After a week of turmoil on financial markets, on Saturday 20 September President Bush said he was proposing to spend $700bn of taxpayers’ money to buy the rotten mortgage assets held by the banks on Wall Street. He said he was doing this to help the average American family with their homes and jobs.
Financial markets in Wall Street, New York, the City of London and all over are in turmoil. In just 24 hours, two out of the four largest investment banks in the US have disappeared. All this confirms what Marxists have always maintained: capitalism does not operate in a smooth and steadily increasing way to progress. It operates violently, lopsidedly, in cycles of boom and slump. Now more banks are set to fail and there will be more misery in the financial markets. Working people are also set to suffer as massive job losses are announced.
Written in August, one year after the beginning of the credit crunch, this article explains how that earthquake in the global financial system has left banks, insurers, pension and municipal funds, hedge funds and private equity companies tottering and falling. Collateral damage has been immense and the after-shocks are still to come.
The Financial Times has hailed the
effective takeover of Fannie Mae and Freddie Mac by the US government as “what
could become the world’s biggest ever financial bail-out.” Treasury secretary
Henry Paulson has promised he will pump in ‘unlimited liquidity.’ Don’t you
wish the government would grant you unlimited liquidity? When it comes to the
food and fuel bills of the poor and the working class, the British and American
governments find that the cupboard is bare. But now it’s not bare. Predictably
markets all over the world have breathed a sigh of relief. Fannie and Freddie
have effectively been nationalised – and big business thoroughly approves!
Fannie Mae and Freddie Mac may sound like two characters out
of the old West, but Fannie Mae is the Federal National Mortgage Association
and Freddie Mac is the Federal Home Mortgage Corporation and they're both in
big trouble. The big two have liabilities of $5.3trillion outstanding. This is
as big as the entire US
national debt, which has ballooned under Bush's stewardship.
Hedge funds are in the news again. They don't much like
being in the public gaze. We wonder why. Does their speculation cause prices to
go up? Do they drive firms into bankruptcy so workers lose their jobs? These
are the questions being asked. Let's see what they get up to.
The immediate cause of the sliding dollar
is not far to seek. It’s the US
deficit with the rest of the world. Last year the USA imported nearly twice as much
as it exported. Their current account deficit stands at 6% of national income.
If a country is spending more than it’s earning, then it has to pay for the
Under capitalism if there is no profit, there is no
production even if people need things or services. Therefore, over the last 25
years there has been a massive expansion of the unproductive sectors of the capitalist
economy, i.e. a massive increase in fictitious capital. This is now expressing
itself in what may be the worst crisis for more than 30 years.
Last month 100,000 American private sector workers lost their jobs. This is the third monthly rise in the unemployment figures in a row. Everything indicates that the USA is now in recession. As it is the biggest single market in the world, this will inevitably have a big impact on the rest of the world.
Last Thursday it
was Carlyle Capital Corporation. On Friday it was the turn of Bear Stearns, the
fifth largest bank in the USA.
The American Central Bank, the Fed, is due to meet this week to talk about
interest rates. Most likely they will cut them again. The trouble is, the more
they slash rates the more people can smell the fear.
Republication of the article is timely. In 2007 the sub-prime mortgage bubble finally burst. The financial crisis has already had a knock-on effect on the banks through the credit crunch. The capitalist world stands on the threshold of recession.
In 2006 the
world's richest two percent of adults owned more than half the global wealth,
while half the world's population own only one percent. In 2007 the World
Wealth Report estimated the total wealth of rich individuals at $37.2 trillion!
While this wealth accumulates for a small minority, the vast majority of
humanity is seeing its living standards plummet. In these figures we see
another picture: the growing tensions between the classes that will lead to
social upheaval and revolution on an unprecedented scale.