Behind the Economic Crisis

FOR OVER A DECADE, THE PROPAGANDISTS of capitalism celebrated
the triumph of the “American model” of business and financial
deregulation, the “end of the business cycle” and even “the
End of History.” The economic turmoil of 2008, which threatens
a general collapse, has laid these ‘theories’ to rest.
For working people various aspects of the turndown
threaten ruin. In effect, through inflation—especially rising
fuel and food costs—the economy is delivering a big pay cut
to those who work for wages and salaries. At the same time,
wages have shown no sign of keeping up, unemployment is
mounting, and credit is drying up. Food stamp use is at a
record high, and charities and food banks are stretched thin.
The current troubles come after three decades of stagnating
wages, during which the maintenance of working
families has depended on what economist Robert Reich
has called “coping mechanisms.” One such mechanism
has been working more hours at more jobs, buttressed by
the mass movement of wives and mothers into the labor
force. A second has been borrowing through the use of
credit cards and home equity lines of credit.
The financial industry encouraged borrowing against
the value of homes through dubious lending practices
such as Adjustable Rate Mortgages (ARMs) and other ‘subprime’
mortgages with enticing low-interest credit. The
Fed under Alan Greenspan cultivated this cheap credit
environment in order to soften the blow of the bursting
Dot-Com bubble of the 1990s.
Subprimes allowed families to afford homes that otherwise
would have been beyond their reach. This helped
inflate a new bubble in the housing market, as prices increasingly
showed little relationship to consumers’ ability to pay.
Meanwhile, creditors ‘risk-managed’ housing debt through
murky techniques of bundling, selling, and repackaging
debt. Speculators reaped windfall profits in the process.
Finally in 2008, this system ran head-on into limits
imposed by material conditions. Growing numbers of
underpaid workers could no longer afford their mortgages,
resulting in higher numbers of delinquencies and foreclosures,
which then threw into doubt the paper value of
bundled debt devices carried by scores of investment
houses and banks. The resulting crisis was not just one of
‘liquidity,’ but of solvency, a full scale crisis of confidence
in the financial system arising from the impoverishment of
the US working and middle classes. You can’t squeeze
blood out of a turnip, as the old saying goes.
On an even more basic level, the financial meltdown is
the latest chapter in the long-term decline of US capitalism.
The crisis in the subprime mortgage sector has set fire to
the larger economy, only under conditions in which a lot of
explosive tinder was lying about. Bundled debt based on
subprime mortgages was but one example of a general feature
of an economy based increasingly on the smoke and
mirrors of financial speculation. As Marx long ago noted,
periods of rampant financial swindling both arise from, and
attempt to gloss over, the more fundamental putrefaction of
the real economy. ‘Creative’ financing—aka “cooking the
books”—has been one of the methods through which capitalists
have attempted to resuscitate the rate of profit in
times when the extraction of surplus value from workers in
the labor process itself has run into a wall.
The overall decline of US capitalism registers most
clearly in another feature of the current crisis, the decline
of the dollar. For years, government and business have
been financed by an extraordinary inflow of investment
and loans from the rest of the world. But foreign creditors
are starting to think twice, as the US itself looks more and
more like a ‘bad credit risk,’ and are diversifying into non-
US and non-dollar denominated assets. The dollar’s status
as de facto international reserve currency—which has
allowed the US to incur deficits that would be considered
unsustainable in other countries—is being eroded.
Investors are seeking refuge not just in other currencies like
the Euro, but in commodities, a process which is ratcheting up
prices for goods and food the world over. The consequences
are explosive. Bread riots have occurred in the Caribbean,
Africa, the Middle East, and in Central, South, and Southeast
Asia, and there exists the danger for a generalized famine.
The wars in Iraq and Afghanistan, and enormous military
spending more generally, have played an important
role in forming and exacerbating the current crisis. Washington’s
attempt to seize Iraqi oil reserves—the world’s second
largest—and to control access to Central Asian gas,
and thereby to put a stranglehold on the world’s most precious
commodities and key strategic regions, has resulted
in a debacle of epic proportions. The failure to achieve stability
in either country, in spite of unfathomable bloodshed
and spending has sent oil prices skyrocketing. Meanwhile
the enormous costs of war and militarism have contributed
to inflation and the further gutting of US infrastructure.
It is significant that none of the three remaining candidates
for the US presidency contemplate even a diminution
of military spending, while their differences over Iraq
are largely tactical—how best to secure domination of the
ravaged nation and the Middle East/Central Asia as a
whole, rather than whether or not to do so. Likewise, the
political leadership of both parties—themselves nearly all
multi-millionaires and tied by a thousand strings to big
business—have made clear that there will be no serious
effort to alleviate the suffering of working people.
The economic crisis of 2008 has starkly demonstrated
the predatory and anarchic essence of the profit system.
The crisis urgently poses the need for socialism—workers’
democratic control and the rational organization of the
economy in order to meet the world’s needs, rather than
the reckless and deadly profit drive of the financial elite.