The Socialist 17 September 2008 |
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Socialist Party editorial
Capitalist crisis - Karl Marx was right
"It is a moment Karl Marx would have relished. From every angle financial capitalism is taking a battering" (The Guardian).
The economic witch-doctors and soothsayers of capitalism were wrong and the socialists and Marxists were right. This is what the collapse of Lehman Brothers - the fourth largest investment bank in the world - means.
The financial 'bloody Sunday' was followed by 'meltdown Monday' and the collapse of share prices worldwide. This has shattered the current ideological foundations - and much more besides - of capitalism.
Capitalism's representatives argued that the collapse of Stalinism and, with it, the planned economies of Russia, Eastern Europe and elsewhere, left capitalism as the only effective vehicle for delivering goods and services to the peoples of the world. The future was one of endless rises in living standards.
We argued that the inherent contradictions within capitalism - a system based on production for profit and not need - remained, particularly the economic cycle of 'boom and bust'. These, however, were masked for an historical period by the unprecedented 'financialisation' of the system through the massive extension of credit.
But like an elastic band stretched to breaking point, it was bound to snap at some stage. Lehman Brothers, for instance, was 'leveraged' - that is, borrowed - on a monumental scale of 35 times the value of its assets. It was 164 years old, had survived two world wars, the depression of the 1930s and a collapse and rescue in 1984 but has now been brought to its knees by this crisis. Yet its chief, Dick Fuld, known as the 'gorilla' for his aggressive manner, paid himself £22 million last year when the weaknesses of the bank were already obvious! He will not suffer - except from loss of face - but the 25,000 Lehman Brothers employees will.
The roots of the crisis are well known. They lie in the disintegration of the housing market in the US and particularly the subprime sector which lent to mostly poor people who had no prospects of repaying their inflated mortgages. However, there is not just one financial problem but now a chain of looming crises, unexploded bombs, which could yet ignite, with further huge slabs of masonry falling off the 'financial architecture' of US and world capitalism.
Why did the US Federal Reserve bail out Bear Stearns, and Freddie Mac and Fannie Mae, and not Lehman? The simple answer is that Hank Paulson, US Treasury Secretary, and the economic strategists of US capitalism believed that unless the former were rescued, a new financial crash like 1929 was possible. Nouriel Roubini, a capitalist economist who has consistently agreed with us Marxists on the seriousness and scale of this crisis, called Paulson's action "socialism for the rich".
Other threatened banks and industries therefore lined up with their begging bowls, asking for bail-outs from the state, which they previously maintained had 'no role' in the workings of so-called free market capitalism. If they were to be helped, what about the two million US workers who have already lost their homes - estimated to rise possibly to ten million by Roubini - who would demand equal treatment with the financial plutocrats? Failure to do so could undermine McCain, the right-wing Republican presidential candidate, who would be seen as openly on the side of the rich, who have been 'saved' by his friends in the Fed.
Therefore, Lehman Brothers has been allowed to die but an 'unofficial' rescue operation was undertaken to save Merrill Lynch. Another financial whale, American International Group (AIG), responsible for insuring against 'risk' in the huge derivatives market - and also the sponsor of Manchester United - is teetering on the brink. But Ken Lewis, the chief executive of Bank of America, said the failure of AIG would be a bigger shock to the system than the bankruptcy of Lehman. He urged the authorities to find a way to support the company. "I don't know of a major bank that doesn't have some significant exposure to AIG," he said. "That would be a much bigger problem than most that we've looked at."
Lehman was, it seems, not crucial for the US economy whereas Fannie, Freddie and even Bear Stearns are major players in US local government finance. Half of the 9,000 banks in the US could have collapsed if they were not rescued. But, the fall-out from the collapse of Lehman could still be very severe, with big international repercussions; debts to Japanese investors in Lehman are considerable, for instance.
US capitalism - and particularly the financial sector - is therefore not yet out of the woods. The derivatives 'industry' is highly unstable, commercial property prices are declining and, crucially, 'insurance' institutions (as a safeguard against the financial collapse of firms) also could collapse. A financial domino effect threatens, which means that this crisis is no 'five-minute wonder'.
It will extend - in fact, it already has done - into the 'real economy', both in Britain - which has entered a recession - and in the US. This has inevitably drawn in Europe, Japan, the rest of Asia and, ultimately, China. It will be the workers in the finance sector - and most of them are white-collar workers - who will be the first to suffer. Sixty-three thousand have already gone down the road, mostly in London and New York. A further 20,000 jobs in UK financial services could vanish in the next year or so.
Some 1.04 million people work in banking, finance and insurance in Britain. Some affected have posted heartbreaking messages on websites: "dh (slang for dear husband) lost job. No savings and likely not getting paid this week... How on earth will we manage? How long will the lenders give you if you can't pay the mortgage?"
Spare a tear for these workers but not for the well-oiled, well-dressed 'masters of the universe' who, despite their crocodile tears, will not really suffer. Unemployment will now rise substantially, with an estimated half a million lost jobs adding to the dole queues in Britain. These events represent a massive indictment of neo-liberal capitalism, the untrammelled rule of the 'market', in which a handful of billionaires can ruin the lives of millions.
Moreover, they do not fully understand the workings of their own system. Alan Greenspan, former chairman of the US Fed, confessed with regards to the "new financial instruments" that "he didn't get it". Eddie George, former governor of the Bank of England, has also admitted that he did not understand them! What chance then for the rest of us understanding these devices which have become "financial weapons of mass destruction"?
The solution is not just the 'de facto' capitalist nationalisation of Bear Stearns or the more explicit example of the US government's takeover of Fannie and Freddie. These failing banks should not only have been nationalised, but put under workers' control and management, with compensation based on proven need and protection of small depositors. Moreover, it should be just the first step to them joining a socialist and democratic plan of production for the economy as a whole.
Great events either confirm or falsify ideas. Capitalism has failed in a period most favourable to this system. If working people are not to be dragged into the abyss of unemployment and poverty, they should embrace the political weapons of socialism and Marxism.
Editorial from The Socialist, 18-24 September 2008