Home Economics of Capitalism Capitalist overproduction and the banking crisis

Capitalist overproduction and the banking crisis

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Lehman Brothers, the day the 158-year-old investment bank filed for bankruptcy.

Just weeks before the U.S. presidential election, the economic and financial crisis that started with a weakening of the U.S. housing market in mid-2006 has taken a dramatic turn for the worse.

Demonstration against bailout for Wall Street, Sept. 2008
Widespread indignation and mass protest played a decisive role in stalling the Wall Street bailout.

Panicky runs on major banks has caused new failures and forced mergers. The crisis and attempts to pass a “bipartisan” $700 billion bailout bill has produced a political crisis, with the U.S. political establishment wracked by acute confusion and division.

The economic crisis first made headlines with the credit market meltdown of August 2007. That was followed by bank runs that brought about the demise of Countrywide Financial Corp., the top U.S. mortgage lender. Bear Stearns, the fifth largest investment bank, went down in March. IndyMac Bancorp, another colossal mortgage lender, failed in July.

In the most recent and most acute phase of the crisis, at least so far, the U.S. government took control of Fannie Mae and Freddie Mac, essentially nationalizing them. These “government-sponsored” entities own or guarantee roughly half of the $12 trillion in outstanding U.S. mortgages.

As they scrambled to prop up the financial system, bankers and politicians debated behind closed doors who would be rescued and who would be allowed to sink. Lehman Brothers, another major investment bank, was forced into bankruptcy, and Merrill Lynch & Co. sold itself at a fire-sale price to Bank of America. The U.S. government then extended to AIG, the world’s biggest insurer, an $85 billion loan in exchange for an 80 percent equity stake in the firm—however much that is now worth.

Finally, huge panicky withdrawals from banking giants Washington Mutual and Wachovia Corp., and even from supposedly safe money market funds, prompted Secretary of the Treasury Henry Paulson and Federal Reserve Chief Ben Bernanke, along with President Bush and Democratic and Republican congressional leaders to propose the “Mother of All Bailouts,” as it has become widely known. The architects estimated the cost at $700 billion, but Paulson admitted in congressional testimony that it could go higher.

After the addition of a few concessions in response to mass outrage at the idea of using taxpayer money to bail out the very interests seen as causing the crisis, a “final” bipartisan deal was announced early Sunday, Sept. 28, prior to the opening of the Asian financial markets.

The following day, however, the laboriously crafted bill failed in the House in a 205-to-228 vote, with two-thirds of voting Republicans and 40 percent of the Democrats turning thumbs down. Among other factors, the mass popular outrage at the bailout scheme played a decisive role in defeating the bill.

Investors responded by pulling their money out of the stock market, sending the Dow Jones Industrial average down 777 points by the close of trading. It was the largest one-day point drop ever, easily beating the 684-point loss on the first day of trading after the Sept. 11 attacks.

False and misleading explanations

Writers and spokespeople representing tendencies ranging from liberal populists such as Ralph Nader to mainstream politicians to right-wing libertarians and beyond appear to agree that the root cause of the crisis is some combination of reckless and predatory lending, greed, runaway speculation, market manipulation and outright incompetence on the part of bankers and other major financial players.

“Lack of oversight” is also frequently cited. Deregulation that began under the Democratic Carter administration and continued under Reagan and other Republican administrations is often pointed to as a contributing factor, if not the major cause.

Bigoted and racist scapegoating is raising its ugly head. Anti-Semitic voices hint at Jewish control of the U.S. government, media and finance and point to Israel and the “Jewish lobby” as somehow behind the crisis. Right-wing representative Dan Tancredo (R-Colo.) has blamed “illegal immigrants,” claiming they triggered the crisis by abandoning homes purchased with false documents by the thousands.

Rising racism and anti-Semitism have always accompanied financial collapse going back to the crash of 1873. A wave of anti-Arab racism was unleashed during the oil crisis of the 1970s. General economic downturn and contraction have been used by reactionaries to promote anti-immigrant worker hysteria. In recent years, Latino workers have been the targets. The rising tide of a fightback movement of the multi-national working class, as happened in the Great Depression of the 1930s, can set back the forces of racism and division by promoting unity in struggle against the bosses.

Contrary to Democratic and Republican politicians and others, the root cause of this crisis is not the greed, recklessness, swindling and incompetence of a handful of Wall Street CEOs, bankers and speculators. Such behavior characterizes virtually every boom phase of the capitalist business cycle, each involving their own particular bubble—railroads in the 19th century, real estate and stocks in the 1920s, high-tech stocks in the 1990s, and housing, oil and grain in recent years.

The real root cause is the capitalist system itself and the inevitable overproduction that is a characteristic and inescapable phase of the capitalist business cycle. During each such phase, more goods—be they houses, cars, clothing, or television sets—are produced than can be sold at a profit, leading to an inevitable crash.

Corporate moguls, capitalist politicians and media pundits go to great lengths to hide this fundamental truth with elaborate lies and fabrications. To admit that capitalism itself is to blame for these recurring crises would be an indictment of the very system that brings them enormous profits at the expense of working people. It would be a call for its destruction.

Expansion of credit

In the capitalist business cycle, each boom phase is extended by an expansion of credit. Credit ensures that, at least for a while, producers continue to find buyers for their commodities by enabling purchases that might not have happened without a loan. In the post-World War II period, government deficit spending, including on the military, has also extended booms—but only so far. Sooner or later, rising interest rates, an exhaustion of credit by borrowers and weakening of the currency force an end to the boom.

The recent industrial boom in Asia drove world interest rates, along with the prices of oil, grain and other key commodities, sharply higher. Western consumers provided the market for a large share of that industrial output, much of it on borrowed money.

The central banks and government-sponsored investment funds— known as “sovereign wealth funds”—of Asian exporters of industrial goods and Middle Eastern and other exporters of oil poured hundreds of billions of surplus dollars into U.S. treasuries, Fannie and Freddie mortgage-backed securities, and other dollar-denominated investments, thereby financing the enormous U.S. trade deficit and propping up the dollar.

The very nature of capitalism and the credit system means that whenever a serious crisis hits, the banks hold society hostage. They say, “Either bail us out or credit will collapse and chaos will result.” It is a vicious circle: The more the contradictions of capitalism develop, the greater the development of the credit system. And the more the credit system develops, the more the banks hold society hostage in a crisis.

Tax money versus borrowed money

A key immediate cause of the current crisis was indeed the exhaustion of the credit of millions of working-class families, including maxed-out credit cards and home equity lines of credit.

The bailout plan is widely seen as taking $700 billion of our tax money and turning it over to the biggest banks in exchange for the mortgages, mortgage-backed securities and other “toxic assets” currently on their books.

Since the federal government is already deep in the red, it is highly unlikely that much if any of the hundreds of billions of dollars of bailout expenditures—which some think will likely exceed a trillion—can come out of current tax revenues.

Instead, the bailout will most likely have to be financed by additional borrowing, which commits future tax revenues to pay the interest and principal on the growing mountain of U.S. government debt.

In other words, now that millions of working-class borrowers have exhausted their credit and been driven into debt slavery and bankruptcy, the bankers and politicians propose that the remaining credit of the U.S. government be tapped to prevent a complete collapse of the financial sector. Needless to say, that credit line is not unlimited. In fact, it is showing signs of being maxed out as well.

One key indication that the credit line of the U.S. government is running out is the fact that private investors are increasingly shunning dollars. In fact, if not for support from foreign central banks, the dollar would likely have declined much more seriously than has already been the case.

Likely outcome of the bailout

In their testimony to Congress, Paulson and Bernanke assured that we the taxpayers will not lose anywhere near the amount being committed to the bailout and could even end up making money. They claim that, when the financial markets stabilize and the economy recovers, the assets acquired by the federal government can be re-sold, presumably back to the same banks now desperate to unload them, and possibly at a profit.

Even if many of the homes and the land they stand on that back the mortgages acquired by the federal government are foreclosed on and auctioned off, the assets acquired by the government are by no means worthless, or so the argument goes.

The hope of the bankers, of course, is that the increasingly centralized and enlarged surviving financial entities will, after the economy re-stabilizes, recoup their losses and more. They can then go on their merry way, resuming lending and “earning” usurious interest as before.

Leaving aside the political repercussions and criminal injustice involved in the federal government—supposedly representing the people—foreclosing on millions of homes and evicting the families living in them, the claims of Paulson and Bernanke are highly optimistic, to say the least.

After the boom (overproduction) phase of the capitalist business cycle comes the overproduction crisis, and then the recession or depression. The latter phase is absolutely critical to eliminating overproduction and laying the basis for a sustainable economic upturn.

While major sectors of the U.S. economy, such as housing construction and automobile production, have been in the dumps for some time, it is highly likely that there will be more plant shutdowns, more production cutbacks and more job losses, not only in the United States but even more so in Asia, before “excess” inventories are wiped out and the “real economy” can stabilize and begin a sustainable upturn.

Loss of U.S. domination

The borrowing capacity of the government in the past has been based on the competitiveness of the U.S. economy and the strength of the dollar as the world’s reserve currency. However, both U.S. industry and the dollar have been in severe decline since at least the period of the Vietnam War. The U.S. government, representing finance capital, has consequently resorted to building up and deploying the military to grab control of oil resources and oil transit routes in the Middle East and elsewhere.

This has been the case whether Republicans or Democrats occupied the White House or controlled Congress. To the extent that this policy succeeds, it forces other governments to do the bidding of the U.S. government and, most importantly, it props up the dollar.

Such imperialist aims will continue to be pursued whether John McCain or Barack Obama wins the upcoming presidential election. This ruinous course will only change when the organized working class establishes a government and state that represent us, taking over the economy and running it in our interests and not those of Wall Street.

With an economic, financial and political crisis now hitting us, the immediate task for progressive activists is to build up the already-emerging mass people’s movement to demand a moratorium on foreclosures and no more evictions. If anything, the hundreds of billions of taxpayers’ dollars that Wall Street hopes to pilfer should instead be used to help working people in dire financial straits. We must also continue and step up the struggle to force an end to the criminal occupations of Iraq and Afghanistan. The money being squandered on these wars would go a long way to meeting our needs at home—needs now greatly magnified by the economic crisis.

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