“Finances and the Current Crisis: How did we get here and what is the way out?” first appeared on PoliticalAffairs.net on October 3, 2008. Read it on PoliticalAffairs.net.
If there were such a thing as a perfect economic storm, I would say we are close to it.
The housing crisis continues and shows no sign of ending; credit and money markets are either churning or freezing up; the stock market is gyrating; unemployment is leaping upward (sharply so in the communities of the nationally and racially oppressed); poverty is up and wages are down; oil and food prices are climbing; the value of the dollar is falling sharply compared to other currencies; the level of indebtedness is astronomical and will be difficult to unwind in the near term. And we sit on the edge of a financial collapse with all the accompanying dislocation and hardship that it would bring.
Falls on working people
While we are for the stabilization and the restoration of the orderly functioning of financial markets, we advocate a plan that not only restores market liquidity, but also addresses the pressing crisis on Main Street and revives the overall economy.
Unfortunately, I don’t think that such a plan is in the offing. A bargain appears to have been struck between Bush and Paulson and leaders of both parties. It is better than what was initially proposed, but does little to stimulate the economy or attend to the crisis of everyday living experienced by millions of ordinary Americans — who, it should be said, played by the rules. In fact, the plan goes in the opposite direction — it asks the American people to pony up to the tune of $700,000,000,000 even though they had no hand in causing this crisis.
The main opposition at this point is from conservative Republican House members and John McCain who, quiet as it is kept, propose in their plan to give billions to Wall Street in the form of tax breaks and are allergic to stiff regulatory measures. Few Democrats and especially progressive Democrats, including Barack Obama, are happy with the outcome, but they don’t see any alternative at this point.
Whether Democrats should have held out for a better deal will certainly be debated. I believe they should have, but from their viewpoint a gun was at their head; the elections, which they are likely to win, are in a few weeks; and the possibility of a complete meltdown of our financial markets can’t be simply ruled out.
Despite the opposition, I expect that a final settlement will be reached soon. In the meantime, the labor-led people’s movement should press its views and organize protest actions. It is obvious that McCain, standing on the grounds of “putting the country first,” will try to exploit the understandable anger of millions of Americans in hopes that this anger will propel him into the White House. Thus the larger movement must continue to expose his demagogy, as we struggle for a far better settlement.
In any event, the struggle continues.
One line of needed action is to contain the housing crisis. As long as it continues, the overall economy will continue its slide downward and markets will continue to churn. The easiest thing is for the government to announce and enforce a moratorium on forecloses, debt forgiveness, and a renegotiation of mortgage terms going forward.
Another is to pass a stimulus bill of a half trillion dollars, paid for by repealing the Bush tax cuts and a special tax on financial transactions and institutions.
Still another is to impose a new regulatory environment on financial markets, including making illegal certain kinds of financial instruments and financial players, like hedge funds.
A fourth is to rapidly end the Iraq war and to initiate a peace process in Afghanistan that helps the people of that country. The Afghan people are exhausted by endless war and at the same time the American people are learning again that occupations don’t work and are very costly.
Finally, a debate over the merits of public takeover of our financial and energy complex is in order. Can our country, given the challenges we face now and into the 21st century, afford to allow these industries to remain in the hands of profiteers? Wouldn’t our country be better served if they were in the public trust and operating in the interest of the public welfare?
Only a single skirmish We should see this struggle over the bailout package as a skirmish, albeit an eventful and seismic one, but a skirmish nonetheless in a protracted struggle that labor and its allies can win. We should also appreciate the new ideological and practical opportunities obtained at this juncture of the class and democratic struggle.
Indeed, it is fair to say that the prevailing ideologies and practices that have driven U.S. capitalism for the past three decades have run up against their own contradictions and conjured up new and old oppositional forces both domestically and internationally. Viewed broadly, what we are seeing is a massive ideological, political and economic defeat for U.S. capitalism.
Financialization, financial-led globalization and neo-liberalism are not yet corpses. But their future is very problematic, although I would add that history tells us that discredited ideologies and practices never exit from the stage voluntarily. They have to be pushed, and pushed by a new political coalition that commands broad-based support, is united in action, and possesses the skills to construct a people’s alternative. But isn’t such a coalition, of which we are a part, forming before our very eyes?
Moreover, this coalition is ready to strike the first and absolutely necessary blow in a few weeks, that is, to elect Barack Obama and bigger majorities in the House and Senate by a landslide.
If people haven’t enough reasons to join this effort, the current implosion on Wall Street and the new constraints it will place on the federal budget should give them reason to roll up their sleeves and get the job done on Election Day. Let’s be clear — the importance of this election has exponentially grown because of events of recent weeks.
From another angle (and I am not going to develop this point here), the implosion of U.S. financial markets has delivered a debilitating body blow to the hopes of U.S. imperialism for unrivaled hegemony in the 21st century. When combined with the Iraq disaster, the worldwide anger over global neo-liberalism and structural adjustment policies, and the emergence of new global powers in nearly every region of the world — China in the first place, it signals a new stage in the hegemonic crisis of U.S. imperialism and the final chapter of a unipolar world.
Giovanni Arrighi, a world systems theorist, says that at the end of what he calls a systemic cycle of capitalist accumulation, leading hegemonic states invariably pursue a path of financial expansion, and its aim is to re-inflate its declining powers. The Dutch pursued this path in the 17th century to be followed by the British in the 19th and early 20th century — successfully for a while, but in the end to no avail. Both eventually lost their leading position in the world capitalist economy and were replaced by another hegemonic state that established the rules, conditions and institutional framework for capital accumulation and system-wide governance.
Much the same fate, according to Arrighi, now awaits U.S. imperialism. The only question that Arrighi doesn’t answer is: will U.S. imperialism adapt peacefully to new world realities or will it engage in, to use his words, a policy of “exploitative domination” to maintain its standing in the world? Bush tried the latter, but failed and will leave the White House in January completely discredited.
Interwoven with longer-term processes While the present turbulence was triggered by mountains of borrowing on thin capital reserves, predatory lending, dubious and risky financial products like credit default swaps and collateralized debt obligations, deregulation, a shadow financial market and bubble economics, it is also the outgrowth of longer-term processes that account for the new dynamics of financial markets and go back to the mid-70s.
At that time, the U.S. economy was stumbling along, battered by the combination of inflation, high unemployment, slow economic growth and a declining rate of profit across U.S. industries. The confluence of these conditions prompted Paul Volcker, then chairman of the Federal Reserve Bank, to drive up interest rates (the Volcker shock) to nearly 20 percent (the Russians were not the first to experience shock therapy). Not surprisingly, this spike in interests rates reined in inflation, restored confidence in the dollar (investors are adverse to holding dollars when inflationary pressures are eroding its value), and attracted mobile capital around the globe to U.S. financial and real estate markets.
It also generated an unprecedented shift of wealth in favor of the very wealthiest families and financial institutions and set off an explosion in the financial sector in terms of its size, scope of activities, debt obligations and players.
At the same time, rising interest rates slowed down the economy, big swathes of industry shut their doors permanently, union jobs were lost, wages stagnated, the social safety net was hollowed out, entire communities nearly collapsed, non-financial corporations were weakened, and the working class and labor movement were thrown on the defensive and have remained there since. Not since the Great Depression has productive capital been destroyed, living standards driven down, and the relative strengths of competing financial and non-financial corporations reshuffled so fast and so broadly.
Much the same was occurring in the newly industrializing countries and the global South. In these countries finance-led globalization was responsible for massive drops in living standards, astronomical indebtedness to U.S. banks, privatization of industries and services, currency devaluations, and unconscionable poverty. It was the convergence of these conditions that set into motion the eruption of political movements in Latin America that are either winning or contesting for state power.
Of course, it took more than shock therapy in the form of high interests rates to effect changes of this magnitude. If Volcker struck the first blow, it was the Reagan administration entering the White House less than a year later that was the main political agent of this upheaval in ideology, politics and economics.
The Reagan counterrevolution
At the ideological level, the Reaganites said that government is best that governs least; that markets are self-correcting, efficient and a fair distributor of wealth; that income inequality is a good and natural thing; that deregulation and privatization are the best fix for what ails the private and public sector; that we lived in a post-civil-rights era where affirmative action had no place; and that tax cuts for the rich trickle down to working people, thereby lifting all boats.
At the political level, the Reaganites framed the agenda of struggle and employed state power in its varied forms with a ruthlessness seldom seen. Remember PATCO — the air traffic controllers union that Reagan crushed early in his first term.
Finally, at the economic level, the Reaganites dismantled much of the old Keynesian model of capital accumulation and economic governance at the state and corporate level — a model that had its origins in the New Deal and was sustained and expanded by successive administrations in the next three decades. It rested on a measure of class compromise, societal obligations, formal equality and expansive macro economic policies that favored broadly shared prosperity.
In its place, they constructed a new model of accumulation and economic governance, popularly called neo-liberalism. In contrast to the preceding model, its main features included flexible production networks on a global scale, union busting, deregulation, low-wage labor, low inflation, the free flow of goods, services and capital, the shrinkage and privatization of the public sector, the re-embedding of racist and sexist practices into the economy and state, the restructuring of the state’s role and functions (not withdrawal from the state, as some incorrectly suggest), and, not least, the reassertion of finance.
It is against this backdrop that I will discuss financialization in Part 2 tomorrow.