The global financial markets have been ridden with anxiety and turbulence for the past few months. The capitalists have watched horror-struck, fearing that their financial system could face a drastic fall like a house of cards collapsing.
Large investment banks, private equity groups, and several international institutions have been shaken up and have lost billions in value as the enormous credit bubble has now collapsed.
The current crisis is a serious enough threat to the world economy that the Federal Reserve, the European Central Bank, and the Bank of Japan intervened with massive injections of liquidity to avert bankruptcies of financial companies.
Big business institutions are happy to share the pain when it comes to their own problems. This is in marked contrast to their behavior when the victims are working people. Politicians have done hardly anything to protect workers who are losing their homes. No one is jumping over their heels to reverse declining wages and benefits.
Financial Crisis
The crucial factor in the financial crisis is uncertainty in the value of the collateral that companies use to buy credit. The most typical collateral is mortgages or other loans backed up by underlying assets. These loans are sliced, diced, and repackaged as investment tools called securities.
The crisis was triggered by so-called sub-prime mortgage-backed securities, backed up by mortgage loans made to people with poor credit, which were the most profitable due to the high interest rates. In the last issue of Justice, we pointed out the potentially dangerous effects of these complex inventions of financial capitalism.
Rising home equity values and low interest rates caused the value of these securities to increase exponentially as the bubble got bigger and huge profits were made by the hedge funds and investment banks that underwrote the debt.
The party is now over. The collapse of the housing bubble, higher interest payments, and higher cost of living have severely undermined the capacity for many ordinary people to pay their mortgage and avoid foreclosure. Delinquent payments, defaults, and foreclosures are at an all-time high. In July 2007, there was a 93% increase in foreclosures over the previous year, an increase from 92,845 to 179,599 (RealtyTrac, 8/21/07).
Most capitalist commentators insist that the fundamentals are sound, but this is not true. In the second quarter of this year, U.S. consumption growth slowed to 1.3% and initial figures suggest it is falling further in the third quarter.
U.S. consumers have been holding up the world economy by buying the worlds goods for the past 15 years. They have only been able to do so because of unprecedented levels of government and personal debt.
Now, high oil and gas prices, falling home values, and stagnating wages are forcing consumers to tighten their belts. At a certain stage, the credit crunch could easily spread into the real economy, leading to an economic downturn.
In an attempt to avert this prospect, the European Central Bank has injected $100 billion into the money markets. The Federal Reserve also stepped in, cutting the cost of lending to commercial banks and hinting that it could cut overall interest rates in September. It had previously hesitated to do so, hoping there would be a correction with a gradual deflation of the bubbles in the U.S. economy without it effecting the real economy. Now, however, the Federal Reserve has been forced to reverse course and intervene in an implicit recognition of how serious the situation is.
A Crisis-ridden System
It wasnt too long ago that capitalist pundits proclaimed the end of sharp economic crises. The reality, however, is that capitalism is a crisis-ridden system. At the end of the 90s, the Federal Reserve moved to contain the collapse of the dot-com boom by lowering interest rates, which combined with an abundant supply of cheap credit and rising home values to trigger the housing bubble.
This led to a feeling of invincibility and incredibly risky investments for casino financial capitalism, which further detached it from the real economy. The current crisis shows that it can only remain suspended in air for a while before the reality-based economic laws have an effect.
The current boom has been defined by the increasing chasm between the ultra-rich and the rest of the population. While a few roll in money, wages for the majority have stagnated. Wages and salaries now make up the lowest share of gross domestic product in the U.S. since 1947. Ultimately the falling share of wages in national income is restricting the market for capitalism and increasing the tendency towards crisis.
Enormous anger has built up during the boom years at the unequal nature of society. A job (albeit often low paid and insecure) and the availability of relatively cheap credit, have softened the blows that have rained down on working-class people.
However, the onset of a world recession, when it comes, will profoundly alter the political situation as billions of working-class people will be expected to pay for the crisis. There is not a mechanical connection between economic developments and the consciousness and combativity of the working class, but, whether sooner or later, the coming economic upheavals will lay the basis for a massive increase in radicalization in the U.S. and internationally.