Commentary
Paying
the Rich and Fleecing the Poor
Last week U.S. President George W. Bush announced a $700 billion bailout of the financial industry in the United States. This falls on the heels of an earlier announcement of the federal takeover of mortgage giants Fannie Mae and Freddie Mac and an $85 billion bailout of AIG, one of the biggest insurance companies in the world with over one trillion dollars in holdings. Bush claimed that the bailout was necessary in order to “save jobs” because if the big banks collapse it will result in a recession.
The Bush bailout package has now been rejected by the U.S. House of Representatives, with many congressmen worried that they will be voted out of office in November if they dare to support it. However, Bush has pledged to bring back a “new” package next week. The “new” bailout will undoubtedly be attached to a variety of populist measures to “punish” the financial institutions for their recklessness. This, coupled with intense pressure on the politicians both from their parties and from Wall Street, will no doubt get the “new” bailout passed.
The difficulties besetting the big U.S. banks are directly related to the collapse of the sub-prime mortgage market. This was a scheme designed to create the highest possible returns on investment by creating a booming housing market by enticing the people – mainly the working poor – to buy homes they could not afford. The mortgage loans often started with very low interest rates that escalated after a couple of years to the very high interest rates that high risk loans can demand. Many of these mortgages were provided with no or minimal down payments. The artificial demand created by the sub-prime lending binge in turn produced a massive housing bubble with house prices reaching astronomical values. It also spurred a construction boom based on the escalating demand for houses that could command ever higher prices.
As with all such bubbles, the U.S. housing bubble finally broke in 2007. Housing prices leveled off and then started to fall and new houses remained unsold. High interest rates caught up with people who had taken sub-prime mortgages when they could not meet the payments. The declining value of their houses overtook those who purchased at the height of the market or had low down payments as they discovered that they owed more than their homes were worth. As a result, millions of Americans are in the process of losing their homes either through foreclosure or simply because they have walked away from the obligations on their overvalued property. The housing market bubble fuelled by the sub-prime mortgages has collapsed, as has the construction industry. The widespread packaging and resale of mortgage loans throughout the financial sector as high yielding “asset-backed commercial paper” has spread the collapse of value well beyond those that made the original bad loans. It has infected the entire U.S. financial sector and the financial markets around the world, particularly Europe. The downturn in the American economy is expected to drag down markets around the world and could lead to a global recession.
However, the sub-prime mortgage collapse is only the tip of the iceberg. While it may have been the trigger for the most recent financial crisis in the U.S., it is a symptom rather than a cause. At the root of the problem are two phenomena unique to capitalism. The first is the anarchy of production under capitalism which leads to periodic crises of over-production – the boom and bust business cycle. During such crises it becomes impossible for corporations, on average, to sell their products at a profit. Some companies go bankrupt, production decreases and profit levels are eventually restored leading to another boom period. At this time, an over-production crisis of unprecedented proportions exists due to both new technologies and the entry of China into the global capitalist system.
The other phenomenon at work is the tendency identified by Karl Marx for the average rate of profit to steadily decline under capitalism. This is due to the increasing organic composition of capital; in other words investment in fixed capital (buildings and machines) tends to increase faster than investment in living labour, as workers are replaced by machines. Since surplus value and, therefore, profits are produced only by living labour, the rate of profit has to decline. This tendency for profits to decline has been overcome periodically by the introduction of new technologies and new forms of organization of production. However, such reversals are always temporary and once the news forms become generalized throughout the economy the downward trend in the rate of profit returns. The latest reversal in the rate of profit, due to the widespread introduction of computers and the invention of the Internet, lasted for less than 10 years and may have been even shorter if not for the wholesale looting of Russia and the rest of the former socialist bloc.
This tendency for the rate of profit to decline led to the adoption of Keynesian economics by most capitalist economies after World War Two. The main feature of Keynesian economics is the artificial stimulation of the economy by government intervention. One form of such intervention is the welfare state, which in essence is the transfer of wealth from the working class (through taxation) to the poor and working poor through various forms of public spending (such as health, education, and social assistance). By the 1980s this form of intervention was no longer sufficient to prop up profit rates and a new mechanism was invented – neo-liberalism.
Neo-liberalism is a system of transferring money from the public treasury without going through the production cycle. One method is the privatization of publicly owned assets, usually at fire-sale prices. Another method is deregulation. Regulations in a capitalist economy are designed primarily to regulate the competition between capitalists – to prevent some capitalists from being robbed by others. Some regulations have a secondary benefit of protecting consumers from unscrupulous business practices. Neo-liberalism seeks to eliminate regulations and allow the most powerful capitalists to swindle not only consumers but also weaker capitalists. It is essentially the law of the jungle.
It is important to note that neither Keynesian economics nor neo-liberalism actually reverse the tendency for profits to decline. Rather, they both increase the profits of some sections of the capitalist class at the expense of other sections as well as at the expense of the working class and people. For example, the windfall profits achieved by some capitalists by swindling the working poor in the U.S. sub-prime mortgage scheme will eventually reduce the profits of those capitalists selling consumer products as those workers will have less to spend on such products. So profits may increase in some sectors, but the average is still declining.
Most workers instinctively know that George W. Bush is insincere when he states that his motivation in handing over a trillion dollars to the bankers is to save jobs for workers. On the other hand, many commentators do consider him to be sincere in attempting to stave off a recession. However, in truth, nothing George W. Bush does can prevent a recession. The U.S. was headed towards recession long before the sub-prime mortgage crisis. If Bush were sincere in wanting to postpone or reduce the depth of the upcoming recession, he would have given the one trillion dollars to the poor and working poor in the U.S. This would have enabled them to meet their mortgage payments, buy food and clothing and also buy some of the surplus consumer products glutting the market.
However, handing over one trillion dollars to the big banks still leaves millions of Americans homeless and broke. Furthermore, it will actually exacerbate the coming recession because it effectively removes one trillion dollars from circulation in the economy and puts it in the hands of billionaires who will use it to buy up other companies rather than to buy consumer goods. And to rub salt in the wound, those same billionaire bankers will end up not only with a trillion dollars from the government but most likely also with the repossessed houses of the workers who are being evicted from their homes.
While the U.S. bailout may keep the financial markets afloat for a few more months, it will do nothing to stave off a recession, which is already a reality in the U.S. and will soon be in many other countries. It is clear that the big capitalists are already reconciled to the fact that a recession, or more likely a depression, is upon us. What they are intent on accomplishing now is to grab as much loot as possible in order to position themselves to buy up their competitors rather than being bought up by them. The biggest swindle in the history of the world is taking place before our eyes, being conducted by the most powerful state in the history of the world on behalf of the most powerful monopoly capitalists. Nothing positive can come out of it for the working class and people.
With this crisis, the huge financial institutions have clearly demonstrated that they are incapable of managing the economy. Their narrow pursuit of maximum profits not only goes against the interests of the vast majority of people, but has put the entire international economy on course for perhaps the greatest depression since the 1930s. Far from paying them for creating this disaster, the people of the world should be demanding that the major international financial institutions should be nationalized and the management of the economy be put under the control of the people.