Wall Street Panics, Ruling Class Scrambles—Financial Crisis & Desperate Emergency Measures

A Week of Deepening Financial Crisis

Two of the four largest independent investment banks in the U.S. ceased to exist last week. In a matter of hours, Lehman Brothers went bankrupt, while Merrill Lynch was forced into liquidation and then absorbed by Bank of America. This follows the government-promoted buyout in April of Bear Stearns, another giant investment banking firm that was on the ropes, by JPMorgan Chase.

It was only several weeks ago that the U.S. government had taken over the two major and failing mortgage-finance giants—Fannie Mae and Freddie Mac. At the time, this takeover was presented as providing an effective firewall against future financial eruptions. But it proved to be no more than the patching up of a pothole during an earthquake. This past week the government had to take over the American International Group (AIG), the giant insurance-financial firm.

At the start of last week, AIG had over a trillion dollars in assets. It had earned enormous profits from insuring mortgage-backed investments circulating in the financial system that were held by other banks. But this has turned into a disaster. Here is some of what happened:

Through deceit and aggressive marketing, banks pushed mortgages on people. The Federal Reserve Bank had pumped low-cost funds into the banking system to prop up mortgage loans. These loans were then combined into larger groups of loans by investment banks (like Lehman Brothers) and turned into financial products that were sold on financial markets. All kinds of lending took place with these original loans as collateral. But when housing prices fell, and mortgages could not be paid, much of this collateral became worthless.

AIG was insuring much of this lending against the risk of loss. But as the losses mounted astronomically, AIG could neither cover the costs of backing this debt nor borrow funds on the financial markets to keep itself afloat.

The financial markets had basically lost confidence, and AIG’s assets tumbled in value. AIG was in danger of collapse. But if AIG went under, the probability was great that it would have taken down other financial institutions with it. This forced the government’s hand.

As the week progressed, the U.S. ruling class was faced with a two-fold danger: additional and cascading losses and bankruptcies in the financial sector; and the possible choking up of lending channels, which could send the economy as a whole into a rapid downward spiral.

By the end of the week, the U.S. government announced what will likely turn out to be the largest bailout operation in U.S. history. The initial cost of that bailout plan is $700 billion. This comes on top of $85 billion to rescue AIG and the plan to spend $200 billion to shore up Fannie Mae and Freddie Mac.

International Dimensions

This is a rolling financial and credit crisis. It is amplifying internationally with bursts of instability. In the midst of last week’s U.S. market gyrations, the Russian stock market sank and shut down for two days. In other parts of the world, concern spread about whether dollar-based loans in global markets would continue on the scale necessary to sustain daily business operations. In response, the central banks of Germany, Japan, England, Canada, and Switzerland pumped some $185 billion into the financial markets.

And investor worry is mounting in East Asia. China, Japan, and South Korea, for instance, count on the U.S. as a major export market.

One of the most significant features of world growth and expansion over the past decade has been the deepening integration of the world capitalist economy. This is happening both on the level of production and trade—like the parts that go into an automobile being manufactured in different factories around the world. And it is happening at the level of finance—where banks are more globally and tightly interlinked with one another through chains of borrowing and lending and even, as in the case of AIG, insuring the risks of borrowing and lending.

The rescue operation announced by the U.S. government at the end of the week was motivated, on the one hand, by the need to stanch the bleeding of the U.S. financial system; and, on the other, by the need to restore international confidence in the U.S. economy.

A particular matter of concern for U.S. rulers is the international strength of the dollar. When we think about the dollar, we mostly think about it in terms of buying and selling with dollars changing hands. But the dollar is also an investible commodity—major currencies are bought and sold and traded on international currency markets. The dollar rises and falls in value in relation to other currencies and in response to international political and economic developments.

The dollar is the world’s leading currency for settling transactions, clearing debts, and holding foreign exchange reserves (trade and investment earnings that become part of the reserves of foreign central banks).

The dollar has been a linchpin of U.S. global supremacy. And it is a linchpin of the whole current global economic order.

If foreign central banks and investors were to flee from dollar holdings, this could set off a global monetary crisis and/or strengthen the position of rivals to U.S. imperialism and rival currencies (like the euro in Western Europe).

The dollar has for the most part held firm over the past month. But this is perhaps the calm before the storm.

Uncharted Waters and the Needs of Empire

These are uncharted waters for imperialist policymakers. They are uncharted in terms of the scale and complexity of the crisis. They are uncharted in terms of the magnitude of the rescue operations required to prevent financial breakdown. And U.S. imperialism does not have unlimited maneuvering room.

The U.S. is already the largest debtor nation in the world. It is waging costly wars for greater empire in Iraq and Afghanistan. And neither McCain nor Obama has any serious intention of ending America’s global “war on terror”—the umbrella under which the U.S. is waging these “wars for empire.”

And here an important dialectic comes into play. “U.S. military dominance,” to quote Kenneth Rogoff, the former chief economist for the International Monetary Fund, “has been one of the linchpins of the dollar.”(Kenneth Rogoff, “America Will Need a $1,000bn Bail-Out,” Financial Times, September 17, 2008). But this military dominance and the wars the U.S. is waging have increasingly come to depend on the steady inflow of foreign capital into the U.S. economy, especially investments by foreign central banks in U.S. government debt (the U.S. Treasury sells bonds to cover the deficits). For this to continue requires that the U.S. economy and dollar remain stable. This is a major contradiction for U.S. imperialism.

When three of the five largest independent investment banks in the United States have gone bankrupt or been absorbed, when the U.S. government intervenes in the financial sector on the scale that it has—this has profound geopolitical implications.

At the same time, the world economy is not standing still. There are major shifts in global economic power. U.S. global economic dominance is declining. And U.S. imperialism is also facing new competitive challenges and the emergence of potential rival constellations of imperial and big powers (see the ongoing Revolution series “Shifts and Faultlines in the World Economy and Great Power Rivalry”).

The U.S. Ruling Class and Imperialist State Come Into View

As the crisis unfolded this past week, some of the realities of bourgeois rule came into sharper focus.

To begin with, while the jobs, homes, and futures of literally millions in this society are in jeopardy, what is the paramount concern of the ruling class? It is the protection of a financial system that sits atop a global system of exploitation. It is the bailout of the owners and investor beneficiaries of that financial system.

There was no public debate over bailouts and loans for financial institutions. And the constant refrain from on-high was, “This is no time to assign blame.” Certainly, there is never a time, from the standpoint of the bourgeoisie, to talk about capitalism and its exploitative and anarchic functioning.

Politically, the system operates in such a way that the masses of people are either conditioned to be passive bystanders, or mobilized under the wing of this or that bourgeois political party or bourgeois-led movement—or subject to repression when people engage in serious resistance.

And through the media, the politicians, and the official “experts,” people are trained to look at things through a certain ideological filter. When a crisis like this one hits, the problem is never presented as the system but rather as particular flaws and malpractices that can be corrected: “excessive greed,” “Wall Street irresponsibility,” “too much regulation” or “too little regulation.”

The truth is that this crisis has deep structural causes in the very nature and workings of this global system of exploitation (and these deeper causes are addressed in the accompanying article “Financial Meltdown and the Madness of Imperialism”).

Lenin once described bourgeois parliaments (like the U.S. Congress) as “talk shops.” This time, Congress did not even get a chance to “talk” first. It has been basically presented with an accomplished fact: a bailout program. Now the bailout will be debated around the edges, with vying bourgeois economic and political interests also being fought out.

There are key institutional mechanisms of bourgeois rule and of the imperialist state. They include the Federal Reserve Bank—which plays a decisive regulating and lubricating role in the U.S. economy and which also plays a special role in the world capitalist economy—and the Department of Treasury. Several mainstream news stories described how the head of the Federal Reserve and of the Treasury, and major Wall Street figures, met to sort out the AIG situation, to come up with a plan to deal with this phase of the crisis, and then to act on it.

As for John McCain and Barack Obama, one of whom will be the next “commander in chief of empire,” their response to the crisis has been an amalgam of the absurd, the hypocritical, and sworn allegiance to the system.

McCain early last week described the U.S. economy as having “sound fundamentals.” Then he moved to launch a rhetorical attack on “casino economies” and “greed” on Wall Street. Then he returned to his boilerplate calls for tax cuts, which will largely benefit the rich.

For his part, Obama has generally endorsed bailouts while deriding the policies of laxity and deregulation of the Bush presidency. The amnesia is striking. There was an orgy of deregulation during the Clinton years, including the repeal of regulatory legislation that laid the ground for the kind of mortgage-backed securities that became the rage on Wall Street. But then again, one of Obama’s chief economic advisers is none other than Robert Rubin, former chairman of Goldman Sachs (one of the last-standing independent investment banks) and head of the U.S. Treasury Department under Clinton.

Meanwhile, in Nevada last week, Obama declared, “Our free market is the engine of America’s great progress. It’s a market that has created a prosperity that is the envy of the world.” Tell that to the hundreds of millions around the world who are experiencing the ravages of a global food crisis. This food crisis is inextricably bound up with the operations of free markets that turn grain and rice into international commodities bought, sold, and speculated on by global investors. It is inextricably bound up with the “freedom” of U.S. agribusiness to dominate world food production and distribution. And it is inextricably bound up with so-called free-market “reforms” imposed on poor countries by the International Monetary Fund (which the U.S. also dominates).
Stepping Back

This crisis is far from over. There may be new rounds of financial upheaval. The economy is already in recession. And it could very well enter into a major slump.

And true to the workings of monopoly capitalism, investors and speculators are feverishly positioning themselves to take advantage of the market turmoil. They are unloading and grabbing up assets, angling to get a bite of the government bailouts, and shifting funds into different markets.

Whoever wins the election in November will be inheriting a battered financial system and a huge overlay of debt and bailout. This is not going to be an era of expanded social spending by government. But it will be an era of more direct government intervention in financial markets. And however U.S. capitalism tries to reconfigure itself, it will rest on more intense international exploitation, austerity, and more misery for people throughout the world and in the U.S.

For millions in U.S. society, this crisis is beginning to throw up many deep and troubling questions about the economy and this whole system. And it has the potential to throw up even deeper ones.

This is a highly fraught and rapidly unfolding situation.