the tech bubble and stock market crash in 2001, the mortgage meltdown in 2007-08.
After each collapse in the financial markets, the government did the same thing. It opened up the money spigots for the benefit of banks, financiers and speculators, and the rest of the capitalist class, saving them from the crisis that they caused. Of course, these bailouts, as they have come to be called, only allowed the debt and speculative bubbles to grow larger ... necessitating ever larger bailouts. The Fed and the government have kept the capitalist class hooked up to a permanent IV line, which they are really addicted to and cannot do without.
The government bailout after the financial and economic collapse of 2007-8 went beyond anything seen before. How big it was is impossible to know, since there has never been a full government accounting. But in 2011, the New York Times estimated that the federal government and Federal Reserve had made commitments of between 12 and 13 trillion dollars – which was comparable in size to the entire U.S. economy at the time. This aid came in the form of direct investments in financial companies, purchases of corporate debt, purchases of mortgage-backed securities, guarantees of trillions of dollars in toxic debt, and trillions more dollars in loans. Many of these programs stretched over years and are undoubtedly ongoing, with many programs off the books. The government basically wrote a blank check to the entire capitalist class.
Even more money came in the form of the ordinary budget process. The government used the military budget – which had doubled in size in less than a decade – to hand money over to contractors, for example. And the government created new programs. Some of the biggest were extended to the entire health care industry through the so-called health care reform, the Affordable Care Act. The federal money which helps people to buy their medical insurance is in fact a subsidy to the insurance companies, allowing them to ask much higher prices. This single subsidy included in the act provides the health insurance companies with 100 billion dollars annually for ten years. And there are many smaller ones: for example, a fund set up to transfer 10 billion dollars to the insurance companies annually, to protect them supposedly against risk, paid for by a tax of $63 a year on everyone who gets employer-provided insurance.
Government officials also slashed corporate taxes. In the depth of the financial collapse, every emergency stimulus bill pushed through Congress included new corporate tax breaks. The U.S. Treasury Department changed tax rules, adding to the tax reductions. As a result, under the Obama Administration, the effective corporate tax rate (that is, the real tax rate) was slashed to 20%, much lower than it had been under the Bush administration. The effective tax rate, in fact, hasn’t been that low since Herbert Hoover was president.
Following these tax cuts, profitable companies like GE, GM, Goodyear, Eaton, Prudential, CBS, Time Warner, Weyerhauser, Xerox, PG&E, and Owens Corning not only avoided paying any taxes at all, they often qualified for tax rebates and tax credits. At tax time, Uncle Sam pays them to the tune of billions of dollars a year. Wells Fargo, for example, in 2009, made a profit of 22 billion dollars. Yet, it paid no taxes and even gained a so-called “tax benefit” of four billion dollars.
All these corporate giveaways triggered record annual deficits that added up so quickly the U.S. debt doubled in just eight years, going from less than 9 trillion dollars in 2007 to more than 18 trillion dollars today. For only the second time in history, the federal debt is now bigger than GDP, that is, the entire economy. The only other time in U.S. history the debt rose to that level was at the end of World War II. And government debt produces more wealth for the capitalist class. Last year, the 431 billion dollars in interest that the government paid on the federal debt was pocketed by the capitalist class, via the banks and other financial institutions.
To make way for all these programs, government officials imposed brutal cuts on all social programs and services that are used by the population, slashing such programs to the proportionally smallest part of the budget since the late 1950s, along with millions of jobs, including in such indispensable sectors as health and education. And government spending on infrastructure and other forms of productive investment in the public sector, including schools, hospitals, transportation, utilities, etc. has been slashed to the bone – while the workforce responsible for all of the construction, maintenance and vital services in these sectors has been decimated.
The U.S. central bank, the Federal Reserve, played an especially important role in the last bailout. Almost immediately, even as financial institutions were collapsing, the Fed provided secret, short-term loans to the banks on an emergency basis. The Fed lent banks close to two trillion dollars on just one single day in the very depth of the crisis – this remarkable amount was hidden until Bloomberg News, suing the Federal Reserve under the Freedom of Information Act, managed to pry out the information. Most of the loans went to the six largest banks.
The Fed also slashed short-term interest rates to near zero, keeping the interest rate there ever since. In other words, the Fed began lending banks massive amounts of money, charging them nothing for it.
The Fed also bought up close to two trillion dollars of mortgage-backed securities from the banks, relieving the capitalists of toxic assets that no one else would buy, replacing bad debt with fresh money. The Fed also bought up another 2.5 trillion dollars in debt from the U.S. Treasury – some of it rotten debt the Treasury had already bought from the banks. In other words, the Fed created more than four trillion dollars, an amount equal to more than 20% of the entire U.S. economy, and handed much of it over to the banks, directly or indirectly.
The banks used the low rates from the Fed as an excuse to cut the interest rate that they pay on deposits to zero. The banks profited from that by using their depositors’ money to buy U.S. government bonds that pay two or three per cent interest on the debt. Thus, the big banks deprived depositors of any interest from savings, while the banks gorged themselves on big chunks of the 431 billion dollars of interest that the U.S. government paid on its mounting debt in 2014.
As for the trillions of dollars that the banks got from the Fed – the banks did not lend it out. They kept the money at the Fed. In return, the Fed paid them interest on the deposits: a quarter of a per cent per year – which is more interest than the banks pay their depositors. Given the huge amount that the banks have on deposit with the Fed, this equates to an additional six billion dollars per year, which is free money, since the Fed gave the banks the money to deposit with the Fed in the first place.
Finally, the banks used the almost free short term loans from the Fed to fuel the growth of huge debt bubbles: financial, corporate, consumer ... and government debt.
In 2008, in the midst of the collapse, former Fed chairman Alan Greenspan was publicly castigated in Congressional hearings for having kept short-term interest rates extremely low for almost ten years, fueling the sub-prime mortgage bubble that finally collapsed.
Nonetheless, the Fed is doing it again with greater intensity. What the Fed did under Greenspan, lowering rates and funneling huge amounts of money to the banks after the 2001 collapse, pales in comparison with what the Fed has been doing since the 2008 collapse.
All that government money stimulated a sharp recovery in corporate balance sheets starting in 2009. At the same time, the record high unemployment caused by the crash enabled the companies to squeeze the labor force still harder, increasing productivity, speed-up and slashing workers’ wages and benefits. Profits compared to the overall economy soon hit record territory, not seen since 1929. This did not lead to new productive investment. Two establishment economists, Laura D’Andrea Tyson and Susan Lund, warned in the New York Times (October 18, 2013), that such lack of investment “may constrain growth for decades to come.” A few capitalists have even raised this publicly as a problem – of course, in the capitalists’ own terms: “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” wrote Laurence Fink, the chairman and CEO of Black Rock, the world’s largest money manager, in an open letter to corporate executives in March 2014.
Everything companies got, they showered on their top shareholders and executives, driving up the price of their stock and the value of shareholdings. Over the last five years, they have been spending on average over 500 billion dollars per year on stock buybacks. And they increased their stock dividends from 600 billion dollars to 900 billion dollars annually, after taxes.
Taken together, companies are funneling close to 10% of the entire U.S. economy, or GDP, back to the big stockholders every single year.
The very biggest companies have been leading the way. Over the last decade, giant Exxon Mobil has spent 30 billion dollars annually on stock buybacks and dividends, with Chevron and ConocoPhillips not far behind. Industrial giants, health insurance giants, pharmaceuticals, high tech companies, giant retailers, mass media conglomerates, financial service companies and banks – they all have been recycling, on average, more than 90% of their profits back to their stockholders through stock buybacks and dividends.
Many have gone into debt to finance even higher dividends and stock buybacks, taking advantage of the very low interest rates that the Fed has been providing the finance sector. These companies include IBM, Microsoft, Cisco, Time Warner, Procter and Gamble, Pfizer, Bank of America and Home Depot. They have been spending more than 100, 150, and even 200% of their year’s profits on stock buybacks and dividends. That means record rates of borrowing by the biggest companies, both directly from banks or by selling their own bonds.
This has driven a huge expansion of debt and of speculation in corporate debt, as well as in the price of company stock. At a time when the rest of the economy has been mired in recession and stagnation, the combined dollar value of all the companies on the various stock exchanges in the U.S. has soared. Today, stocks in the U.S. are said to be worth over 26 trillion dollars, which is almost 50% greater than the entire U.S. economy.
Money that could be borrowed cheaply also stimulated a vast increase in mergers and acquisitions – which on an international scale are expected to reach over four trillion dollars this year, surpassing the old record set in 2007. None of these mergers and acquisitions involve productive investment. Major health insurance companies or beer companies merge with each other to gain near-monopoly control over their respective markets and drive prices up. High tech companies and drug manufacturers buy each other up to get control of each other’s products – or sometimes to be able to unload unprofitable products. None of these financial operations creates jobs. Almost always, they lead to net job losses. And they fuel more growth in corporate debt.
Today, the U.S. corporate bond market is valued at 40 trillion dollars, and it is one of the biggest financial markets in the world, according to the Wall Street Journal (“The New Bond Market: Bigger, Riskier and More Fragile Than Ever,” September 21). The U.S. bond market is nearly twice the size of the five largest foreign stock exchanges (in Japan, China and Europe) combined. According to the Journal, “...bonds appear vulnerable as never before to price reversals and trading disruption that could spill over and threaten financing for business and individuals.”
In plain English this means that all the ways that the capitalists have boosted their wealth and fortunes have only created more debt and more bubbles, thus sowing the seeds for much more dangerous crises in the future.
In spite of that danger, which is quite understood by the big bourgeoisie, they are incapable of boosting their capital through productive investments and they are on a feverish spree of financial dealings, among which are loans, all sorts of loans, the riskier the better – those are all the more attractive because they offer higher interest.
This is what occurred with the housing crisis. There was such a demand for mortgage loans that the banks pushed loans on people who could not pay, bundled the loans into sophisticated bonds, then sold the bonds all over the world up to the point when the defaults led to a general collapse.
With the government and the Federal Reserve enabling the banks and finance companies to put behind them the entire subprime mortgage debacle, the banks and other Wall Street companies took advantage of the foreclosure crisis to expand their revenue. The banks scooped up millions of these foreclosed homes at steep discounts. In some cases, they flipped the houses, reselling them at a fat profit. Or they held onto them to rent them out. Wall Street companies are now renting out about 550,000 single family homes. And they are doing the same thing they did with subprime mortgages. They are bundling the rental homes, turning them into complicated bonds that they sell on financial markets. The only difference is that the income from these securities is based on rent instead of mortgage payments.
Obviously, the foreclosure crisis further exacerbated the shortage in affordable rentals. In a period of only a few years, close to six million families were thrown out of their homes, with hundreds of thousands more foreclosures expected every year for the foreseeable future. As a result of this housing shortage, families are paying the highest-ever percentage of their income in rent. More than a quarter of renters have to put half of their income toward paying the rent.
Foreclosing on people, then scooping up all those foreclosed homes, Wall Street companies positioned themselves to gain greater profits from the resulting increase in rents.
Across the country, the auto loan business has also been booming. In the second quarter of 2015, auto debt owed by U.S. households rose above $1 trillion for the first time, up more than 10% from a year earlier. And the fastest growing part of the loan business is in subprime loans to working people with impaired credit. During the first half of 2015, lenders gave out 56.4 billion dollars in subprime auto loans, which is 181% higher than in the first half of 2009, when the market for these loans bottomed out, according to credit-reporting firm Equifax Inc. Subprime car loans accounted for 20% of the car-loan dollars given out from January through June, the highest share for the period since 2008, according to Equifax.
Just as with mortgages, the banks and financial companies are bundling car loans and turning them into complex financial bonds that they peddle around the world. So far this year, Wall Street has issued 70 billion dollars worth of these securities based on auto loans, which is almost 10% higher than last year. Almost one-third of those bonds are based on subprime loans, which are very much in demand, since they pay much higher interest rates.
The finance companies and banks are charging extremely high interest rates on sub-prime car loans, up to 17 or 18 per cent on new cars and 30 per cent on used cars. They stretch the loan out to an average of close to six years, with almost a third running between seven or eight years, some even hitting nine. The monthly payment may be lower, but the longer the loan, the higher the finance charges. Add up all those charges, and the cost of the car doubles or triples. When someone with a sub-prime car loan tries to buy another car, they find they have no equity left in the car, nothing to use as a trade-in, only payments that will dog them.
The terms of subprime car loans are such an outrageous burden it hasn’t taken long for defaults and non-payments to pile up even though consumers run the risk of losing this basic transportation necessity, which in most parts of the country is required to get to work, to go to school, go to the hospital. Repossessions have almost tripled over the last two years.
This too sounds eerily familiar with what happened to subprime mortgages. The business press has attempted to downplay the problem. They claim that the size of subprime auto debt is much smaller than subprime mortgage debt. They once made similar claims about subprime mortgages. They downplayed the huge risk then, saying that subprime mortgages constituted only 18% of the entire mortgage market.
But subprime mortgages weren’t the exception. They were part of an enormous debt bubble. And when the subprime mortgage market crashed, it triggered a chain reaction. What the 2007-9 mortgage meltdown demonstrated was just how quickly a crisis in one sector of debt could spread.
Auto is not a small corner of the U.S. economy. It constitutes a major part of all U.S. industrial production and it is by far the biggest part of the U.S. consumer market. The rise of subprime auto loans has really fueled auto sales, which have almost doubled from nine million sales in 2009 to nearly 18 million this year, not to speak of the profits of the auto companies and their finance companies, which are making all those subprime loans. They have also fueled the profits of auto suppliers, banks and other finance companies. In other words, subprime auto loans are playing a similar role to what subprime mortgages played in the previous decade. “... the key to boosting spending in the U.S. economy is subprime lending. The financial system was lending against homes before the Great Recession, and now it has moved to lending against cars. But the basic message is the same.” (Subprime Lending Drives Spending, June 13, 2014, by Atif Mian of Princeton University and Amir Sufi of the University of Chicago, two economists who specialize in the role of debt.)
There may have been a few mild reproaches and warnings: “But history shows that a splurge on subprime lending nearly always leads to a crippling cascade of problems ... fissures are appearing in certain parts of the subprime sector.” (“Stressed Borrowers Rattle Resurgent Subprime Lending Industry,” New York Times, September 9, 2014.) And Comptroller of the Currency, Thomas Curry, in charge of regulating the banks, warned in a recent speech that what banks are doing with auto loans “reminds me of what happened in mortgage-backed securities in the run-up to the crisis.” (“Regulator Raises Red Flag on Auto Lending,” Wall Street Journal, October 21, 2015.)
But this has not prevented the sheer insanity of the go-go years of the subprime mortgage era from being replicated.
The banks and auto companies are not the only ones that are blowing up bubbles of subprime debt, using that debt to extort extra profits from working people, who are just trying to pay for bare essentials. So is the U.S. government.
The U.S. government is the main lender today for student loans, which is just another form of subprime debt. Today, 41 million people, one out of eight people in the country, owe close to 1.5 trillion dollars in student debt, an amount that has tripled over the last 10 years. As unemployment skyrocketed during the Great Recession, millions tried to go to school to further their education, gain skills and increase their chance to get a job.
What they got instead was a huge load of debt.
The banks greatly profit from the loans, both because they own about 10% of the loans, and also because they service the loans held by the government. But the lion’s share of the profits go to the government. Over a period of two years, 2012 and 2013, the U.S. government made a profit of 86 billion dollars on student loans (Detroit Free Press, November 25, 2013). Those 86 billion dollars are thus available to be used for the benefit of big business.
Lined right up behind the government are all those private, for-profit colleges, which have been set up by big financial companies and are little more than frauds that provide worthless degrees and certificates. They have expanded as government support for public four-year and two-year colleges has been slashed, making public higher education much more expensive, with many fewer classes, teachers and resources. The for-profit companies are able to attract millions of working class students through heavy promotions and seeming convenience. They arrange for students to take out government loans. The for-profit companies are paid up-front; the students are left holding the debt.
These loans might as well have been issued by a loan shark. The interest rates are so high, it’s like making a car payment ... without having the car. If someone falls behind on their payments, the government tacks on penalties and fees that mount quickly. The government shares the money from the extra fees and penalties with the banks. And there is almost no way to get out of these loans, not even by declaring bankruptcy. The loans literally follow people into the grave. Today, close to a million retirees collecting Social Security are still making payments on student loans, in some cases their own, in some cases because they co-signed for their children or grand children. One quarter of those seniors have defaulted and many are having 15% of their Social Security benefits garnisheed.
In 2012, the Obama administration started up a program called “Pay as You Earn,” which was advertised as a way to make paying off the loans more affordable by cutting monthly debt payments typically by hundreds of dollars. But in reality, the government doesn’t reduce either the interest rate or the principal. So, all this does is stretch out the time that it takes to pay off the debt, often by more than an extra decade, which also increases how much interest is paid. It is nothing but the same kind of debt trap that the typical subprime borrower was forced into.
The heavy burden of student debt erodes working peoples’ credit, often leaving them little choice but a subprime loan when they have to buy a car. And they are vulnerable to other forms of predatory lending, like payday loans, just to make the rent. These loans then become grist for Wall Street’s mill, which bundles the loans, turning them into financial instruments, which it sells for a profit.
The entire economy is like a giant suction pump working overtime to further enrich the capitalist class. Working people are left with mounting debts, facing growing usury and increasingly dangerous and destructive crises. These destructive absurdities can’t be “controlled” or “regulated” because the economy is based on just one thing: the accumulation of private profit and the competition to get ever more. With financial dealings based on loans, the favorite means for capital to make profit, the decaying capitalist economy is sunk ever deeper into an ocean of debt. We are back to the times where usury prevailed. Financial dealings do not create wealth. Capital is not invested to produce wealth. Capital is used simply to grab the wealth already existing. It is a parasite which strives to expand into all the places where it can suck money. The capitalist economy is cannibalizing itself and it drags the vast majority of the population into impoverishment, even without a brutal collapse. But such a collapse could occur any time, given the time bomb represented by the ever-growing ocean of debt which is today the very base of the economy.
The capitalist system cannot be reformed and has nothing good in store for the future. The least we can say is that it is harmful and should be overturned because it has already outlived its usefulness. It is an economic system of the past: humanity can do much better to produce what is needed for the population of the whole world to live a decent life in this 21st century.
The working class would have to expropriate the capitalists, rip their hands from control of the economy, and put it under the direct control of the working population. But this cannot be carried out by changing the laws or elections. It will take a violent revolution. For that, the working class will have to relearn how to fight in its own interests, as well as regain an understanding and consciousness of what it is capable of doing. To help bring it that understanding, a workers revolutionary party needs to be built.