Over the past months, the Wall Street financial elite and big banks have been in a state of panic. The colossal bubble of the past period that kept the economy going is now deflating, with enormous consequences for the U.S. economy as workers bear the brunt of this looming crisis.
In July, the collapse of IndyMac bank and the bailout of the mortgage companies Fannie Mae and Freddie Mac - coming on the heels of the bailout of Bear Stearns in March - threatened to bring down the entire financial system.
Rushing to Wall Street’s aid with the urgency of a knight for a damsel in distress, Democrats and Republicans rescued their buddies from the looming implosion and the series of defaults that would follow. Congress put aside any bickering and put together a huge federal bailout to benefit the very people who created this disaster.
The bailout effort was led by Democratic Senators Chuck Schumer (NY), who represents Wall Street’s interests, and Christopher Dodd, from Connecticut’s insurance industry, along with Barney Frank (D-MA), chair of the House Banking Committee, the Federal Reserve, the Treasury Department, and Bush. As William Greider commented in The Nation, “we haven’t seen ‘bipartisan cooperation’ like this since Washington decided to invade Iraq” (7/30/08).
Rescuing the New Robber Barons
In the spring, the Federal Reserve and the Treasury forked over $29 billion to rescue the heavily depreciated assets of Bear Stearns. The looming defaults of bad debts threatened financial institutions holding mortgages on such properties and would reach the big investors and creditors. With the massive deflation of nominal values, somebody had to take a loss.
The answer from Wall Street and the banking conglomerates was clear: Sock it to the taxpayers.
A series of emergency open-ended loans on easy terms were granted to the banking conglomerates and investment firms – which could cost taxpayers hundreds of billions of dollars if the deterioration continues, as looks likely. But the main point was that the Fed has agreed to take worthless financial paper, such as mortgage securities, bad debts etc., out of the hands of these firms. As a Wall Street Journal editorial pointed out, the profits of these corporations “are privatized but their risk is socialized.”
The most recent rescue was announced by Treasury Secretary Paulson with a commitment of $300 billion from the government to buy the collapsing stock of Fannie Mae and Freddie Mac. These are huge semi-private corporations that account for $5 trillion in mortgages (nearly half the $12 trillion U.S. mortgage market) and were deemed “too big to fail.”
The largest banks have already posted huge losses (up to $1 trillion, according to some estimates) as the collapse of the housing bubble revealed the financial system’s serious problems. The panic of the big financiers and bankers was far from a “mental” condition, as one of McCain’s economic advisors put it. Their panic was based on the certain ruin they faced if the deflation of values continued.
Contrast to Relief for Regular People
This massive federal bailout for the robber barons should be contrasted to the meager measures taken to support working people. According to RealtyTrac.com, already in 2008 1.4 million have defaulted on their home mortgages and enough are now in arrears to suggest that Paulson’s warning of 2 million mortgage defaults in 2008 may be a million too low.
While JPMorgan gets a $29 billion rescue package to buy Bear Stearns, urban areas like Detroit, St Louis, and Cleveland, which have been hit by the economic tsunami of housing defaults, record bankruptcies, and massive losses of manufacturing jobs, get a mere $4 billion in aid from the government.
In many cities and states, huge cuts in public services, from road maintenance to education to after-school programs and health coverage for the poor, are looming because of huge losses of revenue.
Average taxpayers got a $600 check - a drop in the bucket - to help them deal with the economic woes that are engulfing the economy, with major price increases in basic commodities like fuel, food, and healthcare.
Meanwhile, the financial crisis has now had a serious impact on the real economy. Time reported 85% of people are unhappy with the economy, another sure sign that we are in, or heading into, a recession (7/16/08).
The credit crisis, falling home and stock prices, the high cost of oil, and the growing trade deficit are hammering the dollar and the economy. In the first six months of 2008, almost half a million jobs were lost as layoffs are now spreading with no end in sight. The New York Times reported ominously that the number of people who are involuntarily working part-time rose to 5.3 million in July - an increase of over one million since last year, a statistic that does not show in the official 5.7% unemployment.
End of an Era
The massive government intervention to rescue Wall Street and the banking system represents a serious blow to the “free market” ideology that markets make “wiser decisions than government” - a fallacy widely accepted as truth but proven a disaster in providing healthcare and education, creating jobs, protecting the environment, or regulating prices.
To a large degree, the crisis in the financial system was the result of deregulation, especially in the 1990s: Clinton and the Republican Congress obeyed Wall Street and repealed the New Deal-era Glass-Steagall Act that prevented the inherent conflict of interest between commercial and investment operations within the same enterprise, leading to self-dealing and fraudulent stock valuations.
Over the past 25 years, the open warfare of the capitalist neo-liberal offensive destroyed any vestiges of protection of regular people from the predatory practices of the banks and financial system. This led to a series of speculative bubbles in the stock market, the tech stock boom in the 1990s, and – when Greenspan brought interest rates down to virtually negative territory - the housing bubble taking off with all its consequences.
The speculative bubbles and explosive growth of financial speculation is the result of the inability of U.S. capitalism to develop the means of production in a way that benefits society.
The auto, steel, energy, and infrastructure sectors are facing downsizing and layoffs and a refusal of the capitalists to invest productive capital in these sectors. Why bother when billions could be made much easier and faster investing in stocks and real estate.
The entire political system has been exposed for the racket that it really is, serving the whims and desires of its big business masters. Large numbers of advisers of the McCain and Obama campaigns have been implicated in the financial disaster.
Serious Danger Ahead
Meanwhile, the entire economy is now in real danger. Serious commentators say nobody knows how bad things really are. There is a severe risk that the economic situation could lead to a sharp downturn or prolonged stagnation. The U.S., the dominant capitalist power after World War II, is now utterly dependent on foreign creditors - principally China and Japan - while facing huge trade debts and deficits as well as being saddled with a military quagmire and financial drain in Iraq and, increasingly, Afghanistan.
A downward spiral of decreased consumption, reduced lending, layoffs, bankruptcies, and loan defaults leading to further reductions in consumption and investment could get hold of the economy.
This situation is clearly not the result of a few “bad apples” but a direct consequence of decisions taken in the corporate boardrooms of big business. At the center of the economic crisis, war, and environmental destruction is the capitalist system’s drive for profits and the obscene concentration of wealth at the top 1% while tens of millions are condemned to poverty.
Workers in this country are unprepared for the kind of crisis that is looming, and there is no mass movement or real challenge to the dictatorship of big business. But the lessons will not be lost. As millions of workers and young people engage in struggles against the war and to defend their living standards, they will become much more open to the ideas of democratic socialism as the only alternative that can provide a better life for everyone on the planet.
