Aug 20, 2007
The following is an article from the French Trotskyist group, Lutte Ouvrière (Worker’s Struggle), that appeared in the August 17 issue of their newspaper. The article provides an overview of the U.S. real estate crisis, while referring to the impact of the crisis on the French and European banking system.
Last week, the world’s stock markets got a lot of media coverage. The sharp fluctuations in stock prices created fear that a panic could lead to a catastrophic crisis.
In the beginning, they told us it was limited to U.S. real estate and people in other countries didn’t have anything to fear. Then there was a week of turbulence on stock markets throughout the world. Prices collapsed after jumping up and down for some weeks.
Today, the commentators try to sound reassuring, explaining that massive injections of funds by the central banks will restore stability to the situation. But they say little about what led to this crisis, and nothing about what kinds of consequences working people face, even if this crisis is forestalled for awhile.
The crisis began in the U.S. in “sub-prime” mortgages, among certain companies specializing in making these loans. As long as the real estate market went well, in the capitalist sense of the term, that is, real estate prices continued to go up, there was no risk for the companies that made the loans. If the buyer fell behind on mortgage payments, the lender could either offer an additional loan or take back the house, and make a big gain on either operation.
But the real estate market isn’t unlimited, especially in a society that creates many more poor people than rich ones. And when the price of real estate showed signs of weakness, companies that specialize in “sub-prime” mortgages experienced difficulties. On April 2, New Century Financial, the number two “sub-prime” lender in the country, declared bankruptcy. On August 10, American Home Mortgage sought bankruptcy protection.
The crisis spread beyond the “sub-prime” specialists. Many banks, including those based outside the U.S., had a stake in the “sub-prime” mortgage market. As a result, they found themselves at risk.
It’s difficult to know which banks are affected. Infamous “bank secrecy” covers all their deals with an impenetrable veil. However, the French business paper Les Echos on August 13 published a list of the banks that are “most exposed” to the current turmoil. This list includes not only U.S. banks, but Deutsche Bank, Credit Suisse ... and BNP, a French bank. BNP happens to be one of the creditors of the now bankrupt American Home Mortgage. BNP’s managers assured the public that it is owed “only” 40 million dollars. But it’s obvious that BNP’s problems are bigger than that, since it had to freeze the operations in three of its investment funds
No one can foresee the long term consequence of this crisis. The so-called economic experts can’t see it. They didn’t see the crisis coming, and not because they are incompetent. By its very nature, the capitalist system is unpredictable.
Perhaps the only consequence of the crisis will be to lower the standard of living of working people, if they don’t respond collectively to such attacks. But the “sub-prime” crisis can also lead to a generalized bank crisis. If the big banks go bankrupt, they will shut their doors on the noses of private individuals who try to withdraw their meager savings. And this could lead to a general economic crisis. The turbulence in all the stock markets over the last several weeks reflects the fear of the capitalists that industry’s rate of profit will drop. They know that all sectors of the economy are linked.
Could this crisis result in a catastrophe? It’s possible. The great economic crisis of 1929 came after a period when the stock market rose to record levels. Then over a period of months, the implosion of the speculative bubble brought about the greatest economic recession that capitalist society had ever known, which then resulted in World War II.
Humanity won’t be spared from this type of catastrophe so long as the capitalist system continues. At its birth, capitalism was certainly a factor for economic progress – even though it came at a high cost, the pillage of entire regions and the crazed exploitation of the working class. But for a long time, the capitalist system has been worn out.
The capitalist marketplace, in which supply and demand is dominated by the quest for maximum profit, is an irrational system. People’s lives and the very future of the planet depend on how a small handful of rich people place their capital in order to enrich themselves still more.