Faced with the failure of the financial sector and the possible collapse of the economic system, Republicans and Democrats are working together feverishly to come up with a plan and find the funds to save the American financial system. The Congress that has been unable to provide adequate funding to health, education, housing, public transportation, social welfare, and environmental programs has suddenly found billions of dollars to save the banks and insurance companies. When the crisis was ours, they had had no money and no answers. When the crisis is theirs, they find both the funds and a plan.
The bankers and financiers, who fought for deregulation arguing that the free market would regulate itself, now call for government intervention to save the market from collapse. The Republicans, who have argued against virtually any social control or social distribution of wealth, have suddenly become advocates of socialization: the socialization of the economic crisis. The American people who have seen their standard of living stagnate and then decline while the banks and corporations enriched themselves are now expected to absorb the cost of the bankers' failures and losses.
Those who for years fought a national public health program for our citizens as socialism, now call for socialism for the financiers. While factories and jobs could not be saved, while homes and health care insurance were lost, the banks must now be saved. When the economy prospered the notion of sharing the abundance was unthinkable, but when the economy fails the idea of sharing the losses and the debt with the people becomes the solution.
Their Solution: State Capitalism
The financial crisis, the most serious since the Great Depression, has led the George W. Bush administration to propose measures that would suddenly transform the American economy -- and least temporarily -- into a kind of authoritarian state capitalism. To prevent the collapse of the American financial system, and the paralysis of the entire economy, the Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke propose that Congress spend hundreds of billions of dollars, though the cost might go as high as three trillion dollars, to buy up mortgages, other securities, and virtually any financial instrument that's in trouble. While the funds to carry out this operation immediately will come from lenders in China, Japan, Europe, and the Middle East, American taxpayers will ultimately have to pay for this rescue.
The result of the bailout would be that the government would virtually control many of the largest financial institutions in the country. The U.S. government and the banks of the country would suddenly be fused -- or perhaps entangled would be a better word -- into one extremely powerful political-economic entity. While the proposal does not envision state control of the economy as a long-term proposition, merely long enough to save the bankers, still the impact of the current proposals now being debated in Congress will be far-reaching. The American government and the people have suddenly found themselves at a turning point which was not foreseen and for which no one was prepared.
The implications of all of this cannot be predicted, though the possibilities can be explored and evaluated. We ask here: Why have the financial institutions such as Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, and American International Group (AIG) suddenly failed? Why is the economy on the verge of collapse? What options have been proposed? What role can the radical, democratic, socialist left play in responding to this crisis? What do we propose to put in the place of the existing system?
As we are now only too well aware, banks made many bad loans to home buyers, loans that were subsequently bundled together and sold off to Fannie Mae and Freddie Mac which in turn marketed them as mortgage-backed securities, guaranteeing both the principal and the interest. The growing awareness that the mortgages and securities lacked the capital to back them up threatened a creditors' run for their money that sparked the current financial crisis. It is those insecure instruments that the American government will now acquire. Or as New York Times columnist Paul Krugman put it in his column, "Cash for Trash."
The mortgage paper, however, formed only one wing of a much larger house of cards that had arisen in the last couple of decades as financiers created new, almost entirely unregulated instruments called derivatives. While derivatives such as such options and futures (gambling on the future value of a stock or a commodity) have been part of the capitalist financial system virtually since its inception, other derivatives, such as credit default swaps, were more recent creations. Essentially a form of insurance against the failure of an investment arrived at by private contract and unregulated by the government, swaps were an attempt to hedge against the very nature of competitive capitalism. These swaps now amount to more than $60 trillion.
The Derivative Disaster
The derivates -- futures and forwards, caps and collars, options and swaps -- were all derived from the performance of some ever more distant asset. Financiers invested and speculated in these instruments both in order to skim off the value of the assets and to protect themselves from risk. All of this trading was highly leveraged, which is to say that collateral in actual assets was far, far less than the supposed value of the derivatives. A series of failures related to these derivative markets signaled a warning: the bankruptcy of Orange County in 1998 and of Long-Term Capital Management in 2000, the collapse of Amaranth Advisors in 2006, and the $7.2 billion dollar loss by Société Général in early 2008. Now the entire complex and fragile system of derivatives threatens to disintegrate.
The U.S. government deregulated the banking industry leaving many of these transactions unregulated while in other areas it reduced the amount of collateral that financial firms were obligated to hold. At the same time, an international derivative market developed, meaning that the increasingly insecure investments became part of the fabric of global financial transactions. Consequently, the crisis in mortgages and mortgage-backed securities and the possible collapse of the American financial market threatens to become a world economic crisis. With American capitalism teetering on the brink of the Second Great Depression, the theory of the self-regulating free market is dead for both conservatives and liberals.
The Failure of the Second American Century
The financial crisis rests upon a much deeper and broader crisis of American capitalism. While the linkages between one aspect of this and another can only be sketched here, the financial crisis is inseparable from several developments which have undermined the overall strength of the U.S. economy.
First of all is the cost of the Iraq War, which has cost more than a $1 trillion while the Bush administration and the U.S. Congress refused to raise taxes to pay for it. Bush is now asking Congress to raise the U.S. debt ceiling to $11.3 trillion dollars, or 79 percent of our $14.3 billion GDP, the highest since World War II. Some 24 percent of that debt is owed to foreign banks. China holds about $500 billion and Japan about $600 billion in U.S. treasuries. Saudi Arabia, Russia, and Brazil are also large U.S. creditors. The value of the dollar, however, is falling and threatens to cost U.S. creditors a lot of money, making it likely that they will invest their money elsewhere. That would mean a rise in the cost of credit in the United States, making business and government more expensive.
Second, the U.S. wars in Afghanistan and Iraq, which were intended to solidify the dominance of the United States for a second American Century, have failed. If the U.S. commanded the Middle East and Central Asia, it would have had its hand on the petroleum spigot giving it a tremendous advantage over Europe, Japan, and China. But the wars have dragged on for years and the United States has failed to impose its will in Iraq, and is mired in a mess in Afghanistan, and has been impelled by its failure there to expand the conflict into Pakistan. Consequently none of the geopolitical and petroleum benefits have materialized. Thought it may not immediately be apparent, the failure of the U.S. in these wars means effectively the failure of a U.S.-dominated world empire. It also means the opening of a new era of world imperialism as the great powers and near-great powers struggle to dominate the world market and global politics through economic might, political intervention, diplomacy, and war.
Third, all of this has been taking place as world petroleum resources dwindled and refining capacity became a problematic bottleneck leading to a rise in fuel prices that dramatically impacts the real economy. Not only the obvious sectors like airlines and truckers or plastics and chemical manufacturers, but every aspect of American and world business has been affected. The fuel costs for ships that carry the containers in which world commerce moves have risen to levels that begin to inhibit trade.
Global Expansion -- National Decay
Finally, the globalization of the world economy, including world production, has meant a complete transformation of American society. The system of industrial production, labor union contracts, social welfare, and consumerism as well as the corporations, communities, and broader society of the United States have been altered in ways that make the country today virtually unrecognizable to someone who grew up in the 1960s or 1970s. Education, health, housing, and social welfare have all failed to keep pace with the demands of the contemporary global economy. Or put differently, the U.S. has competed by degrading resources committed to education, health, housing and social welfare which made it immediately more competitive while simultaneously and grotesquely corroding the foundations of our society, and probably also its ultimate competitiveness, not to mention the degradation of our humanity. The disjuncture between world economic expansion and the decay of the national physical and social infrastructure represents an obstacle to American economy supremacy.
China, India, and Brazil, the three largest developing economies, wrestle with the same issue of the disjuncture between national development and insertion in the international economy, but from the point of view of their ascending economies. Europe and Japan -- after passing through serious problems in the 1980s -- have done better in maintaining equilibrium between world economic developments and their national economies, but all nations face the same problem of finding some position of social poise in a world of international competition. No industrialized nation has done as poorly in dealing with these issues as the United States where official statistics put poverty at 12 percent and other estimates at double that.
The Plan for Salvation
President Bush and Treasury Secretary Paulson have proposed a plan that would simply have the U.S. government rescue the bankers by taking off their hands the devalued assets that they hold at a cost of $700 billion. With the U.S. government taking out the trash, the bankers would have a clean house, prepared once again to make loans and finance business. The Bush plan would give the Treasury Secretary the power to hire Wall Street firms or executives to manage the newly acquired assets; if done by private firms, they would make millions as government managers. Virtually no other details of the plan have been developed and made public.
House Speaker Nancy Pelosi indicated that while the Democrats support the general thrust of the Republican plan, they will also call for Congressional oversight, for assistance to distressed homeowners, and for limits on compensation to corporate executives employed to manage the plan. According to the New York Times, ". . .Democrats said they planned to consider the bailout proposal separately from an economic recovery program that would include new public works spending, aid to states and added unemployment and food-stamp benefits." Virtually no one in business, government, or the media expresses any confidence that this broad plan will work.
Both presidential candidates, John McCain and Barack Obama, support the Paulson plan with reservations, calling for more oversight. Everyone understands that with a new administration there will have to be a re-regulation of the economy, though on exactly what terms is unclear. McCain would no doubt prefer minimal government oversight and Obama more regulatory action, yet neither candidate has developed a plan that derives from the needs of the American people.
Why the Plan Will Fail
The Paulson plan by itself will fail because it seeks only to restart the economy on the same basis, with all of the problems already touched on above. Everyone recognizes that the plan itself is not enough, but McCain's proposal of mere oversight ignores the reality of the economic disaster that has befallen us and the capitalists' need for intervention, while Obama's economic program is too moderate and too modest to have much impact on a disaster of this scope.
Even if the Paulson plan passes, the next administration will face a continued unraveling of the financial system, the persistence of recession, and the broader issues which derive from both the decline of the United States as a world power and the coming end of the petroleum-based economy, and, we should also note, the environmental crisis. What is needed is not a program aimed to save the bankers and the capitalist system, but one which begins with what we so often erroneously call the American middle class, but would be better called working people, and with the working poor, the casual laborers, and the just plain poor.
We need at once a moratorium on foreclosures, an end to adjustable rate mortgages, renegotiation of 30- and 40-year mortgages and creation of a financial program to aid struggling homeowners. We must tax the banks, insurance companies, and corporations which have profited in the course of creating the financial crisis and make them pay the costs of reconstruction of the financial system, a new system. We need to create affordable and attractive public housing to meet the needs of those who now struggle to pay market rents. We must re-regulate the financial sector and create state and social credit agencies. Still, all of this will only be a bridge over troubled waters, and we may cross the bridge only to find a rising tide on the other side.
A Socialist Alternative
The socialist alternative begins with the understanding that the economic crisis provides an opportunity to rethink and then to redo our economy and our society. While we oppose the efforts to save the capitalist system, we need to demand programs to support its victims. If we are going to spend billions and trillions of dollars to revamp the economy, then it should not be to save the bankers, financiers, and speculators who have brought us to ruin, but rather to keep people in their homes, to find them jobs, and to win them health insurance. If the government is to own things, then it should own not only financial institutions, but also productive industries and construction companies so that we might build a national rail system. If the government owns things, then we should have a national plan for the economy, elaborated through democratic institutions.
To create such a system of democratic socialism which represents the human alternative to an economic crisis suggests a political struggle, which means the building of a new political party to the left of the Democrats. To build such a party that can fight to change the direction of society and build a democratic and socialist alternative will require new social movements larger and more powerful than the civil rights and anti-war movements of the 1960s or even the militant labor movement of the 1930s. Acorn, national network of community organization that focuses on housing issues, called demonstrations around the country saying save homeowners, not bankers. Such demonstrations represent an important beginning of building such a movement.
Everything, however, starts with rejecting the idea that we should save capitalism or reform capitalism. It begins by putting human beings rather than banks at the center of our economic thinking to build a socialist society.