THE CRISIS

CAPITALISM IS THE PROBLEM

The worldwide banking crisis now dominates the front pages of newspapers. Capitalism is mired in its worst crisis since the worldwide economic crisis of 1929.

By Bernd Drucke

[This short article published in: Graswurzelrevolution 37, November 2008 is translated from the German on the World Wide Web, www.linksnet.de/de/artikel/23825.]

Anti-militarists can now rejoice that the war against Iran hatched in the think tanks of US militarism will not occur in the foreseeable future. The huge debt mountain and the trade deficit of the US are gigantic. The greatest military power of world history that spends $660 billion annually for war and armaments is essentially bankrupt. Thus the new war is cancelled. The speculation bubble that arose in the heart of capitalism has burst. Neoliberalism seems to totter. Is a “New Deal” coming now or a new form of “state capitalism”?

The crisis of financial capital is a failure of neoliberal ideology. At the beginning and at the end, the absolute state is the guarantee that the swindle accompanying “perpetual capital accumulation” is kept alive, as Lutz Schulenberg correctly writes (in: DIE AKTION Nr.214, October 2008).

This financial crisis is only restrictedly a reason for joy. Those who caused it profited from it: the big banks, which are now pepped up with two trillion euro by the governments of EU states and $700 billion by the US government. A “bailout plan for the starving” could be realized with a fraction of the money now spent for this “bailout plan for the banking system.” But the responsible do not consider this. Policy in the future will be made at the expense of the poorest. Social spending will be cut worldwide for state banking subsidies.

The consequences of the capitalist rule system are catastrophic for a large part of humanity today. A billion people do not have enough to eat now. In 2008 alone, 75 million people were added, according to the Hunger Research institute, ifpn. For 2007, the United Nations estimated an increase of the number of starving persons from 800 million to 925 million. The capitalist world order, the unjust distribution of resources, post-colonial trade conditions dictated by the IMF and the bio-fuel policy of the EU and the US are causes of this hunger catastrophe. The share of bio-fuel in the increased price of food is estimated at 30% according to calculations of hunger experts. Corn is hardly grown as a staple food for the hungry but fizzles away as a fuel for the gas-guzzling luxury carousels from Daimler, BMW and Co.

Whoever wants this world “order” to remain as it is does not want humanity to live under dignified conditions.

Twenty years ago hardly anyone could imagine that the authoritarian “command socialist” system in Eastern Europe could collapse. But a short time later that is exactly what happened.

Today hardly anyone can imagine that the globally dominant capitalism will disappear. But this is a pre-condition for the survival of humanity.

The capitalist system does not make a mistake; it is the mistake. It is responsible for the earth becoming so exploited and contaminated that every fourth mammal is threatened with extinction, the polar caps melt and the foundation of life of future generations is endangered.

Capitalism is the problem. The solution would be a liberal-socialist social order whose highest principles are mutual aid and respect for nature, a nonviolent rule-free and humanly just world. That is a utopia for which struggle is worthwhile.

SYSTEM ERROR

By Yaak Pabst

[This article published in: Marx 21, 11/7/2008 is translated from the German on the World Wide Web, www.linksnet.de/de/artikel/23847. Yaak Pabst is a political scientist and editor of Marx21.]

Yaak Pabst explains why the failure of the market is not an accident.

The immediate trigger of the present turbulence on the financial- and credit-markets was the collapse of the US housing market. At the beginning, the real estate market was a good business for the banks. Many financial institutions all over the world joined in and scented massive profits. They gave credits and received mortgages on houses and property as securities. Millions of people in the US accepted the banks’ offers of credit and became heavily indebted. In 2008, the average US household had debts amounting to 129 percent of its annual disposable income.

In the course of the boom, real estate credits were given to people who had no real credit-worthiness – for example; persons who fell into default (of payments) in credits in the past or in bankruptcies or forced sales. Thus a sector of so-called “sub-prime” mortgages arose. Since the sub-prime mortgage market is every risky, the banks developed new financial instruments and dispersed the risks. Mortgage debts of different grades were combined and resold in inscrutable packages.

This continued as long as rising real estate prices appeared as a natural law. The momentary value of a house counted as security, not the actual income of the debtor. But when many households could not repay the rising interests for real estate credits, they stopped their loan payments. Thus the banks waited in vain for their money. To gain money, more and more debtors offered their houses for sale. Finally, real estate prices fell and more and more houses and properties in the US were alienated. The speculation bubble burst.

A chain reaction started. The enormous posts in the balance sheets of banks and insurances based on US real estate were corrected downwards or written off entirely. Financial firms were massively affected by these write-offs and threatened with bankruptcy. Because the mortgage debts of millions of Americans were combined and resold in inscrutable packages, no one knew exactly where the toxic credits landed or their extent. Thereupon the banks began not lending money to each other. They feared they would not get their money back if their partners were suddenly dragged into the whirlpool of the crisis. Lending businesses between the banks succumbed. The chaos took its course. The stock exchanges crashed and the banking system faced collapse.

CRISIS WITH SYSTEM

Speculation with US real estate credits accelerated the present crisis. With the crisis in the banking sector, crass cases came to light in which speculators earned golden parachutes in the breakdown of their businesses. As Karl Marx said, the world of finance is “one of the most effective vehicles for crises and swindling.” Insider trading is prohibited. But knowing in advance that a business will announce something and utilizing this news to buy or sell shares of the business is extremely profitable. A study of 172 business mergers on American stock exchanges concluded that insider trading occurred in every single case.

The current dislocations cannot only be referred back to the actions of several dubious traders. The chaos that we now witness is only the latest crisis of the global economic system. In the last 25 years, great financial crises have erupted again and again: from the 1982 debt crisis in Mexico and Latin America, the 1987 crisis on the New York stock exchange, the 1997 Asian crisis, the 1998 crises in Russia and Brazil up to the decline and fall of the New Economy at the end of the 1990s and the recession in the US from 2000 to 2002.

But unlike earlier financial crises of the neoliberal era, today’s crisis has its origin in the heart of the capitalist system, the United States. It expands and will seize the whole world economy. Given the shriveling markets for their goods, the great export economies – Germany, Japan and China – will be drawn into the crisis. The world recession now threatens as in the middle of the 1970s and the beginning of the 1980s. The irresponsible fraud in the financial industry accelerated the crisis but is not its cause. The cause lies much deeper because economic and financial crises are unavoidable in capitalism.

MARX’S CRITICISM

We face a crisis of capitalism as Karl Marx described. Marx discovered profit rates in capitalism fall in the long-term. He saw this dynamic as the main cause for crises in capitalism. The contemporary problems of capitalism lie in this dynamic. The system has not succeeded in keeping profits at the level of the postwar years. At the beginning of the 1970s, the world economy that had grown for decades lost its dynamic. Growth stagnated, profits fell and unemployment returned to the heart of the system – the developed industrial countries.

Since then, the profit rates have never returned to the level they had in the so-called “economic miracle.” They remain too low to produce a lasting expansion of capitalism. Therefore worldwide capitalism has been in a stagnation crisis since the 1870s. Thus we face a profit crisis more than a financial crisis. But this crisis up to today has not dragged the system as a whole to the abyss. This is connected with a process Marx described in “Capital.” There he mentioned a series of “counter-acting facts” to the fall of profit rates. Neoliberalism combined a series of these “counter-acting facts” since neoliberalism itself was an answer to the end of the economic upswing after the Second World War.

THE RISE OF NEOLIBERALISM

The answer of governments to the new crises in the mid-1970s consisted in the timid and then ever faster and more ruthless enforcement of measures against this stagnation. Firstly, large parts of state property were sold for vast sums that played into the hands of private capital. Secondly, controls over the mobility of goods, services and money were removed from country to country – a measure that allowed capital to move freely all over the world.

Thirdly and as the most decisive change, the living standard of the working class was attacked. This is often the fastest and simplest way for raising profits. Employees are paid less and working hours lengthened. Reducing or dismantling the welfare state through tax cuts for corporations and cutting social spending indirectly brought about increased profits.

The attack on the working class was successful in the United States. Between 1975 and 1995, average real wages in the US stagnated or fell slightly for full-time male workers. Elsewhere the attacks were not as successful. Still the welfare states in large parts of Europe were reduced. Through these attacks, capital succeeded in raising its profits and mitigating the crisis.

THE ROLE OF THE FINANCIAL MARKETS

Financial markets and financial institutions played an important role. They are indispensable for the functioning of capitalism. Under the conditions of competition, corporations try to realize maximum profits. Normally they invest part of their earnings in new technologies to gain advantages over the competition.

The stock exchanges, the banking system and similar institutions play an important role when businesses lack attractive investment opportunities in the productive sector (for instance in mechanical engineering or the automobile industry) or want to invest but don’t have the necessary money for that. They help bring together capital and investors. For example, banks manage accounts and businesses that do not want to invest at the moment and make available the money of others eager for new investments.

Because investments of capital in the productive sector had a high risk in the mid-1970s on account of falling profit rates, readiness to speculate on the stock exchanges and international financial markets with surplus money grew. In addition, the expansion and growing complexity of the financial system created a fascinating new possibility for capitalism.

Paying employees as little as possible is in the individual interest of every employer to increase profit. But when everyone does this, workers collectively cannot afford what the capitalists produce in their entirety. What is good for one capitalist is not necessarily good for the system.

By offering employees cheap credits and loans, capitalists could simultaneously pay employees less and still sell them goods and services. In the past, the financial system ensured that money was chased around the globe at break-neck speed. However the stream of real profits in the system rose much less dramatically. This raised the risk since speculative “bubbles” developed and then burst. This process marked the last 30 years.

STATE INTERVENTIONS

Whether the current bailout attempts will be crowned with success is still in the stars. The US Federal Reserve has already announced it will take over an unlimited amount of toxic credits without telling the public or the Congress about the details. This move will increase the debts of the Federal government immeasurably. The US will no longer be able to jump in again in the same way if another crisis of this kind erupts.

At the beginning of 2009, we were told a state intervention would have an effect when the US government acts as “monoline” insurer. The same thing happened when it bought Bear Stearns in March and de facto nationalized the mortgage giants Freddie Mac and Fannie Mae. The US, the EU, Japan and other big industrial nations have already pumped triple-digit billions in tax money into the markets so banks can lend money cheaply in the future.

However this move is limited. The accumulated debts have already surpassed the gross domestic product of the whole world. There is no guarantee that the state interventions will accomplish anything except stabilizing prices in the short-term. They simply give money to the stock markets without any certainty that this money will ever flow back in the state treasuries.

From the view of capital, the state may intervene with temporary limited measures to rehabilitate market capitalism. The state should withdraw as soon as this bailout mission is successful. The obvious question raised by this strategy is: what should keep the financial markets from starting all over again with the same nonsense?

The answer that the government gives us is regulation. In a countermove to the bailout of banks, the state will impose rules. All this already occurred. The general answer to the “Great Depression” of the 1930s was greater state control over the economy in general and the banking system in particular. But when capitalism grew stronger in the 1950s and 1960s, it rebelled against the net of regulations intended to tame the volatility. When a crisis started in the middle of the 1970s, the regulations and controls were gradually abolished again.

The cycle of upswings and downswings is due to the chaotic nature of capitalism based on competition. Such crises can only be ended when this system is replaced by a democratic planned economy controlled by working people.