The international financial crisis and illusions in a purified capitalism

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The international financial crisis and illusions in a purified capitalism

By Peter Schwarz
22 September 2008


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Five days after the collapse of the investment bank Lehman Brothers the extent and consequences of the international financial crisis still remain incalculable. Not a single country or continent is exempt from the crisis.


In Australia the largest investment bank Macquarie is threatened with bankruptcy, Russia is experiencing its deepest financial crisis in ten years, the Asian stock exchanges have registered huge losses, and in Europe one piece of bad news follows the next. While government spokesmen seek to spread optimism, facts provide a different picture. Already the losses suffered by German and French banks following the collapse of Lehman Brothers is reckoned at several billion euros.

The German weekly paper Die Zeit has pointed out that the complex nature of modern financial Instruments means that it could take weeks until the real extent of losses comes to light. “It is likely that the worst is still to come because many loss makers only make themselves known after a period of time”, it writes.

All serious economic comments agree that an end of the crisis is not in sight. “The most frightening aspect of the past 24 hours is that any faith that central bankers and finance ministers could get a grip on the crisis has evaporated dramatically”, wrote the daily Die Welt on Thursday. And the British business paper Financial Times wrote on the same day: “We are without question in the worst financial crisis since 1929. We still do not know how many banks and institutions will collapse.”

On Thursday and Friday the stock markets moved upwards after the US central bank pumped 180 billion dollars into the markets. But some comments rate this enormous financial injection as an “act of despair”, which says more about the extent of the crisis and the panic exerted by it rather than providing any sort of solution.

While the financial crisis continues to unwind its effects are making themselves increasingly felt on production, trade and consumption. Even if it does not come to a complete implosion of the financial markets, a profound recession of the entire world economy is now considered probable.

The shortage of liquidity and increase in interest rates will drive numerous companies into insolvency and in turn intensify the finance crisis. Increasing unemployment, rising prices, sinking wages and further bankruptcies will be the result—a vicious circle.

In addition the three-figure billion-sums pumped into the stock markets by governments and central banks must be financed by the taxpayer. The rapid increase in budget deficits will lead to further cuts in social and public expenditures.

The development of an enormous speculation bubble during past years was accompanied by an unprecedented social polarisation between the wealthy and the masses of the population. Now this process will experience a further quantum spring with the collapse of this bubble.

The result will be vigorous resistance and a worldwide intensification of class struggle. The ideology of the free market, which was raised to the rank of a state religion after the collapse of the Soviet Union, has suffered irreparable damage in the wake of the collapse of major Wall Street banks. Under these conditions social opposition will invariably tend to take an anti-capitalistic and left wing form.

Shock and fear It is against that background that one must understand the debate which is now taking place in the European media over the consequences of the financial crises. This debate is characterised on the one side by a sense of shock at the collapse which has taken place, and on the other side by fears that reaction to the crisis could assume revolutionary forms.

Even in the traditional conservative media, which has up to now praised the free market as the highest achievement of human civilisation, articles are appearing which read as if they were produced by the editorial boards of anti-globalisation movements.

Die Zeit poses the question: “Is finance-capitalism finished?” and predicts “the end of the world domination by the Anglo-Saxon finance industry.”
Writing in the Frankfurter Allgemeine Frank Schirrmacher declares: “There must be some madmen walking around who up until Monday had not been spotted because their madness was identical to the logic of the established system. They destroyed fortunes equivalent to entire national budgets....”

Die Welt complains: “Greed and stupidity have plunged the market into chaos—managers and financial supervisors have failed”. The paper continues: “Any economics student in his first semester could have concluded that the American economic model is not tenable”.

However, while these commentators blame responsibility for the crisis on “predatory capitalism”, “Anglo-Saxon finance capitalism”, and the “greed and stupidity” of individuals, they spread the illusion that there could be a better, more regulated and reasonable form of capitalism.

Die Welt writes, “ The current crisis is the product of a complete failure at many instances in state and economy ... however to conclude that the market economy itself cannot function is mistaken. It is not the free market economy which is responsible for the financial crisis, but rather the fact that important market players and those who supervise the market have failed to follow established economic laws or believed that such laws no longer applied.”

This form of reasoning is most clearly expressed in a commentary in the Süddeutsche Zeitung on Friday titled: “A purified capitalism.” The author Heribert Prantl proclaims the end of “turbo capitalism.” “The form of capitalism known as turbo capitalism has refuted, dissected and conquered itself. The turbo was greed,” he writes. “Turbo capitalism consumes its children, its clients and their share holdings.”

Prantl goes on to praise “the social market economy in the form in which it was developed in the federal republic after the Second World War” as “the most successful economic and social order in economic history”. Because he realises that the “regulating hand” of the nation state has lost his influence with the globalisation of the world economy, he proposes elevating the social market economy to an international level: “It must be regulated in such a way that the international economic and financial order is compatible with social requirements”.

And who is to undertake this “Herculean task”? According to Prantl: “the United Nations, the G-8—and thus the governments of the industrial nations.... The task is to establish a legal system that co-ordinates the anarchy of the markets and then to implement it step by step. Needed is a new contrat social.”

Prantl fails to explain to his readers why precisely those governments of leading industrial nations, which made “turbo-capitalism” their programmatic and political trademark for the past twenty years, should now undertake a different course. His remarks are an attempt, to find a way out of the crisis which is not based on the living struggle of social forces. This, however, is an illusion, and a dangerous one at that.

In Germany the economic crisis of 1929, as is well known, led within the space of four years to the seizure of power by the Nazis. Hitler was able to succeed because of the abject failure of the worker’s parties. The SPD paralysed the working class by binding it to the impotent institutions of the Weimar Republic while supporting Brüning’s emergency laws; and the German Communist Party paralysed the working class by hiding its fatalism behind left-wing phraseology, rejecting a united front to oppose the Nazis.
The bourgeois parties all capitulated to the Nazis, even agreeing to their own disempowerment by voting for Hitler’s Enabling Law.

Prantl, who is thoroughly versed in historical questions evokes Rousseau’s contrat social (social contract). But he forgets that it was the French revolution, one of the greatest revolutions in world history, which lead to its realisation.

“Turbo-capitalism”, when one accepts this category is not merely a product of individual greed. It is based on class interests, which are embodied in the private ownership of the means of production.

Already the opening and liberalisation of the financial markets at the beginning of the eighties was a reaction to the economic recession and the violent class struggle of preceding years. It was bound up with an international offensive against the working class, which culminated in the smashing of the American air traffic controllers’ trade union, PATCO, and the defeat of the one-year’s British miner’s strike. Since then, wages and social benefits have stagnated while profits and fortunes have soared.

The notion that the financial oligarchy will voluntarily yield up its booty and conclude a contrat social is ridiculous. Prantl interprets the intervention of the US government in the finance crisis as a step in this direction. But in fact the opposite is the case. It has plundered the treasury in order to cover the risks of speculators, while workers, the socially weak and small house owners will be required to foot the bill.

[Thinking Man's Idiot]

WSWS : News & Analysis : North America
No to Wall Street bailout!
The socialist answer to the financial crisis

Statement of the Socialist Equality Party National Committee
22 September 2008

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The Socialist Equality Party and its presidential and vice presidential candidates, Jerome White and Bill Van Auken, unequivocally oppose the plan to bail out Wall Street with hundreds of billions of dollars of taxpayer funds announced by the Bush administration and embraced by Democratic presidential candidate Barack Obama and the Democratic congressional leadership.


The plan, which is being rushed through Congress for passage this week, is the response of the government and the entire political establishment to what is acknowledged to be the greatest economic crisis since the Wall Street crash of 1929. It calls for an unprecedented transfer of public funds to the major banks and the American financial elite at the expense of the broad mass of the people.

Both the plan itself and the manner in which it is being imposed are deeply undemocratic. Exploiting the breakdown in US and global financial markets, the financial aristocracy, which is responsible for the crisis, is exercising its control over the government, both political parties, and the media to implement policies of the most far-reaching character without any genuine debate or discussion. As in the aftermath of 9/11, it is seeking to utilize the crisis to push through policies that would otherwise be considered entirely unacceptable.

None of the measures being carried out address the underlying causes of the financial meltdown, nor will they resolve the crisis. At most, they will only postpone the day of reckoning.

None of those who control the banks and finance houses are being held accountable, and not a penny is being provided to provide relief for millions of working class families who are losing their homes, their jobs, and their livelihoods as a result of the frenzied speculation that led to the crisis.

Make no mistake: The working people, who are the victims of the financial parasitism of the ruling elite, will foot the bill to bail out those who have enriched themselves by plundering the social wealth. The massive expansion of budget deficits and the national debt as a result of this plan will be used to justify a brutal assault on basic social programs, education, housing and the wages, jobs, pensions, and health benefits of the working class.

The government has pegged the cost of the program—by which the US Treasury will purchase virtually worthless mortgage-backed assets from banks and other financial institutions—at $700 billion. This sum already represents the biggest corporate bailout in world history. It is larger than the annual budget for Social Security and the combined annual outlay for Medicare and Medicaid. It has been estimated that such an expenditure translates to a cost for each US family of approximately $10,000.

Combined with the stated cost of other corporate bailouts and related outlays carried out over the past several weeks—$200 billion in the government takeover of mortgage giants Fannie Mae and Freddie Mac, $85 billion in the takeover of the insurance conglomerate American International Group (AIG), $50 billion to insure money market funds, and $200 billion in Treasury transfers to the Federal Reserve Board—the $700 billion handout to the banks exceeds the total allotment for all discretionary spending, excluding the Pentagon, for fiscal year 2009.

In fact, the figure of $700 billion is a huge underestimation of the ultimate cost of the Wall Street rescue plan. The New York Times noted Monday that the decision of the Bush administration to extend its purchase of securities to foreign-based banks that operate in the United States—carried out under pressure from global institutions that hold massive amounts of US debt—will substantially drive up the cost of the program.

The text of the four-page “Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets,” published Saturday by the New York Times, reveals the profoundly anti-democratic and open-ended nature of the scheme.

The first provision establishes the unlimited and unilateral authority of the Treasury secretary, an unelected official, to order the use of taxpayer funds to purchase whatever “mortgage-related” securities, at whatever price, at whatever amount and from whatever financial institutions he chooses.

It states that the secretary—currently Henry Paulson, the multi-millionaire former CEO of Goldman Sachs—is “authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the secretary, mortgage-related assets from any financial institution...”

This is followed by a provision stipulating that the Treasury secretary’s authority under the act is “without limitation.”
A further provision authorizes the Treasury secretary to enter into contracts with the banks “without regard to any other provision of law regarding public contracts.” In other words, to ignore established law concerning public contracts.

The proposal states that the government will designate “financial institutions” to operate the bailout program. This means that the government will hand over management of the program to some of the very corporations that are responsible for the crisis and which stand to profit directly or indirectly from the bailout.

Congress, under the proposal, will be relegated to receiving semi-annual reports from the Treasury Department. It will have no real power of oversight or control.

The proposal gives the Treasury secretary unchecked authority to resell assets the department has taken off of the hands of the banks. This means that the banks will profit on both ends of the deal—they will be relieved of massive debts and will then be able to buy back the securities at fire-sale prices after the housing market has restabilized.
The text states that the Treasury secretary’s authority to purchase mortgage-related assets will be limited to $700 billion “at any one time.” In other words, he will be able to buy more worthless assets after having sold back some of those previously purchased—rendering the supposed $700 billion limit fictitious.

Under “Termination of Authority,” the proposal declares a two-year limit, but includes certain exemptions that will, in practice, enable the Treasury to extend the duration of the program indefinitely.
The proposal calls for a $700 billion increase in the statutory limit on the national debt, raising it to $11.315 trillion.

It then defines “mortgage-related assets” so broadly as to potentially cover everything from trillions of dollars in bonds to the estimated $62 trillion unregulated market in so-called “credit default swaps.”
Perhaps the most extraordinary provision reads as follows: “Decisions by the secretary pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

This flagrantly unconstitutional provision establishes the unelected Treasury secretary as a law unto himself, beyond the control or oversight of Congress, other executive agencies or the courts. Two things need to be said of this provision: It makes overt what is normally hidden behind the trappings of American democracy—that is, the dictatorship of finance capital—and it implicitly acknowledges that what is being proposed is a violation of law. Why else insist that no one be allowed to challenge it in court?

That Obama and the entire Democratic Party leadership have lined up to endorse this windfall for the richest people in the country explodes their pretensions to offering an alternative to Bush and McCain and underscores the total subordination of both parties to the financial elite.

The bailout plan, devised by and for the most powerful sections of the American capitalist class, exposes all of the lies and myths that have been promulgated to defend the profit system: the claim that multimillion-dollar paychecks for corporate executives, vast profits for speculators, and ever-widening social inequality are justified because the capitalists must be compensated for their “risk-taking”; the mantra that social problems cannot be solved by “throwing money” at them, and that, at any rate, there is no money for jobs, housing, health care of education; the constant invocations against “big government.”

It demonstrates the class character of the government and the policies and decisions it takes, and the existence, behind the trappings of democracy, of a plutocracy—the rule of the rich.

The real source of the financial crisis is not and cannot be discussed by any of the official institutions or any of the political representatives of big business, whether Republican or Democratic. It is the capitalist system itself, which has for decades sought to overcome its fundamental contradictions by engaging in ever more parasitic and fraudulent forms of financial manipulation—piling up debt while dismantling the productive infrastructure of society.

American capitalism has become the global leader in the creation of personal wealth for the ruling elite entirely separated from the creation of real value in the process of production. The current economic breakdown, which threatens the world’s people with catastrophe, is the inevitable result.

The alternative to the naked dictatorship of capital and the impoverishment of the working people is socialism. The Socialist Equality Party insists that if the resources of the American people must be mobilized to avert an economic catastrophe, then the American working people should assume control of the financial institutions and use them for the common good, not corporate profit and personal enrichment.

We propose that the major banks and financial institutions be nationalized and turned into public utilities, operated under the democratic control of the working population. The vast financial resources that they control must be used to provide decent education, housing, health care, retirement benefits and good-paying jobs for all.

This should be carried out without compensation to their former owners, while securing the deposits and savings of working people and small business owners.

The billions of dollars in social wealth diverted into the private accounts of speculators and bankers must be recovered, to be used for the expansion of social programs that benefit the masses.

There must be a public accounting of the fraud and corruption that have fueled the crisis, and those responsible must be held accountable, including by means of criminal prosecution.

The books of the major banks, financial firms, insurance companies and hedge funds must be opened to public examination, to lay bare illegal and socially destructive activity.

The Socialist Equality Party and its candidates for president and vice president, Jerome White and Bill Van Auken, advocate the creation of a workers’ government—a government of, by and for the working class—to carry out emergency measures to resolve the crisis in the interests of working people, including a halt to all foreclosures and repossession of homes, the creation of millions of public works jobs, a ban on wage-cutting and layoffs, and an enormous expansion in public services.

We issue an urgent appeal to all those who oppose the bankrupting of society for the benefit of the financial elite, who wish to defend the interests of working people, and who see the need for a socialist alternative to the two parties of big business: Support the SEP election campaign and its candidates, Jerome White and Bill Van Auken. Join the Socialist Equality Party.