The Financial Crisis–Some Thoughts From the Editors of Monthly REview
MRZINE September, 2008
Just over a year since the beginning of the worst U.S. financial crisis since the Great Depression, and only six months after the federal bailout of Bear Stearns, the seizing up of credit markets continues. The failure of eight U.S. banks this year, including IndyMac, and the recent instability that struck the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, requiring a special government rescue operation, has had the entire financial world on edge. Mortgage-related losses by themselves “could cause a trillion dollars in credit to vaporize,” according to a special July 28, 2008, Business Week report. The downside effects of financial leveraging (the magnification of results associated with borrowed money) mean that each dollar lost by financial institutions could lead to reductions in lending of fifteen dollars or more, creating a shockwave so massive that it could reveal structural weaknesses throughout the economy. Already the economy is reeling, with faltering growth, a deep slump in housing, massive job losses, rapidly rising oil and consumer goods prices, and a falling dollar.
Yet, the good news from the standpoint of capital is that the financial system has been stabilized somewhat (though the crisis is far from over) as a result of repeated government rescue operations, essentially socializing the losses of private investors, on the principle that the financial entities concerned are “too big to fail.” The Federal Reserves Board’s assets in June 2007 consisted almost entirely (92 percent) of Treasury securities. Now these amount to just 54 percent of the Fed’s assets, and have been replaced by, among other things, loans to financial institutions whose shares have been falling. Moreover, as a result of the Bear Stearns rescue and subsequent Fed interventions, the public now bears the risk on a lot of collateralized mortgage obligations, i.e., largely worthless paper assets—a further cost to the taxpayers.
This raises an important question: “Why No Outrage?” This is the title of an article by longtime gold bull James Grant, editor of Grant’s Interest Rate Observer, writing in the July 19, 2008, issue of the Wall Street Journal. Why is it, Grant asks, that “America’s 21st century financial victims,” the general public, “make no protest against the Federal Reserve’s showering dollars on the people who would seem to need them least?….Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust?” Why, he asks, is there no populist outburst, in the historic tradition of U.S. society? Further, why, in the context of a 2008 presidential contest, are the candidates of the two major political parties virtually silent on the extent of the robbery taking place, and even on the financial crisis itself? “The American people,” he writes, “are famously slow to anger, but they are outdoing themselves in long suffering today.”
The fact that such questions are being asked in the leading U.S. financial paper by a noted financial analyst should give us reason to pause. Moreover, the answers that Grant gives to his questions are as interesting as the questions themselves: “Possibly, in this time of widespread public participation in the stock market, ‘Wall Street’ is really ‘Main Street.’ Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or—yet another possibility—today’s financial failures are too complex to stick in everyman’s craw.”
Grant’s own preferred explanation is that the populists really won in the days of the New Deal and later, and now, due to the expansion of the state’s role, Wall Street has become so “hand-in-glove with the government” that the space for political opposition within the system has evaporated. To be sure, he writes, “government is…—in theory—by and for the people.” But even that, he suggests, is not enough to explain the lack of public angst, which remains largely a mystery.
Although we have long been opposed (and remain so) to views that place monetary policy at the heart of explanations of the course of modern capitalism—a perspective that Grant is identified with—we nevertheless agree with his assessment here that the state and finance are in bed with each other (or have at least closed ranks in the crisis, representing a common ruling-class viewpoint). This also extends to the two major political parties and their candidates. And it includes the media, which ought to be raising a stir. The silence in the context of a general election speaks volumes. We also find ourselves in accord with Grant’s conclusion that in the end there seems to be no completely satisfactory explanation for lack of popular protest over a series of ad hoc grants showering hundreds of billions of dollars of public money on the masters of finance, collectively the richest group of capitalists on the planet. And that raises the question: Is this outrage present nonetheless, growing underground, unheard and unseen? Will it suddenly burst forth, like some old mole, unforeseen and in ways unimagined? That too, we think, is a possibility.
The July 28 Business Week, through Michael Mandel its chief economist,offers this hopeful perspective from a ruling-class standpoint: Nothing will happen until after the election and then the next president will most likely act immediately to initiate a massive bailout of the entire mortgage-based financial system. A new president, Business Week presumes, will have sufficient political clout to socialize private losses even more fully at the expense of the taxpayers, without generating a public revolt. The truth is that the last thing that the capitalist class wants is an explosion of outrage and the destabilization of what for them is a good thing indeed…vast profits from speculative bubbles, plus the government’s increasing absorption of losses on the downside: all paid for by an acquiescent or oblivious public. It is win-win for capital, and lose-lose for everyone else. In 2006 the richest 1 percent of the U.S. population received their highest share of the nation’s adjusted gross income in two decades, and maybe since the 1929 stock market crash, while their average tax rate fell to the lowest level in eighteen years or more (Wall Street Journal, July 23, 2008). Needless to say, the object of capital as a whole is to keep this game going as long as it can.
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