The Jig is Up

By Lynn Henderson

The United States economy is in the greatest financial crisis since the stock market crash and great depression of 1929. This is not the assertion of a few radicals and political “lefties” but the virtually unanimous and sudden conclusion of economists, Wall Street financial experts, Democratic and Republican politicians, and the entire media industry. While the unanimous recognition of the crisis was reached with truly breathtaking speed, almost none of these experts and pundits saw it coming even a few weeks and months ago. And the crisis is not limited to the United States, but has rapidly spread through out the entire world financial system.

We also have virtual unanimity from these same folks on the causes of the financial crisis: The deregulation movement was taken to excess. The lack of government regulation and oversight led to the proliferation of new risky, exotic financial instruments—hedge funds, derivative securities, credit default swaps, securitized and bundled mortgages, etc. These new instruments lacked “transparency” we are told, and were too complicated for the market to accurately evaluate. The usually efficient invisible hand of the free market was unable to perform its normal functions and froze up.

In the housing market, unregulated sub-prime mortgages led to irresponsible lending and borrowing practices that allowed thousands of people to buy homes they really could not afford. When housing prices unexpectedly fell and the higher rates of the sub-prime mortgages kicked in, this triggered a cascading wave of mortgage defaults that led to a credit crunch that quickly spread throughout the entire economy.

There is also near unanimity on what the solution to this crisis is. First, “stabilize” the situation with immediate massive government bailouts of banks, brokerage firms, insurance companies and all other financial institutions “too big to fail.” Provide emergency government guarantees for all loans between banks and banks, banks and brokerage firms, banks and insurance companies—in other words, government guarantees for loans between all the major financial institutions of the country.

They also caution us that this stabilization process will take time, and will be painful. The question of course is—painful for whom? These are the most massive government bailouts in the history of this nation—or any nation, and there are more to come. They are not for free. In the final analysis, wealth will be channeled out of the pockets of the vast majority into the coffers of the financial elite.

But after an admittedly painful period, which will probably include recession, unemployment and other hardships, we are told the economy will be stabilized. Responsible regulations and government oversight will then be put in place which will curb future excesses of greed and speculation and the economy will return to its normal state of growth and prosperity.

None of the above accurately describes the nature, causes and roots of the present financial collapse. Even the comparison with 1929 lacks accuracy. The present financial crisis is more fundamental and more sweeping than the 1929 crash and depression. It is the end of an era. The end of the so-called American Century. The demise of the world financial system which American capitalism set up at the famous Bretton Woods conference in 1944 following WWII. And there is no agreement on what will or can replace it.

For some 50 years now the American working class, or the media’s preferred euphemism, the American middle class, has been the target of an intense class war in which real wages and income have been relentlessly reduced. This has been a one-sided class war with little effective resistance, especially from a hopelessly bureaucratized and conservatized trade union movement, which, in addition, has slavishly tied itself to one of the principle instruments of this class war, the Democratic Party. Everyone recognizes some of the more obvious results of this one-sided class war—an ever-increasing concentration of wealth into the hands of a thin layer at the top. CEO salaries have gone from 40 times that of the average employee to 300 times.

But there is an obvious contradiction here. Economists calculate that approximately 80 percent of the economy is driven by consumer spending. If real wages have been falling over the last 50 years, how has the economy, at least until recently, continued to expand and profits continue to grow? This was accomplished by a number of strategies designed to offset the effect of falling real wages on consumer spending.

The first of these was the simple expedient of drastically increasing the total number of hours worked. Overtime was increased, leisure time was decreased. The single wage earner family was largely eliminated. No longer did one partner work while the other, usually the female, took on the demanding job of running the home and caring for the children. The “Leave It To Beaver” family of the 1950s disappeared from American society.

When this proved insufficient, family members were forced into a second and even a third part time job. Grandpa and grandma were moved into the basement apartment, and shuffled off to Walmart earning extra bucks as greeters to supplement their Social Security check. This is why political and economic apologists for this policy no longer wish to compare individual wage rates over time but rather household income. But the number of extra hours an individual can work is limited, as is the number of additional family members that can be put to work. New steps had to be taken to offset the effect falling wages had on consumer spending and the economy.

The next move was a massive expansion of consumer debt. The credit card industry was born. It was not so long ago that credit cards were mostly limited to business executives who did a lot of traveling. New federal legislation was put in place ending the ability of individual states to regulate credit cards and eliminating all usury laws which capped the maximum interest that could be charged. The nation was flooded with credit cards carrying 20 percent plus interest rates, a return previously only available to Mafia loan operations. The average American family now holds seven of these cards. The banks issuing these cards made record profits and consumer debt soared to record levels. But it did mask the effects of falling real wages and produced a significant if temporary boost in consumer spending.

Paralleling the encouragement of ever more consumer debt was an even more risky policy, the massive and continuous expansion of government debt. We will address this crucial question in greater detail shortly but for now we can note that these record deficit budgets of necessity fueled inflationary pressures. One way these inflationary pressures expressed themselves was an artificial rise in the dollar value of houses—the so-called housing boom.

For most middle-class/working-class families, their home, if they own one, is by far their biggest financial asset. As credit cards maxed out and the size of consumer credit card debt became unsupportable, another particularly dangerous financial gimmick was floated. Consumers were encouraged, and driven by necessity, to take cash equity out of their inflated house value. Second mortgages, third mortgages, home equity loans, became the final desperate hope for keeping their heads above water—for meeting expenses and paying down credit card debt that was killing them with 20 percent plus interest rates. New home buyers were lured into predatory sub-prime and adjustable rate mortgages with the assurance that housing prices would continue to rise indefinitely, allowing them to refinance and even cash out increased equity in the foreseeable future. And again it propped up consumer spending.

The banks made big bucks out of the credit card ploy but it was peanuts in comparison to what they were able to accomplish with the new mortgage schemes. By highly leveraging their mortgage investments, bundling them together into tradeable securities and marketing these throughout the world, they were able to generate some of the largest banking profits in history. When the housing bubble burst, it triggered not just a crisis in the mortgage market but the collapse of a financial house of cards that had been building for decades.

Even more significantly, it exposed fatal flaws in the entire world financial system which had been in place for seventy years, ever since the famous Bretton Woods conference of 1944. When the United States organized the Bretton Woods conference, the U.S. was the largest creditor nation in the world; for all intents and purposes it was the only creditor nation in the world. Today it is the largest debtor nation in the world.

For decades the United States has run ever-larger deficit budgets fueling an ever-larger national debt. In the final analysis this was driven by the need to artificially stimulate an economy whose inadequate wage-driven consumer spending was less and less capable of keeping it on track.

But how was the United States able to do this? How was the United States able to run ever-larger deficit budgets driving an ever-larger national debt? Other nations are not capable of doing this. If Argentina, or Germany or France followed a similar policy it would eventually produce very dire results. The United States was able to pursue such a policy over an extended period of many decades because of the unique, privileged position of the dollar in the world economic system.

The United States won WWII. It won WWII big. It won WWII not just against the Axis powers but against its allies as well. The entire capitalist world came out of WWII in a shambles. Its industrial plants destroyed or in decay, its working classes reduced, dispersed, and demoralized, its political structures in turmoil and its national economies for the most part flat broke.

But the United States came out of WWII immeasurably stronger in every way than when it entered the war. Its industrial capacity had dramatically expanded, incorporating all the new technologies in electronics, chemicals etc. developed during the war. Its working class was intact with better skills and education than prior to the war. It was politically, militarily and financially the dominant capitalist economy in the world.

Prior to WWII, international trade and the settlement of international trade balances were accomplished primarily through the shifting of gold accounts. But by the end of WWII the United States ended up with all the gold, or most of it. A new basis for organizing international trade had to be found and found quickly.

At the 1944 Bretton Woods conference it was agreed that the dollar would replace gold in its international trade function. The dollar would be accepted as good as gold. The dollar would become the reserve currency for the entire capitalist world. This is how the U.S. dollar acquired its unique, privileged position. Or to use a term union members can appreciate, it acquired “super seniority.” This arrangement made certain sense for the world capitalist economy, but only so long as the U.S. economy remained a strong, dominant, expanding economy with a strong financial balance sheet.

What do the continuous deficit budgets and the exploding federal government debt mean? It means this debt has to be funded; the government has to borrow money. It does this by selling U.S. treasury bonds which are government IOUs. Today most of these U.S. treasury bonds are sold in the international market and held by such countries as Japan, the Middle East oil nations and especially China.

The United States has become utterly dependent on continued international purchases of these treasuries and the regular rollover of those already held. As the U.S. debt grows and the dollar becomes shakier these nations become more nervous about continuing these purchases. That’s on one side of the equation; on the other side, the collapse of the dollar as the world reserve currency with nothing to replace it would mean a world-wide crisis and a sharp contraction in international trade—trade on which these nations are very dependent. These are the considerations the holders of U.S. debt are constantly trying to weigh and balance.

This month saw a sea shift in how they weigh and balance the equation. As the crisis unfolded, and the government bailout and infusion of funds began to take place, Treasury Secretary Paulson suddenly and out-of-the-blue made a truly astounding demand that Congress immediately authorize 700 billion dollars to be dispensed by him, as he saw fit, with no congressional or judicial oversight. Despite some claims to the contrary, he essentially got everything he demanded. What provoked such a move?

David Rothkopf, an apparently well-connected scholar at the Carnegie Endowment for International Peace, lets the cat out of the bag in a major article entitled “9/11 Was Big. This is Bigger.” In the October 12, 2008 Washington Post he writes; “Reports from within the Treasury suggested that the U.S. government intervened in the financial sector, at least in part, in response to Chinese threats to reconsider their policy of buying U.S. debts unless Washington moved to stabilize the markets.”

This signals the end for the U.S. dollar’s status as the world reserve currency—the end of “super seniority” for the dollar. And national leaders throughout the world know it. They are demanding a new worldwide economic conference to deal with the crisis. This conference, explains French President Nicolas Sarkozy, would need “to rebuild the entire global financial and monetary system from the bottom up, the way it was done at Bretton Woods after World War II.” He goes on to conclude, “Laissez-faire—it’s finished. The all-powerful market that is always right, it’s finished.”

Germany’s finance minister offered a similar perspective in remarks to his parliamentary colleagues. “The U.S. will lose its status as the superpower of the world financial system,” Peer Steinbruck declared. “This world will become multipolar. The world will never be the same again.”

The strongly pro-market Financial Times of London chimes in declaring that, “We are at the end of the era of American laissez-faire capitalism.”

It’s all well and good to demand a new Bretton Woods but it ignores the fact that the utterly unique historical conditions allowing for the successful Bretton Woods conference of 1944 no longer exist, nor are they reproducible. There was little in the way of negotiations between equals or even serious two-way discussion at the 1944 Bretton Woods conference. A completely dominant and victorious U.S. capitalism dictated, and the rest of the capitalist world acceded. The usual laws of capitalist international competition were uniquely and temporarily in suspension.

That is certainly not the case in the world today. The European nations calling for a world conference can’t even come up with a cooperative, coordinated response to the crisis among themselves. Ireland was the first to break, on September 30 unilaterally providing government protection for its banks. As funds flowed out of Europe to the protected Irish banks a howl of protest was heard from Germany, France, Britain etc. charging unfair competition. But they had no alternative other than individually extending protection to their own national banks.

Next was Iceland. In the recent decade Iceland had transformed itself into a mini Switzerland, soliciting deposits from all over Europe, especially Britain. Its profitable banking sector grew to ten times as large as its entire gross national product. As the world financial crisis unfolded, the small Icelandic economy was in no position to bail out its enormous banking sector.

When European governments turned down his desperate appeals for assistance, Iceland’s prime minister, Geir Haarde, declared that it was now “every country for itself.” He arranged a temporary loan from Russia, and promised to guarantee domestic depositors in Iceland’s banks while reneging on guarantees to foreign depositors. British Prime Minister Gordon Brown responded by suing Iceland and using counterterrorist legislation to take over Icelandic bank assets and operations in the United Kingdom.

As the stock value of their banks and companies plummet, all throughout Europe governments are unilaterally adopting restrictions to prevent outside capital and sovereign wealth funds from buying up their corporations at fire sale prices. In Italy, for example, the government of Prime Minister Silvio Berlusconi has created a “national interests committee” to restrict the activities of sovereign wealth funds.

“This is unprecedented,” said Simon Tilford, chief economist for the Center for European Reform. “It has exposed the limits of European integration and coordination when presented with a crisis of this magnitude.”

It’s not unprecedented. It is merely confirmation of the basic law of capitalist competition, between firms and between capitalist nation states. In times of acute crisis, the law’s application becomes particularly brutal, it becomes: “Every man for himself and the devil take the hindmost.”

What does this all mean for the American middle-class/ working-class? The enormous costs of the Wall Street and banking sector bailouts are unprecedented, with much more to come, including corporate bailouts. Someone will have to pay, and without the aid of a dollar with “super seniority.” How the pace of events plays out is hard to predict but we will certainly see a dramatic intensification of class warfare against the American middle-class/working-class. But it can no longer be a one-sided class war; they will have to resist; they will have no choice. They will not be able to just bare their breasts and accept the incoming rounds.

They are not in an advantageous position to fight this war. The trade union movement will be of little help as it is presently constituted, and it will take time and a tough fight to change it. Unlike most of the major industrial nations, America, has no socialist or labor party which in the heat of battle could be transformed into a fighting political instrument.

Such a party would have to be built from scratch and in the face of deep existing illusions about the progressive nature of the Democratic Party. But the American capitalist elite are not in good shape either. The crisis has shaken them; there is a growing sense of panic and demoralization. No one looks forward to this war. But the war will come. For everyone—the jig is up.