9-29-08, 8:46 am
Original source: The Guardian (Australia)
The financial bomb that exploded last week saw three of the five largest financial institutions on Wall Street collapse within a 24-hour span. Billions of dollars were wiped off the value of shares around the globe, and fears of a total break down of the global financial system took over. In other recent collapses private banks, insurance companies and investment houses have moved in with loans, merger or take-over proposals to secure stability; but not this time — this was too big.
The speed at which it all happened and the magnitude of the potential losses of these powerhouses was too much. So serious was the situation that the US Federal Reserve (central bank), US Treasury (government) and central banks in the European Union, Britain, Switzerland, Canada and Japan and elsewhere stepped in to provide $US180 billion ($A225 b) liquidity.
These massive rescue packages involving loans, company restructuring, sales of assets, etc, served to shore up confidence and stabilise the situation for the time being. They brought together some of the most powerful imperial rivals, who put aside their separate interests to serve an overriding common interest — the bailing out of capitalism. The present crisis is a crisis of capitalism; the global financial crisis is a critical part of it.
New World Order
The present crisis did not come out of the blue, it has been in the making for decades, accelerated by deregulation, privatisation, and other economic rationalist policies (neo-liberalism), globalisation and the domination of larger and larger and ever more powerful monopolies. The most powerful and greedy, the most parasitic and non-productive of these were the giant financial conglomerates. They built the shaky house of cards that spans the globe and is crumbling today.
Nobody is daring to predict the outcome of the present financial crisis, not even how many years it might take to work through. With foreign sovereign funds lined up to take the pickings and massive new debts accumulating to foreign central banks and more takeovers in the wings, the control and ownership of private investment capital is set for a very substantial restructuring and with it considerable shift in economic and political power.
Spending more on the military and starting more wars will not restore the US as the sole super power. US imperialism looks set to be substantially weakened as an international power, although not any less dangerous or desperate to assert global domination.
China is on the ascendancy, and other economic centres including, India and Russia, pose serious threats to US imperialism. Europe also poses a challenge, but it remains to be seen how well it can shore itself up against US developments.
Such shifts in power have been in process for some time; this financial crisis could see them take a new leap forward.
Nothing socialist about rescue operations
The US Treasury threw the world’s largest insurer, American International Group (AIG) a $US5 billion ($A107 b) lifeline loan as news of its collapse reverberated around the world. Its debts run into hundreds of billions of dollars. Merrill Lynch was saved from the bankruptcy courts by Bank of America’s $US50 billion takeover. On September 15 New York investment bank Lehman Brothers filed for bankruptcy protection with estimated debts of over $US450 billion — the largest in US history.
Morgan Stanley and Goldman Sachs remained standing but scarred, as investors lost confidence. On Wednesday last week, the market value of Morgan Stanley plunged almost 25 percent. Goldman Sachs’ share prices fell by almost 14 percent. Rumours abounded, fuelling fears as nobody trusted anybody any more. Who is hiding what?
The credit squeeze continues with banks having abandoned previous flexible practices of lending to each other to ensure liquidity (adequate supplies of accessible money).
Prior to that, the US government had taken control of the two mortgage giants Fannie Mae and Freddie Mac — not to help the people who had been lured and tricked into unpayable loans, but to shore up the private housing sector. Before that there was the government’s part in the rescue of big banking name Bear Stearns.
The Federal Reserve already had, since the sub-prime mortgage crisis hit over year ago, been handing out a steady stream of loans — around $US50 billion a month according to some estimates.
The various media outlets are packed on a daily basis with blow-by-blow descriptions of share price movements, corporate collapses, etc. However, very little is said about the millions of innocent people, losing homes, losing jobs, and sharp losses in retirement savings in the process. Nor mentioned are the cuts the US federal and state governments will now need to make to public health, education, welfare, etc in order to continue subsidising these corporate bail-outs?(not to mention maintaining payments on its huge military bills).
The value of retirement savings with KPMG, alone, is reported to have fallen by $500 billion. Australian workers are in the throws of receiving their annual statements from their superannuation funds. Unless they are over 55 and wish to retire, their money is locked in to superannuation.
Those who are retiring now could find that their savings have shrunk over the past 15 months, by how much depends on the performance of their fund and the choice of products they may have made. Workers take all the risk; there is no government compensation for losses in superannuation funds. The size of the losses in super funds for the last financial year varies considerably, and the news since June 30, 2008 has been bleaker. Industry funds fared better.
The relatively long stretch of economic growth was built on an unsustainable bubble of rising share prices, surplus liquidity and domestic and corporate debt.
As though determined to repeat history the regulatory and other measures adopted in the decades following the 1930s’ Great Depression were wound back by successive governments in the US, Australia, Europe and elsewhere. Analysts are now saying that the combined crashes of three of the largest financial institutions in the world last week has culminated in the worst crisis since the Great Depression. That may prove to be an understatement.
The underlying basics of the capitalist remain — its parasitic, corrupt and exploitative nature; the process of monopolisation and power of the financial sector; the attempts by capitalism to resolve crises by transferring losses onto the backs of the working class. There are also significant differences in the functioning of capitalism and the financial system since then, meaning that the financial and economic crisis which is unwinding will be very different to that of the 1930s.
The financial system itself has undergone a massive transformation since then. These changes include:
Private profit, public risk
Last week’s bail-outs by the Federal Reserve Bank and Treasury in the US demonstrated how seriously the government and financial sector treat the current situation and that they are prepared to go to great lengths to prevent the financial system descending into total collapse and to defend the most powerful citadels of the capitalist system.
They have brought a short-term reprieve, halting the downward plunge on stock markets and partially restoring some of the most recent losses. This relatively small lift in share market indexes should not be taken as an indicator that the worst is over, as suggested by some economic commentators attempting to talk up the economy.
This was confirmed last Saturday, September 20, when the Bush administration announced that it was seeking a blank cheque from Congress of up to $US700 billion to buy up distressed mortgage-related assets from private firms. To put that amount into perspective, it is more than the annual budget for the Pentagon — more than $2,000 for every man, woman and child in the US (comparisons from New York Times, 21-09-08).
This is the same administration that preaches the free market gospels and says government has no role in social welfare. When it comes to the financial gods, Bush’s 'no bail-out' policy was thrown out of the window, and the dollars gushed out of the corporate welfare tap.
'This is a big package because it was a big problem,' Bush said in defence of the $US700 billion proposal. He made the point that 'the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.' There are, of course, other ways of doing nothing!
The Democrats have agreed to support the Bill when it hits Congress this week, on one condition: that the Bill also provides help for ordinary people in the form of an economic stimulus package. Democrat House president Nancy Pelosi said the 'Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall St and keep people in their homes.' Ms Pelosi said that the Democrats would insist on 'enacting an economic recovery package that creates jobs and returns growth to our economy.'
Bush portrays the bail-out of the financial sector as helping every American. In reality, it is a scheme to transfer the losses of the financial conglomerates onto American taxpayers.
Australia not immune
Australia is not immune from developments in the US and elsewhere, and sectors of the economy have the appearance that they are declining into recession. The booming resources sector is only as good as China and world commodity mineral and resource prices hold out. China is in a far stronger position to withstand the global crisis, having retained a large degree of control over its financial sector, but its massive volume of exports to the US means that China is not fully immune from developments on Wall Street either.
In Australia the Rudd government is attempting to talk down the seriousness of the crisis and its likely impact on Australia, yet at the same time it is taking measures to protect Australia’s major financial institutions and minimise political fallout from possible bank and insurance company collapses here as well. The government’s fear of a panic and a rush on savings is a very legitimate one, as there is a very strong psychological element with people living in fear of making big losses or losing everything. A number of the corporate casualties of the crisis were in themselves operating as sound businesses, and could have continued that way if they had not been hit by the credit squeeze or the reckless borrowings of an overseas parent company.
The government is introducing legislation to provide up to $20,000 compensation to customers of collapsed banks and credit unions and also pay claims from general insurance policy-holders if their insurer collapses. This might prove to be of some comfort for a pensioner with meagre savings, but for retirees and others with larger deposits it means losing virtually the lot. Many people at present are under the impression that governments guarantee bank deposits. This is not true. The Commonwealth Bank and other state-owned banks did carry government guarantees, but they have all been privatised and their customers lost that protection as a result.
The $20,000 is peanuts compared with the millions that the financial conglomerates can expect in corporate handouts from government and the Reserve Bank if they collapse.
The new 'nation building funds' (for infrastructure, etc) created by the Rudd government in the 2008-09 budget along with the $60 billion Future Fund, bring the total held to around $100 billion — minus what losses they may have experienced on the markets. Treasurer Wayne Swan noted in Budget Statement No 3, 'One indicator of the government’s longer term financial position and ability to withstand adverse economic shocks is its available stock of financially liquid net assets'.
These funds came from the sale of Telstra and budget surpluses at a high social cost to the people of Australia. Such funds held by governments are known as sovereign funds. As recently as last week PM Kevin Rudd was reassuring the public that these funds provided a buffer for Australia against economic collapse.
There can be no doubt as to whose class interests are being served by last week’s bail-outs and the latest proposal for another $US700 billion worth. The bail-out policy approach towards the financial crisis does not help the real victims of these collapses — the ordinary people and communities whose assets go up in smoke, who lose their jobs, are thrown out of their homes, cannot afford private health services. It not only throws buckets of money at the real criminals who created this situation but fails to take any serious measures to address the causes.
What about the people!
Why weren’t the hundreds of billions of dollars in assistance directed to the victims of the crisis, the ordinary people of America? Why are there no serious plans to tightly regulate the financial sector and take control of economic policy out of the hands of the market forces, the transnational corporations? Why aren’t the US or Australian governments nationalising the major financial corporations? Why aren’t our governments outlawing the many highly speculative products that are pure gambling and bear no relationship to the real economy?
What plans are there to deal with the totally unaccountable, secretive hedge funds? There are rumours that some of them have deliberately taken destabilising measures to pave the way for rich pickings.
The answer to these questions lies in the very nature of the capitalist system which is driven by the pursuit of private profit derived from the exploitation of workers.
The People’s Weekly World Editorial on last week’s financial earthquake said it all with the question: 'The government is injecting billions to bail out failed financial companies. Don’t the nation’s communities and working families deserve the same so they don’t fail?'
