The Financial Meltdown and a Socialist Response
By David Finkel
THE FINANCIAL AND stock market meltdown of September-October 2008 is unlike anything that the vast majority of us have seen in our lifetimes. Americans would have to be old enough to remember 1929 and the onset of the Great Depression to have seen a crisis of this magnitude. People in Japan, it’s true, know all about the “lost decade” after the late 1980s bank crashes – but the current situation is a disaster on a global scale.
The reference to 1929 does not mean necessarily that the world economy today is headed for the same destination, i.e. a Great Depression. Actually, the outcome of this crisis is unpredictable. Among other differences, the 1929 stock market crash and subsequent credit crisis led to the Great Depression of the 1930s in part because governments responded with “tight money” policies until too late, an act of suicide which central banks and governments today definitely will not repeat. Quite the contrary, extremely energetic state interventions in Europe and the USA – very much against the recent ideological free-market “run of play” – have halted the fears of a total global banking collapse and the short-term stock market panic.
It’s indeed instructive how quickly the entire ideology of “unleashing the free market” and financial deregulation could be thrown aside in order to rescue giant banks that are “too big to fail.” The U.S. Treasury will not only be purchasing (at above-market rates) the “toxic assets” held by these institutions, but pumping hundreds of billions more into them by buying “preferred shares” in them. This means “non-voting shares,” so that the bailout of these collapsing banks still leaves them under private control. Nonetheless the U.S. government, that bastion of rightwing free-market conservatism, is taking measures that the most liberal Democrats wouldn’t have dreamed of proposing six months ago. Many European governments (e.g. Britain) are going further in partial nationalization of banks, even if these measures are intended to be temporary.
There’s the bailout for the corporate and Wall Street incompetents and crooks who helped drive the economic ship into the ground. The obvious question becomes, then, where’s “the rescue package” for working people who are losing their homes, their jobs, their credit, their health insurance and their hopes for security in retirement? What can, or should, government do to confront our emergency? This question has to be addressed in the context of where the U.S. and global economies are heading.
Regarding the underlying economy, all that seems certain now is that a recession has begun, on a global scale and likely to be sharp and severe for the next 18-24 months. The figures for September show escalating job losses in the United States and many European countries. Beyond that, we don’t know where the present crisis leads in the long run and we won’t try to speculate here. But there are a number of important ideas that socialists have to present about what the crisis means for working people and what kind of response is necessary.
Capitalism – all the way from the 17th century until that time in the future when it will be overthrown – is inherently a system of booms and bubbles and busts and panics. That’s true with or without “heavy state intervention” or “the unfettered free market.” But the magnitude of the present disaster in global credit markets marks the colossal failure, and the terminal point, of a whole “regime” of deregulation of finance capital, especially in the USA, in which the “unfettered free market” would produce ever-growing wealth and the institutions would somehow police themselves. The Depression-era rules regarding the separation of commercial and investment banking were obliterated (Enron showed where this kind of deregulation would lead in the energy industry, but the obvious lessons were disregarded).
What happened in reality, as everyone now knows, was the combination of a housing bubble, those subprime loans imposed overwhelmingly in poor and communities of color, massive increases in personal and corporate debt, and the proliferation of “derivatives,” based on the packaging and recirculation of debts. Banks throughout the world economy made enormous paper profits by selling each other the equivalent of casino chips. In the end, they have wound up sitting on uncounted trillions of dollars in fictitious value (those “toxic assets” consisting of loans that will never be repaid). No wonder they stopped lending money even to each other – because each bank not only feels the need to hoard its own cash, but also suspects all other banks of hiding their real conditions just as it’s hidden its own.
The current wave of government intervention was essential in order to prevent the threat of a complete shutdown of credit – the oil in the engine of global capitalism – a threat that had caused stock markets to plunge by 40% in a few weeks. The political tide in the United States is also turning toward re-regulation, not only cosmetically in reducing the obscene pay of Wall Street CEOs but placing some controls on the behavior of finance capital. This trend will accelerate in 2009 with larger Democratic majorities in Congress and the likelihood of a Democratic president – although Barack Obama’s economic advisors include the likes of Robert Rubin, one of the Clinton-era architects of deregulation.
Regulation in itself, however, does little to address the real catastrophe facing tens of millions of working class families. And yet the measures that need to be taken in this emergency are quite clear, including these:
- Immediate ban on foreclosures. Not only homeowners are being thrown on the street, but renters who didn’t even know their landlords were in foreclosure! Thanks to some popular struggles, the Cook County (IL) sheriff has suspended eviction of renters – an example that needs to spread. But no one should lose their home until there’s a –
- Rewriting of mortgages to their real value. There’s no point in pretending that homes in today’s market are worth their paper value in the housing bubble. Mortgages on primary residences, not only those now in foreclosure, need to be written down by 30-40%, with interest payments reduced to abolish those subprime “adjustable-rate” schemes that were jammed down the throats of lower-income people and communities of color. (There are many cases where African-American women in particular could only get these extortion-rate loans even though their income and credit rating should have qualified for standard-rate mortgages.)
- The government should take over these mortgages, paying the banks no more than their actual – not paper – value, and the more subprime lenders that go out of business in the process, the better. Further, no family should have to make mortgage payments exceeding 15% of household income. This will also have the effect of a serious “stimulus program” for working class America.
- Change government priorities to what we need and eliminate what we can’t afford. At a time when federal, state and city budgets are choked by debt, “what we can’t afford” is obvious: the cost of empire. That means the Bush gang’s $3 trillion war in Iraq has got to go. U.S. military bases in 150 countries; hundreds of billions for weapons in space; those bloated contracts for Halliburton and private mercenary forces like Blackwater – all those expenses need to be zeroed out, and the world as well as our own society will be better for it.
What is it then that we really need? For openers, the following:
- Guaranteed universal health care is an absolute must, especially at a time of growing employment insecurity. There are already at least 45 million people in this country without health insurance, a number growing all the time. For all those families, the real-life threat of a “terrorist attack” is negligible compared to the daily terror of being bankrupted by an illness, or even permanent injury or death from lack of treatment. A single paper universal health insurance program is the proven, affordable method for resolving this crisis, cutting costs, saving lives, and protecting families from bankruptcy at the same time.
- A jobs program on the scale of the 1930s is necessary and feasible. There is no lack of work to be done – especially when our infrastructure needs to be not only repaired but converted to the imperatives of a sustainable economy to avoid environmental disaster. Wherever corporate America won’t invest in renewable energy, massive recycling, mass transit and news transportation technologies, the government should step in with the necessary resources, creating literally millions of productive jobs at union wages.
- Universal higher education can be guaranteed by supporting sustainable university tuition at public institutions, and by removing the crushing burden of student loans. This society has the resources to guarantee free higher education to all – but at the very least, rather than leaving school with tens of thousands of dollars in debts they can’t pay, students must have access to no-interest loans that they can repay after graduation with payments not exceeding 10% of their income.
There’s a great deal more that can and should be done to meet human needs rather than corporate profit in our society – as well as addressing the global crises of hunger, poverty and health, and the threats of irreversible environmental catastrophe within a few short decades. In reality, the way out of the global economic crisis lies in a democratically controlled “sustainability revolution” as profound as the industrial and scientific revolutions of previous centuries. That journey has to begin with immediate human needs, and the above measures are first steps in addressing our emergency at home. What’s needed most urgently right now are the mass labor and social movements capable of fighting for these demands and winning them!
-- David Finkel is an editor of Against the Current and member of the National Committee of Solidarity.