Times are hard for the world economy! Not only has it still to get over last year’s sub-prime crisis in the US housing market, the overall situation of the capitalist economy has never seemed so dangerous since the late 1960s: despite all the efforts of the ruling class to fend it off, the crisis is back with a vengeance. The US housing crisis has been transformed into an international financial crisis, with alarms going off everywhere as American and European banking and financial institutions appear to be threatened with insolvency. Those financial institutions that were in danger of bankruptcy have only survived thanks to state intervention, and there is a real fear that many financial institutions which up to now had been considered safe, may find themselves in danger of bankruptcy and so creating the conditions for a major financial crash. The crisis of confidence gripping the international banking system has aroused serious concern among many fractions of the world ruling class that there is a real danger of the whole system seizing up, making it impossible for companies and households to get the credits (even at higher prices) on which the economy’s activity depends. There is a risk that a full-blown financial crash be combined with a whole series of other “economic disasters” which are by no means accidents, but which on the contrary are expressions of a violent return of an economic crisis which the bourgeoisie has been trying to stave off by every means possible:
A forecast slowdown in economic activity, or even a recession in the case of some countries, such as the United States. The bourgeoisie managed to overcome successive crises since the 1970s thanks to an ever-growing mountain of debt, which brought ever more meager results. Will it be possible to hold off recession once again without new and greater injections of debt, with all the risks that implies for the stability of the world’s banking and credit mechanisms.
The decline in share values, punctuated by the occasional abrupt fall, has shaken confidence in the foundations of the whole system of speculation. The successes of stock exchange speculation, which made it possible to hide much of the difficulties of the world economy in particular by contributing in large part to the rise in company profitability since the mid-1980s, also created the myth that equity values could only go on rising no matter what ups and downs affected the economy.
The weight of military spending is an increasingly intolerable burden on the economy, as we can see clearly in the case of the USA. And yet this weight cannot be reduced at will. It is the consequence of the growing weight of militarism in social life, where each nation is increasingly pushed into military adventures at the same time as it is confronted with ever more insurmountable economic difficulties.
The return of inflation doubly haunts the bourgeoisie. On the one hand it threatens to reduce trade as a result of more and more unpredictable fluctuations in prices. At the same time, it is easier for workers to spread the struggle to other branches of industry when the fight concerns the defense of wages eaten away by inflation than when it concerns the threat of redundancy for example. Yet the only means for holding back inflation – reduction in credit and state spending – would only make the recession worse if they were put into operation.
Consequently, the present situation is not just a worse remake of all the crises since the 1960s, it concentrates them all in one explosive bundle which has given the economic disaster a whole new quality, much more likely to lead to a calling into question of the whole system. Another sign of the times is that whereas up to now it is America that has played the part of locomotive to draw the world economy out of recession, the only direction that the USA seems likely to draw the world today, is over the cliff and into recession.
The deepening economic crisis in the United States
When it comes to the economic situation in the U.S., George Bush is the most optimistic man in America—he may be the only optimist in America. February 28th, even though he acknowledged the risk of an economic slowdown, the President declared, “I don’t think we’re headed for a recession… I believe that our economy has got the fundamentals in place for us… to grow and continue growing, more robustly that we’re growing now. So we’re still for a strong dollar.” Two weeks later, on March 14th, the President reaffirmed his optimistic outlook before a meeting of economists in New York City where he expressed confidence in the “resilient” American economy. He did this on the very day that the Federal Reserve and JP Morgan Chase were forced to collaborate on an emergency bailout plan for Bear Stearns, the Wall Street investment bank, after it suffered a run on the bank reminiscent of the Great Depression; that crude oil prices hit a record high $111 per gallon, despite the fact that supply far exceeds demand; that the government announced that mortgage foreclosures rose 60 percent in February; and that the dollar hit a record low against the Euro. Bush’s denial of reality notwithstanding, it is clear that the appearance of prosperity that accompanied the housing boom and real estate economic bubble of the last few years has given way to a full-blown economic catastrophe in the world’s most powerful economy, thus putting the economic crisis in the forefront of the international situation.
The housing crisis is symptomatic of a chronic crisis of the system.
Ever since the first signs that the housing boom was coming to an end at the beginning of 2007, bourgeois economists began debating the odds of a recession in the US economy. Just three months ago, at the beginning of 2008, the predictions ranged considerably, stretching from the ‘pessimists’ who thought that a recession had already started in December, to the ‘optimists’ who were still expecting a miracle that would avoid it. In the middle, hedging their bets, were the uncommitted experts saying that the economy “could literally go either way.”
Things have gone so bad so fast in the last two months that, except for Bush, there is no more room for optimism or ‘centrism.’ The consensus is now that the good times have come to an end. In other words the American economy is now in recession or, at best, in the edge of one.
However this bourgeois recognition of American capitalism’s troubles has little value for understanding the real state of the system. The bourgeoisie’s official definition of an economic recession is two consecutive quarters of negative economic growth. The National Bureau of Economic Research uses different, slightly more useful criteria, defining recession as a significant, protracted decline in activity that cuts across the economy, affecting measures like income, employment, retail sales and industrial production. On the basis of these definitions, the bourgeoisie can’t identify a recession until it has been underway for a while, often until the worst of it is already past. Thus according to some estimates one will have to wait until late this year to know if there is a recession, or, the date of its beginning.
In this sense the recession predictions that fill the pages of economic sections of newspapers and magazines are very misleading. In the last instance they only contribute to hiding the catastrophic state of American capitalism that can only get worse in the months to come regardless of when the economy officially enters in recession.
What is important to emphasize is that the present slump is far from reflecting a supposedly “healthy” American economy that is simply going through a troubled phase in an otherwise 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 only aggravate the next catastrophic collapse.
This has been the history of American capitalism - and global 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 affects 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 contradictions 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 technology/internet bubble in 2000/01 by creating a new bubble based, this time, on real estate. Despite the fact that companies in 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, activity related to private housing is in total disarray. New home construction has already fallen by around 40 percent since its peak in 2006; sales have fallen even faster, dragging prices down with it. Home prices have dropped by 13 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 sub-prime 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 declining real estate values that have accompanied the crisis means that many people hold mortgages that exceed the current value of their homes, which means that they couldn’t even recoup their losses if they sold their homes. This creates a situation in which in is more financially sensible to walk away from their mortgage obligations and declare bankruptcy.
The bursting of the real estate bubble is wreaking havoc in the financial sector. So far the crisis in real estate has generated over 170 billion dollars in losses at the world’s largest financial institutions. Billions of dollars in stock market value have been wiped out, rocking Wall Street. 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 further other sectors of the economy.
From the housing crisis to the credit crunch
Moreover, the financial crisis related to the mortgages is only the tip of the iceberg. The same reckless lending practices that were dominant in the mortgage market were also the norm in the credit card and auto loan industries, where problems are also increasing. And here lies the essence of today capitalist “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 essentially 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 that were weighed down by huge debts that they had no means to repay had 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 itself was a reaction to and an effort at overcoming the burst 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 on the stock market. The exact mechanisms of these schemes are not completely 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 crisis reveals the bluff of liberalism and the crisis of state capitalism
The American bourgeoisie likes to present itself as the ideological champion of free market capitalism. This is nothing but 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.
For the moment what is being done to alleviate the current crisis is more of the same— the application of the same old policies of easy money and cheap credit to prop up the economy. The American bourgeoisie’s response to the credit crunch is yet more credit! The Federal Reserve has cut its interest rate benchmark 5 times since September and seems posed to do so once more at its next scheduled meeting in March. In a clear recognition that this medicine is not working the Fed has steadily increased its intervention in the financial markets offering cheap money – $200 billion in March, on top of another multibillion package offered last December— to the financial institutions that are short on cash.
For their part the White House and Congress moved quickly as well in passing a so-called ‘economic stimulus package”, in essence approving rebates for families and tax breaks for businesses and passing legislation geared towards easing the mortgage defaults epidemic and reviving the battered housing market. However given the extent of the housing and financial crisis there is even growing consideration of proposals for a massive bailout by the State of the whole housing debacle, the price tag of which would make the huge $124.6 billions bailout by the State of the Saving and Loans industry in 1990 look insignificant.
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 presides over a very sick economy. The monstrous public and private national debt, the federal budget deficit, the fragile financial system, and the huge trade deficit, all these make more difficult for the bourgeoisie to deal with the collapse of its system. In fact so far the traditional government medicine to jolt the economy has failed to produce any positive results. On the contrary it seems to be aggravating the illness that it is intended to cure. Despite the Fed’s moves to easy the credit crunch, stabilize the financial sector and revive the mortgage market, credit is in short supply and expensive, the Wall Street rollercoaster ride continues unabated with wild swings and an overall downward tendency, and rising mortgages rates are not helping to alleviate the housing slump. Furthermore the Fed’s policy of cheap money is contributing to the downward plunge of the dollar, which every week is hitting new lows against the Euro and other currencies and driving up prices of key commodities like oil. This rising price of energy, food and other commodities at the same time of a sharply slowed down economic activity are fueling fears among the “experts” about the prospect of a period of “stagflation” for the American economy. Today rising inflation is already squeezing consumption of people trying to survive on fixed incomes and obliging the working class and other sectors of the population to tighten their belts.
Attacks on the US working class
The March 7 announcement by the U.S. Labor Department that 63 000 jobs were lost nationwide during the month of February sent jitters around the bourgeois world. Surely not because of concerns for the lot of laid-off workers but because this sharp decline in employment confirmed the economists’ worst nightmares of a worsening crisis. It was the second consecutive decline in employment and the third straight drop for the private sector. However in a kind of sick joke at the expense of unemployed workers, the overall unemployment rate declined from 4.9 to 4.8 percent. How is this possible? The reason is nothing but a clever statistical trick used by the bourgeoisie to underreport the number of unemployed. For the U.S. government, you are only unemployed if you are out of job, have actively looked for one in the last month and are ready to work at the moment of the survey. Thus the official unemployment rate significantly understates the jobs crisis. It ignores millions of “discouraged” American workers who have lost their jobs and have given up on the possibility of finding a new one and haven’t applied for a new job in the previous 30 days at the time of the survey, or who want to join the workforce but are too discouraged to try because the job situation remains so bleak or simply are not willing to work for half the wage rate that they had in their recent lost job, or millions of underemployed workers who want to work fulltime but are forced to work part-time because there are no fulltime jobs available. If these workers were included the unemployment statistics, the rate would be significantly higher. To further underreport unemployment, since 1983, thanks to Ronald Reagan’s statistical sleight of hand, U.S.-based military personnel have bee considered part of the domestic workforce (previously unemployment was calculated based on the civilian workforce only). This maneuver adds nearly two million man and women “employed” by the U.S. military to the denominator used to calculate the unemployment rate, artificially lowering the rate.
The present economic slump is bringing an avalanche of lay-offs across all sectors of the economy, but one has to say that the now defunct housing boom was not a paradise for the working class. Income, pensions, health care, working conditions, all continued to deteriorate while the housing market was booming. This fact has led even some bourgeois economists to point out that this was a ‘jobless’ and ‘wageless’ recovery. But even this recognition falls short of presenting the whole picture. The reality is that for the working class, working and living conditions have continued to deteriorate for the last four decades of open economic crisis, expansions and busts not withstanding. As this crisis worsens during the present economic slump there is nothing in store for the working class but more misery as the bourgeoisie tries to make it bear the impact of its economic difficulties.
The dire conditions facing the American economy portends a bleak economic picture on the global level. The world’s biggest, most powerful economy will surely bring its trading partners down with it. There is no economic engine that can compensate for the American plunge and keep the global economy afloat. The credit crunch will undermine world trade, the collapse of the dollar will slash exports to the U.S. aggravating the economic situation in country after country, and the attacks on the proletariat’s standard of living will increase everywhere. If there is one bright spot, it is that all of this will accelerate the return of the proletariat to reclaiming the class struggle against capitalism, as it is forced to defend itself against the ravages of the capitalist crisis.
The perspective of the acceleration of the capitalist crisis brings with it the promise of a development of the class struggle: in it, the proletariat will have to go beyond the steps forward it has already made since the historic recovery of the struggle at the end of the 1960s.
ES/JG March 14, 2008
 See the article in International Review n°131: “From the crisis of liquidity to the liquidation of capitalism”
 Misplaced optimism seems to be a characteristic of American presidents. Thus Richard Nixon declared in his 1969 inaugural address, just two years before the crisis which would force the US to abandon dollar convertibility and the whole Bretton Woods system: “We have learned at last to manage a modern economy to assure its continued growth”. On 4th December 1928, just months before the crash of 1929, his predecessor Calvin Coolidge spoke to the US Congress in these terms: “No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time (…) [The country] can regard the present with satisfaction and anticipate the future with optimism”.
 This article was written just before the announce that Bear Stearns – the USA’s fifth largest merchant bank - would be sold to JP Morgan as part of a government sponsored rescue operation, for $2 per share, i.e. a reduction in value of 98%.