Record Corporate
Bailout Reveals the Bankruptcy of American Capitalism
By Barry Grey
13/09/08 "WSWS"
-- - The US government takeover of the mortgage finance
giants Fannie Mae and Freddie Mac has dealt a shattering blow to
the ideology of market capitalism, which has been used for
decades to justify a relentless assault on the working class and
a vast transfer of wealth to the American ruling elite.
The endless invocations of the virtues of private enterprise,
individual entrepreneurship and self-reliance, used to demonize
socialism and defend a system that exploits the vast majority
for the benefit of a financial elite, have been exposed as
frauds. When it comes to big capital, losses are socialized.
Only profits remain private.
The same forces who year after year have inveighed against “big
government” in order to justify the removal of all legal
impediments to the accumulation of corporate profits and private
fortunes, and carry out the destruction of social safeguards for
the working class, have engineered a massive expansion of
government power to safeguard the interests of the financial
elite.
The bailout has as well exposed the real relations of political
power and influence behind the façade of American democracy. The
largest government bailout of private companies in world
history—whose ultimate cost to taxpayers is likely to reach
hundreds of billions—was sanctioned in advance by the Democratic
Congress and given instant approval by the leadership of both
parties and both of their presidential candidates.
There have been no investigations into the greatest financial
scandal in world history. Neither party has any interest in
bringing to light the swindling and skullduggery of the Wall
Street moguls, because they are both bound hand and foot to
those responsible for the financial debacle.
What has been revealed is the existence in the United States,
behind the increasingly tattered veneer of democratic
institutions, of a plutocracy—the political rule of the rich.
When it comes to the basic interests of the financial
aristocracy, both parties and all of the official institutions
of society snap to attention and do the bidding of their Wall
Street masters.
The bailout of the two mortgage giants—which account for 80
percent of new home mortgages in the US—is a demonstration of
the historic failure of American capitalism and the profit
system on a global scale. It was precipitated by the deepest
economic crisis since the Depression of the 1930s, whose
epicenter is the United States. The Bush administration moved to
take over Fannie Mae and Freddie Mac under conditions of a rapid
erosion of international confidence in the solvency of not only
these two companies, but of the United States government itself.
Over the past several months, global investors, including
central banks and government investment funds, primarily in Asia
and Russia, have been dumping their vast holdings in
mortgage-backed securities issued by the US government-sponsored
firms. Fannie Mae and Freddie Mac have a combined liability of
$5.3 trillion in mortgage-backed securities which they own or
guarantee. The run on their assets has not only intensified the
crisis of the two companies, which are massively leveraged and
have suffered billions of dollars in losses as a result of the
collapse of the US housing market, it has thrown into question
the status of all US government debt, including US Treasury
bonds.
The US, by far the world’s largest debtor nation, with a current
account deficit of nearly $800 billion, is sustained by the
inflow of hundreds of billions of dollars from abroad. It
currently imports $1 trillion in foreign capital every year, or
over $4 billion every working day.
But the assumption by the US government of the debts of the two
mortgage companies, while averting an immediate financial
meltdown, only compounds the crisis of American capitalism. As
Martin Wolf, the financial correspondent of the Financial Times,
wrote on Tuesday, “As a result, US housing finance has been
brought under direct government control and, in the process, the
gross liabilities of the US government, properly measured, have
increased by $5,400 billion, a sum equal to the entire publicly
held debt and 40 percent of gross domestic product.”
At a stroke, US sovereign debt has doubled and is now roughly
equal to America’s gross domestic product. On July 14, one day
after US Treasury Secretary Henry Paulson called for legislation
to give him unilateral and unlimited powers to use public funds
to rescue Fannie Mae and Freddie Mac, the Wall Street Journal
editorialized on the implications of a government bailout of the
two companies. It wrote: “But with financial woes mounting, some
investors are betting they may profit from weighing the
unthinkable question: Could the US government default?”
This immense increase in US government indebtedness can only
further undermine international confidence in the
credit-worthiness of US Treasury bonds, resulting in a further
decline in the dollar and a sharp increase in the interest paid
by the US to borrow from its international creditors.
The claims made by the Bush administration, echoed by the US
media, that the bailout of the two mortgage finance companies
will consume at most $200 billion in public funds—itself a
massive amount that eclipses previous corporate bailouts,
including the $160 billion bailout of the savings and loans
industry less than two decades ago—are not credible. An
indication of the sums envisioned by US policy makers is the
fact that the legislation passed last July giving Paulson the
power to bail out Fannie Mae and Freddie Mac raised the US debt
limit by $800 billion, increasing the cushion between the debt
limit and current government indebtedness to $1.1 trillion.
Some sense of the social priorities of the US ruling elite and
its two parties can be gleaned from a comparison between the
sums being extended to bail out just these two companies and
those allocated by the federal government in 2008 for education
($67.5 billion), unemployment benefits ($37.3 billion), highways
and mass transit ($53.1 billion) and housing ($7.4 billion).
Moreover, the bailout of Fannie Mae and Freddie Mac is only the
prelude to a far broader use of public funds to bolster the
balance sheets of major corporations. Democratic presidential
candidate Barack Obama and his Republican opponent John McCain
are both supporting a $50 billion bailout of the US auto
companies, which will inevitably entail further cuts in jobs and
wages. And the plunge of the Wall Street investment bank Lehman
Brothers toward bankruptcy—the firm’s stock fell by 45 percent
on Tuesday—poses another rescue operation similar to the $29
billion bailout of Bear Stearns last March.
It is already being widely broached that the government
establish a permanent mechanism for using taxpayer funds to buy
billions of dollars in failing assets from major banks and
financial companies. The Wall Street Journal wrote on Tuesday,
“Creating a government-backed entity to buy up these assets
could jump-start the market for home loans and relieve banks and
other financial institutions, which are taking big hits to their
balance sheets as they fall in value.”
The Financial Times sounded the same theme, declaring, “The US
government might end up having to support the recapitalization
of a much wider range of financial institutions in order to curb
the credit crunch.”
These statements give the lie to the attempt to portray Fannie
Mae and Freddie Mac as aberrations, which in their reckless
speculation and pursuit of super profits departed from the norm.
On the contrary, they typify the financial parasitism and
outright criminality that have become pervasive characteristics
of the workings of American capitalism and the social
physiognomy of the US corporate elite.
The operations of the two government-sponsored firms are
entirely in line with the unbridled speculation, based on an
immense expansion of debt, that has become the hallmark of
American capitalism. Their role in the housing and credit boom
that has now come crashing down was of a piece with the creation
of the vast edifice of paper values, engineered through the
so-called “securitization” of debt, which sustained the super
profits and immense salaries raked in by Wall Street.
In the wake of the bailout, press reports have noted the bloated
salaries of the companies’ CEOs. Before they were sacked as part
of the government takeover, Fannie Mae CEO Daniel Mudd and
Freddie Mac chief Richard Syron took in between them $29.5
million over the several years they headed their respective
corporations. And they stand to receive another $29 million as
part of their exit packages.
But these sums are by no means exceptional. The Financial Times
reported last week that compensation for major executives of the
seven biggest US banks totaled $95 billion between 2005 and
2007.
The collapse of Fannie Mae and Freddie Mac is a paradigm of the
US economy as a whole. Over the past three decades, the decay of
American capitalism has taken the form of a vast growth of
financial parasitism. At its heart, this involves the separation
of wealth creation from the creation of real value in the
production process. The American ruling elite has largely
dismantled the productive base of the US economy, ruthlessly
downsizing manufacturing at the cost of millions of jobs and the
destruction of working class living standards, in order to reap
higher profits from increasingly reckless forms of financial
speculation.
The indices of the growth of financial speculation in the US
economy are staggering: In 1982, the profits of US financial
companies accounted for 5 percent of total after-tax corporate
profits. In 2007, they made up 41 percent of corporate profits.
This process has generated ever greater levels of social
inequality, the most telling symptom of the degenerate state of
the US profit system. A report by the Congressional Research
Service, updated July 31, provides a measure of the ever growing
chasm between the ruling elite and the broad mass of the
American people. It states that the share of national income
accounted for by the top 1 percent of earners (as reported on
tax returns) reached 21.8 percent in 2005—a level not seen since
1928. The report further noted that in 2006, corporate profits
totaled 12.4 percent of national income, a level not reached in
50 years.
The cost of the ever-expanding bailout of American big business
will be borne squarely by the working class. Even in the midst
of growing unemployment and poverty and a flood of home
foreclosures, there is much talk in the media about the American
people “living beyond their means.”
That the next administration, whether headed by McCain or Obama,
will sharply intensify the assault on working class living
standards was spelled out by the New York Times, which
editorialized Tuesday: “Senators John McCain and Barack Obama
have both voiced support for the bailout, which shows good
judgment. But what the next president will need to worry about,
and both candidates need to talk about, is the depth of the
country’s economic problems. It will take discipline and
sacrifice to address them.”
The only alternative to a rapid lowering of working class living
standards and the only rational and progressive solution to the
financial crisis is a socialist program of nationalization of
the entire financial system under the democratic control of the
working people, with provisions to secure the investments of
small depositors and share-holders. The wealth and resources of
the country must be developed and allocated to meet the social
needs of the population, not the money-mad strivings of
financial speculators.
This policy can be carried out only through the independent
political mobilization of the working class in opposition to the
two-party system and the financial aristocracy which it serves.
The Socialist Equality Party is dedicated to the building of
such a mass socialist movement of the working class.
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