The Economic Crisis Deepens - The Worst is Still to Come
As 2007 come to a close the American bourgeoisie was not in a party mood and rightly so, because there wasn't much to celebrate for American capitalism. By all accounts 2007 has been a horrendous year for the US economy. It opened with the bursting of the real estate bubble, then in the summer came the bust of the financial sector, a series of mini-crashes of the stock market, and the drastic devaluation of the dollar. Finally, to top it all off, the year ended with ominous news of low job creation, anemic holiday season sales and fears of rising inflation, fueled by the rising prices of oil and other commodities.
Understandably as the new year begins the mood in the ruling class is beset by gloomy forecasts for the coming year. In fact, there is no light at the end of the tunnel. 2008 does not promise to be much better than 2007. On the contrary even by the most optimistic predictions, the worst is still to come.
A worsening economic crisis
The bourgeoisie's official definition of a recession is two consecutive quarters of negative growth. Based on the avalanche of bad economic news that have come out in the last weeks, some economists are saying that a recession may have already begun in December. However not all economists are convinced that things are that bad. Despite all the bad news, the GDP is still showing small positive growth rates today, so, some economists express hope that the American economy may avoid falling into a recession. On the other hand some other experts think "it literally could go either way."
These predictions that fill the pages of the economic sections of newspapers and magazines are very misleading. In the last instance they only contribute to hide the catastrophic state of American capitalism that can only get worse in the months to come regardless of whether or not the economy officially enters recession.
What is important to emphasize is that we're not talking about a supposedly "healthy" American economy that is simply going through a troubled phase in a supposedly normal business cycle of expansion and bust. What we are witnessing are the convulsions of a system in a chronic state of crisis that can only buy ephemeral moments of "health" by toxic remedies that will only aggravate the next catastrophic collapse.
This has been the history of American capitalism -and worldwide capitalism- since the end of the sixties with the return of the open economic crisis. For the last four decades through official expansions and busts the overall economy has only kept a semblance of functionality thanks to systematic state capitalist monetary and fiscal policies that the government is obliged to apply to fight the effects of the crisis. However the situation has not remained static. During these decades of crisis and state intervention to manage it, the economy has accumulated so many absurdities that today there is a real threat of an economic catastrophe, the likes of which we have not seen in the history of capitalism.
The bourgeoisie bought its way out of the burst of the tech/internet bubble in 2000/01 by creating a new bubble based, this time, on real estate. Despite the fact that key industries in the manufacturing sector -the auto and air line industries for instance- continue going bankrupt, the real estate boom for the last five years gave the semblance of an expanding economy. Now the boom has transformed itself into the present bust that has shaken the whole edifice of the capitalist system and which will still have future repercussions that no one can yet predict.
According to the latest data about the real estate crisis, the activity related to private housing is in total disarray. The construction of new homes has already fallen by around 40 percent since its peak in 2006; sales have fallen even faster dragging down with it prices. Home prices have dropped by 7 percent nation-wide since the peak in 2006 with predictions that they will fall by another 15 to 20 percent before hitting bottom. The real estate boom has left a huge inventory of vacant unsold homes - about 2.1 million, or about 2.6 percent of the nation's housing supply. And the glut is bound to increase as the wave of foreclosures continues to broaden, hitting even borrowers with supposedly good credit. Last year's foreclosures were mostly limited to the so-called subprime mortgages -loans given to people with essentially no means to repay. Nearly one-fourth of such loans were in default by last November. Although default rates on loans given to people with relatively good credit are much lower, they are also rising. In November, 6.6 percent of these loans were either delinquent, in foreclosure, or had been repossessed. In a sign of worse things to come, this spike in foreclosures is happening even before many mortgages have reset to higher interest rates.
The bursting of the real estate bubble is wreaking havoc in the financial sector. So far the crisis in real estate has generated over 100 billion dollars in losses at the world's largest financial institutions. Billions of dollars in stock market value have been wiped out, rocking up Wall St. Among the big names that lost at least a third of their value in 2007 were Fannie Mae, Freddie Mac, Bear Stearns, Moody's, and Citigroup. MBIA, a company that specializes in guaranteeing the financial health of others, lost nearly three-quarters of its value! Several of yesterday's high-flying mortgage related companies have gone bankrupt.
And this is only the beginning. As foreclosures accelerate in the coming months banks will be counting new losses and the credit crunch already in place will tighten up even more, impacting other sectors of the economy.
Moreover, the financial crisis related to the mortgages is only the tip of the iceberg. The same reckless lending practices that we are learning were dominant in the mortgage market are also the norm in the credit card and auto loans industries, where problems are also increasing. And here lies the essence of today capitalism's "health". Its little dirty secret is the perversion of the mechanism of credit as a way to buy its way out of a lack of solvent markets to sell its commodities. Lending is no longer a promise of repayment with a profit backed up by some material reality (i.e., collateral) that can stimulate capitalist development. It has become a way of keeping the economy artificially afloat and preventing the collapse of the system under the weight of its historic crisis. Already in the 1980's the financial crisis that followed the bust of the Latin American economies weighed down by debts that they had no means to repay demonstrated the limits of credit as a remedy to deal with the crisis. The same lesson could have been learned in 1997 and 1998 at the time of the collapse of the Asian tigers and dragons, and Russia's default on its debt. In fact the housing bubble was a reaction and an effort to overcome the burst of tech/internet bubble. One can justly pose the question, what is the next bubble going to be?
Yet there is another aspect of the present financial crisis. This is the rampant speculation that accompanied the real estate bubble. What we are talking about is not small time speculation by an individual investor buying a house and quickly flipping it to make a quick buck from the fast appreciation of the value of the property. This is peanuts. What really counts is the big time speculation that all the major financial institutions engaged in through the securitization and selling of mortgage-debt in the stock market. The exact mechanisms of these schemes are not easy to come by, but from what is known they look very much like the age old ponzi schemes. In any case, what this monstrous level of speculation shows is the degree to which the economy has become a "casino economy" where capital is not invested in the real economy, but instead it is used to gamble.
The medicine is not working
The American bourgeoisie likes to present itself as the ideological champion of free market capitalism. This is nothing other than ideological posturing. An economy left to function according to the laws of the market has no place in today's capitalism, dominated by omnipresent state intervention. This is the sense of the "debate" within the bourgeoisie on how to manage the present economic mess. In essence there is nothing new being put forward. The same old monetary and fiscal policies are applied in hope to stimulate the economy. Among the big proposals are lower taxes and rising spending - public projects like public infrastructure expansion: highways, bridges, airports.
For the moment what is already being done is also the application of the same old policies of easy money. So far the Federal Reserve has cut its interest rate benchmark three times and seems posed to do so once more this month. In a desperate move to bolster liquidity on the credit market it offered a big Christmas gift -cheap multibillion emergency dollars - to the financial institutions that were short on cash.
What these efforts by the State to manage the crisis will amount to remains to be seen. What is evident is that more than ever the bourgeoisie has less margin of maneuver for its economic policies. After decades of managing the crisis, the American bourgeoisie sits on a very sick economy. The monstrous national debt, the federal budget deficit, the fragile financial system, all this makes it more difficult for the bourgeoisie to deal with the collapse of its system.
For the working class the aggravation of the economic crisis will undoubtedly bring more misery as it deals with the attacks that the bourgeoisie will launch to try to make it bear the impact of its economic difficulties. It is time to prepare to defend itself and give society a different perspective than the present madness of capitalism.
- Eduardo Smith 1/13/08