Wednesday, September 17, 2008

CAPITALISM: THINGS FALL APART


It is getting scary out there folks. The capitalist crisis currently underway has spread around the globe and few are immune.

The two capitalist candidates here in the USA can't offer anything much because they have to support a system - capitalism - which just ain't working.

I'm not going to tell you that capitalism will now collapse and that the socialist era has finally arrived.

That never seems to happen, so when it does (and sooner or later it will) I'll be as surprised as the next person.

So while McCain announces all is well (well sort of, maybe, or not quite or something) and Obama finds the time to pick up a cool 9 million bucks amidst the limousines and glamor of Hollywood stars and starlets, most of the rest of the American people grow more and more nervous about what the future holds for them.

I believe the image at the right is the work of John Breiner (at least, it comes from his web page). It is entitled "Things fall Apart."

The first article below is from Socialist World.net. The second is from Moscow News.

Capitalist crisis
Karl Marx was right

Editorial from The Socialist, paper of the the Socialist Party, Committee for a Workers' International in England and Wales

“It is a moment Karl Marx would have relished. From every angle financial capitalism is taking a battering” (The Guardian).

The economic witch-doctors and soothsayers of capitalism were wrong and the socialists and Marxists were right. This is what the collapse of Lehman Brothers – the fourth largest investment bank in the world – means.

The financial ‘bloody Sunday’ was followed by ‘meltdown Monday’ and the collapse of share prices worldwide. This has shattered the current ideological foundations – and much more besides – of capitalism.

Capitalism’s representatives argued that the collapse of Stalinism and, with it, the planned economies of Russia, Eastern Europe and elsewhere, left capitalism as the only effective vehicle for delivering goods and services to the peoples of the world. The future was one of endless rises in living standards.

We argued that the inherent contradictions within capitalism – a system based on production for profit and not need – remained, particularly the economic cycle of ‘boom and bust’. These, however, were masked for an historical period by the unprecedented ‘financialisation’ of the system through the massive extension of credit.

But like an elastic band stretched to breaking point, it was bound to snap at some stage. Lehman Brothers, for instance, was ‘leveraged’ – that is, borrowed – on a monumental scale of 35 times the value of its assets. It was 164 years old, had survived two world wars, the depression of the 1930s and a collapse and rescue in 1984 but has now been brought to its knees by this crisis. Yet its chief, Dick Fuld, known as the ‘gorilla’ for his aggressive manner, paid himself £22 million last year when the weaknesses of the bank were already obvious! He will not suffer – except from loss of face – but the 25,000 Lehman Brothers employees will.

The roots of the crisis are well known. They lie in the disintegration of the housing market in the US and particularly the subprime sector which lent to mostly poor people who had no prospects of repaying their inflated mortgages. However, there is not just one financial problem but now a chain of looming crises, unexploded bombs, which could yet ignite, with further huge slabs of masonry falling off the ‘financial architecture’ of US and world capitalism.

Why did the US Federal Reserve bail out Bear Stearns, and Freddie Mac and Fannie Mae, and not Lehman? The simple answer is that Hank Paulson, US Treasury Secretary, and the economic strategists of US capitalism believed that unless the former were rescued, a new financial crash like 1929 was possible. Nouriel Roubini, a capitalist economist who has consistently agreed with us Marxists on the seriousness and scale of this crisis, called Paulson’s action “socialism for the rich”.

Other threatened banks and industries therefore lined up with their begging bowls, asking for bail-outs from the state, which they previously maintained had ‘no role’ in the workings of so-called free market capitalism. If they were to be helped, what about the two million US workers who have already lost their homes – estimated to rise possibly to ten million by Roubini – who would demand equal treatment with the financial plutocrats? Failure to do so could undermine McCain, the right-wing Republican presidential candidate, who would be seen as openly on the side of the rich, who have been ‘saved’ by his friends in the Fed.

Therefore, Lehman Brothers has been allowed to die but an ‘unofficial’ rescue operation was undertaken to save Merrill Lynch. Another financial whale, American International Group (AIG), responsible for insuring against ‘risk’ in the huge derivatives market – and also the sponsor of Manchester United – is teetering on the brink. But Ken Lewis, the chief executive of Bank of America, said the failure of AIG would be a bigger shock to the system than the bankruptcy of Lehman. He urged the authorities to find a way to support the company. “I don’t know of a major bank that doesn’t have some significant exposure to AIG,” he said. “That would be a much bigger problem than most that we’ve looked at.”

Lehman was, it seems, not crucial for the US economy whereas Fannie, Freddie and even Bear Stearns are major players in US local government finance. Half of the 9,000 banks in the US could have collapsed if they were not rescued. But, the fall-out from the collapse of Lehman could still be very severe, with big international repercussions; debts to Japanese investors in Lehman are considerable, for instance.

Instability
US capitalism – and particularly the financial sector – is therefore not yet out of the woods. The derivatives ‘industry’ is highly unstable, commercial property prices are declining and, crucially, ‘insurance’ institutions (as a safeguard against the financial collapse of firms) also could collapse. A financial domino effect threatens, which means that this crisis is no ‘five-minute wonder’.

It will extend – in fact, it already has done – into the ‘real economy’, both in Britain – which has entered a recession – and in the US. This has inevitably drawn in Europe, Japan, the rest of Asia and, ultimately, China. It will be the workers in the finance sector – and most of them are white-collar workers – who will be the first to suffer. Sixty-three thousand have already gone down the road, mostly in London and New York. A further 20,000 jobs in UK financial services could vanish in the next year or so.

Some 1.04 million people work in banking, finance and insurance in Britain. Some affected have posted heartbreaking messages on websites: “dh (slang for dear husband) lost job. No savings and likely not getting paid this week… How on earth will we manage? How long will the lenders give you if you can’t pay the mortgage?”

Spare a tear for these workers but not for the well-oiled, well-dressed ‘masters of the universe’ who, despite their crocodile tears, will not really suffer. Unemployment will now rise substantially, with an estimated half a million lost jobs adding to the dole queues in Britain. These events represent a massive indictment of neo-liberal capitalism, the untrammelled rule of the ‘market’, in which a handful of billionaires can ruin the lives of millions.

Moreover, they do not fully understand the workings of their own system. Alan Greenspan, former chairman of the US Fed, confessed with regards to the “new financial instruments” that “he didn’t get it”. Eddie George, former governor of the Bank of England, has also admitted that he did not understand them! What chance then for the rest of us understanding these devices which have become “financial weapons of mass destruction”?

The solution is not just the ‘de facto’ capitalist nationalisation of Bear Stearns or the more explicit example of the US government’s takeover of Fannie and Freddie. These failing banks should not only have been nationalised, but put under workers’ control and management, with compensation based on proven need and protection of small depositors. Moreover, it should be just the first step to them joining a socialist and democratic plan of production for the economy as a whole.

Great events either confirm or falsify ideas. Capitalism has failed in a period most favourable to this system.

If working people are not to be dragged into the abyss of unemployment and poverty, they should embrace the political weapons of socialism and Marxism.

Below are the comments of the economist Nouriel Roubini, Professor of economics, who has come to the same conclusions as the CWI regarding the crisis of the world economy from a capitalist standpoint. These were published in the London newspaper The Independent on 17 September, 2008



This will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades.

This is not just a sub-prime mortgage crisis, this is the crisis of an entire sub-prime financial system, and at the end of the day it will imply credit losses of at least $1trn (£561bn) and more likely $2trn.

As I predicted months ago, no independent broker-dealer will survive. In the credit default swaps market, $62trn of nominal protection sits on top an outstanding stock of only $6trn of bonds, and counter-party risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.

Hundreds of small banks with massive exposure to real estate will go bust, and the Federal Deposit Insurance Corp will for sure run out of money. Hundreds of US municipalities will go bust. Equity prices in the US and abroad will go much deeper in to bear territory.

In a typical US recession, equity prices fall by an average 28 per cent relative to the peak, but this is not a typical US recession. Equity prices will fall 40 per cent relative to their peak, so we are only barely mid-way in the meltdown of US and global stock markets.

The rest of the world will not de-couple from the US recession. Already 12 major economies are on the way to a recessionary hard landing. All of the G7 economies are now entering recession, while the rest of the world will experience a severe growth slowdown. This financial crisis signals the beginning of the decline of the American empire.


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Government Hesitance Worrying to Investors
18 September 2008
By Miriam Elder / Staff Writer

As Russian markets suffer their worst crash since the 1998 default crisis amid earth-shattering global turmoil, longtime investors in the country warned that it was time for the government to wake up.

"Officials are showing a remarkable degree of sang-froid — deer in the headlights is another way of putting it," said Eric Kraus, an adviser to brokerage Otkritie who has worked in Russia for more than a decade.

The lack of confidence-building statements is "not reassuring," said Kraus, who closed his own fund 12 months ago amid initial global liquidity jitters.

Russia's RTS Index has plummeted by 57 percent since mid-May, while the oil price has fallen 37 percent from its July 11 high of $147 per barrel. In the month since the war with Georgia, more than $20 billion of foreign capital is thought to have quit the country as tensions between Russia and the West worsened amid perceptions of political risk.

President Dmitry Medvedev said last week that the flood of capital from Russia was caused 75 percent by global turmoil, and 25 percent "is from our own investment problems, including the consequences of the war in the Caucasus."

While the Central Bank and Finance Ministry have pumped billions of dollars into the markets since last week, top government officials have appeared indifferent or even dismissive, a factor that has contributed to the lack of confidence in Russia's ailing exchanges, bankers said.

On Wednesday, the government offered $44 billion in loans to the country's three biggest banks, while state auctions saw banks taking up $19 billion in short-term cash, a day after they borrowed $20 billion.

As regulators closed Russia's markets for the second time in two days Wednesday, Medvedev and Prime Minister Vladimir Putin issued a series of statements that appeared aimed at boosting national self-esteem.

On Wednesday, Medvedev signed friendship treaties with the Georgian breakaway regions of South Ossetia and Abkhazia, formalizing Russia's military, diplomatic and economic cooperation with what it sees as independent states, and told his Security Council that it was time to draw up a law grabbing part of the disputed resource-rich Arctic.

In a televised meeting Tuesday, Putin said Russia had built up a "security cushion" to prevent it from economic shocks — before announcing that defense spending would rise 27 percent next year to nearly $100 billion.

Sitting on $574 billion of foreign currency reserves and $175 billion in two oil stabilization funds, the government is in a wholly different position than 1998, when the ruble collapsed and the country defaulted on its sovereign debt.

Yet then, as now, the country's top leadership appeared at a loss for how to react, several bankers said.

"The Central Bank and the monetary officials in Russia can inject extra liquidity, as they have before," said Hawk Sunshine, head of equities at Metropol. "For how long? It's a matter of confidence, a bit of a show game."

"The drain of liquidity is going to really hurt the mid-cap companies that are looking for financing," he said. "Russians don't lend money to other Russians cheaply, period."

Others said there was only so much the government could do.

"It's a complete crisis of confidence," said James Fenkner of Red Star Asset Management. "The investors don't trust the brokers, and the brokers don't trust the investors."

"No one knows who owes how much to whom," he said.

The market swirled with rumors Wednesday that several brokers were due to fail. KIT Finance was the first brokerage to stand on the brink, as it announced it was seeking strategic investors to save it from financial obligations it was unable to meet.

"What the market is saying is that it's heading for a complete and total collapse," Fenkner said. "Either that's true, or if they deal with this right, we'll look back and see it as a great buying opportunity."

"At this point, it's not about words," Fenkner said, adding that the government should instruct state-controlled banks such as Gazprombank and VTB to step in and lend, buy bonds and allow brokers wide margins.

"This is the classic crisis of capitalism, where you have everyone acting in their own self-interest, holding back on doing what would be good for the whole market — and that's when you need the government to step in," he said.


Miriam Elder is a staff writer for the Moscow News and has published articles in numerous newspapers around the world. These include the London Telegraph, the International Herald Tribune, the Los Angeles Times, and the Times of London to name a few.

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