Unprecedented bailouts to avoid financial collapse
Capitalism: Prognosis uncertain
By Juan Chingo Thursday, October 16, 2008
After last week’s crash in the stock markets that threatened a financial collapse and the beginning of a new Great Depression, the imperialist governments, especially the European governments, closely followed by the US, announced the biggest bailouts of the banks and the financial system in the history of capitalism.
The daily paper Financial Times calculated that the European governments (including those that do not belong to the Eurozone) put a total of 1.873 billion euros – which is approximately equal to the annual GDP of France! – at the disposal of saving the banking sector. That huge sum of money, to which is added the sums laid out by the US government and rescues of other countries like Australia, is an approximate sign of the scale of the disaster. However, this money injection of millions and the “radical” measures that the governments of the main powers have taken, like calling for measures of partial “nationalization” of the banks, in reality a capitalist measure for bailing out the bankers, were not sufficient to halt the stock market failures, after a brief euphoria. Beyond the oscillations of the bonds markets, what has begun is a period when the economic prospects are of a deep and prolonged recession at a world level.
To employ a media metaphor, a first operation of high complexity has been carried out on capitalism. The patient has shown slight symptoms of life, in spite of the intensity of the operation. His recovery could be slow and painful, and he will certainly need new operations. Diagnosis: his condition continues to be uncertain.
Unexpected response by the main European governments
After a week which had shown a strong division and a policy of “every man for himself,” the governments of the main European powers gave an unexpected response, by coordinating the common lines of a plan to rescue the financial system to be applied by each government at a national level. These measures were adopted by the Eurogroup Summit (the fifteen countries that make up the Eurozone), following the “leadership” of Great Britain, that belongs to the European Union (EU), but has not adopted the euro, and its Prime Minister, Gordon Brown, who, facing the imminent collapse of the British banking system, one of the most affected in Europe because of its high exposure and indebtedness, was the first to develop a plan of massive state intervention in the banking system (that really looks like a “desperate act”). Faced with the crisis, the agencies of the EU, like the European Commission, appeared totally incompetent, displaying the structural weaknesses of the construction of the EU. The plan of the European governments has three main components: (1) state guarantee for the credits between firms, to reactivate inter-bank credit; (2) recapitalization of the banks in difficulties with public funds through buying shares and temporary new accounting rules; (3) the purchase of toxic assets from banks, if it is indispensable or unavoidable, although there will not be a common rescue fund, basically because Germany has doubts about who would control those public monies.
These measures signify an unprecedented intervention by the state, both in the liabilities of the banks (capital strengthened, with public money, wholesale financing guaranteed, by government, inter-banking backed by public assistance, clients’ deposits primarily guaranteed, by a public agency) and in the assets (part of the most unliquidated credits [those not converted into cash] of commercial banking is going to pass into the hands of the state, in exchange for cash liquidity). The aim is to avoid economic collapse for lack of liquidity. That is why, perhaps, the biggest element, in terms of maintaining the functioning of money markets, is the plan to guarantee inter-bank loans for up to five years, a measure that seeks to disentangle the blocks of this credit circuit, essential for the functioning of the entire financial system. Although it could work in theory, the loans are not mandatory. So far, commitments in money by country are: Germany, 500 billion euros; France, 360 billion euros; Spain, 150 billion euros; Austria, 100 billion euros, etc. The British Prime Minister announced that his government will become the majority stockholder in the Royal Bank of Scotland (RBS), at the same time it is majority stockholder in the group resulting from the merger between Lloyds TSB and the Halifax Bank of Scotland (HBOS). The bill is equivalent to 37 billion pounds (46.472 billion euros) that the taxpayers will have to pay in exchange for assets of the affected banks.
The US, closely following European governments
On October 14, with enormous reluctance, the US Treasury Secretary, Henry Paulson, announced the details of the plan to acquire preferred stocks for a value of $250 billion, from the bailout proposed by the Treasury, now approved by Congress.
Paulson met privately with the sharks of the nine main US banks and told them that they had to accept the “injection of capital” and that this could not be voluntary. The aim of bringing together the nine executives and making them all participate in the plan, is to avoid stigmatizing a bank that accepts state participation, which could trigger a run against it. At the same time, Paulson reassured the CEOs (directors) of the banks by telling them that state purchase of preferred stocks would not dilute the power of the stockholders, since it only entails collecting interest on the $250 billion that would be handed over, in addition to the fact that the banks will not be required to eliminate dividends, nor will the directors responsible for the disaster be obliged to resign. According to the now approved law, it was only agreed that some limits would be placed on their compensation, but, given Paulson’s position as a former executive of Goldman Sachs, one could only expect that these limits will be cosmetic. Nor does this imply a compulsory restructuring of the banking system, as Sweden did at the beginning of the 1990’s, that is, concentrating investment in the banks that are considered “salvageable,” and having strategies like separating the bad assets for auction (as happened during the S&L, savings and loan, crisis, at the end of the 1980’s) for those that can no longer continue to function. Washington’s proposal contemplates fewer conditions that its European counterparts; it is a scandalous rescue of what remains of US banking, that seeks to avoid partial confiscation of the capital of the bankers.
For its part, the FDIC (Federal Deposit Insurance Corporation) will offer an unlimited guarantee for bank deposits of non interest-bearing accounts, generally those of businesses, a measure similar to that adopted by the European countries last week.
The White House announced the purchase of bank credits after the United Kingdom, Germany, France and other countries of the European Union (EU) made public the injection of large quantities of money to save the firms and face up to the crisis that is devastating international markets. The problem is that this new Treasury plan has the aim of helping the US match the European countries in what has become race among countries – now moved to the level of inter-imperialist blocs – to reassure investors that their banks are not going to go bankrupt or that other countries will not eclipse their bailout plans, and, by so doing, divert bank deposits or investment capital. As Kenneth S. Rogoff, Harvard economics professor and an advisor of John McCain, said, “The Europeans not only set up an action plan, they forced our hand.”
The European leaders quickly got on the horse: "The scale, ambition, and potential costs of the programs announced yesterday suggest that European leaders like Gordon Brown, French President Nicolas Sarkozy, and German Chancellor Angela Merkel were determined to respond to the challenge of the financial crisis through concerted actions, showing a degree of leadership that left Washington, the global economic leader, overshadowed. 'Europe united has made a bigger commitment than the US,' said Sarkozy to the head of the EU, on announcing a package of 360 billion euros for France. 'The European politicians are surpassing the US in their efforts to solve the crisis,' said the Unicredit di Italia bank" ( "EU takes a €2 trillion financial gamble”, The Guardian 10/14). But more than the "boldness" of the European governments, what stands out is the unprecedented loss of US influence on the financial terrain, even compared with the prospect of only a week before. This is what the following analysis emphasizes: "Since the creation of the Bretton Woods monetary system in 1944 every global financial initiative of any significance has been devised, led and co-ordinated by the US Government. This US leadership did not mean that America always got its way in financial affairs — nor that US co-ordination always succeeded, as exemplified by the breakdown of Bretton Woods in 1971. But it did mean that international financial initiatives were never attempted until ideas and the leadership came from Washington. The sole exception to this rule in the past 30 years was the creation of the euro; but this was viewed in Washington as an intra-European affair with limited global consequences. The present global banking crisis has been a very different matter, since it originates in the US itself. Even a few weeks ago a solution without US leadership would have been inconceivable. In the past few days, however, the failure of the Bush Administration to follow through in any concrete way on the $700 billion 'Paulson package' that it rammed so painfully through the Congress, has focused attention on Washington’s vacuum of leadership and ideas. Aghast at the dithering incompetence of the US in handling this crisis, European politicians have realised that Henry Paulson, the supposedly brilliant US Treasury Secretary, was an emperor with no clothes. Instead of waiting for US leadership, they had to take responsibility for Europe’s problems. In trying to do this, they have found an unlikely intellectual guide and champion: the British Treasury and Gordon Brown." ("Reliance on the US will never be the same," Anatole Kaletsky, The Times, 10/13). The political crisis and US leadership vacuum in the current crisis is not a minor fact. It is the expression on the financial plane of the weakness shown on the geopolitical plane in Georgia, where the European leaders had to act for themselves and arrive at an agreement with Moscow, two unprecedented situations. If the new administration does not succeed in reversing the situation, even if only partially, this vacuum in the ability of US leadership could ignite a run against the dollar, affecting its ability to arbitrate, while enjoying its monopoly on the world's reserve currency. In turn, the US loss of influence could accelerate the need for different international actors to make autonomous decisions beyond their previous willingness, to avoid having the crisis devour them, as the European governments did. Although it is still premature to draw conclusions before the scope and prospects of the crisis are clearer, from a geopolitical point of view, whatever the outcome of the crisis may be, the US will have to adopt itself from the new relations of force that emerge from the crisis.
As for the EU, the moment of truth will come when some of the weaker or smaller countries suffer intense economic pressure, as "deleveraging" [reducing the amount of debt a company holds] intensifies. Prevented from using a policy of devaluation as in the past, they will have to resort to sophistries over the use of fiscal policy and possibly even help from the stronger member states, a matter that will truly test the coordination of the last few days.
Profound problems continue to be posed in the financial system
The massive bailouts have lessened the dynamic that was coming in recent weeks when the stock market crash and panic that was going through the markets, and, even more important, paralysis of the interbank circuit that was already affecting companies' credit sources, made it appear that the international financial system was taking a big hit. But the financial system continues in problems. A key sign of that is the situation of the monetary market, that improved slightly, but not sufficiently. There are growing signs of a credit drought because the European banks are withholding credit for the private sector and companies as that they are trying to repair their capital fitness (the minimum capital required to maintain its risks or credit exposure). In Germany, one-fifth of the corporate lenders are already experiencing credit drought conditions, a quite dramatic increase compared to only one month ago, when credit was still flowing freely. In turn, the process of additional deleveraging of bank balance sheets is continuing. Although recapitalization of banking could turn out to be helpful in sustaining this process, it would be of use only with difficulty to reactivate credit immediately, given the risk of new potential losses. For that reason, some economists were proposing giving the current recapitalizations more scope than the European governments have undertaken — partial nationalization in the case of the United Kingdom — moving forward, in fact, to a temporary nationalization of banking as a way of reestablishing credit: "The recent decision of the US Federal Reserve to bypass the banking system and to lend directly to the non-banking sector by buying commercial paper is a step in the right direction. It allows companies to obtain cash by borrowing long; a service banks do not want to provide anymore. The step taken by the Fed is insufficient, however. The Fed cannot take over all bank lending operations. Only the government can do this by temporarily transforming private banks into public ones. It can then order the management of these state banks to lend to each other. Such a transformation (call it a temporary nationalisation) will make it possible to jump start the interbank market and allow the normal flow of credit to be activated" ("Temporary full state ownership is the only solution," Paul De Grauwe, Financial Times, 10/9).
In turn, there are worrying reports that other segments of the credit market are suffering a dramatic worsening, like the credit-card debt and debt for buying cars, that for some could be the next subprime crisis in a few months. A sign of this has already been the impact of the suspension of payments in General Electric's quarterly results, that suggested that the growing defaults on credit cards and other loans that forced it to set aside up to a billion dollars to cover this year's losses. GE Capital, that reports half of its earnings, could suffer losses of up to $6.6 billion this year and up to $9 billion in 2009 (before taxes), largely because of the deterioration of consumers' financial situation.
In this context, there are voices that call for prudence in the face of what they consider the worst economic situation in decades. Among them, the economist George Magnus, from the Swiss bank UBS, who sees slightly more encouraging signs after the decisions made by European governments and the G7 to curb the "... point where financial instability has become so acute that only an exceptional, immediate and global government attack on the causes of instability is likely to avert a systemic banking failure, in which non-financial companies could rapidly fail too." However, he still indentifies four current sources of danger: "Even if a financial meltdown is averted, we should be under no illusion that the deleveraging in the financial and household sectors will stop. As a result, four big battlegrounds remain. First, there is a high possibility of further bouts of financial stress and failures. Money markets are still broken and recovery will take time. Second, illiquidity, a preference for cash-type instruments, even over government bonds, and a considerably expanded supply of government bonds raise the threat of an untimely increase in bond yields. Third, the global recession that has started may yet turn out to be sharper than expected - and certainly longer. This will bring sustained, and some new, credit risks. Fourth, much slower growth and the risk of some home-made financial crises in emerging markets warrant close scrutiny." ("Is there time to avert a Minsky meltdown?", George Magnus, Financial Times 10/13). For his part, the economist Nouriel Roubini maintains, that, after seeing the abyss of systemic disaster up close, governments have chosen an aggressive policy, but he warns that the amount promised for bank recapitalization will hardly manage to cover 50%, and he demands essentially Keynesian short-term measures, like the expansion of public expenditures and other more populist measures, like the partial cancellation of debt for those who owe mortgages, as a way to reactivate internal demand. For Roubini, only the resolute application of policies like these will mark the difference between a U-shaped economic recovery lasting between 18 and 24 months, and a Japan-style decade of poverty.
The next Achilles' heel: The severity of the international recession
What is unavoidable is a hard recession, as recognized by Bill gates himself, whose estimates of US unemployment have been raised to 9%, way above the analysts' consensus. It still remains to be seen if even the measures taken will be sufficient to avoid a depression characterized by the absence of internal demand and deflation. It is this prospect that destroyed investors' confidence on October 15. The optimism triggered on October 13, thanks to the rescue plans set up on both sides of the Atlantic, remained a worthless piece of paper, given the possibility of a recession, posed by the Federal Reserve and the fall in retail sales, that reached 1.2% in September. Confidence will not return so easily. With the European stock exchanges falling more than 5%, Wall Street could only join the panic caused by the delicate situation of the global economy. This is the way the Dow sank by 7.87%, the Standard and Poor 500 by 9.03%, and the Nasdaq (technology) by 8.47%.
According to the Fed, "economic activity was weakened throughout the 12 districts of the Federal Reserve," as a result, on the one hand, of disinvestments and, on the other hand, of consumers' reducing expenditures. To this one must add the fact that the Fed's Chairman, Ben Bernanke, asserted that "restricting the flow of credit to househholds, businesses, and local and state governments, financial turbulence and pressure on financial firms, involves a significant threat for the growth of the economy." In a speech prepared for the Economic Club of New York, the main authority at the Fed again insisted that "financial turbulences involve a significant threat for the US economy."
But this is not just a US prospect, but a world prospect: the Baltic Dry index, an indicator of prices for maritime transport of dry materials in bulk (minerals, coal, metals, cereals, etc.) fell 20% in the last two days. This could indicate a more rapid deterioration than expected of the Chinese economy. To this is added concern that the financial crisis has affected financing of international commerce. Exporter countries of southeast Asia like Korea, one of biggest economies in the world, are in serious difficulties. The Financial Times reports that, "Lest anyone miss the point that one of the world's most successful exporting nations is in a bind, Mr Kang, the finance minister, recently told a parliamentary session that 'apart from exports, everything - including investment, consumption, employment and the current account balance - is showing a trend similar to that seen during the [Asian crisis]' and it adds, "Arguably, this time around, Korea could be seen as a victim of its own success. On a macroeconomic level, a country that derives 40 per cent of its GDP from exports will now have to cope with dwindling western demand for its products. Companies such as and LG supply consumers worldwide with goods ranging from computer chips and mobile phones to televisions and fridges. Korea is also the world's leading shipbuilding nation ... Hyundai, meanwhile, has built the world's largest car manufacturing centre in its southern fiefdom of Ulsan, using a dedicated deep-water port to ship out 1 million vehicles a year" "Sinking Feeling," Financial Times 10/13). This situation is combined with a deterioration of the financial system as a result of massive indebtedness of businesses and households, similar to that of the US, in the context of the ahrdening of the international credit market, which makes the country extremely vulnerable: "Elsewhere on the checklist for vulnerability, South Korea ticks several boxes. It has high external debt. Short- and long-term borrowing totals $400 billion, above the levels at the time of the last crisis both in nominal terms and as a percentage of GDP. The current account balance has teetered into the red, for the first time since the crisis of 1997-98. Portfolio capital flows into the country are susceptible to swift changes of direction - foreigners have been net sellers of the stock market in each of the past four years ..."
But the deacceleration of China, more rapidly than expected, could be the death blow that was lacking for the entire world economy. And this seems to be what is happening. The chief executive of Rio Tinto, one of the two largest mining giants in the world, said that "... there was a marked reduction in Chinese demand for raw materials compared to the overheated levels of 2007 and added that the 'vast majority of Chinese producers of aluminum were now having operational losses'" (Financial Times, 10/15). The correspondent of the Argentinean daily Clarín offers a similar vision in situ: " ... Minister Wang Chen, from the Information Office of the State Council, who during supper will speak clearly with moving frankness of how the scene has changed. 'The impact will be great. China is observing the phenomenon, and we have made modifications in the development strategy,' he comments. The usual comparison with the crisis of 1929 is exaggerated, for his government, but he does maintain that 'We understand that the US is on the verge of recession. In addition, the crisis has had destructive consequences in Europe. We are the second-biggest country in foreign trade, but now we are unable to export many products.' 'How does that affect the production process?' 'Small and medium-sized firms East and West are bankrupt. And there have been extreme cases of businessmen committing suicide. But we have also had many fewer bankruptcies this way than in the West.'" ("China: wave of bankruptcies, suicides and changing plans because of the crisis," Clarín, 10/15).
Another sign that the situation is deteriorating more rapidly than was thought, is the low interest rate recorded last week. The real estate market, that has been one of the sources of internal demand, together with car sales, has weakened. A possible significant collapse of the real estate market next year will probably affect the banking sector. Although only a few predict a growth in GDP of less than 8%, a worse scenario that would generate a more acute deacceleration cannot be ruled out, if the deterioration of the real estate market provokes an extreme withdrawal of private investment.
A forced landing by China would have enormous consequences for raw materials markets and for the countries that depend on them, and it would call into question China's role as shock absorber of the severe economic collapse of the imperialist countries. International recession could in turn ignite new tensions and spikes of financial crises. No country is going to emerge unscathed.
An inherent defect in the imperialist system
A big weak point in the rescue plan of the European governments are the international loans. The problem is that the complete guarantee for the monetary market can only be made at a European level. However, the governments have not arrived at the point at which, for instance, if a Spanish bank does not return the money that it received on loan from a French bank, the French government will provide insurance. This guarantee would permit giving more confidence to loans in the vital intra-European circuit, since banks believe more in their own governments (but the monetary authorities of each country are not willing to use public money to guarantee the unpaid loan from a bank of another country). This is one more sign that what has been approved are different national plans, although they are presented as European plans.
This last point is a demonstration of a big flaw in the international capitalist system on the European level, that we could also extend to the inter-bank loans between firms of different continents, especially between European and US firms, strongly intertwined in the financial globalization that developed in the last few years. The international crisis reveals that, in the context of the existence of financial corporations that have been internationalized, national states are unwilling to rescue foreign firms, and the different governments do not wish to assume the liabilities of other nations, in spite of displays of "coordination" and "solidarity" by different imperialist governments. In other words, transnationalized financial institutions exist, but there is not the least institution to manage inter-bank loans in the global economy, nor even on the European scale, where the integration of national capital is greater than at the transatlantic level. A clear sign on the financial plane — for its part, the most "globalized" of all the capitals — of the not-to-be-resolved contradiction of capitalism in its imperialist stage, between the degree of development of productive forces — that, unlike classical imperialism of the beginning of the twentieth century, has achieved an extremely high degree of centralization and international concentration of capital — and the existence of national borders. This tendency continues the more that advancements have been made, in comparison with the beginning of the twentieth century, in establishing various degrees of national coordination, as for instance the EU itself, but without resolving this basic contradiction of imperialist capitalism. This defect, in this crisis or in the future, could undermine the integration of the global economy, leading to fragmentation of the world market, of the convertibility of currency, among other matters. Against the new "neokautskyian" theories that suggest that greater integration of capital and the injection of money in the financial system will prevent catastrophic scenarios like those of the 1930's, it is good to publish the extreme vulnerability that the world capitalist system has shown in these days, although now these ideologues feel relieved and believe they are vindicated, perhaps prematurely, by the exceptional bailout that has been carried out. On the contrary, these theories, although they start from elements of reality that have undoubtedly changed since the 1929 Crash, the Great Depression, and the period between the World Wars, they evaluate them in a one-sided manner, leading them to reformist conclusions, like denying the historical possibility of new interimperialist wars or denying that the bourgeois unity of Europe is a reactionary utopia.
Thursday, October 23, 2008
Saturday, October 18, 2008
US--"Decline, in slow motion" by Cde Celeste
[I have been concerned about housing for years; I joined the Grantist WIL in 2004 because I wanted to do something about the precarious housing situation of working people here in southern New England. The best article I ever wrote for the Grantists was entitled, "Give me shelter." So I was moved by Cde Celeste's paragraphs about the plight of those fleeing foreclosures and what has happened to the neighborhoods they used to live in. What follows is a note from Cde Celeste's blog. The description of street-level change in New York, that she refers to, will also be translated. -- YM]
As others see us: “Decline, in show motion”
By Celeste Murillo
http://teseguilospasos.blogspot.com/2008/10/la-decadencia-en-cmara-lenta.html
As others see us: “Decline, in show motion”
By Celeste Murillo
http://teseguilospasos.blogspot.com/2008/10/la-decadencia-en-cmara-lenta.html
While on both sides of the Atlantic they continue paying out billions of dollars, and the hysteria of the stock markets increases (up, down, rebound, fall, rebound-and-fall-again), life goes on for millions, but it gets worse, or with worse prospects. No one is an optimist now, or the optimists are the least pessimistic: recession is a fact.
Although little gets said about the tent cities on the outskirts of Los Angeles, the foreclosures, and the newly unemployed, the social crisis already arrived a while ago, and it only promises to become merciless.
In the same week that Paulson was announcing the purchase of bank shares to save them from bankruptcy, the raids against undocumented immigrants in the factories increased (in Los Angeles some weeks ago, the biggest raid took place, with the deportation of almost 700 people).
While Gordon Brown and the European Union (EU) were guaranteeing the bailout of the European banks, layoffs and suspensions of autoworkers began in the Spanish state.
Today, I read a postcard written from New York, which, for some reason, (I believe because of the tour of the stores) made me remember the unhappy walks of Jimmy in John Dos Passos’ _Manhattan Transfer_, which speaks of the growth of those smart [fashionable] neighborhoods in New York, that were built on the destruction of the neighborhoods that once served as a home for those who have now been fleeing from foreclosures, layoffs and deportations…. But, by chance, it carried a mark of anger as well.
* * *
[What follows is the text of the "postcard" Cde Celeste mentions above, and it is really a well-wrtten essay about social change. -- YM]
October 5, 2008
From the other side
From the other side
By Ernesto Semán
Thursday morning, while the US Congress was debating the fate of $700 billion, one of the first political graffiti in more than a decade appeared in Brooklyn: “No bailout it screws u!” it said on a highway column. It’s a neighborhood of bridges and highways, and the graffiti possibly came from the Red Hook Houses, an enormous public housing complex that coexists with the noise of the highway, and that also survives in the middle of a neighborhood that has changed at top speed.
Barely going up to the bridge over the graffiti, like the balconies of other houses in the area, Red Hook offers the best views of Wall Street. Every morning for fifteen years, a credit and consumption policy that transformed the US economy was set in motion from the other side of the East River. Right here, from this side of the river, every day one could see the ambivalences of that change.
[To be continued]
Saturday, October 11, 2008
Fracción Trotskista on "Capitalism in intensive care"
The crisis gets politicized and globalized quickly
Capitalism under intensive care
By Juan Chingo Thursday, October 9, 2008
The European division, in the face of the international financial crisis, and last week’s fracture in the Democratic and Republican parties in the US, show that the world capitalist crisis – the biggest since the 1930’s – is becoming politicized at an accelerated rate. The leap in the European crisis and the repercussions in the semi-colonial and dependent countries, are indicators of the globalization of this financial disaster. As we have been explaining, greater internationalization of the economy and of finances that occurred in the last few decades, permitted a recovery of the rate of profit, but has also oiled the mechanisms for spreading crises.
US: Will a great depression be avoided?
The House of Representatives’ approval of the Paulson Plan on October 3 was not enough to curb the fall of markets throughout the world. Faced with this situation, the Federal Reserve (the Fed) had to take extreme measures to avoid financial collapse and, above all, remedy the lack of financing for firms, which could precipitate the beginning of a Great Depression.
Thus, the monetary authority will pay interest to banks for the reserves they have in the Fed, with the aim of improving the conditions of liquidity of financial entities. But, still more important, it announced the setting up of a fund to buy IOU’s of firms that have remained without financing in the credit markets. The creation of a “Commercial Paper Funding Facility” (CPFF), announced by the Fed, has the aim of providing liquidity to firms that issue private debt and every time find fewer buyers in the markets.
But this is not enough either, and the stock markets continue to drop. This time, the cause was the speech by the Chairman of the Fed, Ben Bernanke, who asserted that he would be “reconsidering whether his current position – keeping interest rates at 2% -- continues to be adequate in light of events” and left the door open to lowering interest rates in the short term, in the face of “the worsening prospects of economic growth.” These statements, that show that the crisis is going to continue to worsen, unleashed the panic. Numbers in red seized the banking sector. Sovereign, Wachovia and National City, that were the only ones that had registered increases as October 6 began, fell by 15%, 11% and 9%, respectively. Meanwhile, firms like Citigroup, Goldman Sachs or JP Morgan fell between 8% and 13% at the close. One of the most punished banks was the Bank of America, with a collapse of more than 26%.
The seriousness of the crisis is shown by the powerlessness of the monetary and political authorities. A good example is the opposite effect of that expected from the approval of the $700 billion bailout plan, or the negative reaction to the Fed’s buying up the debts of firms.
The concerted attempt by the main central banks of the world to lower the interest rates by half a point scarcely had a limited impact.
Everything seems to indicate that, more and more, a perverse logic based on the certainty that, in the face of the magnitude of the crisis, any intervention is a drop in the ocean, is beginning to install itself.
A savage US financial and economic decline
The conviction that no measure will work expresses the profound deterioration of US finances and economy. To make a metaphor, the “circulatory system” of capitalism is obstructed. This dictates there are parts that the blood – money and credit – does not reach, which threatens to kill the patient, the economy. Even the imperturbable Warren Buffett, the richest man on earth, who, with this private rescue of banks and firms, has become the modern J. Pierpoint Morgan [1], has said that the “credit drought” is “sucking the blood” out of the economy.
We are going through a critical period when the mechanism of transferring funds from savings to investment could be seriously affected.
Inter-bank credit has become so expensive as to make transactions practically impossible, owing to the fact that no bank believes it will recover the money lent. This distrust is now moving to society, as the beginning of the run on various segments of the financial and banking system shows. The situation is beginning to resemble the 1929 crash, when any mechanism to encourage liquidity was completely useless. A vicious circle had been established: the banks were using government money to solve their problems and not for giving credit. This lack of financing was stifling the real economy. To avoid suffocation, firms were withdrawing their funds from financial institutions, to be able to maintain their activity and face up to their current expenses. The result was that the banks needed more money from government to clean up their balance sheets.
The Fed’s financing of firms seeks precisely to avoid this scenario. Will it arrive in time or are the damages already irreversible?
Capitalism under intensive care
By Juan Chingo Thursday, October 9, 2008
The European division, in the face of the international financial crisis, and last week’s fracture in the Democratic and Republican parties in the US, show that the world capitalist crisis – the biggest since the 1930’s – is becoming politicized at an accelerated rate. The leap in the European crisis and the repercussions in the semi-colonial and dependent countries, are indicators of the globalization of this financial disaster. As we have been explaining, greater internationalization of the economy and of finances that occurred in the last few decades, permitted a recovery of the rate of profit, but has also oiled the mechanisms for spreading crises.
US: Will a great depression be avoided?
The House of Representatives’ approval of the Paulson Plan on October 3 was not enough to curb the fall of markets throughout the world. Faced with this situation, the Federal Reserve (the Fed) had to take extreme measures to avoid financial collapse and, above all, remedy the lack of financing for firms, which could precipitate the beginning of a Great Depression.
Thus, the monetary authority will pay interest to banks for the reserves they have in the Fed, with the aim of improving the conditions of liquidity of financial entities. But, still more important, it announced the setting up of a fund to buy IOU’s of firms that have remained without financing in the credit markets. The creation of a “Commercial Paper Funding Facility” (CPFF), announced by the Fed, has the aim of providing liquidity to firms that issue private debt and every time find fewer buyers in the markets.
But this is not enough either, and the stock markets continue to drop. This time, the cause was the speech by the Chairman of the Fed, Ben Bernanke, who asserted that he would be “reconsidering whether his current position – keeping interest rates at 2% -- continues to be adequate in light of events” and left the door open to lowering interest rates in the short term, in the face of “the worsening prospects of economic growth.” These statements, that show that the crisis is going to continue to worsen, unleashed the panic. Numbers in red seized the banking sector. Sovereign, Wachovia and National City, that were the only ones that had registered increases as October 6 began, fell by 15%, 11% and 9%, respectively. Meanwhile, firms like Citigroup, Goldman Sachs or JP Morgan fell between 8% and 13% at the close. One of the most punished banks was the Bank of America, with a collapse of more than 26%.
The seriousness of the crisis is shown by the powerlessness of the monetary and political authorities. A good example is the opposite effect of that expected from the approval of the $700 billion bailout plan, or the negative reaction to the Fed’s buying up the debts of firms.
The concerted attempt by the main central banks of the world to lower the interest rates by half a point scarcely had a limited impact.
Everything seems to indicate that, more and more, a perverse logic based on the certainty that, in the face of the magnitude of the crisis, any intervention is a drop in the ocean, is beginning to install itself.
A savage US financial and economic decline
The conviction that no measure will work expresses the profound deterioration of US finances and economy. To make a metaphor, the “circulatory system” of capitalism is obstructed. This dictates there are parts that the blood – money and credit – does not reach, which threatens to kill the patient, the economy. Even the imperturbable Warren Buffett, the richest man on earth, who, with this private rescue of banks and firms, has become the modern J. Pierpoint Morgan [1], has said that the “credit drought” is “sucking the blood” out of the economy.
We are going through a critical period when the mechanism of transferring funds from savings to investment could be seriously affected.
Inter-bank credit has become so expensive as to make transactions practically impossible, owing to the fact that no bank believes it will recover the money lent. This distrust is now moving to society, as the beginning of the run on various segments of the financial and banking system shows. The situation is beginning to resemble the 1929 crash, when any mechanism to encourage liquidity was completely useless. A vicious circle had been established: the banks were using government money to solve their problems and not for giving credit. This lack of financing was stifling the real economy. To avoid suffocation, firms were withdrawing their funds from financial institutions, to be able to maintain their activity and face up to their current expenses. The result was that the banks needed more money from government to clean up their balance sheets.
The Fed’s financing of firms seeks precisely to avoid this scenario. Will it arrive in time or are the damages already irreversible?
Data on the real economy are more and more worrying. In September alone, 159,000 jobs were lost, the biggest monthly decline since March 2003. But the current rate of unemployment, that is around 6%, will be insignificant if the system of financing the economy collapses.
There are already symptoms of what might happen. For instance, California, the most populous state in the US, has revealed in advance that it will need a $7 billion US government loan to be able to pay for public services like police, hospitals and firefighters. Leading businesses, like General Electric (GE), are desperately seeking financing. General Electric managed to get Warren Buffett’s company Berkshire Hathaway, to buy preferred shares for $3 billion dollars. But not all companies are as lucky, and many firms are deeply in debt. This rise in the cost of financing will not only make investment plans more conservative, but will affect profits. Although, unlike the collapse of the “dot com” bubble, most companies are less exposed – an expression of the fact that accumulated profit has not been reinvested – many automotive and auto parts companies and retail merchants, have mountains of debts.
European (Dis)Union: The crisis could hit the euro really hard
For the European Union (EU), unlike the US, the current crisis could become a crisis of the monetary system. The widening of the current banking crisis to the EU could destroy its common currency, the euro, whose creation was never accompanied by the establishment of adequate institutions to face financial crises. This is not an accidental oversight, but has to do with the structural weaknesses of the EU project, and sharply expresses its insurmountable contradictions.
The thing is that the EU largely facilitated the integration of European banking, by creating giants that were beyond its ability to administer at a continental level. Now that credit markets are paralyzed, these institutions have a credit (liability) exposure that exceeds the tax ability of the countries of origin, by several times. This is the case with the German Deutsche Bank, with a liability that exceeds by 1.5 times what goes into the government coffers by taxes, and Barclays, of England, whose liability is two times England’s tax ability. This contrasts with, for example, the liabilities of the Bank of America, which are approximately half of US tax revenues.
The current crisis, that is fully striking at the main European banks, has shown this weakness of the EU project, by triggering a policy of “every man for himself” among its member countries.
There is an accelerated process of re-nationalization of financial policies in the 27 member states of the EU, which are not now looking to Brussels (headquarters of the EU institutions) before acting. For instance, Ireland decided to guarantee all deposits (including debt) of the banks for two years, which precipitated a war for deposits within the EU. The unilateral step taken by Germany, after a coordination meeting in Paris with France, England and Italy to find common measures for the crisis, was a pathetic sign. Subsequently, the commitment reached on October 7 among the finance ministers of the 27 countries (Ecofin) is far from establishing a common standard for protecting deposits. They agreed to increase the guarantee for individuals with a sum of at least 50,000 euros. But the initial proposal to raise it to 100,000 euros was not agreed to. Some countries, like those of Eastern Europe and Finland, among others, considered that such a high ceiling would involve a very heavy burden, while Greece, Spain, the Netherlands, Belgium and Austria announced that they will raise the guarantee limit to 100,000 euros. But this could be insufficient to respond to the real problem: the danger of flight of medium-high assets that exceed this quantity toward other European countries that have guaranteed 100% of deposits, like Germany and Ireland. This risk continues to exist because, as the collapse of the British banks shows, widespread mistrust continues. Some media give a more optimistic view of the finance ministers’ meeting. For instance, Financial Times Deutschland emphasizes the statements by the French Minister, Christine Lagarde, that the UE will not accept its own version of Lehman Brothers (the US investment bank whose fall signified a before and after in the world financial crisis). According to this daily paper, there is no massive rescue plan, like the one France suggested and rejected, but there is a coordination of national efforts. Angela Merkel, the German head of government, announced that she is working to establish criteria that would make it possible to distinguish between institutions that are systematically important and those that are not. This criterion could become the mother of all disagreements. If the US Congress split up over the plan to bail out US banks, who can guarantee that the 27 will manage to agree on which banks to save when the national interests of the member states are at stake? This policy can only end up exacerbating the disputes within the EU.
The fundamental problem is that stronger countries like Germany are unwilling to use their tax resources to save, for example, Spanish banking, whose rescue would cost more than 500 billion euros. In this context of European dis(unity), it is not surprising that the stock markets continue to plummet.
The bailout plan of the British government, that announced an assistance package of $62 billion, was not enough to calm the panic. According to the finance minister, the money will serve to buy shares in the main banks of the country – a partial re-nationalization – that on October 7 suffered steep falls that amounted to around 40% in the case of the Royal Bank of Scotland (RBS). So far, the institutions that have confirmed their participation in the recapitalization program are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, RBS and Standard Chartered.
The case of Iceland, one of the weakest links of Europe, shows the extremes the crisis could reach if it continues to develop in the countries of the Continent. Iceland is in advanced “Argentinization” (referring to the Argentinean economic crash and default of 2001); its currency has been devalued by 50% in a single year against the euro and the dollar, losing, in fact, its ability to serve as a means of payment. Icelandic authorities complained that the friends of the country have not offered financial assistance, forcing it to seek an injection of money from Russia. But it would not be necessary to reach this point for the Eurozone to be put into doubt. For instance, the abandonment to its fate and the possible collapse of Italian finances or the Spanish banking system [2] would put the EU’s integrity at risk. And that could happen very quickly in view of a bank crisis of great magnitude, for instance, the Italian Unicredit, strongly exposed in Eastern Europe and the Baltic countries, or from some government crisis.
Many people cling to the idea that the history of the EU is marked by crises that threatened to destroy it, but, as a last resort, ended up strengthening it. Without going further, the establishment of the euro practically required the collapse of the European Monetary System of 1992-1995. For many people, this could be repeated, resulting in the rise of a Federal Europe where the central government takes significant powers to such an extent that, for instance, France in the Eurozone would be like Texas in the US. But the existence of strong national interests makes this scenario highly unlikely, or even utopian. For “France to be Texas,” changes greater than the current ones would be necessary -- that the crisis be much more devastating, or the conquest of new zones of influence, etc., -- that could sweep away the differences that separate the 27 states of the EU, especially the different interests of the powers, since there is no evolutionary road towards greater integration. On the other hand, if the crisis deepens, it is highly likely that it will hit the euro really hard.
What will happen to the dollar? Is the situation headed towards fragmentation of the world market?
Astonished, the short-sighted analysts of The New York Times say, “The stock markets are plummeting; the credit market is still frozen, and some foreign officials predict that the US will lose its financial superpower status. However, the dollar, the most visible symbol of US financial power, is rising.”
A combination of factors explains the strength of the dollar.
In the first place, the dollar’s increase corresponds to the repatriation of funds of US financial institutions to the US, that they need so much, alongside of the fact that speculators are getting rid of their positions throughout the world, by “taking refuge” in US Treasury bonds. The dollar has been strongly supported by the Federal Reserve, that established a monetary exchange network with the European Central Bank, the Bank of Japan, the Bank of England, and other banks to provide foreign banks with dollars. The Federal Reserve had to expand dollar liquidity to the international financial system on an unprecedented scale, to the extent of $1.25 billion.
In the second place, the dollar has recently risen owing to the momentary fact that US economic indicators in the second quarter were better than those of Europe and Japan, that have already entered a recession, at the same time that the previous devaluation of the dollar pushed US exports, especially agricultural products, to the world.
In the third place, the countries of Asia, in large part, supported the dollar as part of an aggressive export policy that allowed them to maintain high growth rates after the 1997-1998 crisis. As various analysts suggest, when Chinese consumption is hardly more than 30% of GDP, the transition to an economy based on the internal market is not something that can be done rapidly and without shocks; that is why these countries have a strategic interest in avoiding a rapid depreciation of the dollar. The massive accumulation of reserves, a result of this aggressive commercial policy, led to these countries’ buying US Treasury bonds or bonds from enterprises like Freddie Mac and Fannie Mae, that is, financial assets. Now, when there is a big question mark over the future of the euro, sovereign funds have to be prudent in a policy of diversification.
That said, we must consider political factors. The problem is, if US dominance was based on the control of the dollar as the world’s reserve currency, this privilege was sustained, not so much by the weight of the US economy in the world, which had been receding in recent decades, but fundamentally because after the collapse of the former USSR, the US was the only superpower, based on unquestionable military supremacy and international influence (“consensus”). These factors had been severely eroding recently, as the disaster in Iraq and Afghanistan and the recent conflict between Russia and Georgia show. The fact that Germany, a key part of NATO, committed itself in Moscow not to support the entry of Georgia and the Ukraine into NATO, amplifies the weakness of the US.
If the dollar managed to maintain itself, that would be a blow for the European Union and the euro. However, the worsening crisis in the US and internationally undermines the bases that until now have supported the dollar’s strength, at the same time that the massive bailouts of the financial and corporate system in the US and the geometrical growth of US government indebtedness are sinking its bases of support. It would appear that the question is whether there is going to be a run against the dollar.
In this framework, the current international financial crisis that has its epicenter in the US, and that is, at the same time, a crisis of the Anglo-Saxon model, and, even more important, of the “pattern of growth” promoted through the indebtedness that allowed living beyond one’s means for decades, is a blow that could be too strong for the US capacity for leadership and the strength of the dollar. In great part, this will depend on the handling of the current crisis by the US authorities, that, as last week’s crisis in Congress has shown, had rarely manifested such impotence and cowardice, and such a “leadership vacuum,” on the part of the administration, the Congressional leadership, and the two presidential candidates. In this context, the hypothesis that Jacques Sapir, French economist and historian, brings up, cannot be ruled out: “Whether the most dreaded scenario develops or not, depends on the way the managers of private funds in Asia and in the Middle East decide to improve their stockholders’ portfolio strategy. If the feeling of uncertainty about US leadership and its ability to administer the current crisis leads them to lose their confidence (at least a ‘confidence with problems’), leading them to get rid of their stocks in dollars, then the sovereign funds would have to follow them rapidly to avoid big capital losses. A fall of 25% to 35% in the value of the dollar against other currencies, together with dramatic changes in the capital flow movements and commodity prices, would then become quite a probable fact. This would create great uncertainty throughout the world and push towards ever larger fragmentation of financial space, with the probable emergence, as a result, of regional reserve currencies” (“How far could the US dollar fall?” Real-World Economics Review, issue no. 47). In this sense, voices are already beginning to be heard, like that of the former President of Thailand, Thaksin Shinawatra, who was the first to distance himself from the IMF's post-Asian crisis orthodoxy by suggesting the need for an "Asian bond that could save us from the dollar" (Financial Times, October 6, 2008). The possible fall of the dollar, which would mean the loss of the main international reference and exchange currency, would lead to the rise of different currency zones, that is, to a situation of greater anarchy and inter-capitalist struggle on a world level, with tensions and conflicts between states, and also opportunities for class struggle, of comparable size to those experienced in the first half of the twentieth century. Those decades showed the sharp development of the epoch that Marxists called that of "crises, wars and revolutions."
Friday, October 3, 2008
The US economy -- closer to the abyss
US: The economic crisis has divided the capitalist parties
The US economy, closer to the abyss
By Juan Chingo Thursday, October 2, 2008
At press time, the US Senate was voting in favor, by 74 votes to 25, of the so-called Paulson Plan, which uses a sum of $700 billion dollars to rescue the banking system. This approval by the Senate attempts to respond to the political crisis begun on September 29, when the House of Representatives had rejected the plan, which led to a real "black Monday" with the fall of stock markets around the world. The bailout plan needs the approval of both Houses, which it will try to get with the backing of the Senate. But, independently of whether Congress ends up approving it in the coming days, the great giants of US banking are suffering an unprecedented loss of confidence. This could, for instance, lead to a run on the international interbank circuit of the main foreign banks, if doubts over the solvency of US financial institutions grow. The colossus of world capitalism increasingly resembles Argentina in 2001. It is unbelievable that the comparison can be thought of, in spite of the obvious differences. Thus it is that economists like Paul Krugman are already talking about a "banana republic." This week the crisis struck big European banks and has led to a wave of bailouts and nationalizations in several countries, showing that it has definitely become an international crisis.
Political crisis in Washington
The uncertainty that had seized Washington in the face of the acceleration of the crisis jumped in a nightmarish manner with Monday's rejection of the Paulson Plan by the US Congress' House of Representatives. This result expresses, in the first place, the extreme weakness of Bush, who has the lowest approval rating of his presidency (26%), while more than 70% disapprove of him. This was obvious from Bush's inability to convince public opinion and his own party of the need for the bailout plan. Secondly, the vote expresses the fierce divisions in the Republican Party, one of the two pillars of the bipartisan system. These divisions do not appear to be capable of being solved: if McCain loses the elections, which right now is most likely, these divisions will deepen, and if he managed to win, he would not be able to unite the party either. In fact, he had no influence on its most right-wing sectors, which called the attempt to transfer a vast sum of money to the richest people, "socialism." Although this speech could find an echo among groups of the middle classes, desperate because of the mortgage crisis, the program of the Republican right wing is to lower taxes on the rich still further and destroy the little that remains of Social Security, by transferring public money to big capital, but through other ways.
The Democratic Party, in spite of its open alliance with Wall Street, and in spite of the fact that Barack Obama supported bailing out the bankers from the very first and agreed with Bush and McCain on the details of the plan, was not able to avoid having a group of its most populist legislators or "liberals" vote against the President's proposal, arguing that it was a bailout of the multimillionaires of big banking, in spite of the decorative amendments that were incorporated to make the proposal more acceptable to the population. In addition to the distrust by the financial market because of the limits added to Paulson's original plan, and the opposition of a large number of economists, who consider that the bailout is expensive but ineffective for overcoming the crisis (see LVO 296 <http://www.pts.org.ar/spip.php?rubrique2513>), rejection of the bailout plan by a large part of the population was the determining element that exerted pressure on the legislators of both parties. This new political reality adds an element of great uncertainty to the crisis and to its likely solutions that makes the crisis unpredictable. The break-up of the "neoliberal coalition" (now Bush, but also Obama and McCain) in the voting in the House of Representatives was sufficient to oppose Paulson Plan I, but it is unable to offer a New Deal-type of alternative, since right now it is impossible that they will come together politlcally beyond this last vote. On the other hand, the appearance of lines of division in both parties is a serious element, that has exposed the weakness of the bipartisan system at a moment of extreme vulnerability, that requires and will require ever bigger budget and financial decisions, for which congressional support is technically, legally and politically necessary. For that reason, the only sure bet is a deepening of the crisis, even if they manage to approve some package.
Beyond the fact that the markets have returned to believing in the bailout -- as the Tuesday rebound of the stock markets shows, after the biggest fall on Wall Street since the 1987 crash -- that optimism really does not rest on any substantive advance in negotiations. In the final analysis, reactions by European and US markets throughout the week will show if simple panic and the subsequent financial setback are stronger than the attempts by the world's central banks to get the money markets out of paralysis. The repercussions of this situation on the big industrial and service-sector companies, which are currently solvent, with profits and operations, could be enormous, to the extent that they lack short-term credit to finance payment of wages and operating costs, precipitating an even more disastrous phase of the crisis.
The sword of Damocles over the US financial system
The US economy, closer to the abyss
By Juan Chingo Thursday, October 2, 2008
At press time, the US Senate was voting in favor, by 74 votes to 25, of the so-called Paulson Plan, which uses a sum of $700 billion dollars to rescue the banking system. This approval by the Senate attempts to respond to the political crisis begun on September 29, when the House of Representatives had rejected the plan, which led to a real "black Monday" with the fall of stock markets around the world. The bailout plan needs the approval of both Houses, which it will try to get with the backing of the Senate. But, independently of whether Congress ends up approving it in the coming days, the great giants of US banking are suffering an unprecedented loss of confidence. This could, for instance, lead to a run on the international interbank circuit of the main foreign banks, if doubts over the solvency of US financial institutions grow. The colossus of world capitalism increasingly resembles Argentina in 2001. It is unbelievable that the comparison can be thought of, in spite of the obvious differences. Thus it is that economists like Paul Krugman are already talking about a "banana republic." This week the crisis struck big European banks and has led to a wave of bailouts and nationalizations in several countries, showing that it has definitely become an international crisis.
Political crisis in Washington
The uncertainty that had seized Washington in the face of the acceleration of the crisis jumped in a nightmarish manner with Monday's rejection of the Paulson Plan by the US Congress' House of Representatives. This result expresses, in the first place, the extreme weakness of Bush, who has the lowest approval rating of his presidency (26%), while more than 70% disapprove of him. This was obvious from Bush's inability to convince public opinion and his own party of the need for the bailout plan. Secondly, the vote expresses the fierce divisions in the Republican Party, one of the two pillars of the bipartisan system. These divisions do not appear to be capable of being solved: if McCain loses the elections, which right now is most likely, these divisions will deepen, and if he managed to win, he would not be able to unite the party either. In fact, he had no influence on its most right-wing sectors, which called the attempt to transfer a vast sum of money to the richest people, "socialism." Although this speech could find an echo among groups of the middle classes, desperate because of the mortgage crisis, the program of the Republican right wing is to lower taxes on the rich still further and destroy the little that remains of Social Security, by transferring public money to big capital, but through other ways.
The Democratic Party, in spite of its open alliance with Wall Street, and in spite of the fact that Barack Obama supported bailing out the bankers from the very first and agreed with Bush and McCain on the details of the plan, was not able to avoid having a group of its most populist legislators or "liberals" vote against the President's proposal, arguing that it was a bailout of the multimillionaires of big banking, in spite of the decorative amendments that were incorporated to make the proposal more acceptable to the population. In addition to the distrust by the financial market because of the limits added to Paulson's original plan, and the opposition of a large number of economists, who consider that the bailout is expensive but ineffective for overcoming the crisis (see LVO 296 <http://www.pts.org.ar/spip.php?rubrique2513>), rejection of the bailout plan by a large part of the population was the determining element that exerted pressure on the legislators of both parties. This new political reality adds an element of great uncertainty to the crisis and to its likely solutions that makes the crisis unpredictable. The break-up of the "neoliberal coalition" (now Bush, but also Obama and McCain) in the voting in the House of Representatives was sufficient to oppose Paulson Plan I, but it is unable to offer a New Deal-type of alternative, since right now it is impossible that they will come together politlcally beyond this last vote. On the other hand, the appearance of lines of division in both parties is a serious element, that has exposed the weakness of the bipartisan system at a moment of extreme vulnerability, that requires and will require ever bigger budget and financial decisions, for which congressional support is technically, legally and politically necessary. For that reason, the only sure bet is a deepening of the crisis, even if they manage to approve some package.
Beyond the fact that the markets have returned to believing in the bailout -- as the Tuesday rebound of the stock markets shows, after the biggest fall on Wall Street since the 1987 crash -- that optimism really does not rest on any substantive advance in negotiations. In the final analysis, reactions by European and US markets throughout the week will show if simple panic and the subsequent financial setback are stronger than the attempts by the world's central banks to get the money markets out of paralysis. The repercussions of this situation on the big industrial and service-sector companies, which are currently solvent, with profits and operations, could be enormous, to the extent that they lack short-term credit to finance payment of wages and operating costs, precipitating an even more disastrous phase of the crisis.
The sword of Damocles over the US financial system
The crisis in the US keeps getting worse. As one Japanese analyst says: "From Japan's experience in the 1990's, it is clear that the US financial crisis is following a familiar model.... We are now experiencing the 'wolf pack syndrome.' Wolves are good at attacking their prey as a team, but they turn against the weakest members of their own pack if hunger prevails. When Lehman fell, Washington Mutual became the next victim, followed by Wachovia. When Wachovia merged with Citicorp, people began to look at National City. This goes on until the last wolf does not find anything to hunt. In Japan, we now have three national banks, down from more than a dozen in 1980. According to the Japanese Financial Services Agency, they were all too big to fail.... At this rate, the US is also headed towards having three mega-banks...." (“America must seek aid for a global credit line”, Kenichi Ohmae, Financial Times 9/30/08). This prospect does not seem very distant. This weeks's acquisition by Citigroup of the operations of Wachovia Corporation, the sixth-largest US bank, reinforces the idea of a concentration into three hegemonic banks, Citigroup, JP Morgan and Bank of America, that will control more than 30% of deposits. This trio will thus acquire enormous power in establishing prices for their credit and services, which they will not repay to their clients, who are now supporting them with their taxes abundantly used for bailing the trio out.
But much is still missing, in order to arrive at this result, and more catastrophic scenarios cannot be ruled out. As the economist Nouriel Roubini says, "This is a crisis of credit and solvency that goes beyond a lack of liquidity. No one is lending anything to anyone, and no one believes anyone (not even the most reliable people), and everyone is hoarding the liquidity injected by the central bnaks. And as liquidity goes toward the big banks, the rest of the system does not have access to funds, and the mechanisms of credit transmission are blocked." Roubini then mentions two traditional Wall Street names: Goldman Sachs and Morgan Stanley: "After the fall of Bear Stearns and Lehman Brothers, and the merger of Merrill Lynch with the Bank of America, I suggested that Morgan and Goldman should also merge with some financial institution that had a big base of insured deposits, to avoid a sudden run against them. Instead, Morgan and Goldman chose a cosmetic option, becoming commercial banks in an attempt to get liquidity.... In the short term, neither of these two institutions can create a franchise of subsidiaries, nor do they have the time or resources to purchase smaller banks. The injection of $8 billion dollars of Japanese capital in Morgan and $5 billion from Buffett in Goldman, are a drop in the ocean, because both need more capital. More banks are losing clients and business." In these circumstances, "... they should now merge with big international financial institutions, given that no US institution is sufficiently sound to join in a merger." For this economist, the worst could be yet to come: "The next step in the panic could become the mother of all runs on banks, a run against liabilities of banks, and of the US financial system in the interbank market among countries, of billions of dollars to the extent that foreign banks begin to worry about their security of their exposed liquidity in US financial institutions" (Global EconoMonitor, 9/29/08). In other words, the attempt of the Treasury Secretary, Paulson, to rescue his friends at Goldman Sachs could have huge "collateral damage." If this scenario takes place, undoubtedly the repercussions will not be limited to the US, but will be global. A widespread run by foreign banks and governments against corporate bonds, stocks and US Treasury bonds raises the danger of fragmentation of the global commercial and investments system.
A potentially revolutionary period of convulsions is beginning
It is unquestionable that the US has taken yet another step towards a Great Depression. If it manages to avoid the scenario of a crash, the most likely prospect appears to be that of a lost decade, like Japan in the 1990's. This situation, together with the Russian challenge in Georgia, a US ally, signals the end of the period of unquestioned US hegemony, that opened after the disaster of the former USSR. The early stages of this hegemonic decline were, on the one hand, the crisis of 1997-1999, that marked the loss of US authority in the entire semicolonial and dependent world, for example Russia and China, that were openly moving away from the Washington Consensus and the IMF. On the other hand, the failure of militarizing foreign policy -- a response to this loss of political influence that began under Clinton and was taken to the extreme by the Bush administration, as was obvious with the military disaster in Iraq and Afghanistan.
The idea that the qualitative weakening of US leadership would mean the rise of a more multilateral or multipolar world, with a greater balance of power among the great powers, is not only illusory but, above all, dangerous, because it does not allow arming oneself for the convulsive period that is beginning. As the British Marxist economist Alan Freeman says, "Many people say that we can go peacefully to a more multipolar world. But capitalism needs for there to be one single world system, requires that there be only one reference currency and only one financial system. All the experiences of times with multilateral balances of power ended in blocs that confronted mercilessly. None was peaceful" (Crítica, 10/01/08). The illusions of the ruling elites in Europe and other countries that an Obama administration would mean a return to the "good" times of harmonic and peaceful globalization in 1991-1997 died before Obama will possibly arrive at the presidency.
We are entering an extremely convulsive period, characterized by a leap in international and economic tensions, with likely proxy wars, like the one in Georgia ,or vehement protectionist measures and commercial wars for the capture of capital, and therefore bigger tensions in the class struggle. In summary, a time of updating what Marxists of the beginning of the twentieth century called the "epoch of crises, wars and revolutions." The working class is behind, regarding the development of events. However, the crisis is going to shake the working class, its organizations, and its conservative consciousness violently. Those who, affected by the negative consequences of the advance of capitalist restoration in the former USSR, Eastern Europe, and China for the workers' movement and the mass movement, have posed the need for a "new epoch, new program, new party," leaving behind the lessons of the Russian Revolution and Bolshevism, were too quick to adapt themselves to a brief impasse that has ended. The lessons of those great workers' revolutions, adapted to the current situation, are becoming more necessary than ever, in order to confront the catastrophe with which capital now threatens us. The need for the proletarian socialist revolution, to put an end to the power of the big banks and corporations, is becoming more and more obvious.
======
The crisis strikes Europe
At the end of September, the fall of financial firms spread to the European Union. In just one day, the governments of seven countries had to come to the rescue of five financial firms. France is pondering what to do to prevent the collapse of some of its large banks. The bailout of Fortis by the governments of Belgium, the Netherlands and Luxemburg, with the injection of 11.2 billion euros in exchange for 49% of its capital, was the first in a series of failures.
Subsequently, another big firm, the Franco-Belgian bank Dexia, was helped by the authorities of both countries. The combined crisis of these two banks has meant a big political shock in Belgium.
This was followed by the British government's nationalization of the mortgage bank Bradford & Bingley, taking charge of the 50 billion pound portfolio ($91 billion US) of mortgages and other credits. The government paid an additional 18 billion pounds ($33 billion US) to facilitate the sale of Bradford & Bingley's savings banks, including all of its retail branches, to the Spanish Banco de Santander, the second biggest in Europe, that announced it will pay 612 million pounds ($1.1 billion US) for the 197 branches of Bradford & Bingley and the 20 billion pounds [nearly $35 billion US] in deposits.
The same day, the German economic ministry asked a group of private banks to help rescue the Hypo Real Estate firm, the second-largest mortgage bank in Germany, through an injection of 35 billion euros. However, at the end of the week, this plan is up in the air, and the bank, on the verge of bankruptcy. This firm issues bonds that are in the portfolios of many financial institutions throughout the world, which is why its fall would have a strong cascading effect similar to that which the bankruptcy of the insurance company AIG, nationalized by the US government two weeks ago, would have had. Finally, to prevent this outcome, a new bailout was agreed upon.
Lastly, in Denmark the Roskilde Bank had to be taken over by the central bank, which subsequently sold its branches to three other firms. Meanwhile, in Iceland, the government agreed to keep 75% of Glitnir Bank, the third-largest bank in the country in market capitalization, for 600 million euros. This shows that the financial system is in a hellish spiral that does not stop. As the French Marxist economist Isaac Joshua says, "We have even arrived at a domino effect that anticipates its own motion. Once a piece has fallen, the financial actors look for which one will be the next, convinced that there will be another one. Once a victim is designated, the pack of wolves surrounds him, isolates him, fixing their feverish eyes on him, waiting for him to fall, to tear him apart, without ceasing to complain about the dreadful crisis. The logic of the financial crisis supports itself" (Rouge, no. 2267, 9/25/2008). What happened in Europe this week is an alarm signal about the financial system and the banks exposed to the US crisis and to the accumulation of debts from the real estate market of countries like England or the Spanish State. Let us add to this that many European banking firms are "too big to be allowed to fail" but "too big to be rescued" by the national governments of their respective countries, unless a rescue mechanism is set up on a continental scale. In this context, perhaps the most unusual thing was the decision by the government of Ireland to guarantee the deposits in the country's banks for two years and their debt issuances, with the aim of calming the population and holding up its financial system. This de facto nationalization of the entire financial system is being investigated by the European regulatory authorities to see if it constitutes anti-competitive behavior, which would give Ireland advantages over the rest of Europe, which has led the British authorities and banks to hit the ceiling. For its part, Germany has decided to guarantee all deposits. This decision by the main economy of Europe could lead to the rest of European governments doing the same, and investors would have to decide which sovereign guarantee is the most secure. We would be facing the beginning of a ruthless struggle for scarce capital among the different European imperialisms, which would call their monetary union into question.
Thursday, October 2, 2008
Cde Celeste about the US: "The social crisis has already arrived"
[From http://www.ft-ci.org/]
Bailout costing millions for businesses, poverty for workers and the people
By Celeste Murillo
The social crisis has already arrived
The latest report on US unempoyment brought no good news: in September alone, 100,000 jobs were destroyed. These are in addition to the 84,000 jobs lost in August, when unemployment climbed to 6.1%; since the beginning of this year, more than 600,000 jobs have disappeared. This index is one of the highest since the 2001 recession; it is in addition to the price increase of basic products, fuel and the enormous indebtedness of working-class families.
The first social consequences of the crisis are reflected in unprecedented pictures like the "tent cities," that have grown alongside the big cities like Los Angeles and San Francisco. This is one of the most somber snapshots: thousands of people live in their cars or tents with their families. Many of the inhabitants of these precarious "cities" are working-class families (in large part, black and Latino, the sectors most affected by "garbage" mortgages). Many left their homes, fleeing from evictions and debts. Fuel to heat houses has already increased 30% since 2007, and some months before winter in the US, the government is threatening to reduce heating assistance for low-income households, as part of the cuts in social programs (largely underfunded, because of tax cuts for the rich).
In April, the government had already announced that 28 million people would need food stamps to be able to bring food to their tables: the biggest increase since the 1960's.
The most serious thing is the fact that the bursting of the real estate bubble, begun in 2007, is deepening bad conditions of life for a big part of the workers and popular groups (it is estimated that only 25% have wages that cover their needs including health insurance). Before the crisis erupted, in the richest country on earth, 51.7 million were already living in poverty, 35 million suffered hunger during 2006, and 50 million had no medical insurance (there is no public health system nor union benevolent funds).
In August alone, more than 300,000 homes got an eviction notice: 1 out of every 416 properties in the US (CNBC, September 12). Although an assistance package for small debtors was approved in May, this was hardly enough to refinance the debts of one sector, but millions of foreclosures are continuing.
With this background, the biggest bailout in history was orchestrated: billions of dollars to bail out the firms that got rich during recent decades. Despite the defeat of the first vote in Congress, both the Democratic candidate Barack Obama and the Republican John McCain, as well as the leaders of both parties, have shown their desire to support the big firms and the Bush administration, the most unpopular in the history of the country (see <http://www.ft-ci.org/article.php3?id_article=1482>). Despite its hypocritical campaign speeches, the Democratic Party has proven once again that it is no alternative for the millions that are hoping for "the change" that Obama is hawking so much.
Voices of protest are heard
Dissatisfaction with the economic situation grew with the rejection of the bailout plan of Paulson & Co. Everyone knows who will pay the bill. Bush was clear: "These measures will require that we use a significant amount of taxpayer dollars," referring to the $700 billion they are trying to pass in Congress. According to opinion polls, more than 70% reject the measure because they see that it will be them, the ones who lose their job, those who owe money, the workers and the impoverished middle sectors, who will pay for the crisis.
Although so far the main obstacles have come from the opposition inside Congress, the rejection has made itself felt, even though passively, till now. Protests have been carried out, mobilizations in front of banks and public offices, and in the very heart of Wall Street, against the " Bailout." The main slogans aim against the Republican administration and rescuing the firms with tax dollars.
As in the election race, in spite of the hypocrisies that get broadcast on television, neither of the parties is an alternative. With few differences, Democrats and Republicans have shown their loyalty to Wall Street and the big firms, not to workers or the people. The only way to alleviate this crisis is to force the ones who provoked it, to pay: it is necessary to suspend all foreclosures, distribute the hours of work among all available workers to fight against unemployment, put into operation a public works plan under workers' control, to repair the infrastructure of the country and create millions of jobs financed by taxes on the big fortunes. Not one dollar for the banks!
These and all the measures necessary to confront the crisis can only be imposed through the mobilization of workers and the impoverished sectors, independent of the Democratic and Republican parties.
Bailout costing millions for businesses, poverty for workers and the people
By Celeste Murillo
The social crisis has already arrived
The latest report on US unempoyment brought no good news: in September alone, 100,000 jobs were destroyed. These are in addition to the 84,000 jobs lost in August, when unemployment climbed to 6.1%; since the beginning of this year, more than 600,000 jobs have disappeared. This index is one of the highest since the 2001 recession; it is in addition to the price increase of basic products, fuel and the enormous indebtedness of working-class families.
The first social consequences of the crisis are reflected in unprecedented pictures like the "tent cities," that have grown alongside the big cities like Los Angeles and San Francisco. This is one of the most somber snapshots: thousands of people live in their cars or tents with their families. Many of the inhabitants of these precarious "cities" are working-class families (in large part, black and Latino, the sectors most affected by "garbage" mortgages). Many left their homes, fleeing from evictions and debts. Fuel to heat houses has already increased 30% since 2007, and some months before winter in the US, the government is threatening to reduce heating assistance for low-income households, as part of the cuts in social programs (largely underfunded, because of tax cuts for the rich).
In April, the government had already announced that 28 million people would need food stamps to be able to bring food to their tables: the biggest increase since the 1960's.
The most serious thing is the fact that the bursting of the real estate bubble, begun in 2007, is deepening bad conditions of life for a big part of the workers and popular groups (it is estimated that only 25% have wages that cover their needs including health insurance). Before the crisis erupted, in the richest country on earth, 51.7 million were already living in poverty, 35 million suffered hunger during 2006, and 50 million had no medical insurance (there is no public health system nor union benevolent funds).
In August alone, more than 300,000 homes got an eviction notice: 1 out of every 416 properties in the US (CNBC, September 12). Although an assistance package for small debtors was approved in May, this was hardly enough to refinance the debts of one sector, but millions of foreclosures are continuing.
With this background, the biggest bailout in history was orchestrated: billions of dollars to bail out the firms that got rich during recent decades. Despite the defeat of the first vote in Congress, both the Democratic candidate Barack Obama and the Republican John McCain, as well as the leaders of both parties, have shown their desire to support the big firms and the Bush administration, the most unpopular in the history of the country (see <http://www.ft-ci.org/article.php3?id_article=1482>). Despite its hypocritical campaign speeches, the Democratic Party has proven once again that it is no alternative for the millions that are hoping for "the change" that Obama is hawking so much.
Voices of protest are heard
Dissatisfaction with the economic situation grew with the rejection of the bailout plan of Paulson & Co. Everyone knows who will pay the bill. Bush was clear: "These measures will require that we use a significant amount of taxpayer dollars," referring to the $700 billion they are trying to pass in Congress. According to opinion polls, more than 70% reject the measure because they see that it will be them, the ones who lose their job, those who owe money, the workers and the impoverished middle sectors, who will pay for the crisis.
Although so far the main obstacles have come from the opposition inside Congress, the rejection has made itself felt, even though passively, till now. Protests have been carried out, mobilizations in front of banks and public offices, and in the very heart of Wall Street, against the " Bailout." The main slogans aim against the Republican administration and rescuing the firms with tax dollars.
As in the election race, in spite of the hypocrisies that get broadcast on television, neither of the parties is an alternative. With few differences, Democrats and Republicans have shown their loyalty to Wall Street and the big firms, not to workers or the people. The only way to alleviate this crisis is to force the ones who provoked it, to pay: it is necessary to suspend all foreclosures, distribute the hours of work among all available workers to fight against unemployment, put into operation a public works plan under workers' control, to repair the infrastructure of the country and create millions of jobs financed by taxes on the big fortunes. Not one dollar for the banks!
These and all the measures necessary to confront the crisis can only be imposed through the mobilization of workers and the impoverished sectors, independent of the Democratic and Republican parties.
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