‘Modern history’s greatest regulatory failure’; ‘The end of American capitalism as we know it’; these are just two of the headlines thrown up by the credit crunch, both appearing in the Financial Times, the organ of British finance capital. In the course of a single week, we have seen the collapse of three of America’s biggest financial institutions: on Sunday 13th September, Bank of America announced it was buying out Merrill Lynch, one of the world’s most famous investment banks; on the following Monday, Lehman Brothers, the fourth largest securities firm in the US, filed for bankruptcy; and, as if that were not enough, on Tuesday, the US Federal Reserve invested $85 billion in a takeover of AIG, America’s largest insurance company. More recently, on Thursday 25th, the huge US bank Washington Mutual, in a state of collapse, was taken over by JP Morgan Chase, in a move described as ‘the biggest bank failure in American history” (Saskia Scholtes, Joanna Chung and Deborah Brewster, JP Morgan swoops in again, FT, September 26 2008).
The crisis can hardly be said to have left Britain untouched either. On the night of Wednesday 17th, executives from Lloyds TSB and HBOS finalised a takeover of the latter by the former, in a move that will see a single company dominate the mortgages (with a 28% market share), current accounts, savings and loans markets, and lead lo large-scale job-losses (one estimate puts potential job-losses at 40,000, nearly one-third of the combined staff of Lloyds and HBOS). Needless to say, the government rushed through legislation relaxing anti-monopoly laws in the name of ‘financial stability’; in reality they proved themselves completely servile to the interests of finance capital and the relentless drive of big companies to dominate markets.
The cause of the crisis
So, what caused this financial crisis? Well, superficially, one can blame the collapse of house prices. This was brought about as investors began to realise that a large proportion of the debt securities that they were trading were based on sub-prime mortgages that were never going to be paid back. (Debt securities are financial assets based on debt; for example, if you or I take out a mortgage on a house, our bank will sell that mortgage, our debt, on as a security, which will be traded on the market. If we default on our debt, the security becomes worthless.)
The demise of Northern Rock is a good example of this – whilst not having a single sub-prime mortgage on its books, it was hugely leveraged (the leverage of an institution is the amount of capital borrowed from other institutions to fund its investment activities); the sub-prime mortgage crisis precipitated a loss of confidence by the banks that had leant Northern Rock money. Unable to borrow money to continue its activities, it found itself mired in debt and unable to function.
However, whilst the collapse of house prices was indeed the straw that broke the camel’s back, this requires that it was already heavily laden with straw. Marxists understand that historical events don’t occur in a vacuum; rather, they are a result of the build up of contradictions within the system. Once the contradictions become sharp enough, a single event is enough to trigger an explosion. This has many analogies in nature: a single snowdrop may trigger an avalanche, but the avalanche can only happen if large amounts of snow have already fallen into an unstable configuration, leading to a dialectical contradiction between the inertia of the snowflakes (caused by friction and inter-molecular forces, van der Waal’s effects etc.) and the stress in the system (caused by the effect of gravity on the weight of the snowflakes).
What were these contradictions? The following quote from the Financial Times gives an indication:
“The degree of leverage that these institutions took on is indefensible. The average large securities firm was leveraged 27 to one in mid-2007. They were not regulated by any prudential supervisor. In effect, they regulated themselves. The lack of transparency was stunning. Many big lenders did not disclose off-balance-sheet risks. In some cases, they did not understand these risks themselves. More fundamentally, we allowed a second, huge financial system to develop outside the normal banking network. It consisted of investment banks, mortgage finance companies and the like. It was unregulated, not transparent and way too leveraged. But with nine separate and mostly ineffective financial regulators, these risks were ignored. That is, until this second system crashed.”
In plain English, the whole system of finance capital is based on banks borrowing from other banks to buy equities (the general term for assets traded on financial markets) on the basis that the value of these equities will continue to rise indefinitely. If these equities begin to fall in price, the huge debts of these banks become exposed, and the contradictions in the system become apparent.
As the organ of finance capital and big business in Britain, the Financial Times very often gives a sound and honest analysis of economic and political perspectives, of course from the side of the barricades opposing ourselves. Unlike the wretched prolefeed that passes for the popular press, the primary role of the FT is to inform its capitalist readership. Some of the best ‘Marxists’ are in fact big capitalists, who need a scientific understanding of political economy in order to defend their class interests.
In fact, the whole of the US (and, for that matter, the British) economy is so ‘leveraged’ that “[t]he fear that drove this extraordinary decision is that AIG’s failure would increase counterparty risk, actual and perceived, throughout the financial system of the US and the rest of the world, to such an extent that no financial institution would have been willing to extend credit to any other financial institution. Credit to households and non-financial enterprises would have been the next domino to fall and, voilÃ , financial Armageddon.” Not an appealing prospect.
Fall of the rate of profit and a Marxist theory of crisis
Whilst Marx was never able to complete a theory of crisis in his lifetime (volumes II and III of Capital remained unfinished when he died), Marxists traditionally link capitalist crisis to the tendency of the rate of profit (surplus value extracted per unit capital invested) to fall over time. In order to deduce this tendency, Marx divides this ‘unit capital invested’ into two parts: constant capital, which invested in the production process (e.g. the plant, raw materials etc.); and variable capital, which is invested in staff wages. Surplus value can only be extracted from workers, not machines. Surplus value is the value of the labour given by a worker above and beyond that which is paid to him or her as wages; hence it is the source of profit for the capitalist. Therefore, increasing the constant capital, for example, by investing in new machinery, whilst doubtless improving the production process, will mean that for the same surplus value extracted, a greater total capital (constant and variable) will have been invested; hence, the rate of profit will fall. This manifests itself as a fall in prices of commodities (think about how the price of electronic goods falls over time).
Of course, this tendency is not a law – there are other interacting factors which can cause the rate of profit to rise. Marx identified more intense exploitation of labour, reduction of wages below their value, cheapening of the elements of constant capital, and the increase in share capital, amongst other factors.
Clearly, the tendency for the rate of profit to fall represents a huge contradiction in the capitalist system: competition forces capitalists to increase constant capital (by investing in new technology, for instance), which leads to an ever-diminishing rate of return on that investment. This article is not the place for a detailed survey of the differing schools of thought on a how this contradiction manifests itself. However, this current crisis originated in the financial sector, which in this current epoch dominates world capitalism. The following quote from Capital is illuminating:
“Concentration grows… since beyond certain limits a large capital with a lower rate of profit accumulates more quickly than a small capital with a higher rate of profit. This growing concentration leads in turn, at a certain point, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises” (Capital Volume III p. 359, my emphasis).
Marx is clearly identifying how concentration (i.e. the grouping of more and more capital under the control of less and less capitalists, tending to monopoly) is a driving force behind falling rate of profit, and how this falling rate of profit drives capitalists to seek profit through speculation, in effect making ‘free money’ through trading bits of paper. Despite all the increasingly complex types of securities – many not understood by those who trade them – they are in effect simply pieces of paper with made-up numbers on them. Remember, Marx identified ‘increase in share capital’ as a factor which can counteract the tendency of falling rate of profit. In the age of huge monopoly capitalism, where 500 companies control 45% of the world’s economy, it is hardly surprising that it is increasingly hard to turn a large profit without engaging in ‘risky’ financial activities (i.e. without gambling other people’s money).
The lie of the ‘free market’
The US government will continue spending billions of dollars in an attempt to shore-up the system (Congress is being pressed to agree a $700bn rescue package – all paid for by the taxpayer, of course). This gives the lie to the existence of the so-called ‘free market’. When the going gets tough, the moguls of finance capital are all too happy to support government intervention, and even nationalisation, if it supports their interests. For example:
“If financial behemoths such as AIG are too large and/or too interconnected to fail but not too smart to get into situations where they need to be bailed out, what is the case for letting private firms engage in such activities in the first place? Is the reality of the modern, transactions-oriented model of financial capitalism that large private companies 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 long-standing 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.” (Willem Buiter, Goodbye capitalism American-style’, FT, September 18 2008)
To Buiter, who is the former chief economist of the European Bank for Reconstruction and Development, and former external member of the Monetary Policy Committee of the Bank of England, ‘deposit-taking banks’ are a key part of the financial infrastructure, allowing investment banks and other such institutions to make their mega-profits, and so should not be entrusted to the private sector. How’s that for confidence in private enterprise! In fact, the vast majority of financial commentators are at least calling for significantly better regulation of the financial markets.
Implications for the financial sector
Clearly this recession will not be short-lived. Although the market will enjoy brief upswings, the overall economic forecast is gloomy. One immediate consequence is that independent investment banks, those banks which don’t engage in the day-to-day ‘run of the mill’ deposit-taking activities and concentrate instead on making mega-profits trading bits of paper, will cease to exist, at least for a long time. America’s last remaining independent investment banks, JP Morgan and Goldman Sachs, have agreed to become “bank holding” companies to gain permanent access to Federal Reserve funds (i.e. the possibility of being bailed out if their business goes belly-up), in effect becoming normal banks, and accepting all the government regulation that goes with that. In the current climate, investment banks can’t survive on their own.
However, this move may not prevent JP Morgan and Goldman Sachs from being swallowed up by established ‘deposit-taking banks’. It is often the case that, in times of financial crisis, the process of monopolisation and concentration becomes more acute (the merger of Lloyds TSB and HBOS being a prime example). Expect there to be more takeovers and mergers.
Implications for the class struggle
There is always a time-lag between crises in the financial markets and their effect on the ‘real’ economy, these effects will be felt soon enough, in the form of job losses as companies ‘rationalise’ to safeguard their profits, home repossessions for those who can’t pay their mortgages, inability of small businesses to secure credit, etc. This will initially lead to a mood of depression, but that will soon be replaced by an outpouring of class-anger. Even now, the $700bn bail-out, which will cost each American taxpayer on average over $5,000, is causing widespread anger amongst the US working class.
Another perceptive article in the FT warns its capitalist readers of this impending possibility. The writer tries to explain the reasons for the lack of class struggle in recent times in the US, and why this is all about to change. As explained earlier, the serious strategists of capitalism have to understand the movements of the working class in order to combat them, and this writer borrows the scientific method of Marxism, which understands that a slump in class struggle can hide a build-up of contradictions and class anger. This is a far cry from the crude ‘anti-Americanism’ that appears in what passes for the ‘left’ press, and understands nothing of the American working class and their traditions. Because we by and large agree with the FT’s analysis, we reproduce a large extract of the article:
“For most of the past century, income inequality decreased, even as the overall economy grew – thus, while in 1916, the top 0.01 per cent of Americans took home about 4.5 per cent of the national total wage income, by 1971, the plutocrats’ share of the pie had shrunk to 0.5 per cent. But in the 1970s, that trend went into reverse. By 1998, the top 0.01 per cent was collecting 3 per cent of the national total, and that tiny elite’s share has grown further in the subsequent decade.
“Yet even as the gap between rich and poor became a Grand Canyon, powerful US social and cultural traditions stopped income inequality from taking off as a political issue.
“US citizens continued to support capitalism and lionise their capitalist heroes, partly thanks to the national conviction that with enough elbow grease and inspiration, anyone can become a millionaire. As one European-born hedge fund manager, happily based in New York, said: “In Europe, people envy the rich; in the US, people hope to become them.”
“As a result, economic populism failed to take off at the ballot box. It wasn’t enough to give Al Gore a decisive victory in 2000; the “two Americas” rhetoric of John Edwards, the would-be Democratic nominee, could not get him past third place – and that was among Democratic voters. For the left, this national aversion to class-conscious politics has been intensely frustrating. They worried, as Thomas Franks argued in his seminal 2004 book, What’s the Matter with Kansas?, that by appealing to the social and cultural values of Middle America, the Republicans had successfully distracted the electorate from the growing economic divide.
“For the first fortnight of September, Sarah Palin’s Viagra-like effect on John McCain’s showing in the opinion polls suggested that this year culture might again trump class. But Wall Street’s meltdown over the past 10 days – and a taxpayer-funded price tag for the clean-up that is approaching a trillion dollars – has radically changed that political calculus. And it is not just the Wal-Mart moms – this year’s hot political demographic – who are blaming greedy CEOs for the country’s economic woes. Even on The Street itself, everyone who is not actually in the C-suite is blaming the bosses at the very top.
“A senior banker at one of the firms caught up in the turmoil of the past two weeks told me that greatest pressure on his CEO to give up at least part of his golden parachute is coming from angry employees within in the firm, not from Main Street or within the Beltway.
“The last time income inequality peaked in America – at the end of the 19th century and beginning of the 20th century – popular discontent fuelled the rise of the Populist, or People’s, party, one of the most successful third-party movements in US history.
“So far we have not seen such a dramatic reshaping of the political map, but class politics is a powerful genie and, for the first time in a very long time, Americans have let it out of the bottle.” (Chrystia Freeland, Bosses’ greed releases class war, FT, September 24 2008).
It hasn’t taken long for these predictions to be realised. According to an article linked to by LaborStart, the independent website for trade-union news, American unions called a demonstration on Thursday September 25th to protest the bailout. With only two days’ notice, the demonstration attracted several hundred people. This is but a foretaste of what is to come. The American proletariat, for so long dormant, is beginning to move.
Where do we stand?
As socialists, believe control of the economy should not be left to the anarchy of the capitalist market. But we are disgusted by the way the working class has been asked to foot the bill for this catastrophe, whilst the parasites that made millions have got away scot-free. Before the taxpayer is asked to come up with a single penny (or cent), these executives, financial ‘advisors’ and traders whose lust for profit sustains this insane system should have their bank accounts emptied out. It is not acceptable that in the fat years they make huge profits and bonuses, and in the thin years they get bailed out by the rest of us. If we working people were ‘leveraged’ 27 to one, we’d have bailiffs knocking on the door and removing the furniture; these parasites deserve no less.
And nor should nationalisations be carried out simply with the aim of re-privatising them later, when things pick up. Capitalism has failed to provide us with a decent standard of living and a secure future, and its failure will plunge millions of workers across America and the world into poverty. Yes, we should nationalise the banks, but if we pay for them, we should benefit from them: these nationalisations should be carried out as part of a move towards a planned economy, placed under the democratic control and management of local workers’ and citizens’ councils, for the benefit of the towns and cities they serve, not the profits of the few.
This article first appeared on Socialist Appeal.
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This post was written by Walter Leon