Capitalism on trial
The neoliberal dogmas that have dominated for more than 25 years are discredited, but they need to be replaced by more than proposals for re-regulating the banks.
THE WORLD financial system is in the grip of the most severe crisis since the Great Depression of the 1930s--and there's worse to come, not only for the banks and speculators of Wall Street, but far beyond, in every part of the U.S., and around the globe.
The business world has been struck by a man-made earthquake, and people will be paying for this economic disaster for years to come in a number of ways--higher prices for food and other necessities, millions of foreclosures and evictions, greater unemployment, growing poverty, government programs cut back or eliminated, and rising tensions throughout society.
The claim will echo around the corporate media that this was the inevitable consequence of all Americans "living beyond their means." Don't believe it. The vast majority of people who will have to pay the price for this disaster are blameless. They did nothing wrong.
The crisis was caused by an irrational free-market system and the insatiable greed of a small class of rulers who continually seek greater wealth and power, without regard for the costs.
Wall Street's meltdown is an indictment of the capitalist system, which has, once again, proven itself "unfit to rule," as Karl Marx and Frederick Engels wrote more than 150 years ago.
The immensity of this crisis demands an alternative that goes far beyond new regulations on the banks and government interventions to save whichever band of corporate parasites is failing this week. Ultimately, it demands a vision of a different kind of society altogether--a socialist world dedicated to the principles of solidarity, democracy and liberation, rather than the wealth and power of a tiny minority.
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IT'S IMPOSSIBLE to exaggerate the scope of what has taken place in the financial world in the past several weeks. Scenarios that would have been dismissed as the fantasies of radical doomsayers a month ago now appear as accepted fact on the front pages of newspapers like the Wall Street Journal.
The latest previously inconceivable turn of events--latest, as of Thursday afternoon, when this article was being written, but that doesn't mean it will last the week, much less the month--was the U.S. government's effective nationalization of the largest insurance company in the world, American Insurance Group (AIG).
When desperate efforts by Treasury Department and Federal Reserve Bank officials to find a private-sector rescuer for AIG failed, the government stepped in with an $85 billion loan, payable over two years, in return for effective control of the company.
Set together with the takeover of mortgage giants Fannie Mae and Freddie Mac less than 10 days before, the U.S. government--that neoliberal scourge of nationalization in other countries--now owns the two largest mortgage companies and the single largest insurance company in the world.
Why, you might wonder, is an insurance company like AIG on the verge of bankruptcy because of a crisis associated with the bursting of the housing bubble and the resulting foreclosures on sub-prime mortgages?
AIG got into trouble almost entirely because of an obscure part of its business--selling what are called "credit default swaps," which amount to an insurance policy on investments in bonds. Basically, AIG was selling financial protection to investors and companies that bought bonds--if the seller of those bonds defaulted on the promise to pay back the principal, plus interest, investors could cover their losses.
Credit default swaps are pretty much an invention of the last 10 years. Yet these financial insurance policies today may cover as much as $62 trillion worth of debt, according to estimates--greater, that is, than the total annual production of goods and services of every country of the world.
The sales of credit default swaps accompanied a massive--and little-examined, until now--boom in investments based on debt, and especially mortgage debt. Essentially, Wall Street pushed the expansion in mortgage financing and refinancing to feed a demand for bonds that packaged together large numbers of these loans for sale to big investors. As these "mortgage-backed securities" became bigger--and as they came to include a greater and greater proportion of risky sub-prime loans pushed on homebuyers by aggressive mortgage companies--the big investors who bought the bonds looked for protection against investments going bad. So the demand for credit default swaps boomed as well.
To AIG executives, it looked like easy money. They could sell the promise to pay off in the event of defaults, which never seemed to happen while the housing market was booming. But then the bubble burst, and AIG was suddenly on the hook for immense sums of money.
Essentially, AIG was gambling that they could take in more money by selling this specialized form of insurance than they would ever pay out. But when this bluff was called by the mortgage crisis, AIG was busted out of the game.
Or it would have been, if AIG had to play by the rules that ordinary people do. Instead, the insurance giant got help from "the house"--in the form of the Federal Reserve, which made an $85 billion emergency loan this week that put the U.S. government on the line for AIG's bets on mortgage-backed bonds.
Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson had just finished putting their foot down against pleas that they put government funds behind a bailout of the investment bank Lehman Brothers. Instead, Lehman Brothers filed for bankruptcy. Meanwhile, another investment bank, Merrill Lynch, sold itself to Bank of America at a bargain price.
But AIG was different. The threat of its bankruptcy wasn't so much about the company itself, but all the other firms, struggling already because of the crisis, that would incur another loss if AIG went down. And because AIG's credit default swap business was unregulated, no one could say with assurance how extensive the damage would be if it failed.
So the government intervened, most of all to protect the other players. Financial institutions around the world all have their own tangle of high-stakes gambles on everything from the value of mortgage-backed bonds to the future price of oil to the direction of the stock market. Whether they survive or go under might depend on the money owed to them by a single busted insurance company.
It's easy to get lost in the details of what has happened--both the mind-boggling scope of the financial shell game that has been taking place for the last decade, and the unprecedented consequences as government officials and surviving players try to figure out how to unravel the mess.
But it's important not to lose sight of a larger point: No one could possibly claim that Wall Street's high-stakes casino contributed anything to the good of society as a whole. The entire world of credit default swaps, hedge funds, collateralized debt obligations and the rest of the alphabet soup concocted by Wall Street in this latest boom was directed toward one thing--make a tiny group of people rich beyond most people's wildest dreams.
The financial catastrophe unfolding on Wall Street is the product of blind greed and arrogance. And now that the house of cards is collapsing, the U.S. government's series of rescues carry another lesson: The bigger the bet and the wider the potential damage if it loses, the more likely the Feds will have to come to the rescue to stop the whole game from coming to an end.
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NOW THAT the full fury of the financial storm has struck, the neoliberal dogmas of the last several decades are out the window--above all, the belief that the free market can only function at its efficient best if government oversight and regulation is kept to a minimum, if not eliminated outright.
Even Republican presidential nominee John McCain, in his latest speeches, is displaying a previously hidden zeal for financial reform of the "reckless management and a casino culture on Wall Street."
Unfortunately for him, McCain's record of support for deregulation is long. "You are interviewing the greatest free trader you will ever interview, and the greatest deregulator you will ever interview," he told a reporter last year.
Barack Obama is likewise talking tough about Wall Street--notwithstanding the huge sums he and fellow Democrat Hillary Clinton collected from the financial industry during this election cycle as part of a significant shift in business support away from the Republicans. Nevertheless, Obama, like McCain, is promising tough regulations to put Wall Street's house in order--though that certainly won't have much effect on the disaster unfolding right now.
Probably, the more accurate assessment came from Senate Majority Leader Harry Reid, who told reporters that Congress likely wouldn't pass legislation overhauling financial regulations this year "because no one knows what to do."
Reid at least deserves points for honesty compared to the substance-less bluster of the two presidential candidates.
But "no one knows what to do"? Really?
After all, now that the U.S. government has carried out several quasi-nationalizations on an emergency basis, an obvious question looms, as the Financial Times' Willem Buiter pointed out:
If financial behemoths like AIG are too large and/or too interconnected to fail, but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?
Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good, and get bailed out and taken into temporary public ownership when the going gets bad, with the taxpayer taking the risk and the losses?
If so, then why not keep these activities in permanent public ownership? There is a longstanding argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.
William Greider of The Nation poses the question more bluntly: "People have the right to ask: What exactly are the rest of us getting for our money?"
Greider is right. For example, now that they have bailed out the mortgage giants Fannie Mae and Freddie Mac, shouldn't U.S. taxpayers have a say in the companies' operations? Why shouldn't the public owners of these companies insist on a moratorium on foreclosures on the loans owned or guaranteed by Fannie and Freddie--nearly half of all mortgages in the U.S.? That would do a hundred times more for working people struggling with the mortgage crisis than the weak housing law passed this summer, whose main aim anyway was to enable the government takeover of Fannie and Freddie.
Now that the federal government has gotten into the insurance business with the takeover of the largest insurance company in the world, is there any justification for anyone in the U.S. going without health care coverage, much less 45 million people?
And when the objection comes that the U.S. government will have to cut spending to pay for the Wall Street rescues, there should be no question about where the money should come from. The federal government could get the whole sum for the AIG takeover from the Pentagon budget and still leave the U.S. military with more money--many times over--than any other country in the world.
If the U.S. needs to raise some quick cash, it could end the occupations of Iraq and Afghanistan--and not only cover the cost of the Fannie and Freddie takeover in a year-and-a-half at most, but, more importantly, begin to right a terrible injustice committed halfway around the world in the name of ordinary people in the U.S.
But of course, none of this is on the agenda of any political leader in Washington, from either of the mainstream parties--because any effective measure that would help ordinary people would strain at the boundaries of the profit system they are dedicated to preserving.
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NO ONE knows what's next in this new and frightening stage of the economic crisis.
The financial world is grasping for explanations, so it is no surprise that ordinary people, who were kept in the dark about the scale of the theft and the degree of danger, are struggling to understand what happened. Every new day brings new questions, and answering them will be a process--here at SocialistWorker.org, as at any other media source, independent or mainstream.
But we have no problem drawing one conclusion from the start--that the capitalist system has proved, once again, to be a failure in serving the needs of any but a small minority of society.
For more than 25 years, the theology of neoliberalism--with its worship of the free market and its demonization of "big government"--has reigned supreme in the U.S.
But it is obvious that the market is in crisis precisely because of the ceaseless, irrational and unplanned pursuit of the greatest profit for a few. And it is equally obvious--and even grudgingly acknowledged by virtually all sides of the political mainstream--that the state, and not some "responsible" section of private capital, is needed to stop the system from grinding to a halt.
This is not the first guilty verdict against capitalism. As socialist filmmaker Ken Loach told the Guardian newspaper: "You look around the world, and you see massive need on the one hand, and massive wealth on the other, and the two never connect. The market is massively inefficient, capitalism is massively unstable and turbulent, and it's insane that we are all bound to this terrible wheel of instability."
But the present crisis is laying bare the failure of the system for more and more people to see--and opening up opportunities to make the case for a socialist society, where the blind and irrational pursuit of profit and power is replaced by a commitment to freedom and equality for everyone in it.
Such a society won't be achieved by dreaming about it. Those who are convinced that an alternative is necessary to end the injustices of this world need to be organized to struggle for another one.