Banks and investment firms implode. The stock market plummets. The focus is on Wall Street, but who’s really being hurt? The speculators with billions of dollars in bonuses?
The real destruction is taking place on Main Street: nearly a million more people unemployed; retiree savings evaporating; services for children and mothers under the knife. And, as the U.S. crisis ricochets, poverty will claim millions more around the world.
How did this happen, and where is the economy headed now? Commentators spout mystifying economic jargon while denouncing the greed of bankers and brokers. They portray the breakdown as a horrible aberration. What they can’t acknowledge is that this crisis isn’t a misstep — it is a predictable part of the dance of capital. Only ending the dance will solve the problem.
A system born to crisis. The meltdown appears to have originated in the stratosphere of high finance. But this is deceptive; the source is much more fundamental.
Because every capitalist is driven by the need to grow and rake in more profits, the system has a basic flaw: a tendency to overproduce, leading to slowdown and depression. A boom cycle fueled by spending on reconstruction after World War II slowed to an end in the 1970s. Since then, the world economy has operated under the constant threat of recession.
Why does the economy experience these periodic crises of overproduction, as Karl Marx called them? Why can’t consumption keep pace?
As Marx explained, it’s only human labor that gives products real economic value, which is the source of profits. The more capital is spent on machines and computers relative to labor, the more the rate of profit drops. Each individual product is worth less. So, to keep profits up and stay competitive, a business owner has to produce a whole lot more of them.
At the same time, he tries to maximize profits by minimizing labor costs: paying workers less and forcing fewer of them to produce more. For workers, this means speedup, increasing unemployment, a “race to the bottom” in which bosses go wherever they can pay the least, dramatic cuts in employer-paid benefits, and wages that fail to keep up with inflation.
But the eventual results are also grim for the capitalists. Not only does reducing labor costs continue to lower the rate of profit, it means that workers have less money to buy the goods and services they create — however badly they need them! It’s a case of killing the goose that lays the golden eggs.
How then to keep profits high? In recent years, more and more businesses removed capital from manufacturing and other enterprises that actually produce goods — and shoveled that capital into speculation.
The make-believe world of high finance. Two big areas of speculation emerged. The first was real estate, which changed hands at breakneck pace, hyperinflating property values.
This was great for the banks, which expanded their market by promoting “subprime mortgages.” These reeled in home buyers with low initial monthly payments that later ballooned into much higher amounts.
As real wages fell and unemployment grew, people couldn’t make their payments. They ended up on the streets, and the banks — which had lent far more than they had — started to crash. Down with the banks went the institutions supposed to guarantee their mortgage lending, Fannie Mae and Freddie Mac.
The foreclosure crisis and bursting of the housing bubble wreaked havoc on the other site of speculative frenzy: the derivatives market. This is essentially a pyramid scheme. Subprime mortgages and other potentially bad debts are packaged up, sold miraculously as assets, rebundled, sold again, and so on, until nobody knows how much they’re supposed to be worth, even in theory.
Then financiers invented yet another onion layer, the “credit default swap.” They started selling each other insurance against their derivatives turning out to be toxic! This is the scheme that led to AIG’s collapse.
The whole wealth of the finance sector is smoke and mirrors. It’s what Marx called fictitious capital. Rather than resulting from the production of anything tangible, this capital is nothing more than electrons bounced off satellites from computer to computer. And the sector is so detached from reality that its supposed value now equals nearly six times the value of the actual, material wealth of the entire world.
Whatever forms the bailout takes, it’s not capable of fixing the economy. Pumping money into corporations, whether they are “bad” (nearly bankrupt) or “good” (apparently solvent), just gives them license to start another round of speculation. And taking money out of workers’ pockets to pay for the bailout will deepen the recession.
Defining the alternative. Free-market diehards blast the bailout as “creeping socialism.” Not even close!
Saving the ruling elite’s collective butt is exactly what the state exists to do. The first recorded U.S. bailout was in 1787. While meeting to draft the Constitution, the new government used public money to buy up, at full price, essentially worthless bonds held by speculators.
Similarly, the government’s partial buyout of ailing financial institutions is not “nationalization.” The government is making no attempt to run what it has bought. It plans to reprivatize the purchased assets ASAP, and at bargain basement prices.
Again, it’s all about state intervention to save the capitalist system. The most extreme form of this is fascism. In Germany during the depression of the 1930s, panicked businessmen were willing to turn part of their control over to the Nazi state — in exchange for the government protecting their profits and smashing workers’ resistance to pay cuts.
When socialists call for nationalization, the goal is to make a business or an entire area of industry a public concern that provides for majority needs, not minority profits. And the employees who create the goods and services and the workingclass consumers who use them should make the decisions about production and distribution.
Public ownership and workers’ control of major industries — like the banks and insurance companies! — would be a huge step forward. But to get rid of the chaos and waste of capitalism will require overthrowing it for a planned, rational and equitable system of economic and political democracy: socialism. Or, in the words of Freedom Socialist Party founder Clara Fraser, “a synthesis of ecological balance, social harmony, personal freedom and material comfort that is the human birthright.”
The road from here to there. Right now, unions and community and political organizations need to join together to demand immediate action to ease the suffering on Main Street. Job No. 1 could be fighting for a moratorium on foreclosures. A tiny fraction of the bosses’ bailout — around $50 billion — could save all working people’s homes.
Tough times ahead mean that winning free, universal healthcare is essential. So is creating new jobs. And the article “How Can Unions Address the Economic Crisis?” on page three offers more ideas for what is needed.
Paying for all this? The means are there. Stop the corporate bailouts; end the occupation of Iraq; get out of Afghanistan — and voilà!
Humanity is crying out for an end to the vicious and insane profit system, carrying us all along as it hurtles toward disaster. The time to start building a revolutionary movement to replace it is now.
Contact Susan Williams, M.D., who played a key role in winning a doctors’ union at Harlem’s Metropolitan Hospital, at email@example.com.