Under a capitalist state, the wealthy corporate and financial interests make the rules. The rules established in recent decades assumed that the capitalist economy was basically stable. Now that reality has proven this assumption to be false, threatening the elites themselves, they turn to the public at large for the means of salvation.
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Such is one lesson from the ongoing U.S. and global financial crisis, the result of a huge overproduction crisis compounded by decades of banking deregulation and political corruption for private profit. The American economy, according to some experts, faces its greatest crisis since the 1929 stock market crash that led to the Great Depression.
Its initial spark was the implosion, beginning in 2006, of the subprime mortgage market. The subprime crisis was initiated by rising interest rates, which in turn brought about a general downturn in the U.S. housing market after nearly a decade of growth that saw home ownership reach its highest-ever levels and home values increase over 100 percent.
Many working-class people had been, thanks to the unrestrained hunt for profit on the part of lenders and their agents, approved for mortgage loans well above their means to pay. Borrowers assumed that continually rising home values would allow them to refinance at more favorable interest rates before the initial “teaser” rates exponentially increased, taking monthly payments to new heights with them.
But when construction of new houses exceeded the demand at prices and interest rates workers could afford, home values began to fall, and a snowball effect took over. Once families were unable to refinance to escape unaffordable subprime interest payments, lending institutions foreclosed on the properties and put them back on the market. This drove prices even lower, worsening the problem. Approximately 1.3 million homes were foreclosed in 2007 alone.
The spirit of deregulation also included loosened rules on both the types of financial instruments available for trade and the shape of the financial institutions themselves.
In 1999, Congress repealed the Glass-Steagall Act of 1933 with approval of the Clinton administration, allowing single entities such as Bank of America to operate simultaneously as commercial, investment and merchant banks, and even provide insurance. These so-called “universal” banks, as well as other giant lenders such as Fannie Mae and Freddie Mac, then began to bundle mortgages they had acquired into securities that could be traded on the open market.
When interest rates rose and over-extended home buyers fell behind or defaulted on their mortgage payments, the values of mortgage-backed securities plummeted, generating massive uncertainty about the financial health of some of the greatest capitalist powerhouses. Chaos ensued as behemoths such as Bear Stearns, Countrywide and IndyMac met their demise.
The mortgage crisis quickly spread from the subprime category to the supposedly higher quality loans. The two giants of U.S. mortgage lending, Fannie Mae and Freddie Mac, were so deeply affected that they had to be brought into “conservatorship”—effectively taken over—by the U.S. government. Trading in mortgage-backed securities, as well as short-term “commercial paper” issued to finance much of the lending, ground to a halt, values plummeted and financial institutions were forced to record losses amounting to hundreds of billions of dollars.
In barely two years, the housing bubble that had been an essential foundation to the global economy had burst.
Free market swallows financial giants
Of particular note in this crisis is the differing response to the failure of two financial giants, Lehman Brothers and American International Group Inc., the world’s largest insurer.
Lehman was allowed to fail by the federal government and fellow Wall Street institutions allegedly because, in the words of Treasury Secretary Henry Paulson, there was “no political will” to bail out another bank after Fannie and Freddie went under.
But AIG, which went from a model of capitalist management to an economic pariah over a few days, was all but purchased by the U.S. government to prevent its collapse. Despite Paulson’s words, there are some institutions that the government deems “too big to fail.” AIG, which insured trillions of dollars in debt around the world, is viewed as a lynchpin of the global capitalist economy.
This directly contradicts the supposed central tenet of capitalism, the sacrosanct “free market” based on the law of supply and demand. If this principle had been upheld by its most hypocritical acolytes, AIG would have met the same fate as Lehman Brothers, and nearly every large bank in the world would have failed.
When the free market model yields a crisis, the capitalist class turns to their government and state to prevent the collapse of the system upon which their wealth and power rests. The government is now scrambling to prevent collapse by using revenues from taxes exacted on working people. Adding the recently proposed $700 billion rescue plan to the bailouts of Freddie Mac, Fannie Mae, AIG, and Bear Stearns, the total surpasses $1 trillion.
To meet its expanded obligations, the U.S. government will also need to borrow enormous amounts of money. The result will be an added insidious tax on working people in the form of rising prices.
Another possible outcome will be a major deepening of the crisis in the form of international investors fleeing the dollar. In this “flight to safety,” they will invest in gold, the universal measure of value. Recent huge jumps in the dollar price of gold indicate that the threat to “dollar hegemony”—that is, to the dollar’s continued role as world reserve currency—is very real.
Marx and the cycles of capitalism
As capitalist financial officials attempt to sort out the next steps to overcome the current systemic crisis, it is worthwhile to review Karl Marx’s analysis of the laws of motion of the capitalist economy.
For Marx, the boom-and-bust cycle of capitalism was a given based on the economic imperative of competing capitalists seeking to out-produce one another to gain market hegemony and maximize profit. This leads periodically to “crises of overproduction”: The market is flooded with more products than can be sold for a profit, pushing the capitalists to slow down or halt production and slash jobs. Workers and businesses respond to their lost income with less spending, and economic activity plunges to new depths until overproduced goods have been absorbed or destroyed and capitalist production can finally return to its upward swing.
In modern capitalism, credit is used to grease the wheels of the market when overproduction threatens to bring them to a halt. So that markets do not become bloated with unsold commodities, capitalists extend credit to create buyers where there were previously none.
Subprime mortgages were one of the credit instruments that, besides yielding enormous profits to lenders, helped delay the inevitable bursting of the housing bubble. The practice created buyers for homes who could not afford them otherwise—for a while, at least. The bursting of the bubble shows that there is no magic wand the financial wizards of Wall Street can wave to nullify the fundamental laws that govern the cycles of capitalist production.
One conservative reckoning has placed job losses this year at 600,000, a figure sure to increase following the failure of more financial institutions and the inevitable ripple effects. Prices of food and fuel remain high as winter looms. Foreclosures have disproportionately affected oppressed communities, especially African Americans and Latinos, for whom subprime loans appeared to be the only viable path to home ownership. Many workers with shares in retirement accounts or pension funds have seen their modest nest eggs all but wiped out. Credit is tight.
Unlike with Fannie, Freddie and AIG, the U.S. government has categorically refused to supply debt relief to working people. Instead, workers are blamed for “living beyond their means” or making “bad investment decisions.”
The duty of Marxists is to fight these abusive practices and educate the working class on the underlying causes of capitalist injustice and crisis. The ultimate solution is for the organized workers themselves to take collective control of the economy, establishing a genuine “ownership society”—socialism.
