A crash course in capitalism Claudio Katz The seism on Wall Street has surprised the world Establishment. At the summits of power, panic and alarmist declarations dominate. Everyone is absorbing an event which could be the beginning of a change of epoch. The comparison with the fall of the Berlin Wall gives some indication of this historical dimension.
The present crisis started to incubate in June 2007, with the collapse of the insurance funds managed by Bear Stearns, and demonstrated its force with the nationalization of the British bank Northern Rock. From this gestation we moved on to events the profundity of which is obvious to everyone. Dimension and costs The rapid conversion of problems of liquidity into insolvent deficits illustrated from the beginning the enormous dimension of a crisis which could not be contained by partial patching up. The reduction of interest rates proved to be useless, just like the attempt to form rescue funds managed by the banks. Nor was making large sums of money available or the assistance of the external sovereign funds sufficient. The government of the United States undertook several contradictory initiatives to attenuate the explosion. By allowing Lehman Brothers to go bankrupt it opened up the possibility of a brutal cleansing of the banks which were failing and tried to place certain limits on rescue operations. It thus granted the Federal Reserve full powers to judge who should be saved and who could drown. But since that sowed terror among financiers, it quickly backtracked. The opposite alternative, aiming at nationalizing all the losses, was consolidated by the nationalization of AIG. The official support granted to the largest world insurer (and to its gigantic portfolio of pension funds) thus supplemented the previous rescue of Fannie Mae and Freddie Mac, which finance half of housing in the United States. The fact that these semi-public institutions were contaminated indicates to what point the initial problems of bad quality debts (subprimes) had already been surpassed. The new series of nationalisations came to the aid of the latest victims of the hurricane: hedge funds, venture capital funds(which operate with highly speculative financial products) and money market funds (which accumulate investments that are less audacious and not without government guarantee). But in fact the it was the commercial banks that constituted the critical point. The bankruptcy of Washington Mutual inaugurated the collapse which threatens to extend to 117 minor entities surveyed by the FDIC (the official guaranteeing body). Certain estimates forecast that the last rites will be said over half of the 8,500 US banks. In any case, the crisis has already reached the investment banks (which raise money directly in the financial circuits) and is affecting the entire system, with interbank operations becoming paralysed and insinuations of deposits being in danger. We are also seeing a vertiginous wave of acquisitions within this framework. Merrill Lynch was captured by Bank of America, Bear Stearns was taken over by Morgan Stanley, Wachovia passed into the hands of Citigroup (or Wells Fargo) and Goldman Sachs put its package of shares up for sale. This virulent change of owners extended on an international scale, with the acquisition of Britain’s HBOS by Lloyds and the absorption of subsidiaries of Bradford and Bingley by the Spanish bank Santander. Some buyers (Barclays) are pocketing the small change of their old competitors (Lehman) or foraging among their leftovers. The result of all that will be a new level of banking concentration. Those who will survive their gambles (possibly the trio JP Morgan Chase, Bank of America and Citigroup) will take the leadership of the whole of the American financial system. This centralization is being preceded by a furious devaluation of the capital concerned, handled up until now in the financial sphere. Another option underway is that of the nationalization of toxic mortgages, an option that Congress is examining in a climate of blackmail by the Stock Exchange. The financiers (presented as “the market”) demanded government aid to stop the economy going under (“restoring confidence”). They asked the government to purchase the depreciated securities in order to revalorize them before reselling them. This rescue resembles that obtained by Mexican financiers in 1995. There too the state bought the devalued securities, thus cleansing companies’ balance sheets, and marketed bonds at a pure loss for the state budget. The speculators had created a climate of panic so that this new swindle would come as a blessed relief. But this time the shameless aid brought by the state to those responsible for the collapse produced an indignation against the bankers which called into question their sacrosanct rules of the free market. This rejection of Wall Street - which had not been seen since Roosevelt’s time - obliged the legislators to incorporate some restrictions on the blank cheque initially asked for by the Federal Reserve. The amendments thus include tax reductions of various kinds, to create the illusion of a more equitable distribution of the load. The widespread malaise expresses, moreover, a massive intuition that there has been a useless waste of resources. If the future confirms that two thirds of mortgage credits are completely irrecoverable, a mountain of money will have been frittered away. It is obvious that no financial engineering can resist the continuing collapse of property prices, nor the unending deterioration of the income of house-buyers. For this reason Congress is also sponsoring a certain form of renegotiation of mortgages between those in debt and the banks, with the mediation of the state. But only a context of economic recovery - which appears distant - could provide support for such an initiative. For the moment, what predominates is a crisis without an foreseeable solution, which has put into question all the neo-liberal principles. In a climate of state intervention and subsidies, the regulator is welcome and the market is challenged. But as the rescue is not free, it will be necessary to resort to an operation whose cost is unknown. The emission of securities on securities was so sophisticated that nobody is in a position to calculate the amount concerned. In July 2007 the Federal Reserve estimated the losses at around 50 billion dollars. At the beginning of the year 2008 the figure leapt to 512 billion dollars and current evaluations turn around 1,000 to 2,000 billion dollars. How will such a bill be paid? The great banking crises of recent decades had colossal costs for the underdeveloped countries. They represented 55.1 per cent of the Gross Domestic Product (GDP) of Argentina (1980-1987), 55 per cent of that of Indonesia (1997-2004) and 34 per cent of that of Thailand (1997-2004). But this percentage hardly reached 3.2 per cent of GDP at the time of the last great financial rescue operation in the United States (1981-1991). This is the first time in decade that the leading world power will have to face a full-scale financial loss. full: http://www.internationalviewpoint.org/spip.php?article1562 _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
