The tropical storm of the global financial crisis became a hurricane in September, measured in bank collapses, plummeting stock markets, wholesale nationalisations, takeovers and desperate political gambits to rescue the system.
The refusal of the US Congress to vote though Treasury Secretary Hank Paulson’s unprecedented $700 billion package to buy up the ‘illiquid’- or unsellable – debts held by US banks led to angry outbursts again the US legislators from politicians and economists around the world.George Bush, Paulson and a string of US politicians, financiers and policymakers had warned that failure to back Paulson’s plan would push America into a deep, prolonged and ‘painful’ recession.Markets took the hint and dumped shares on a vast scale.
Wall Street dived in its biggest fall since the crash of 1987, wiping more than $1.3 trillion off share values, with the S&P500 index falling by 8 percent and the NASDAQ by more than 9%. In Britain the FTSE plunged by more than 5% and stock markets across Asia and Europe followed. Bank shares were hammered, especially Royal Bank of Scotland, Halifax Bank of Scotland, HSBC and Barclays. But non-financial manufacturing companies were severely hit too.
The crash followed a week of extraordinarily bad news for the financial system, the banking parasites and indeed for anyone who believes that the capitalist system has escaped from its deep contradictions.
Just prior to the Congress vote, the day’s news was already starting to look like doomsday for finance capital. In Britain Bradford & Bingley was nationalised, the government cynically lumbering taxpayers with its toxic debt while agreeing to sell on its assets including its savings accounts to Spanish bank Santander. In the USA large commercial bank Wachovia had to be rescued after its value collapsed, following hot on the heels of the country’s biggest mortgage lender Washington Mutual – by being bought out and sold on by regulators after it was effectively judged to be insolvent. Once worth $50 billion, it was sold for $1.8 billion: the largest bank failure in US history. †
In Europe the governments of the Netherlands, Luxembourg and Belgium took concerted action to nationalise the huge Fortis bank. The German bank Hypo Real Estate lost 75% of its value and had to be bailed out by a consortium. Icelandic bank Glitnir ran out of funds and was nationalised too.
Central banks in the USA and Europe again opened huge credit lines to the banks to keep them afloat. The dollar plunged until speculators realised that other countries were also in deep trouble: sterling suffered its biggest one day loss since John Major’s monetary crisis of 1992.And all this followed prior weeks of severe crisis, which saw the rescue of US mortgage lenders Fannie Mae and Freddie Mac, the collapse of the investment banks with Lehman Brothers going bust and Merrill Lynch being bought out cheap, and of course the government intervention in the UK to force Lloyds TSB to buy out collapsing Halifax Bank of Scotland (see page 2). And AIG the biggest insurance company in the world was nationalised by Bush.There is no way that anyone can continue to pretend that the financial crisis will have no effect on the real economy. George Bush has stopped repeating his absurd refrain that “the fundamentals of the US economy are sound”. So has Republican presidential candidate John McCain. In fact as we go to press McCain and Obama have joined calls for the Paulson plan to be resurrected, with Obama declaring that “We must act and act now. We can’t have another day like yesterday.”
Yet in and among all the calls for action from the top US politicians, a terrible admission is being made. The day after Congress rejected the Paulson plan, Bush said in a televised address to the American people:
“Our country is not facing a choice between government action and the smooth functioning of the free market. We’re facing a choice between action and the real prospect of economic hardship for millions of Americans.”Indeed! Contrary to everything Bush and his ideologues have been telling the world for years, in direct contradiction to the whole pro-market ideology of ‘neoliberalism’, the US president is suddenly admitting that the market is not perfect, that it does not deliver prosperity, that our fate and well-being cannot be left to this chaotic and mad market scramble, that left to its own devices the market will wreak havoc and impoverish millions.
But he is only saying this now because government intervention is needed to save the billionaire bankers and their system. He wants ordinary working class people to pay for it. When the market was enriching the bankers at the expense of the masses, the very idea of interfering with it was denounced as contrary to the laws of nature.
The real choice that American workers face is between the market leading them into recession and poverty, or fighting the market, fighting to force the bosses to pay the price of the crisis, fighting for nationalisation of the banks under their own control, without compensation, so that workers’ homes and jobs can be protected at the expense of the super-rich. The idea of democratic control of economic life being exercised by the workers, of the workers imposing their interests over and above those of the tiny minority of capitalists is called socialism: and the American workers need it urgently.
The Paulson plan came under huge criticism all across America. There have been widespread and angry protests and marches against the idea of $700 billion being handed over to bankers and the very Wall Street parasites that caused the crisis in the first place. In Congress, Republican party representatives vehemently opposed the bill. Some, like South Carolina Congressman Gresham Barrett, did so for ultra-ideological pro- free market reasons, saying: “My fear is the government will be forever changing the face of the American free market. Because I believe so strongly in the principles of the free market and the belief in freedom, I will be opposing this Bill.”Economic advisers to big capitalists however, are quick to throw their market ideology out of the window when their rich masters need state intervention. Responding to Congressman Barrett, former chief economist of the European bank of Reconstruction and Development Willem Buiter said tartly: “Those who genuinely hold these views are mad, but honest and principled. I wish them a good depression.”
Other Republican opponents of the plan in Congress adopted a less ideological but more politically revealing stance. Congressman Ted Poe from Texas had a fine turn of phrase to sum up what election campaigners must be hearing on doorsteps and street corners across America: “New York City fat cats expect Joe Sixpack to buck up and pay for all of this nonsense.” Fearing for their seats, scores of representatives couldn’t be seen to back the Paulson bailout plan. What a sign of anger in America, of a potential social explosion as the crisis and recession mounts.
The Paulson Plan
Fresh from nationalising AIG, Paulson’s radical proposal of 20 September aimed to draw a line under the crisis by creating a $700 billion fund: a “bad bank” that would buy up all the toxic debts. Bush demanded that Congress and the Democrats backed this “Troubled Asset Relief Program” (TARP). Desperate to push through the bailout, George Bush told an emergency summit: “If money isn’t loosened up, this sucker [the financial system] could go down.”
But millions quickly recognised it as an out and out swindle.
After a year of refusing any significant protection to millions threatened with losing their homes or jobs, the government suddenly proposed that tax payers bail out the richest people in the world. For decades, ever since Reagan and Thatcher, the rich have insisted on “free markets” and an end to state intervention, despite the huge social costs to jobs, wages, welfare and the environment yet now they demand that the state saves them from their own system! The plan is to socialise the losses of the bankers, while allowing them to keep the billions in bonuses and profits they have banked over the years, including the $38 billion in bonuses they paid out in 2007 alone as they drove their banks over the brink.The size of the bailout that Paulson demands is gigantic if the TARP was a country it would be the seventeenth largest in the world, between Holland and Turkey. And with other bailouts AIG, Fannie Mae and Freddie Mac this adds up to more than a trillion dollars. It is worth over $2300 for every American. †
The costs will be greater since the Bush government has, with its trillion dollar tax cuts for the rich and trillion dollar war in Iraq, run up a massive $9.8 trillion federal debt while operating at a massive deficit requiring nearly $2 billion a day in loans, and the TARP bailout will add up to $100-$150 billion per year of new debt service costs, according to James S. Henry of US journal The Nation.Bush and Paulson’s arrogance knows no bounds. Paulson, ex-CEO of the massive investment bank Goldman Sachs and personally worth $700 million, demanded that there be no restrictions on the CEO pay for the companies taking part. The Treasury and any “advisors” it brought in (read top bankers, investors and other wheeler-dealers) would have unlimited power to do what they liked with the TARP funds, without any oversight or right to legal challenge by courts or any other body. Time Magazine didn’t call him “King Henry” for nothing! No doubt the corporate “advisors” will tell Paulson to pay them top-dollar for these rubbish assets if he doesn’t, it will not go anywhere near resolving their balance sheet problems.
What would the bail out mean?
As we go to press, the Paulson Plan has been rejected by Congress. But Bush has told Americans on a live TV broadcast that he’ll keep pushing it, and Obama and McCain have added their voices to the panic, saying something must be done. There is every chance that the Plan will go through within days of this article being published, perhaps with a few minor concessions thrown in the bourgeoisie put democracy to one side very quickly in times of crisis. Paulson hopes that by taking over the banks’ toxic debts, the banking system will stabilise and the banks will start lending again. His aim is to put the banks in a position where they can open up new lines of credit and avert the major collapse in the real economy that is certain if businesses can’t find the credit to fund their operations. And for sure the current banking crisis means credit is drying up. In Britain net mortgage lending slumped to just £143 million in August 5% of the £3 billion in July and the lowest level since April ’93.But will the Paulson plan lead to a new virtuous cycle of accumulation? The major contradictions in the current situation suggest this is very unlikely. First, the US government’s finances will be dramatically worsened by the bailout of the billionaires. They will try to claw money back by cutting welfare programmes and public spending on anything that benefits the people as a whole. The only thing they will still find untold billions for is their wars, their tanks and bombs. As Merrill Lynch’s recent report confirmed, “Net fiscal costs from banking crises are substantial, averaging 13.3% of GDP” – so even if Paulson’s plan doesn’t go through, we can expect to see huge spending cuts.
The biggest problem for American capitalism is what this deterioration of its public finances would mean internationally. The USA is already a massive debtor on a world scale. It is dependent on foreign purchases of US Treasury Bonds to stay afloat and its huge sovereign wealth funds and foreign governments that are buying these bonds and pumping money into the US Treasury. The Paulson Plan if it goes through even with a few minor amendments would be like a massive credit downgrade for America.The South China Morning Post, China’s biggest business paper, reported last week that Chinese regulators had called on Chinese banks and financiers to stop putting money into the US Treasury – the regulator denied it immediately, but it was a sign of something serious. China wants to divest itself of its depreciating dollar-denominated assets stealthily. If it does it noisily, it would spark a run on the dollar that would drive down the value of its vast dollar holdings even more. The BBC quotes the Merrill Lynch report as warning that “With foreigners significant holders and continued buyers of US financial assets, primarily fixed income, and primarily foreign official institutions, we remain concerned of the risk of a US current account deficit financing crisis. Nearly half of outstanding Treasurys are held by foreigners and 90% of foreign inflows into agency debt has been from foreign official institutions.”The USA could conceivably face a run on its currency that would not only cause a huge inflationary push at home, but would undermine its ‘seigniorage’ the advantage it derives worldwide from its control of what is still the world’s main currency. That would add petrol to the fire of rising rivalries between the major powers.
Second, simply pumping more credit back into the system will intensify the crisis. In the short term it will aggravate inflation. Working people will see the value of the dollars and cents in their pockets fall, leaving them able to buy less and less. But for the capitalists too inflation is a serious problem because their own stockpiles of cash depreciate in value. In Paulson’s schema the injection will create a better credit environment, encourage capitalists to take their capital out of the low-interest bearing but secure gold and treasury bonds, and re-invest in production, grow the economy and stave off recession (or the “depression” many commentators have invoked).There has been a lot of talk about the need for the banks to “deleverage” the process where they withdraw the bad lines of credit. A report by Bianco Research recently argued the banks have deleveraged to the tune of $300 billion but the central banks have pumped the same amount back into the system, meaning in effect the state is taking a share of the risk. The Paulson Plan by taking over all the existing bad debts takes this “risk sharing” to a whole new level by putting the risk for all the existing toxic debts onto the state. But Paulson’s solution assumes that in the “real economy” is full of credit worthy firms and individuals able to make their regular repayments if only the banks would resume lending again. But this ignores the crisis of profitability hitting the corporations. The US Bureau of Economic Analysis reported second quarter US corporate profits fell $37.8 billion and comes on top of the $17.6 billion decline in the first quarter of this year. The US Commerce Department also reported that in the second quarter of this year internal corporate funds available for investment decreased $41.3 billion. That the corporations could do with an injection of credit to keep going is not in doubt but can this new capital be re-invested profitably to realise a new round of accumulation? This is the question at the heart of the current crisis as capital too much capital is pursuing too few profits than can be reinvested for profitable returns. It is classic example of what Marxists call a generalised crisis over-accumulation.In the last major recession in America 2000 2001 large amounts of capital were injected back into the system through credit, tax cuts and military spending to re-stimulate economic growth. But this boom was either speculative based on rising property prices and the value of fictitious forms of capital like the Collateralised Debt Obligations that triggered the Credit Crunch or based on credit fuelled expansion.The Paulson plan may shore up the banking system for a time but it will not put the banks in a position where they can flood the system with credit in the manner that this system has got use too.A real, sharp devaluation of capital needs to take place in the so called “real economy”. One possibility is that the Paulson Plan will stimulate inflation, avoid a hard, sharp devaluation of capital in the short term and create a longer term period marked by stagnation and inflation what they called “stagflation” in the ë70s. If the Paulson Plan fails the crash phase is likely to be much more severe but could also be less long lasting.A generalised over-accumulation of capital is driving the cycle from the crisis to the crash phase. And either way the bosses will fight to make the working class pay dearly for the crisis we did nothing to cause. The result will be a question of struggle, as Luke Cooper put it recently on FifthInternational.org:”Capitalists will attempt to stay alive by consuming each other in a mad bout of cannibalism. Intensified inter-state rivalry will proceed, as each nation’s rulers look to move the worst aspects of the crisis onto the other. Capital will be united in one thing alone: the class struggle against the working class. Home repossessions, unemployment, pay cuts, job losses, should be expected. The task of organising the resistance, and directing it against not just this or that attack by the employers and their governments, but against the system itself, is more urgent than ever.”