The Wall Street crisis
and the failure of American capitalism
By Barry Grey
17/09/08 "WSWS" -- - 16 September 2008 --
The
end of Lehman Brothers and Merrill Lynch, two of the largest
Wall Street investment banks, one week after the government
takeover of the mortgage finance giants Fannie Mae and Freddie
Mac, marks a new stage in the convulsive crisis of American
capitalism.
On Monday, global markets fell
sharply in a sign of mounting panic and doubt over the stability
of the entire US banking system. Throughout Europe stock markets
plunged by as much as 4 percent.
The fall on Wall Street was even
steeper, with the Dow Jones Industrial Average losing 504
points, or 4.42 percent. There is every indication that the
sell-off will intensify, with the full implications of the
collapse of the two Wall Street banks as yet far from clear.
The immediate concern is the
fate of American International Group (AIG), the world’s largest
insurance company, and Washington Mutual, the largest savings
and loan bank in the US, both of which are teetering on
bankruptcy.
The sudden demise of Lehman
Brothers and Merrill Lynch has removed a huge amount of
liquidity from the economy, as paper values built up over
decades of speculation come crashing down. This is capital that
is needed to finance business operations, and its elimination
will inevitably depress economic activity, fueling unemployment
and recession, further undermining home prices and consumer
spending, and further weakening the balance sheets of already
financially shaken banks.
A sea change is unfolding in the
US and world economy that portends a catastrophe of dimensions
not seen since the Great Depression of the 1930s.
The fall of icons of American
capitalism such as 158-year-old Lehman Brothers and 94-year-old
Merrill Lynch can only lead to the further discrediting of the
“free market” ideology of the US ruling elite, as well as its
political and economic system. The spectacle of giants of
capitalism drowning in debt piled up over decades of reckless
speculation must inevitably discredit the social class—the
American capitalist class—which is responsible for the debacle.
The bromides that have been
uttered by the official spokesmen for the government, the media,
Wall Street and the political parties over the past year of
mounting financial crisis have lost all credibility. The
assurances that the latest government bailout will stabilize the
situation, that the US banking system is “fundamentally sound,”
that the housing and credit markets are about to “turn the
corner,” etc., reassure no one.
On Monday, President Bush
mouthed such phrases in a brief White House appearance. Treasury
Secretary Henry Paulson at a White House press conference evaded
questions about who was responsible for the financial disaster
and instead declared that he was “focused on the future.”
The presidential candidates,
Republican John McCain and Democrat Barack Obama, made
perfunctory statements that were remarkable only for their
brevity and vacuity. What is widely acknowledged, even in ruling
class circles, as the greatest financial crisis since the Great
Depression is unfolding in the midst of a presidential election.
But it barely rates a mention by either the Republican or
Democratic candidate.
Both parties and their
candidates tip toe around a financial scandal of world historic
proportions because they are equally implicated. They are both
bound hand and foot to Wall Street and single-mindedly dedicated
to the defense of American capitalism.
McCain issued a statement
demanding “reform” in Washington and on Wall Street and pledging
to bring “accountability” to Wall Street. This from a
multi-millionaire whose campaign is being run by a bevy of
lobbyists for Wall Street and other sections of big business.
His Democratic counterpart,
Barack Obama, issued a predictably mealy-mouthed statement
complaining that “too many folks in Washington and on Wall
Street weren’t minding the store.” While attempting to pin the
blame for the crisis entirely on the Bush
administration—ignoring the “free market,” deregulatory policies
of Democrats Jimmy Carter and Bill Clinton—he offered a mutual
amnesty between himself and McCain, saying, “I certainly don’t
fault Senator McCain for these problems...”
These events are signposts in
the historic failure of American and world capitalism. For the
working class, they mean a rapid growth of unemployment,
poverty, homelessness and social misery. The government, Wall
Street and both political parties will seek to place the burden
for the consequences of their own greed and incompetence
squarely on the backs of working people.
The collapse is devastating ever
wider layers of the population, including those who have worked
on Wall Street and received some of the financial benefits of
the speculative boom. Some 26,000 Lehman employees are not only
out of a job, with few prospects of finding similar employment
elsewhere, but as owners of 25 percent of the company’s stock
they have lost a combined $10 billion, wiping out their savings
and retirement funds.
Tens of thousands of employees
at Merrill Lynch and Bank of America will lose their jobs in the
merger of the two firms, adding to the 110,000 jobs slashed in
the US financial services industry over the past year.
The broader implications of the
mounting financial crisis were signaled by Hewlett-Packard’s
announcement Monday that it was cutting 25,000 jobs.
Many of those who precipitated
this economic disaster, on the other hand, will profit
handsomely from the debris they have left behind. Hedge funds
and other short-sellers, who bet on the collapse of
corporations, are even now speculating furiously on the demise
of the remaining Wall Street firms, Morgan Stanley and Goldman
Sachs, as well as big commercial banks such as Bank of America.
William Gross of the nation’s
largest bond fund, Pimco, took in $1.7 billion last week by
betting on—and publicly agitating for—a government takeover of
Fannie Mae and Freddie Mac.
The emergency talks over the
weekend, involving the heads of the major commercial and
investment banks and led by Treasury Secretary Paulson and top
Federal Reserve officials, centered on rescuing Merrill Lynch
and orchestrating an orderly liquidation of Lehman. Under
pressure from Paulson and the Fed, Merrill agreed to sell itself
to Bank of America, the largest consumer commercial bank in the
US.
At the same time, there were
frantic negotiations over the fate of AIG, which faces
bankruptcy unless it can raise tens of billions of dollars in
capital. When US markets opened Monday, AIG was asking for
emergency loans from the Fed to stave off collapse.
A failure of AIG threatens to
bring down the entire credit system both in the US and
internationally, because the company holds a large stake in the
multi-trillion-dollar, unregulated market in so-called “credit
default swaps.” AIG has sold CDS contracts to banks, hedge funds
and big investors all over the world, under which it guarantees
the mortgage-backed debt of a wide range of companies in the
event that they default. If AIG should go under, the value of
the debt which it insures would fall to an unknown level,
destabilizing the credit markets and threatening a chain
reaction of defaults and bankruptcies.
The events of the past two weeks
demonstrate that the American financial aristocracy is plunging
the entire country into bankruptcy. These events are themselves
climatic moments in a protracted process.
For three decades, the “free
market” has been elevated to the status of a secular religion in
the US, with the capitalist market as its god and socialism as
its devil. This period, under both Republican and Democratic
administrations, has seen the wholesale dismantling of the
productive base of the US economy, at the cost of millions of
jobs and the living standards of the American working class.
In the name of the supposed
infallibility of the market, the operations of big business have
been deregulated, removing all legal restraints on corporate
profit-making and fueling the accumulation of ever more obscene
levels of wealth in the hands of a financial oligarchy. A vast
process of social plunder has occurred, in which the wealth of
the country has been redistributed from the bottom to the very
top.
The scrapping of huge sections
of industry and the immense growth of social inequality are the
hallmarks of the historic decline of American capitalism. At the
heart of this decay is the separation of the process of personal
enrichment of the ruling elite from the material process of
production.
The United States has become the
world leader not in manufacturing technology or industrial
power, but in financial speculation and parasitism. As Floyd
Norris, the economics columnist of the New York Times,
put it on Friday, “During recent years, Lehman—along with many
competitors—went on a borrowing binge to buy assets with as
little money down as possible.”
By its very nature, the
parasitism of American capitalism has generated corruption and
criminality on an unprecedented scale. Wall Street CEOs have
awarded themselves tens of millions and even billions in
compensation, in an utterly irrational and socially destructive
squandering of social resources for the benefit of private
greed.
At the end of 2007, for example,
the Lehman board awarded CEO Richard S. Fuld a compensation
package worth more than $40 million. According to Reda
Associates, he can expect to collect $63.3 million if he is
terminated. In 2004, he paid $13.75 million for an ocean-front
home in Jupiter Island, Florida, adding to his other properties,
including a home in Sun Valley, Idaho.
Joe Gregory, a former president
of Lehman, used to travel to work in a helicopter. He recently
put his 9,500-square-foot ocean-front home in Bridgehampton, New
York on the market for $32.5 million.
The Financial Times
recently reported that compensation for major executives of the
seven largest US banks totaled $95 billion over the past three
years, even as the banks recorded $500 billion in losses.
The question of precisely who
and what is to blame for the greatest economic disaster in more
than three quarters of a century is something that will not and
cannot be raised by any section of the political or media
establishment.
Since the eruption of the
current crisis, there have been no serious congressional
hearings, no public investigations, no attempts to hold anyone
accountable. Massive government interventions into the
supposedly sacrosanct precincts of the “free market,” for the
purpose of bailing out giant Wall Street firms, including the
biggest government takeover of corporate entities in US history,
have been carried out without any public debate or significant
opposition from either political party. This, while millions of
Americans are losing their homes and their jobs as a result of
predatory corporate practices!
Certain conclusions must be
drawn from the crisis of the American economic and political
system. There is no solution within the framework of the profit
system. What is needed is a socialist program that places the
needs of the people before the profits and personal fortunes of
the ruling elite.
The entire financial system must
be taken out of private hands and nationalized in the form of a
public utility under the democratic control of the working
class, with provisions taken to safeguard the holdings of small
depositors and share-holders. It must be subordinated to the
social needs of the people and dedicated to developing and
expanding the productive forces in order to eliminate poverty
and unemployment and vastly improve the living standards and
cultural level of the entire population.
Those who are responsible for
the economic catastrophe must be called to account. Criminal
investigations should be undertaken with appropriate sanctions
for those who have plundered the social wealth. A full public
accounting should be made of the hundreds of billions that have
been diverted to private bank accounts through fraud and
criminality. Such gains should be seized and used for the public
good.
The only social force that can
carry this out is the working class. It requires a clean break
with the Democratic Party and the two-party system and the
mobilization of the immense social power of the working class in
its own party, on the basis of a revolutionary socialist
program.
This is the program fought for
by the Socialist Equality Party.
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