Facing Up To the Capitalist Crisis

This article was written before the US Government takeover of Freddie Mac and Fannie Mae but the purpose of it is explained clearly here. This is the biggest financial bailout in capitalist history. The cost of bailing out the two home loan corporations is equivalent to more than twice the entire GDP of the United Kingdom and more than 17% of US GDP. And it won't be the last ...

Even without sharing our view that the present economic “downturn” marks another stage in capitalism’s long-running post-war accumulation crisis it is clear that times are changing for the working class, and not for the better. The full knock-on effects of the bursting of capitalism’s biggest-ever and most complex speculative financial bubble are still to come but already the impact on the real lives of workers is severe.

Here in Britain we hardly need to mention “inflation” and the effect of food, fuel and utility bill increases on household budgets (or more worryingly for the capitalists, on “high street spending”). At the same time tumbling house prices have made many people think again about the wisdom of calculating that the value of their home will protect them against personal economic misfortune. There is not even a plus side to lower house prices since the tightening of credit conditions and upping of mortgage interest rates by cash-strapped banks and financial bodies means that even more people are being priced off that famous first rung of the mortgage ladder. (Mortgage approvals are less than half they were at their peak in 2006.) More people are resorting to renting (so rents are going up: law of the market) while the number in arrears with mortgage payments rises (over 300,000 at the last count) and the surge in repossessions (forecast to reach 45,000 this year) is drawing comparisons with the height of the “last housing downturn” in 1991 when there were 75,000 repossessions. The spectre of unemployment is looming larger as the crisis expands from the financial sector to building contractors and throughout the “real economy”. As this article is being written claims for unemployment benefit are the highest for sixteen years while the overall jobless figure went up by 60,000 in the three months to June alone. Paradoxically the total number of wage workers increased in the same period - a fact explained by a Department of Work and Pensions official as due to “an increase of 25,000 in employment for those above the state pension age” (1) - which only goes to show how inadequate workers’ pensions are becoming.

Yet so far the only response of Gordon Brown, our previously “prudent Chancellor”, has been not even to pretend to do anything to ease the situation for the working class. People are worried about rising prices, he admits, but then it’s the same the whole world over - well, what can you do? Gordon’s successor at number eleven, Alistair Darling, has been more forthright about where Labour stands in relation to the working class with his “warning” - to the unions - not to retaliate against the declining value of wages by making “disastrous” pay demands. The official line here is that it was wage increases which created an inflationary spiral “where every penny you get through pay rises is eaten up through price rises ... in the “1970s, 1980s and even the early 1990s” and therefore

We have got to be vigilant in relation to all pay - public and private sector pay alike - because if we get ourselves into that spiral, it will take years to get out of it. (2)

In other words, the working class should simply accept lower real wages and if they resist the full power of the capitalist media will be brought down to blame “greedy” workers for the crisis in the first place. In truth, though, the government has done nothing but tighten the screws on the working class, especially on workers who are in the greatest difficulty. The “mistake” of abolishing the 10p income tax band has not been rescinded and the jumbled compensation measures hurriedly announced to win back Labour voters are yet to be implemented (no wonder Glasgow East was such a disaster). As more people face unemployment the government is making it even more difficult and ignominious to claim benefit and long-term unemployed on incapacity benefits will face a veritable inquisition if the government still dares to go ahead with the plans issued by the Department of Work and Pensions in July.

What is more, there is no pretence - given that this is called a “labour” government - at putting a curb on capital. Brown has refused to contemplate a windfall tax on energy companies who are busy speculating on future prices, much less impose price restrictions. (That, of course, would smell of “government intervention”.) True, the government intervened to save Northern Rock by taking over responsibility for its liabilities but this was more about stemming a wider financial collapse of the whole rotten banking sector than protecting savers’ deposits. As for the level of housing repossessions which Shelter (the homeless charity) describes as at “crisis point”, the government has no policy whatsoever. By contrast the Bank of England is falling over itself to try and prevent a much more dramatic financial crash by lending out to banks and financial bodies whose “off balance sheet” “toxic assets” are yet to be revealed and written off.

Freddie and Fanny

Of course it is not just in the UK that the central bank is constantly intervening to avert a more spectacular financial crash. The ECB was the first to inject “liquidity” into the European banking system when the sub-prime crisis first broke over a year ago. And in the USA, at the heart of the maelstrom, the contrast between the free market official rhetoric and the reality of growing intervention by the government and the Federal Reserve has not passed unnoticed by financial commentators. Indeed their voices are increasingly being raised to demand more state intervention. Bush’s announcement of a $150bn fiscal stimulus in the early stages of the crisis (a tax rebate to wage earners to try and maintain consumer spending) received little comment. (Except that its effect was miniscule.) From the start the Federal Reserve has worked to oil a financial system which has all but ground to a halt: interest rates have been lowered to a real rate of less than zero; as banks and financial institutions refuse to lend to each other it has accepted more and more dubious collateral in return for low interest loans designed to avoid a complete seize-up. However, the full extent of the state’s readiness to intervene was revealed by the way it acted to prevent the outright collapse of Bear Stearns, an investment bank, back in March. In a plan worked out by Treasury secretary Hank Paulson (former chairman of Goldman Sachs) and Bernanke at the Federal Reserve, the Fed (with Treasury backing) extended $29 billion-worth of credit to another investment house, JP Morgan Chase, so that it could take over Bear Stearns, or rather take over responsibility for the worthless mortgage “assets” lying on Bear Sterns balance books and thereby avoid an outright collapse that would have rebounded through the whole financial system. This move spelled the end of the pretence that the Fed was keeping to the legal mandate it has had since the Great Depression to restrict the take up of Federal funds only to commercial banks, not investment banks and brokerage firms of the like of Bear Stearns. But “needs must...” and there is no doubt that the US financial system is in desperate need.

Giving Treasury backing to what are in effect Federal bail-outs is not only a licence for the state to print money, it is also intended to indicate to investors, particularly foreign investors, that the enterprise is too big to fail and therefore that their money is safe, thus averting the necessity of actually having to print the money! However, in the case of at least two “government sponsored enterprises” (GSEs), Fannie Mae and Freddie Mac, whose role is not to lend directly to house buyers but to buy up loans from originating bodies, this trick is not working. These two bodies are the central pillars of the US mortgage market and are designed to keep the whole thing from drying up. (Fannie Mae has its origins in the Great Depression and Roosevelt’s New Deal.) Almost half of US mortgage debt is either directly held or else guaranteed by these agencies which on the one hand operate as “normal” companies, issuing shares on the stock market and raising the funds they lend out on the international financial markets. (3) On the other hand, however, they have enjoyed the implicit understanding of investors that in the event of a drop in value of their investments the US Treasury would step in to protect them. It is evident that Fannie and Freddie, with their assumed backing by the US state, stoked the fires of the sub-prime crisis. These agencies not only benefited from being able to raise funds themselves at the lowest rates precisely because their assumed state protection meant they enjoyed the AAA highest credit rating; they also repackaged mortgage loans from the initial lenders (for which they charged a fee) and sold them on as highly-rated mortgage-backed securities. (Sounds familiar now.) Once the whole thing blew up Fannie and Freddie were therefore far from impervious and found themselves having to write off huge losses. In the face of the very real risk that they would default on their own loan obligations and with their share values plummeting the US Treasury was obliged to formally state that if necessary it would extend credit to the two institutions as well as invest in their equity. Apparently Paulson thought that would be enough to assure investors. It wasn’t. On July 31st Bush signed into law a bill that allows the Treasury to pump money into the bankrupt agencies. Let’s be clear. The significance of bailing out Fannie and Freddie far outweighs that of Northern Rock.

“The Worst is Yet to Come”

In the first place it is not just maintaining the confidence of investors in Fannie and Freddie that is at stake. Alongside these two giants there are a host of other US GSEs (government sponsored enterprises) whose higher rates of return have increasingly made them the place of choice for foreign investors, including states. Non-US investors now hold a record $1,000bn of debt issued by such agencies, while, as the Financial Times points out:

In the past year China has bought $66bn in agencies and only $12bn of Treasuries, while Russia bought $34bn of agencies and sold $22bn of Treasuries ... They, like other investors have long assumed that the debt issued by GSEs is implicitly backed by the US government, valuing it closer to low-risk Treasuries than higher-risk corporate debt. (4)

For the United States any notion that these bodies could be left to fend for themselves is out of the question. Not only would it provoke a run on the dollar, it would swiftly undermine the standing and credibility of the US as the major capitalist power. On the other hand, the more the US is obliged to “actually intervene”, i.e. to resort to the printing press with “capital injections” from the Treasury, the more the dollar is also undermined. Yet the overseers of US economic interests have no choice. Maintaining international confidence in the dollar is essential to the US, both in order to continue to attract the foreign financial investment on which it depends and to ensure that the dollar remains the currency of international trade: the vital means by which the USA has managed to offload much of the impact of its crisis and maintain its dominant position in the world. So, that champion of the free market is being exposed for what it is: a land where the state exists to protect the interests of monopoly capital.

In fact the official free market ideology is giving way to calls for state intervention which are reminiscent of the New Deal and Keynesian public works attempts to solve the crisis of capital accumulation. Behind the editorials in the Financial Times calling for the US state to invest in the rebuilding of dilapidated infrastructure to the likes of Larry Summers, one time advisor to President Clinton, calling also for further fiscal stimulus to boost demand and measures to reduce mortgage debts, there lies the acknowledgement that the knock-on effects of the sub-prime crisis are far from over. These people who know something of the extent of the fictitious capital that has to be formally written off, of the loans that will never be repaid, understand that “the worst is yet to come” (5) and that the situation is so desperate that, in Summers’ own words, “we have more to fear than fear itself”. (6) In fact the US capitalist class stands to lose a whole lot more money as the financial crisis spreads inexorably to the whole of the “corporate sector” where defaults are spreading and where the pundits are now guessing which one of the giant car companies will finally go bust.

Need for a New Working Class Party

For the working class, whose situation hardly figures in the calls for state intervention, the crisis has already had a dramatic impact. Paulson, US Treasury Secretary, has given his name to the so-called “Paulson doctrine” which accepts the need to honour the debts of bankrupt financial bodies whilst letting the shareholders be clobbered, has acknowledged that house foreclosures (repossessions) in 2007 reached 1.5 million and predicted another 2.5 million in 2008. However, he has also made it clear that nothing would be done to save the vast majority of them from being thrown onto the street. No wonder that millions more who find themselves with negative equity (house prices are declining at an annual rate of 13%) are simply locking up and walking away from the mortgage payments altogether. Even if the US has so far avoided falling into official recession - due, ironically to the weak dollar which has boosted exports - unemployment and “involuntary part-time working” are up, overtime is down whilst in at least one state, California, federal employees are being obliged to accept draconian pay cuts under threat that the state is bankrupt. Food and fuel prices, like everywhere else, are on the rise. In other words, it is a similar situation to the working class here, to which we now return.

As in the US, so in the UK it is now normal for workers to build up debt, to rely on credit cards and loans to supplement income and get the kids through education; normal to have nothing much in the way of pension to look forward to (1.3 million or 11.7 per cent of pensioners are now still working); to have a job that might finish any day or week; to have a paltry basic wage that is only liveable on from bonuses (obtained by competing with the rest of your workmates and which can change at the boss’s drop of a hat) or from overtime which is equally erratic and far from voluntary. A society with an increasing division of wealth where the word “reform” inevitably means cuts in services and further attacks on the social wage. In other words, the working class has become atomised and subdued by the illusion that it is up to individuals to secure their own well-being. This is not the best position from which to launch a collective fight back but, as the article in this issue on public sector workers shows, the working class has not and will not entirely lose its instinct to put up collective resistance.

We have no doubt that the coming period will see a revival of class struggle. However, so long as workers by and large remain oblivious of the seriousness of the present situation, so long as they remain impervious to the reality of how desperate the bosses - from the government to the employers to the banks and building societies - are to offset their losses by grabbing a larger and larger portion of the value wage labour alone creates, thereby creating permanently lower living standards, they are not going to challenge capitalism. More than this, until a revolutionary political minority of the working class can make itself heard and influence the course of the class struggle there is no way that the working class will be able to gain the upper hand. As we indicated at the outset, it is not necessary for every worker to understand that the present situation is the result of the capitalist accumulation crisis, but it is necessary that any political organisation claiming to stand for the interests of the working class be clear about where we are today. The so-called credit crunch marks a new, more serious, stage in world capitalism’s post-war accumulation crisis. It is a crisis which has much more than simply financial or strictly economic implications. History has proved that in the present imperialist epoch, where each state is pitted against each other as once individual firms competed in the early days of industrial capitalism, economic competition is intertwined and supplemented by political and military rivalry. The sharper the economic crisis the more dangerous therefore the international political and military tensions become. Today’s crisis, as the articles on Georgia, Iran and Africa in this issue highlight, is no exception.

In the struggles which lie ahead workers everywhere are going to be told to abandon the fight for their own interests because the wider politico-economic situation of the “nation” (or some other euphemism for getting them to tie themselves to the coat tails of capital) is too serious to warrant “disruption”. In the heartlands of capitalism on both sides of the Atlantic it is time for the working class to wake up from its political lethargy and indifferentism, time for those who recognise the enormity of the present situation to join in the first steps towards the formation of a party of a new type. Such a party will have nothing in common with new or old Labour, nothing to do with state capitalism and “new deals” that ostensibly reconcile the interests of wage workers with those who benefit from the exploitation of wage labour. For the world’s working class the only solution to this global crisis of historic dimensions is to embark on the revolutionary path for the overthrow of capitalism itself. For that to happen we need to have a party which spans capital’s national boundaries, unified round the communist programme and capable of leading the struggle up to and beyond the overthrow of the capitalist states. It is an ambitious aim but the level of the ambition only matches the gravity of the situation.


(1) Financial Times 14.8.08.

(2) Alistair Darling in an interview with the BBC, reported in the Financial Times 19.6.08.

(3) Together Freddie Mac and Fannie Mae account for $5,200 of total US mortgage debt. In addition $1,100bn is held by other GSEs in the shape of the dozen Federal Home Loan Banks, again a legacy of the Great Depression, making the state ultimately responsible for more than half the $12,080 total US mortgage debt. Since the rest of the mortgage market has virtually collapsed these agencies together account for 90% of all new mortgages issued.

(4) 14.7.08.

(5) The phrase in this case is not ours but that of Kenneth Rogoff, a former chief economist at the IMF who predicted at a conference in Singapore, “We’re not just going to see mid-sized banks go under in the next few months. We’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks.” Financial Times, 20.8.08.

(6) Lawrence Summers, “What We Can Do at This Dangerous Moment”, article in the Financial Times 30.6.08. This is his ironic take on Roosevelt’s famous inauguration speech in 1933 when he announced that “the only thing we have to fear is fear itself” to try to calm the financial panic following the Wall Street Crash. The day after Roosevelt shut the banks for four days in order to force the insolvent ones to merge with those which had survived the stock market speculation.

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