Capitalism is bankrupt; socialism is the only answer
By Doug Lorimer
Since the September 15 failure of Wall Street-based Lehman Brothers, the fourth largest investment bank in the US, the world’s capitalist governments have been scrambling to keep the worst financial crisis since the Great Depression of the 1930s from turning into a total collapse of the global financial system.
What had been a year-old credit squeeze, precipitated by the gradual deflation of the US housing price bubble since late 2005, was turned into a potentially catastrophic credit freeze when US Treasury secretary Henry Paulson — a former CEO of Goldman Sachs — the largest Wall Street investment bank, allowed Lehman Brothers to go into bankruptcy.
Following the collapse of the “sub-prime” mortgage market in March 2007, Lehman Brothers had reported losses of US$2.8 billion and was forced to sell off $6 billion of its total financial assets. On September 9, Lehman reported a further loss of $3.9 billion, taking its assets to around $130 billion less than its total debt of $768 billion. Lehman’s losses were paralleled by other major US banks. Since mid-2007 the nine largest US commercial banks have written off $323 billion in “troubled assets”. This wipes out their combined reported profit of $305 billion since 2004.
In the wake of Paulson’s decision to allow Lehman to fail, the big banks refused to lend to one another, and short-term loans for big corporations, known as the commercial paper market, ceased to function. Paulson’s first response to the credit freeze was to commit the US government to provide $700 billion to buy up the so-called toxic debts of the big US banks, mostly their fraudulently created “sub-prime” mortgage-backed securities, at the original massively inflated prices the banks paid for these “assets”.
When the announcement of the $700 billion bank bailout plan failed to end the credit freeze, Paulson followed the lead of the British government, which had announced that it would spend $700 billion to buy stock in the eight largest British banks, effectively nationalising them. On October 14, Paulson announced that the US Treasury department would spend $250 billion buying non-voting stock in the country’s nine biggest banks, partially nationalising them, but leaving both formal and actual control of them in the hands of the existing owners. The same day, the giant Bank of New York Mellon Corporation, owned by the financial dynasty founded by Andrew Mellon, announced it would immediately sell $3 billion worth of shares to the Treasury department.
‘Socialism for the rich’
Nationalisation or partial nationalisation — that is, socialisation of the corporate elite’s losses, or “socialism for the rich”, as some commentators have called it — has ended up being the US capitalist financial oligarchy’s preferred way of bailing itself out of the financial crisis and protecting itself from the accompanying economic downturn. Since the end of August, the US government has nationalised Fannie Mae and Freddie Mac, the companies that own or guarantee nearly half of the $12 trillion in US mortgage loans, injecting $200 billion into these companies. Washington also nationalised the American International Group, the world’s biggest insurance company.
The disastrous consequences of the financial crisis have been most dramatically revealed by the situation in Iceland, where the government has seized control of the country’s three largest banks, which hold debts equal to 10 times Iceland’s annual gross domestic product. With Iceland’s government hovering on the verge of bankruptcy, its currency has become virtually worthless for international transactions by ordinary citizens. Savings and pension funds are in limbo following the collapse of the country’s largest banks. The government has restricted the use of foreign currency by Icelandic firms to essential purchases such as food, fuel and medicine.
Little or nothing is being offered to those who will be the real victims of this crisis — working people facing the loss of their jobs, homes, life savings or pensions. The US congressional Democrats, including Democrat presidential candidate Senator Barrack Obama, for example, while voting to spend $2.5 trillion of public funds to bail out the Wall Street banks, have proposed to spend only $150 billion — 6% as much — to ameliorate the impact upon working people of an economic crisis that is likely to surpass any economic slump since the Great Depression.
Already millions of poor in the US face homelessness due to bank foreclosures. The 26.4% of US workers who were already on poverty wages before the crisis began will soon have to choose between paying for food, rent or health care. The poor and the elderly will likely see cuts in the government services they depend on most, such as Medicaid and Medicare, as the US government prioritises paying interest to bondholders over social spending.
There are some extraordinary parallels between today’s financial crisis and the one that followed the Wall Street stock market crash of 1929. Then, as now, major banks failed under the weight of a chain of bad debt. A bank failure in one country spread the crisis to the next. Across the developed capitalist countries, governments followed the “do-nothing” policy advocated by Andrew Mellon, the US Treasury secretary of the time. Mellon infamously declared, “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate”, adding: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” As a result of this attitude, 25% of US workers became unemployed.
While the bank nationalisations or bailouts may keep the capitalist financial system functioning, they can’t prevent a slump in what’s misleadingly called the “real economy” — the production and sale for profit of goods and services. The massive government bailouts will likely prevent a replay of 1931, when the international capitalist banking system collapsed, although there’s no guarantee. That’s because neither the capitalist financial oligarchy nor its governments can control a shadow banking system worth $10 trillion — the same size as the official system. It’s impossible to be certain that another failure of a financial institution won’t trigger an even greater financial panic, whether next year or next week.
What is certain is that the economic downturn that the capitalist world is now entering will be the worst since the Second World War and perhaps the longest as well. “Frankly, [the notion that] there is going to be a short and shallow recession, six to eight months, is out of the window”, New York University economics Professor Nouriel Roubini told NBC on October 23, adding: “The last two recessions lasted only eight months each ... This time around this is going to be three times as long, three times as deep.”
Commenting on the recession that Britain has now entered, Roger Bootle, managing director of Capital Economics, told the October 24 London Daily Telegraph: “What we are going to see of the next two years is a contraction of the same magnitude [as the early 1990s]. That one lasted two years, but this one could go on for four or five years.”
The very existence of some major corporations is now in peril, because their profits were already in sharp decline before the financial crisis hit. The three big US auto companies — General Motors, Ford and Chrysler — have been losing money for several years now. Over the last few weeks, there have been reports that, to avoid bankruptcy, GM and Chrysler will merge, shedding 40,000 jobs worldwide.
China facing recession
A notion that is rapidly being discredited is the idea that China’s continued economic growth will insulate Australia from a recession. On October 23, Stephen Walters, JPMorganChase’s Sydney-based chief economist, warned that Australia’s official jobless rate will more than double to at least 1 million over the next two years as economic growth in China declines under the impact of declining demand for its cheap manufactures in the US and Europe.
The latest official statistics show that China’s GDP growth dropped back in the third quarter to 9% — worse than the expected 9.7% and well below the 2007 figure of 11.9%. China’s economy must grow by more than 8% annually to create jobs for the 24 million people entering the labour market each year. Currently, there are officially 71 million unemployed workers in China.
Not only are China’s export markets contracting, but it is also undergoing its own financial crisis due to the simultaneous bursting of financial bubbles in its stock market and property sectors. “The slowdown in the Chinese economy so far is unexpectedly serious”, Li Wei, an economist with the Standard Chartered Bank, told the October 14 China Daily. Li’s team forecast it would grow by 7.9% in 2009 and by 7% in 2010, leading to massive increases in unemployment.
The economic crisis that is now unfolding is thus of global scope and is shattering longstanding economic relationships in which China played a central role. Over the past two decades, China emerged as the capitalist world’s industrial sweatshop, producing low-tech manufactures for export to the developed capitalist countries. China recycled its huge export earnings back into the US, buying up more than $1 trillion of US government debt — a process that helped fund massive US trade and budget deficits. The influx of recycled dollars from the Chinese and Japanese central banks enabled the US Federal Reserve Board to pursue a cheap credit policy, which fuelled debt-driven household consumption in the US. This in turn maintained the market for Chinese goods. But the economic downturn in the US is now feeding back into an economic downturn in China.
The global financial crisis was triggered by the collapse of the housing market bubble in the US. But the root cause of the crisis is not a lack of bank regulation or out-of-control capitalists, as the capitalist media and politicians claim. The root cause is a classic capitalist crisis of the sort analysed 150 years ago by Karl Marx. At bottom, it is a crisis of overproduction — there are too many goods to be sold at a profit, not just in the US, but worldwide. The most obvious commodity in which there has been over-investment is housing, fuelled by the housing market price bubble.
The current crisis is rooted in the halving from 1967 to 1972 of the average rate of industrial profit in the US and other developed capitalist economies, due to the downward pressure on the rate of profit caused by the huge growth in the organic composition of capital during the previous 20-year capitalist economic expansion. The “organic composition of capital” is a term Marx used to denote the ratio of capital spent on “dead labour” — machinery, fuel and raw materials — compared with the amount of capital spent on hiring workers, “living labour”, which is the source of capitalist profit. Capitalist firms seek to increase their mass of profits by increasing labour productivity through replacing “living labour” with labour-saving technology. But this has the tendency to increase the organic composition of capital and to erode the rate of profit.
The halving of the rate of profit at the end of the 1960s made investments in expanding the production of goods less profitable for the capitalist financial oligarchy that owns the big industrial corporations, banks and other financial businesses. Instead, they put more and more of their capital into financial markets, to reap higher speculative profits from these markets. These markets began to inflate greatly from the early 1980s as the Reagan administration pumped massive amounts of bank credit into war goods contracts with the aim of pulling the US economy out of its 1980-82 recession. In the process, Reagan turned the US from the world’s biggest creditor country into its biggest debtor.
In 2007 dollars, US government debt reached almost $3 trillion in 1945, due to the huge budget deficits Washington ran to finance its war effort. US public debt declined to around $2 trillion by 1950. It rose slowly up to 1980. But by 1990, US public debt had more than doubled to $5 trillion. By 2000, it had increased to around $7 trillion. Under the Bush administration, it has grown to just over $10.5 trillion, only $4 trillion less than the total value of goods and services produced in the US last year.
In all the developed capitalist countries, since the Second World War, which ended the Great Depression, greater and greater sums of credit, of debt, have had to be injected into the economy to halt each periodic crisis of overproduction of commodities accelerating into a severe and prolonged recession. The capitalist rulers have staved these off with a growing mountain of debt, which has fuelled repeated speculative financial asset bubbles.
These bubbles are the inevitable consequences of the domination of the capitalist economy by giant associations of capitalists, that is, corporations. In the 1870s, when capitalist corporations — “joint-stock companies” as they were called at the time — were only beginning to become the dominant form of capitalist business organisation, Marx, in the third volume of Capital, described them as representing “capitalist production in its highest development”. He predicted that corporate capitalism would create a “financial aristocracy, a new kind of parasite in the guise of company promoters, speculators and merely nominal directors; an entire system of swindling and cheating with respect to the promotion of companies, issue of shares and share dealing”.
The objective function of a capitalist economic downturn is to eliminate the “deadwood” — the less profitable, less efficient companies, thus providing a bigger potential market for the remaining companies. But the effect of staving off the depression with debt expansion is to enable the “deadwood” to survive the overproduction crisis. Furthermore, a large part of the “deadwood” is made up of corporations that are “too big” to be allowed to fail.
The credit freeze following Lehman’s failure illustrates just what the consequences for capitalism are of allowing even one insolvent corporation to go bust. Hence the continuous need for the financial oligarchy to use their state to socialise corporate losses, to bail them out of insolvency. But this has increasingly pushed the developed capitalist economies toward stagnation. The real growth rate of the world capitalist economy fell from an average 4.9% per year in the 1960s to 3.8% in the 1970s, to 2.7% in the 1980s, and to just 1.2% in the 1990s. What will come after the current severe and prolonged recession? New York University economist Nouriel Roubini predicts at least a decade of stagnation, that is, the recession will be followed by at least 10 years of anaemic growth. In the years ahead, working people will suffer not only from persistently high levels of unemployment and growing impoverishment, but from waves of inflation that will flow from the capitalist governments’ current massive expansion of the money supply to bail out the financial oligarchs from the mess they have made.
The only way out of the impending catastrophe for working people is to organise themselves into a mass movement to take political power out of the hands of the capitalist financial oligarchy and to reorganise the economy along socialist lines. If you want proof of this, you only have to read the October 8 Reuters analysis of the impact of the crisis on Venezuela. This imperialist news agency noted: “Venezuela has suffered little direct effect from the market chaos because Chavez nationalized the most important companies that once traded on the minuscule Caracas stock exchange and because its currency is fixed by exchange controls”. The working people’s government headed by Hugo Chavez has redirected these nationalised companies to tackle the pressing needs of the country’s poor, rather than enriching the local capitalist oligarchy. Similarly, there will be no home foreclosures or starving pensioners in Cuba, where capitalist businesses were expropriated by a working people’s government 48 years ago.
The capitalist governments’ bank nationalisations demonstrate that capitalism is a bankrupt economic system. Without huge levels of state intervention the “free market” profit system would stop functioning. Capitalist media commentators have begun describing this as a turn toward “socialism”. But, as Karl Marx and Frederick Engels pointed out more than a century ago, the nationalisation of capitalist businesses by capitalist governments has nothing to do with socialism.
After the conservative German Chancellor Otto von Bismarck “went in for state ownership of industrial establishments, a kind of spurious socialism has arisen, degenerating, now and again, into something of flunkyism, that without more ado declares all state ownership, even of the Bismarckian sort, to be socialistic”, Engels observed in 1877. Engels went on to explain that the “modern state, no matter what its form is essentially a capitalist machine — the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit.”
Socialism requires the reorganisation of the economy to serve working people’s needs. Its precondition is therefore the organisation of the working class as the ruling class through revolutionary action of the masses to replace the capitalist state machine with a working people’s government, as has occurred in Cuba and Venezuela. This is the fundamental lesson that socialists need to take to working people in the harsh times ahead of us.