Mar 142013
 

The Political Economy of the Current(2008) Capitalist Financial Crisis

 

                                           by Edberto M. Villegas 

 

US capitalism is once again wracked by a financial crisis, brought about by intense speculative investments in subprime mortgage lending and in stocks after a similar crisis in the late 1980’s, which was likewise sparked by a plunge of real estate prices. At that earlier financial turmoil, the US government came to the rescue of bankrupt and tottering banks and other capitalist corporations through a bailout of $500 billion, passed of course in the forms of new taxes to the ordinary American citizens. Now, President Bush and his economic team, composed of Secretary of the Treasury Henry Paulson and Federal Reserve Bank Chairman(the central bank of the US) Ben Bernanke, have announced a plan to release $700 billion to buy the bad debts of ailing capitalist banks and other financial institutions. This rescue program for the big corporations is expected to raise US budget deficit to $482 billion by next year, and  according to some analysts possibly reaching $1 trillion annual deficit in time. Other central banks of foreign governments, England, Switzerland, Japan and the European Union, pledged an additional $220 billion to make a grand total of $1 trillion, including the announced American counterpart, in their bid to protect their capitalist corporations who have huge exposures in the US finance market..

 

            In this so called “mother of all bailouts” to save the rich, backed by the governments of capitalist countries, particularly the US, it is the ordinary workers who will bear the brunt. Some economic analysts are optimistic that the recovery of the stock markets of capitalism the world over from this huge bailout will lead to the creation of new jobs which will spur consumer demands, increasing profitability for business once again. Meanwhile as a result of the financial meltdown, unemployment continues to rise in the US, reaching a high 6.1% in September 2008, the highest in the last two decades in this country. Thousands of Americans have lost their homes, with many of them living in trailers while looking for new jobs. Global unemployment has reached 190 million, not counting the 1.3 billion  “working poor”, in 2007  even before this present financial crisis and this number is bound to increase. That is why the expectation that the massive bailout for sick capitalist corporations will eventually trickle down to the masses is just rationalization for the miseries of the world people which are caused by capitalist greed for profits in the first place.. Capitalist economists are so obsessed with what they call a transition period towards economic prosperity in their so-called business cycles that they forget that in this period of transition if ever it is true, thousands of poor and unemployed would be dead in the meanwhile. In the history of capitalism, as we will see below, it is not the logic of an imagined business cycle that made capitalist economies to once more enjoy good times, but wars that have caused the deaths of millions of the lower classes.

 

The Rise of Finance Capital

 

            What is the nature of crises that have shaken the capitalist financial market, the present of which is more intense and adding greater sufferings to the already burdened majority classes, to be aggravated further by the passing over of higher taxes to them to finance capitalist governments’ bailouts of the rich? In order to answer this question, let us delve into a brief background into the rise of the modern financial market of capitalism. Capitalism thrives on accumulating profits and more profits through the extraction of greater surplus values from the labor of their workers, including intellectual workers, like engineers, scientists, etc.. The difference between a miser and a capitalist is that the former hoards his earnings, while the latter reinvests it back to business in order to create more profits. The first big capitalists were engaged in production during the Industrial Revolution in England, particularly the making of textiles. Since the production of commodities by the working class never balances with their purchasing power, for after all it is the working class who are the main consumers of capitalist goods, overproduction in a particular capitalist country will inevitably occur and  there arises the need to look for other markets by the capitalists. [1]  There is also the search for cheap labor and raw materials to counter the costs of production due to the introduction of more modern machineries.[2] Thus, the English bourgeoisie or capitalists supported by their government put up the English East India company to penetrate the markets of Asia, most particularly populous China. With the emergence of other capitalist countries in the latter half of the nineteenth century, Belgium, Germany, France, Netherland, and the Johnny-come lately, the US , a general crises of overproduction occurred in 1870, resulting in a scramble for colonies, which also victimized the Philippines in 1898, courtesy of the US. Africa and China were carved out by the European capitalist nations, and South America exclusively claimed by US capitalists as its zone of business as early as 1854 in the infamous President Monroe’s doctrine. Inspite of the opening of new colonies, however, the second crises of overproduction of capitalism descended on it in 1911, leading to the closing down of many factories, laying off thousands of workers, especially in the US. In 1914, the first great war of the capitalist nations, World War I, erupted, primarily caused, among other reasons, by the quarrel between England and Germany to control the oil rich territories of the Middle East. That war spurred the recovery of the US economy through the selling of arms on credits; and England and France, profited from the defeat of Germany by seizing the latter’s capitalist assets and colonies based on the notorious Versailles Treaty, the vindictiveness of which nurtured the rise of Nazi Germany.

 

            In this backdrop of recurring capitalist overproductions, there emerged the combination of industrial and financial capital, the financial oligarchy or the monopoly capitalists, which intensified their investments in the financial market to avoid the spectre of overproduction. Finance capital, after all, by dealing in the selling and buying of bonds and stocks and other forms of securities  and extending loans can expect to profit through interests and dividends without producing a single good. Through manipulating accounts, as would often occur in the development of finance capital and the spreading of rumors among the public, the latter could be enticed to buy stocks and bonds which will increase the capital value of capitalist corporations. Thus, after the second crisis of overproduction in 1911, which capitalism hurdled through World War I, excepting defeated Germany, the financial oligarchs strengthened their financial institutions to rake in more monies from the public by setting up more mutual funds, insurance companies and eventually investment houses. Going into the 1930s, though there was a growing stockpile of goods in capitalist warehouses due to the chaotic technique of capitalist production where every one is on his own as government intervention is considered anathema, capitalist corporations continued to profit through the rising values of credits or fictitious capital, stocks, bonds, and other paper capital. But soon, this kind of bubble economy will be exposed and will burst as it did in the Great Depression of 1929, also caused primarily by a plunge in the speculation on real estate properties in the US, which led to the fall of stocks in Wall Street. As usual, millions of Americans were thrown off their jobs with even some Wall Street employees jumping off windows because of their sudden poverty. The term “cardboard” America became in vogue during the Depression, which tries to depict the situation where many Americans lived in cardboard houses on the streets and other areas and with cardboard soles for their shoes. These scenes with thousands of Americans now living in trailers because of the current financial turmoil of capitalism may be revised as “trailer America”.

 

The Recurring Capitalist Financial Crises

 

            It was another great war, World War II which again salvaged the bankrupt monopoly capitalists of the US as the New Deal of Rossevelt that desperately tried to revive the sick American economy came to no avail. The intervention of the US government through deficit spending in the 1930’s is a case in point where a capitalist government violates its principle of free enterprise when it comes to saving the rich as in in the present case in the “mother of all bail outs” .The US, through selling of arms and other war materiel on credit again even to their former enemy, the USSR, entered the so-called golden years of the American economy in the 1950s, greatly assisted by its establishments of the IMF and WB in 1946 to assure its premier position vis-à-vis other capitalist nations devastated by the war, which now rely on US investment funds.

 

            The two wars entered into the US after 1946, the Korean War and the Vietnam War continued to create an artificial prosperity for Wall Street as the American monopoly capitalists, the industrial military complex, maintain their profits through the churning out of war materiel which also boosted other related industries, like oil and the electronic business.  But with the end of the Vietnam war in 1976, recessions started to haunt the US economy and  speculative investments intensified to stem the falling rate of profit due to overproduction. The increasing speculative investments in the US money market led to the great crash in the real estate business, causing a plunge in Wall Street stocks on what has been called as Black Tuesday in November, 1987. As we have mentioned earlier, in this market crash the US government came to the aid of bankrupt capitalist corporations through a bailout of $500 billion. However, even after the bailout, speculative investment continued to rise, especially in mutual trust funds and again in real estate.(Talk about the greedy never learning) During the first half of the 1990’s, US speculative investment was 23 of the private sector’s total net fixed capital stock, more than any industry.[3] US finance companies also scouted around for high-earning speculative investments in the global financial markets, particularly seeking out sovereign bonds of countries in the latters’ mania for foreign investment though these may be hot money. It is to be noted that the policy of the liberalization of the finance market promoted by globalization helped considerably in the unbridled flow of speculative capital the world over, which eventually brought about the Asian financial crisis of 1997 and the Russian and Brazilian crisis of 1998. With this trend, especially on their home front, the US capitalism was dangerously creating again a bubble economy for their people. In 1997, the values of shares in the US stock exchange reached $10.9 trillion, exceeding US GDP of $8 trillion. The fervid shifting to speculative investment led by US monopoly capitalism has been followed by other capitalist nations. Thus, we have such big fund managers and investment banks at present, United Bank of Switzerland(assets $920 billion), Kampo of Japan(assets $720 billion), Axa of France(assets $429 billion) and Barclays of England(assets $385 billion), among others.  Finance managers have crafted new devises to attract investors from other corporations and the general public. There are now what are called the new derivatives, apart from  stocks, bonds and  mutual funds, like investing in the future prices of commodities (like oil) and in hedge funds.[4]

 

The Nature of the Present Bubble Economy

 

With the rise of US speculative investment in the 1990s, its bubble economy will inevitably burst and this happened again in 2000 with the collapse of the dot com industry  . In that year, the stocks of  big computer companies started a steep dive in Wall Street, as it turned out that they have been hoodwinking the public regarding their financial liquidities. These companies have enticed the public to buy stocks from them in the much vaunted information revolution propaganda or the so-called New Economy, even backed by the US government. World Com and Adelpha and other big dot com companies went bankrupt when it was found that they have been doctoring their books of account to show profits. The 4th largest oil company in the US, Enron, also closed down and was a subject of an investigation, together with the dot com crowd, by Washington regarding malfeasance. However, those involved in such shady dealings with the money of ordinary Americans, as usual, received very mild penalties from the US government.

 

But the financial moguls in Wall Street went on in their  selfish and merry ways in offering dubious credit arrangements to the general public, which were then packaged as enticing security papers to other financial institutions, like investment banks and brokerage firms. The increase of course in the credit values of the finance corporations would hike the prices of their stocks in Wall Street. Easy credits or the so-called subprime mortgage rate(the lowest interest rate in housing loans at 5%) were extended to ordinary Americans who were building their homes. At the center of this activity were the financial institutions Freddie Mac and Fanny May, whose mortgage loans, including those they grant to other banks for this purpose, was 70% of all housing credits in the US. Other investment banks, like  Bear Sterns and the Lehman Brothers, the latter the 4th largest investment bank in the US, overextended their housing loans as this gave them a good leverage in the market, boasting  the values of their stocks. The risk analyses that are supposed to be conducted by these finance institutions were haphazard since they were merely interested in raking in quick premiums from the public, and when mortgage came in due, millions of ordinary Americans defaulted. Real estate prices plummeted due to foreclosed homes, and the stock values of the big investment banks began their steep decline as they could not collect bad debts, many of which were bundled as bonds and other forms of securities and sold to other banks and financial institutions, both in the US and abroad. First to fall in March 2008 was the investment bank Bear Sterns which was bought by JP Morgan Chase & Co after the US government bailed it out with a $30 billion loan. Next was IndyMac, the largest thrift bank ever to go bankrupt in the US, and the Federal government had to seize this bank. Fearing the spread of bankruptcies among other large banks and financial houses, the US government nationalized Freddie Mac and Fanny Mae, which were after all first established by the Federal government in the 1930’s to serve the housing needs of the American people, but later privatized in the spirit of American capitalism. But the tide that the financial capitalists had reaped due to their unbridled appetite for profit though they may be just paper capital could not be turned back, and Lehman Brothers with its $60 billion loans that went sour declared bankruptcy in September 2008. Due to the exposure of Merrill Lynch & Co,  the biggest brokerage firm in the US, in Lehman Bro., it arranged a hasty deal  to be bought by Bank of America. And when AIG(American International Group), the biggest insurance firm in the world, was also tottering due to the unstoppable  financial turbulence which decreased its stock worth, the US government bailed it out with an infusion of $85 billion. The chaos in the US finance market has spread to other countries since capitalist business interlock with each other through the buying and selling of securities and other  financial papers with  Halifax Bank of Scotland succumbing when its stock prices plummeted  and the British Bank Lloyds TSB announced it would take over this imperiled bank for $21 billlion. President Bush’s announcement that there would be a bail out of $180, which was increased to $700 billion in his appeal to the US Congress, together with the funding from other foreign central banks aim to restore confidence on the irrational and wobbling capitalist economy.

 

            In the Philippines, seven banks, led by Banco de Oro and the government Development Bank of the Philippines(DBP) have a total exposure to bankrupt Lehman Brothers of $386 or about P2 trillion. This big amount is sure to translate to the slow flow of capital to the industrial sector, which will primarily affect small businesses, causing their bankruptcies. Thousand more workers can be laid off in the domestic economy, adding to the already high national employment rate of 11%.

 

The Finance Market is One Grand Casino

 

Speculative investment which has brought crisis after crisis to the US economy is now turning to be the leading method in which capitalist corporations all over the world are trying to make easy and quick profits without producing any commodity. Credit capital has also constantly wrought havoc to money capital and even the gold standard. Twice the gold standard has been abandoned by capitalist nations, the first time in 1920 and the second in 1971 since the values of money and credit have run riot. And at present money capital cannot keep pace with the increase of credit capital as financial capitalists become obsessed with increasing the value of their enterprises even it is only based on fictitious capital(credit) which have not yet been converted to money, much less have equivalent values to productive capital expressed in the capitalist’s GDP. Global financial assets which include equities, private and government debt securities, stocks, bonds, treasury bills and other forms of financial derivatives and bank deposits have bloated sixteen-fold from US$12 trillion in 1980 to an estimated US$190 trillion in 2007, over a third which are in the US. The value of global financial assets in 2006 was equivalent to 350% of global gross domestic product(GDP).

 

The milieu of speculation on finance capital is the gambling world where fortunes are supposed to be realized through chance, but in practice are gained more through deceptions and frauds. Even the accepted legal practice of gaining profit through the buying and selling of stocks is based on putting one over the public. Take the simple example of a company selling stocks to the general public. Say we have a company founded with a capital of P10 million, divided into 1000 shares each of P10000. This company is expected to earn an annual profit determined by the average rate of profit, say 15% or an annual profit of P1.5 million or P1500 per share. Say the average interest is 5%, thus, a money lent is not expected to bring more than 5%, and P1500 is regarded as the normal annual income on P30000. The founders of the company will therefore succeed in selling their shares on the stock exchange for P30000 each instead of P10000 and appropriates the difference, which is the capitalization of the difference between future average profit and the present average interest.

 

Another form of nefarious activities in the capitalist finance market is artificially jacking up the prices of securities, particularly stocks and bonds, by doctoring corporate books of account, dubiously showing a profit like what the oil company Enron did as well as other top computer corporations in the US 2000 financial crash. And there is inside trading which is conducted through buying your own stocks in massive amount to create a momentary surge of its value to entice the investing public who often follow the herd mentality in the stock market. And when the demand for their stocks suddenly increases, the insiders will immediately dispose of them to gain a quick profit, meanwhile leaving the gullible public holding the bag when their stock values begin to fall. Spreading rumors that a company has hit it rich can also momentarily push up the value of a stock. A company, for instance, can spread the false news that it  has discovered  new source of oil or even a gold mine(this latter in fact happened when a company put up a makeshift gold mine in Indonesia and made press releases that it has discovered gold complete with fake pictures when in fact it was all a deception) to create an artificial rise in its stocks.  Then there is the practice of short-selling  where A borrows stocks from B, sells it to C when their value go up, then waits for their value to go down, and returns them to B, pocketing the difference. Even the US Federal Reserve wants to put a stop to this practice of short-selling stocks which are not owned by a firm or an individual, though this behaviour is considered legal and widespread in the stock exchange. Actually, short selling is betting on the stocks of a company losing its value, which means it subsists on the miseries of others. Thus, the capitalist finance market, especially the stock exchanges, is like one grand casino where the unscrupulous and the manipulative thrive and most of the times win edging out the trusting and hopeful general public who merely desire to increase the values of their lifetime savings, their pensions and other liquid assets. In the history of finance capitalism the public is played for a fool, and the capitalists often also get burned themselves with the heat of their greed as we are witnessing at present.

 

Conclusion

 

All right-thinking individuals should now begin to realize that the solution to the persistent financial crises of capitalism, spawned by its overproduction, is not to reform the system as capitalist governments are wont to pursue, much less bailout unscrupulous capitalist institutions. Some finance leaders of capitalism have recommended the establishment of a so-called World Central Bank, which will act as the lender of last resort for ailing banks. But this is like rewarding thieves and scoundrels who through their nefarious dealings are the causes themselves of the miseries of a great portion of humankind. Capitalist governments have considered less regulation of and even less taxes on the activities of private firms as sacrosanct in their ideological commitment to freedom of competitions in the market place. But the drive of capitalists to accumulate more profits and subdue their competitors has become a breeding ground for chaos in its productive and financial sectors and is threatening to bring down the whole global economy into one great economic turmoil. One financial crises after the other also bring about a greater and greater concentration of capital in the hands of a few as lesser capitalists close down business.

 

 There is growing contradictions between the public ownership of capital in the financial system of capitalism and its control and disposal of a few. The financial capitalists have thrived in cheating the public of their hard-earned monies invested in stocks, mutual funds and other forms of credit capital. Thus the very philosophy of the acquisition of wealth of capitalism is becoming a bane to the majority world people who are seeking deeper and deeper into poverty because of the desperate resuscitation of dying capitalism by their governments. For indeed the sufferings of the vast majority of the people is the price for the continued existence of this irrational and moribund system for in-built in its very nature is greed and corruption. The task therefore of all those who wish to preserve all that remain good for humanity is to put an end to this scourge in our midst. The working classes of the world, who are the first victims of capitalism, together with their allies must finally deliver the death blow for the demise of this inhuman system in the history of the earth.

 

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[1] If the worker is paid the whole value of what he produces, there would be no profit for the capitalists. Thus, the aim of the aggressive capitalists is to increase more and more  the surplus value or the unpaid value that his worker produces either through extending his working hours(absolute surplus value) or introducing machines to accelerate the production of goods(relative surplus value).

[2] In Flyod L. Darrow “Masters of Science and Invention”, Harcourt, 1951, is discussed how the inventions and ideas of  members of the working class and destitute scientists have been coopted by the bourgeoisie to be used for their business.

[3] Robert Brenner, The Economics of Global Turbulence, A Special Report on the World Economy, 1950-1998, New Left Review, London, 1998, p. 211.

[4] Hedge fund is considered the most risk-free type of speculative investment because it is supposed to balance the value of one security paper against others based on a calculation of odds by stastisticians.

 

The date posted here is due to our website rebuild, it does not reflect the original date this article was posted. This article was originally posted in Yonip in Oct 2nd 2008

 

 

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