[by Andrew Pollack]
The Great Depression of the 1930s is commonly said to have started with the stock market crash of Black Friday, October 24, 1929. Leaving aside the fact that the crash in fact had its roots in a decades-long crisis of the system, it’s ironic that this October has turned out to be an equally dark and stormy one, as the financial crisis spread through virtually every institution and sector of the economy, with maelstroms spreading across the globe. As a result the ideological crisis of capitalism became front-page news, and by Halloween the rulers were trying to stop their ears against the moans of a shade long presumed dead and buried: the spectre of communism.
While the ruling class has turned eagerly to its government for a bailout, some of its members were assigned to scare little liberal children with the bogey of socialism. The most notable (and absurd) were the McCain/Palin accusations that Obama was a socialist who wanted to “spread the wealth.”
When Marx and Engels wrote 160 years ago of the first sighting of the unholy spectre “haunting Europe — the spectre of communism,” they added: “Where is the party in opposition that has not been decried as communistic by its opponents in power? Where is the opposition that has not hurled back the branding reproach of communism?” Once again history repeats itself as slapstick, as New Jersey Democrats aired a radio ad calling a Republican seeking municipal office a socialist because he once belonged to the Labour Party in Ireland. And New Yorker columnist Hendrik Hertzberg pointed out that VP candidate Sarah Palin has herself benefited from a form of “socialism”: her state has no income or sales tax, relying instead on levies on oil companies. She had earlier told reporters that “collectively Alaskans own the resources. So we share in the wealth when the development of these resources occurs.”
During October the stock exchanges took a wild roller-coaster ride, with a handful of dramatic surges far overshadowed by stomach-wrenching plunges. At month-end, the S&P was down 16.5 percent, the worst since the 1987 stock market crash, and the most volatile in its 80-year history. The Dow Jones Industrial Average also fell sharply in October, losing just over 14 percent, and the tech-heavy Nasdaq declined 17.3 percent.
The S&P is now down 46% from its October 2007 peak. That is already almost as bad as the 48% drop during the 1973-74 bear market and the 2000-2 bear market drop of 49% — and the “real” economy news presages further stock drops in coming months.
By the end of October global stock markets had lost over 51% of their value this year.
“I’ve never seen a panic like this,” said the chief economist at Standard & Poor’s.
“The economy has taken a turn for the worse, big time,” said the chief economist for Decision Economics. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. There are no signs of any help anytime soon, from anywhere.”
“Sales at the nation’s largest retailers,” reported the New York Times, “fell off a cliff in October, with the majority reporting decreases in double digit percentages.
The Wall Street Journal reported that investors and lenders were pulling hundreds of billions out of hedge funds to cover their losses, and NYU economist Nouriel Roubini predicted that up to 30% of all hedge funds will fail. He also warned that the world is heading for a protracted recession that will end US financial dominance, and turmoil over world trade, currency markets, and debt is likely to cause geopolitical tensions between the Western world and emerging superpowers such as Russia, China, and “a bunch of unstable oil states.”
China’s manufacturing sector deteriorated at a record pace in October as overseas customers slashed orders – especially the US, whose debt-fueled consumer purchases have propped up that sector during its dramatic expansion. (The New York Times, after years of accepting ruling class attacks on US workers’ income, inhibiting their ability to buy goods without recourse to credit, now berates China for not paying its workers enough to prop up demand!)
R. Taggart Murphy, a business professor in Tokyo, wrote: “Asia relies on the US as the final engine of demand. Japan last month, for example, ran its first trade deficit since 1982.” His conclusion: “The days of export-led growth for Asia are over.”
And the collapse of exports is already hitting the poorest countries of Africa, the Middle East, Asia and Latin America the hardest, as revenue from commodity exports plunges, while hundreds of millions dependent on shrinking food aid sink more swiftly toward starvation.
After months of soaring prices, the possibility of global deflation looms – one of the most telling signs of the onset of a depression. Falling prices mean less demand for goods and thus less incentive to invest for bosses, growing debt in real prices, all reinforcing each other in an ever-faster race to the bottom. The soaring prices of the preceding period were clearly a product of the inflation typical of a speculative boom reaching its apex just before a bust, reinforced by the policies used by government, monopolies, and speculative capital to forestall such collapses – policies which Marxists have always said would lead to an even more dire reckoning when it came time to pay the piper.
Friedrich Engels’ description in Socialism: Utopian and Scientific of the stages of a crisis are eerily evocative of this October’s events and what’s sure to follow:
“Commerce is at a stand-still, markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence; bankruptcy follows upon bankruptcy. The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. Little by little, the pace quickens. It becomes a trot. The industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit, and speculation, which finally, after breakneck leaps, ends where it began — in the ditch of a crisis.”
Engels also portrayed the concentration of capital which is once more occurring, starting with the banks:
“The fact that the socialized organization of production within the factory has developed so far that it has become incompatible with the anarchy of production in society, is brought home by the violent concentration of capital that occurs during crises, through the ruin of many large, and a still greater number of small, capitalists.”
This concentration leads in turn to a growing awareness of the objectively socialized nature of production and exchange – i.e. although profits are privately appropriated, the work from which they derive is carried on collectively by increasingly large and coordinated groups of workers. As a result, “these productive forces themselves press forward to the removal of the existing contradiction, to the abolition of their quality as capital, to the practical recognition of their character as social production forces.”
Engels then describes how this phenomenon leads, on the one hand, to the state socializing some industries in order to protect the rulers’ profits as a whole; and, on the other hand, to workers recognizing the need for and possibility of genuine socialization of the entire economy on their own behalf.
The Volcker Recession Redux
US factory activity contracted sharply in October, falling to its lowest since 1982. That was the nadir of the recession engineered by Federal Reserve Chair Paul Volcker. If you don’t count that recession, this year’s decline is the steepest since the early 1970s.
Volcker is now one of Obama’s key economic advisers.
Consumer spending declined for the first time in 17 years, with the sharpest drop since the end of 1974 (again not counting the Volcker recession).
Employers shed 240,000 more jobs in October, the 10th straight monthly decline. The economy has shed 1.2 million jobs since the beginning of the year, the bulk of them lost in the last three months. Many companies have cut workers’ hours, further diminishing paychecks. In October, wages grew just 2.9%, well below the rate of inflation. Housing prices continued to decline.
Many economists now expect the unemployment rate to reach 8% by the middle of next year, again a level seen only in the early 1970s and in the Volcker Recession.
And the grief is not just in the US. The Financial Times reported that “Not since the Depression have so many countries faced so much trouble at once. The financial crisis has gone global, like a virus mutating in the face of every experimental cure. From South Korea to Iceland to Brazil, the pandemic has spread.”
The Times noted that shrinkage of global markets means major producers like China and India “will have to dump products on world markets to keep factories running and stave off unemployment, pressing prices lower.” This of course will further exacerbate US manufacturers’ troubles and thus workers’ ability to buy, rebounding back again on China and India, and on and on and on…
October also saw the second edition of Treasury Secretary Henry Paulson’s $700 billion bailout plan. Originally intended to buy “distressed assets” related to mortgages from banks, he converted it into a direct injection of $250 billion to banks (in the form of purchase of nonvoting preferred shares), under the dubious assumption that this gift would restart the lending whose shutoff was crippling production and trade. The rest will be doled out to other banks and corporations in a manner yet to be determined. In fact throughout the month companies from auto, insurance, and other sectors came forward begging for a piece of the plan, offers which are all under consideration.
Paulson’s move came after British Prime Minister Gordon Brown initiated a similar plan, and European finance ministers clamored for the US to do something to stop the crisis which was washing up on their shores.
But rather than restarting lending, over a dozen of the country’s biggest banks said in mid October that they are considering using some of their federal money to buy other banks, and hoarding the rest as cash reserves.
In an editorial headlined “Loans? Did we say we’d do loans?”, The New York Times quoted a JPMorganChase exec admitting they would use the money to buy other banks, or bank it in case “the recession turns into depression.”
On October 31st the Wall Street Journal revealed a Halloween trick played by these banks on taxpayers, reporting that up to $40 billion of Paulson’s gift could go to bank executives’ compensation. And banks receiving the cash were allowed to continue to pay dividends to shareholders.
Meanwhile so many executives from Paulson’s former firm, Goldman Sachs, have been called on by him to staff or advise the new entities overseeing the giveaway that the firm’s new nickname is “Government Sachs.”
But it’s not just greed leading to this hoarding. In fact, given the process described by Engels above in which reinforcing cutbacks are dictated by the logic of an anarchic system, it’s simply a matter of survival. One bank official said: “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns. Who are we going to lend money to?”
While not a Marxist, economics professor Paul De Grauwe was astute enough to see the reality of this systemic logic, noting in the Financial Times that in these circumstances banks would never lend to each other, and therefore only governments have the reach and the power to fund and force investment in such times of market paralysis. He therefore recommended total – if temporary – state ownership of the banks until the crisis passed.
European bank analysts made predictions for banks there that apply to the US as well, telling the Times: “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one.”
Martin Wolf, the key economic writer for the FT, said “The idea that a quick recession would purge the world of past excesses is ludicrous.” He warned of “a mountain of private debt – in the US, equal to three times GDP – topple[ing] over into mass bankruptcy. The downward spiral would begin with further decay of financial systems and proceed via pervasive mistrust, the vanishing of credit, closure of vast numbers of businesses, soaring unemployment, tumbling commodity prices, cascading declines in asset prices and soaring repossessions. Globalisation would spread the catastrophe everywhere.
“This would be a recipe… for xenophobia, nationalism and revolution. Everything must be done to prevent the inescapable recession from turning into something worse… Deflation is a real danger. At stake could be the legitimacy of the open market economy itself… the danger remains huge and time is short.”
That loss of legitimacy, explains radical economist William Tabb, includes further blows to the already-battered “Washington Consensus,” the notion that the IMF and World Bank, and the imperialist powers behind it, should be able to dictate financial, trade, and government spending conditions for neo-colonial countries.
Auto Crisis Deepens
The spreading crisis manifested itself most harshly and visibly in auto. This is symptomatic rather than just symbolic, given that industry’s centrality to the economy and to the country’s trade union history. The defeat suffered last year in contracts marking landmark givebacks in wages and benefits, all supposedly to stop job losses in the hundreds of thousands, will now be followed by losses of as many if not more jobs – and perhaps the bankruptcy or disappearance of one or all of the Big Three.
Sales of new cars and trucks in the US plunged in October to the lowest level in 25 years. GM’s sales dropped the most, by 45%, and even Japanese companies’ US sales plunged by 23% or more, with the world’s number two car company, Toyota, dropping 32%.
GM is burning through more than $1 billion in cash a month and had lost $18.8 billion by midway through the year. It is expected to run out of cash some time next year.
The Bush Administration rejected GM’s pleas for billions in aid on top of the $25 billion already promised the Big Three, supposedly to finance development of energy-efficient cars. But Obama and Democrats in Congress had promised such additional aid, and moved quickly after the election to work out the terms for granting it.
GM is also expected to press the UAW for more concessions. As a JPMorgan analyst wrote: “GM desperately needs a reason to renegotiate many parts of its 2007 UAW contract.” It is avidly seeking a merger with Chrysler, and in fact needed the new Federal aid so it would have enough cash to finance the termination costs of the 30,000 workers it expected to lay off after a merger. (As we go to press, October earnings data led GM to announce it was burning cash at twice the rate previously announced and couldn’t even afford to explore a merger.)
Regardless of the form, additional aid from Washington will certainly be insufficient to make a difference: an industry already plagued by overcapacity is not going to come through this crisis without some form of dramatic concentration, whether through bankruptcies, dissolutions, mergers, or some combination, any of which will involve unprecedented plant closings and layoffs.
Peter Morici, a business professor and former chief economist at the U.S. International Trade Commission, encouraged Chrysler to file for bankruptcy in order “to remove the burdens of the UAW contract [such as health and retiree benefits] and scale down the company to one half to two thirds its current size. That would serve GM’s interests, too — both Ford and GM would benefit from some capacity and cars going off the market.”
Meanwhile European carmakers are facing similar problems in their domestic markets and are seeking aid from their own governments, while complaining of Washington aid to the Big Three.
The failure of the Big Three would have broad consequences for the economy. The companies combined employ more than 200,000 people in the US, and indirectly support jobs for millions more Americans through their suppliers and dealerships.
The UAW has already given GM one pass on payments owed to the VEBA health plan, and is likely – unless members put their foot down – to agree to a second and a third.
Suffering of workers outside auto worsened in October as well. Nearly one in five homeowners now has a home worth less than what they owe on it. A new report found that one-quarter of working families are “low-wage.” Utility companies are stepping up power cutoffs for unpaid bills.
Jobs for day laborers – almost all immigrants or African-Americans – are dwindling.
A 30-nation report showed the income gap between rich and poor in the US has widened rapidly since 2000, and is now the worst in any of the OECD states except for Mexico and Turkey, with both the highest incomes for the richest 10% and the lowest for the poorest 10%.
The US infant mortality rate continues to slide down the ranks of developed countries (and is worse than Cuba’s). Workers are increasingly going without their drugs and foregoing needed care for lack of funds. Meanwhile some of the biggest private healthcare insurers are reinventing themselves as money managers, changing their status to financial corporations (thus potentially making them eligible for a chunk of the Paulson bailout stash).
In October the Sheriff of Cook County (Chicago) announced he would no longer carry out evictions. And while he resumed them a week later, his initial statements denouncing bankers and landlords were hailed around the country. Meanwhile activists in Boston and Long Island took action of their own to stop foreclosures of families.
Not surprisingly governments around the world rushed to say that even their feeble plans to halt global warming would have to be put on the back burner until the crisis is over.
And just as soaring oil prices and climate change are encouraging a move back to public transportation, transit agencies around the country are readying massive cutbacks in order to come up with billions of dollars to repay investors as long-term financing deals arranged through failed insurance giant American International Group disintegrate.
The crisis’s impact on pensions also escalated. Stock market declines have cost American workers as much as $2 trillion in retirement security savings during the past 15 months.
Most of the losses were in 401(k)s, which account for four-fifths of all pension money. But public pension funds dropped 14.8% in value for the year ended Sept. 30 (which doesn’t include the October stock drops).
Higher gas prices, food costs and stagnant wages have caused more and more workers to cut or stop retirement contributions—and even withdraw funds. More and more workers are taking loans against retirement plans to pay everyday bills.
The Ruling Class Whistles Past the Graveyard
The bourgeoisie’s ideological crisis has led to a telling flip-flop in the field of economic theory. Now instead of touting the virtues of efficient markets fueled by omniscient consumers, the crisis is being blamed on “the madness of crowds,” as “behavioral economics” is hailed as an explanation for why supposedly irrational consumers and producers can’t see that their individual refusals to buy or produce are reinforcing the downward spiral.
At the same time the cruder apologists for the system focused on blaming the poor, especially Blacks and Latin@s, for the crisis, claiming government funding of mortgages for them is at the root of the financial collapse (despite studies proving that private sector loans, not those from Fannie or Freddie, which were required to increase minority homeownership, triggered the mortgage-securities collapse).
But while the ruling class continues its self-mystification, workers and their allies are seeking real answers. For instance, the media reports swelling sales of Marx’s Capital in Germany, England and elsewhere.
Meanwhile those at the pinnacle of capital lashed out in defensive anger and demanded even more largesse. At a meeting October 10th, the highest officials of Wall Street and of New York City and state governments gathered at the New York Stock Exchange to discuss the financial crisis. Said a Times report of the meeting, “All agreed that now is not the time to raise taxes or impose new regulations on their businesses.”
What’s more they threatened retaliation for high taxes: James Dimon, CEO of JPMorgan Chase, said: “New York tries to tax everything we do around the world. If you have a choice where you put a job, it will not be here.” Laurence Fink, chief executive of BlackRock, a giant money-management company, said “Taxes are extraordinarily high here. We’re going to be moving a lot of that business elsewhere if we don’t reduce taxes.”
Attendees reacted defensively to what they admit is a groundswell of anger and hatred against Wall Street, with one banker claiming that the bad apples had already “been washed away” by the crisis!
Dimon warned that times are going “to get very tough” in the city and called for the mayor and governor to pare their budgets. The Times noted the efforts of Dimon and the other bankers in attendance in backing the effort by New York City Mayor Michael Bloomberg to eliminate term limits so he can stay in office and “guide the city through recession” – i.e. make business-friendly cuts. And in a sign that the bankers’ faith in him was well-placed, the day after Obama’s victory, Bloomberg announced substantial budget cuts, including the firing of 3,000 city workers.
During his campaign Barack Obama expressed approval of both versions of Paulson’s business bailout plans, promising only to supplement it with some modest “stimulus” spending measures and some re-regulation of the sort which even corporation heads and mainstream economists say is now acceptable.
His statements since the election – and his appointment of Clinton-era, welfare-slashing, NAFTA-backing, and corporation gift-granting Rahm Emanuel as Chief of Staff – shows there is no “progressive Obama” waiting to come out of hiding once he’s in the White House, as many liberals and even radicals have been deluding themselves.
Obama proposes to give employers a $3,000 tax credit for each new worker hired; says he will allow Americans of all ages to borrow from retirement savings without a tax penalty; eliminate income taxes on unemployment benefits and extend their duration; and double, to $50 billion, the government’s loan guarantees for automakers.
Obama also called for more Federal aid for cities and states with fiscal problems, and more government guarantees for financial institutions. He proposes a 90-day moratorium on home foreclosures by banks receiving government aid if homeowners are making payments, and he wants to empower bankruptcy judges to ease the terms of home loans.
He has pledged $65 billion for a second round of rebates to taxpayers.
Obama advisers put the cost of his full economic stimulus plan at $175 billion, about a fourth of the Paulson business bailout plan.
House Democratic leaders have said they would develop a package for increased spending on public works, health care subsidies for states, extended unemployment pay and food stamp assistance, part to be passed this year, the rest after Obama takes office.
But he has repeatedly emphasized that the economic crisis means many of his earlier, already-minimal promises to working people will be put on hold: “I won’t pretend this will be easy. George Bush has dug a deep hole for us. It’s going to take a while for us to dig our way out. We’re going to have to set priorities as never before.”
Even the weak promises made by Obama fall short of the spending undertaken by FDR in the 1930’s to try to save the system – spending which itself turned out to be inadequate. In the end the system was saved by a combination of far more mammoth war spending (continued in the postwar era by permanent inflation via private and public debt creation), and the massive elimination of existing capital and inventory (in this case through a combination of the passage of time and the conscious destruction of war) which is always required before capital is willing to once again invest after a depression.
An op-ed column in the Times the day before the election captured perfectly the nature of the Obama phenomenon as the blissful marriage of ruling class figures and subservient “progressives.” Co-authored by Robert Rubin – head of Citigroup, chief Clinton-era deregulator, and Obama advisor, and Jared Bernstein – progressive head of the Economics Policy Institute and favorite data source for union bureaucrats’ economic prouncements, the two demanded “No More Economic False Choices.” “We are surrounded by polarizing dichotomies,” they wrote. “Fiscal recklessness versus fiscal rectitude; capital versus labor; free trade versus protectionism.
The two joined in calls for a short term fiscal stimulus, but also “a commitment to re-establishing sound fiscal conditions” (i.e., budget cuts to decrease deficits).
They agreed with Obama’s call for moving tax rates back to Clinton era standards – which still would mean dramatically less taxes paid by the rich than at any time since the New Deal.
They also agreed on a partial privatization of Social Security, calling for “establishing some kind of individualized account separate from Social Security.”
They said the shrinking income of workers could be overcome not by a battle of “capital versus labor,” but rather through allowing workers “to choose to be unionized or not” a backhanded nod to the Employee Free Choice Act for card-check union recognition.
In sum, they wrote, “False choices, grounded in ideology, have kept us from effectively addressing all these issues. We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.”
It’s exactly this wedding of rulers and ruled that must be busted up, as labor stands up for its own side in the real dichotomies of class and ideology inherent in this system.
Further showing whose side he’s on, the Friday after the election Obama held a meeting with his “economics brain trust,” which includes Rubin and Volcker, as well as former Treasury Secretary Larry Summers, investor Warren Buffett, former Securities and Exchange Commission Chairman William Donaldson, Xerox chairman Anne Mulcahy and TIAA-CREF president and CEO Roger Ferguson (and former Labor Secretary Robert Reich as liberal soft cop).
Real Solutions to the Crisis
Neither the promises of Obama and Congressional Democrats, nor the slightly richer stimulus packages advocated by the AFL-CIO and Change to Win labor federations, will resolve the crisis, rooted as it is in a decline in profitability since the late 1960s/early 1970s and resulting in a paralyzed economy. Nor will the unions’ panacea, the Employee Free Choice Act (which provides for card-check recognition) on its own turn around the many-faceted employer assault launched at the same time, which has resulted in ever-increasing inequality, insecurity, and ever-shrinking rates of unionization.
In his proposal to amalgamate and nationalize the banks under workers’ control, in order to give workers control over funds flowing to production (“The Impending Catastrophe and How to Combat It”), Lenin criticized reformers who shrink from such thoroughgoing measures against capital. He could have been speaking about such “progressive” economists as today’s Doug Henwood, who railed against those opposing Paulson’s first plan, soon dumped even by its author, as “not leftists but nihilists.”
In the Workers’ Action Program printed in our last issue and available on our website, we called for an Emergency Congress of Labor at which representatives of the working class can draw up a set of demands meeting workers’ needs.
This October’s events prove such a Congress is ever more urgently needed, and highlight the worth of particular planks of that program:
* Make the banks, corporations and the ruling class pay the full price of the crisis! Nationalize the entire banking system under the control of capitalism’s victims, not its agents!
* No to mortgage foreclosures! Reduce present mortgage payments in proportion to the capitalist-caused decline in value!
* Jobs for all at top union wages! Reduce the workweek to 30 hours with no cut in pay to provide jobs for all!
* Restore and guarantee all pensions! For a real Social Security system that pays pensions at union wage levels! Eliminate the private health insurers and providers, and merge Medicare and Medicaid into a free, universal, and public health system that covers all needed services without charge!
Regardless of whether they thought Obama would make a concrete difference, most of the Black community hailed his victory as at least a symbolic blow to the culture of racism in this country. That culture has long made the permanent Depression-level unemployment rates among Blacks either invisible or excusable via racist lies – and these rates are certain to rise to even more horrific levels in coming months. Socialist Action, when agitating for the above demands, takes note of the special needs arising in each case of Black and other oppressed workers, especially immigrants.
In his discussion of the intertwined economic and ecological crises in “Capitalism and Climate Change,” John Bellamy Foster notes that only a “revolutionary social transformation” can resolve them: “Forget about capitalism, forget about whether the system can do it. Say this is necessary for the planet, for human survival, for justice, for environmental justice, and we just have to do it.”
In that spirit while discussing our Action Program with workers we will also be educating about the need for socialism as the only means to win these demands permanently, and in so doing to save our livelihoods, our lives and our planet.