Capitalism in crisis; a working people's perspective,Part 1
Capitalism in crisis
A working people’s perspective
Part 1
The world economy has been shaken to its very foundations in the past few weeks and capitalism faces the beginnings of its worst nightmare since the Great Depression of 1929-38. There have been hues and cries from several quarters and working people in Nigeria and across the world grope for answers and the way forward. Baba Aye of the WPV/ANSA comments on this monumental crisis of capitalism from the Global Labour University in Kassel, in the first part of a series dedicated to furthering working people’s understanding of the issues as a contribution to finding the way forward.
There are times really when 200 years would seem like 200 days; in terms of those two centuries impact on the movement of human history. And there are times like now, which people living them and generations to come will never forget; when 200 days seem like 200 years! The September slump of the world economy (more like a sad September for capital) is one that unveils the claim by capitalists and their apologists that the “market” and its supposedly “invisible hand” remain the pathway for human development and social progress for the blatant lie it is. The neo-liberal ideology behind; privatisation, downsizing, liberalisation, and all other “government has no business doing business”, faces a challenge like never before, from its own for-profit logic of capitalism!
We have seen several responses to this calamity that faces capitalism. These have come from capitalist policy-makers, economists, columnists and other hangers-on. They have also come from the working people and different left forces who in different ways believe that another world is possible. As a saying in some Nigerian languages goes, we see different kinds of knives when an elephant is brought down. Not surprising some of these views has hinted at the September slump being a herald of the death of the capitalist elephant.
It is noteworthy though that while the BBC for example asserts that many terms, until a few weeks before being part of the financial system’s language (e.g. “short selling”, “leverage” and “derivatives”) have now become words you hear in discussions at groceries and barbers’ shops, most working people still come face-to-face with the interpretations of the recent events from the eyes and pens of representatives of capitalism especially in Nigeria. But we feel the pains of their sad September and need to analyse what is happening properly to come to grasps with the challenge of finding the way forward. In this series Working People’s Vanguard shall present perspectives on the crisis and “what is to be done?” from the world view of working class people.
From credit crunch to financial meltdown
The crisis started as what was called a “credit crunch” caused by massive defaults in the payment of “sub-prime mortgage” by working and middle class people in the US. This started late in 2006 and took up steam by mid-2007, by August this year the embers of its fires had become a raging inferno that was to unleash the financial meltdown’s most dramatic events. Sub-prime mortgages are loans made available by (mortgage) banks to persons like you and I, who are not money- miss-roads like the prime capitalist to purchase houses. These loans where packaged by the banks in ways to attract more people to buy into it despite their low incomes. It was easy to get into, but with very high interest rates. For over six years, the prices of houses rose in the US, getting to a peak of almost 20% in 2004. It was thus profitable for the financial system to invest in it through the loans to millions of working people. By 2006 though, the prices of houses began a downward fall as economic hardships and the compounded interests on the loans, made it difficult for more and more working people who had homes to pay their mortgages and by the beginning of 2007, their value had fallen below 0! The fall never stopped, by August, it was -15.8%. When the prices and value of these houses were high, repossessing homes of defaulters on the mortgage was something the banks could live with. Some loans could also be written off without qualms as bad debts (in 2001 for example, 0.4% of mortgage loans where written off as losses by commercial banks in the US). However when the economic downturn makes it impossible for even still more working people to pay their mortgages and the value of these houses is in the red, then there is big trouble, for the banks, as lenders.
By August, 3 out of every 50 house owners in the US had defaulted in the payment of their mortgages. Over 1 million persons have been rendered homeless, many sleeping now in tents, trailers or their cars. The mortgage banks have had to write off 0.82% of mortgages as bad debts, costing them about $240bn. These financial institutions have made frenzied attempts to raise new capital to save the situation with over $160bn raised. Meanwhile the financial sector as a whole as raised over $360b and written off $500b in the last one year, but as we shall see below, this has been to no avail as the djini they released from the bottle refuses to go back without assuring them of massive destruction.
How did the sub-prime mortgage defaults lead to a “cash crunch”? And how did this crunch precipitate the financial meltdown that has sent quakes and tremors through the world of capital?
In the capitalist financial system there is a parasitic “secondary market”, where claims on debts as assets are traded for the purpose of making more profits without production or any genuine value whatsoever added in the process. One of the main instruments of this market is Collateralized-debt-obligations (CDOs). The debts of mortgage entered into by sub-prime mortgage home owners, were packaged as CDOs. With the “assurance” of the mortgages being paid in the future these CDOs (like shares in the primary market) were sold and bought as bonds by capitalist speculators and their institutions who consider themselves as “investors” and investment banks, respectively. In 2004 CDOs issued globally amounted to $157bn. By 2005 it was $272bn, it rose to $552bn by 2006 and shortly before the crunch began, it stood at $503bn. The sales of these issued bonds (which are packaged and re-packaged, bought and sold in a manner very much like casino-gambling) raked in $2trn, last year alone! That however, was before the cookie started to crumble. It is interesting to note here in passing that the first CDO was issued in 1987 by a Wall Street Investment banking firm known as Drexel Burnham Lambert, which was liquidated in 1990 for criminal trading of junk bonds (also known as “high yield debts). Need one say more to point out the thievery behind that instrument of “fictitious capital”?
When sub-prime mortgage “clients” started defaulting in droves, panic spread into this secondary market. Because the CDOs had been so chopped up into little bits and gone through so much re-packaging and circulation within the finance sector (every one of those capitalist gluttons, wanted a piece of the pie!), no one knew how vulnerable any one of them was. Normally, banks borrow from themselves on a daily basis as they tend to invest much more than what they have as shareholders capital and deposits so as to make more and more money. But with the uncertainty and fear of the unknown that had now set-in on them like a plague, each bank decided to hold on to its own money, the inter-bank lending practice froze like shit in snow; last year’s cash crunch was the result.
The first major casualty of the crunch to meltdown dilemma was Bear Stearns, until its collapse in March, the fifth largest investment bank on Wall Street. Two of the hedge funds it ran had earlier gone burst last year, but the fall of the big bear itself, which had profited from the business of capitalism’s recovery efforts during the depression of the ‘30s, signalled the coming of greater things like those we witnessed in the week of September 15-19. The United States Treasury had to come in and persuade J. P Morgan Chase bank (which pays Tony Blair $1m annually, just to help it talk from time to time with governments-particularly in “emerging economies”-for securing “deals”) to buy Bear Stearns at a give away price with a $30b guarantee, from the pool of America tax payers money. This was three days after the release of $300b dollars in for Bear Stearns survival by the US government failed to save the situation! Leading bourgeois columnist with the Financial Times, Martin Wolf was forced to consider March 14, when the deal was struck as “the day the dream of global free-market capitalism died”. Even he did not envisage that worse was still to come, though this was written on the wall! Bear Stearns crash was due to what is called over-leveraging. This has been a critical factor in all the stories we have heard and seen in this unfolding drama of “how are the mighty fallen”.
What is (over-)leveraging, you might ask? It is but a new name and concept beatified by the complex mathematical formulas and concoctions of the best brains of the capitalist world; to express and justify a very old and indeed inherent characteristic of capital. This is the driving seat fictitious capital takes over real production. Leverage in simple terms is the utilisation of debts or borrowed funds to greatly enhance the profit that a unit of invested capital could generate. Bear Stearns for example had a capital outlay of $11.8b, but with leverage, it had an investment profile of $395b. A great chunk of this leverage was tied to bonds on the sub-prime mortgage market! The crazy thing about their so-called leverage which is now a lever for their doom is that to acquire the leverage capitalist don’t even have to actually borrow the monies that constitute the leverage directly. They have a whole spectrum of what are called derivatives which are financial instruments, which have their values dependent on the values of other financial instruments like loans, mortgages, bonds, stocks, interest rates and exchange rates. The whole idea is to spread out the risks while making the deals and getting money rolling into the investment banks which faced virtually no restrictions in the name of free market, while the party lasted. But now it is spreading the fir that is consuming the capitalist system.
IndyMac followed, but it was relatively small fry. Federal National Mortgage Association and Federal Home Mortgage Association, popularly known in America as Fannie Mae and Freddie Mac, were next. Fannie Mae was established in 1938, as a component of the New Deal, which got capitalism out of the mess of the Great Depression, to guarantee the mortgages of broke banks. It was privatised 30 years later. Freddie Mac was formed in 1970. While they were privately owned firms until August, they were considered as Government Sponsored Enterprises, with strategic importance in American mortgage finance system between them, they guaranteed $5.3trn of the $12trn, of loans to mouse owners in the US. In less than 1 year as the sub-prime mortgage wahala spread, the share values of “Fannie” and “”Freddie” fell by 80% and 86%, respectively. Within a few days before they eventually went under the figures jumped up by 38% and 45%. Scared at the possible consequences of their collapse, the US treasury moved in with what Henry Paulson, its secretary called “unlimited liquidity”. So much for neo-liberal economics, policies and politics! But why did Fannie and Freddie get to such a brink. Once again like Bear Stearns leverage. As against the $5.3t it had in its vaults, it had loaned out $62trn, in the secondary market of speculation. Yet American tax payers had to (and still are) paying for these banks greed.
The icing on the cake, or more like vinegar in the tea for the bourgeoisie, was to come in their sad September, that started in the shape of the “Monday meltdown” that swallowed Merrill Lynch, Lehman brothers, AIG and Washington Mutual in quick succession. These were the giants of Wall Street and they were on their knees, filing for bankruptcy or being nationalised by a neo-liberal state. The week of weeping in Washington is still fresh in our minds. We thus, for now at least, will not hold ourselves here for space in repeating its details, our aim being to go beyond the surface of what happened, to why and how these happened.
Having established the dynamics of the lurching of America’s cash crunch to the most bizarre financial meltdown in history, we need to see the ripple effects in motion and weigh the reactions and responses to these.
A spreading contagion and diverse responses
America has been the engine room for global capital accumulation, for decades. Apart from its “leveraged” foreign reserves (being the biggest debtor country of all times!), its control of global financial institutions and its massive proportion of the multinational/transnational corporations determining the flow of capital across the globe, the sheer volume of its huge populations consumption has provided a veritable nexus for global trade. Thus its crisis turns out to be the world’s crisis. It was so in 1929, it is much more so in this era of globalisation. There are those who believe that the crisis will be contained within the shores of the US. A good number of these, incidentally, have been major proponents of the (Anglo-) American model.
The contagion of economic collapse is however spreading and it is a long drawn global crisis that we have emerging. The facts on the ground across the world validate this position.
It is important to also analyse how different forces in the society, across and within nations are reacting or responding to the crisis.
Great Britain stopped being great to America in 1776, when America gained its independence from it. Once an empire which the sun never set over its dominions, it has been content with a junior partnership role to America in forging global capitalism. It probably will have more wounds than any other country apart from the US, in this dilemma the capitalist world finds itself in. As in the US, the craze of sub-prime mortgage had eaten up British society in the aftermath of the 2001 recession. The real estate market was juicy for investors and the “buy-to-let” market (where investors bought houses merely to let them out to working people) raked in £120b for investors last year alone. But the bottom came out of the bucket, there too. Northern Rock, a leading Bank had to be nationalised last year due to the (sub-) prime mess it had gotten itself into. The British government coughed out £50m of tax payers’ money for this, jacking up the UK’s debts profile by 44.3%
More recently, HBOS (the Halifax Bank of Scotland) had to be packaged for Lloyds bank to buy at a give-away price, by the government. B&B which had made a profit of £108m in the first 4 months of 2007 had lost £8m within the same time frame this year. Its share value had fallen to £350m by August. This was less than its profit last year alone! It was also nationalised to prevent its collapse and then sold to the Spanish Santander bank.
The contagion is spreading across the capitals of Europe. The Swiss UBS has made write-downs to the tune of $50b, Deutsche bank which is a 501 to 1 leverage has an albatross of E 20b on its neck and the tail goes on. As the Financial Times put it “European banks are living on borrowed time”. Australia is not left out; Macquerie, its leading investment bank is going burst presently
But is this crisis limited to the West; Europe and North America? Many capitalist commentators have been optimistic that capital flow only has to now move southwards. They have eyes on the BRIC counties (Brazil, Russia, India and China), the emerging markets in (particularly in Asia and Eastern Europe). This hope is however grossly misplaced.
The economies of virtually all these countries are beginning to seize. Russia had to shore up its state-owned Sherbank with $100b and the monstrous Chinese capitalist machine donned in socialist phraseology is slowing down from its growth rate of 12% to barely 8% this year.
The situation in Africa is no better. South Africa, arguably the economic hub of the continent is witnessing an economic slowdown, which makes nonsense of earlier forecasts of a growth gear this year. The country’s GDP as dropped from over 5% last year to 3.8 and is now expected to further contract to 3.2% next year. Inflation rate has jumped to 11.2% from 6.5% last year. In Nigeria, the illusions of many in a stock market that seemed to just be rolling in the goodies for everybody is fast turning into a nightmare. Stocks fell by 33% in value within 4 months and the Federal Government had to step in to institute a ceiling and floor to stocks prices movement.
With this scenario, it is not surprising that even some of the most liberal of capitalist politicians and ideologues, up to yesterday are now calling for some extent of regulation of the financial market. Hank Paulson the $500m-worth US Secretary Treasury (who until he became secretary of the treasurer was the CEO of Goldman Sachs, the biggest of these swindler-investment banks) rolled out the Troubled Asset Relief Programme (TARP) that is to cost American taxpayers $700b. Added up to the $600b already spent (to no avail!) over the past 1 year for the relief of capitalists troubled assets (which they now don’t talk about) that sums up to $1.3t! And from the treasury’s own analysis; this is just the beginning. They don’t know how bad it can yet get!
For Gordon Brown in the UK who had much earlier claimed that “the cycle of boom-an-burst has been abolished”, the problem is simply one of “irresponsibility” on the part of some finance speculators. On the continent of Europe the reactions have been much more strident and hypocritical.
Sarkozy of France, who as always been proud to flaunt his died-in-the-wool liberal soul, for any who care to take note, spoke out loudly at the UN for “regulated capitalism”! Angela Merkel, the German Chancellor holds up the crisis as an Anglo-American problem, saying; “I criticize the casual attitude of the finance market-Unfortunately they have opposed voluntary regulations for a long time with the support of Great Britain and the United States”. Interestingly though Lafontaine of Die Linke, the (supposedly) Left Party in Germany has rushed to the side of the US calling for German support (which would cost it $100b) of the TARP. This of course is merely to tell big business that “we might be left, but we are your friends; after your death and resurrection, please remember us in your paradise!”
The international labour movement has not been left out of the reactions to this crisis which will leave working people as its major victims. The responses do however reflect the self-imposed limitations of seeking a workable answer within the confines of the unworkable character of capitalism. In a statement released on September 30, titled “the time has come”, the International Trade Union Confederation position was that “resolving the financial crisis must go hand in hand with concerted action to stimulate jobs and growth so that the imminent danger of world recession is averted”. This statement amongst other things shows a common fad with the issue at hand; seeing it merely as “a financial crisis”. On the contrary it is a crisis of capitalism, starting in the financial sector due to its burden of fictitious capital just as did happen in 1929!
The Presidium of the Socialist International representing the neither here no there ideology of “social democracy” which in recent times of the “third way” has become more of there than here, also met on the crisis, late September. Comprising presidents of several countries that have bought the neo-liberal ideology hook, line and sinker in practice, it issued a statement wherein it pompously averred that “for the global social democratic movement, the current times are a defining moment, one in which real priorities and alternatives must now be placed at the centre of the political agenda to guide us out of this”.
The working class and left forces, which seemed to have been stunned initially by the very force of how deeply reality is confirming our analysis before our very own eyes began swinging into action in America. Two mass protests Ain New York, two days before TARP was first presented to the US Congress signalled things to come.
The way forward
Earlier in July Joseph Stiglitz published an interesting article with a question mark: “The End of Neoliberalism? Today, many a neo-liberal barely two months ago, nay, a few weeks back are now the ones screaming the essay’s title…without the question mark! Naomi Klein of the alter-globalisation movement pointed out though, that such belief would be self-foolery. The issues though go deeper than the possibly mortal blow that the neo-liberal ideology of capitalism has received.
The capitalist system has fluctuated between the paradigms of less regulation and more regulation; depending on which at a particular point in time is best suited for safeguarding capital and engendering its continued expansion and accumulation. A Stiglitz could well be the 21st Century’s Keynes as Friedman rose up to refurbish Adams Smith 300years later. For us as working people, the challenge is to develop and popularise ideas for the building of that possible new world on the ruins of capital and with these mobilise our strength for the overthrow of this anarchic and destructive system of capitalism.
Closer relations would need to be forged with and within the alternative globalisation movement. At Belem when the World Social Forum is held next year, the agenda of the movement of movements must be taken to a new level to reflect the times we now are in. in Nigeria, the forthcoming Nigeria Social Forum have a programme for social change beyond the sloganeering on another Nigeria’s possibility.
The road ahead is very steep for us, but it also holds great possibilities, much more than at any time in the history of our generation.
It is not given that the situation will result in revolutionary triumphs across the world. On the contrary, it could lead to right-wing take-overs as the mass of the people sink into the abyss of poverty and discontent, without the subjective factor of revolutionary parties as agency.
We must build our ideas and we must build our forces. We must together “bring to birth a new world from the ashes of the old” whore of capitalism and its finance casinos.
Viva la Revolucion!
AAmandla! Ngawethu!
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