[by Andrew Pollack]
US bankers had much to be thankful for this Thanksgiving. Citigroup, the country’s largest bank, got a package worth $306 billion in investment and guarantees from the government, and its rivals expect to be next in line. The Fed committed $800 billion more to try to revive the flow of credit. And Bloomberg News totaled up promises made to the country’s banks and came up with a figure of $7.76 trillion, half the country’s annual Gross Domestic Production.
But no matter what portion of these trillions end up actually being spent, the underlying systemic crisis will only be resolved either on the backs of workers, or by the seizure by those workers of the institutions which created the crisis.
Late Sunday night, November 23rd, Federal regulators approved a plan to stabilize Citigroup by having Washington assume billions of dollars of the bank’s losses.
After the firm’s stock lost half its value in a week, plunging the Friday before to $3.77 (down from $50 in 2007), Citigroup asked Washington to bail it out. In what has become a recurring pattern, banking and government officials negotiated through the weekend to come up with a deal in order to forestall overseas markets from plunging when they opened early Monday.
The bailout came only days after Treasury Secretary Henry Paulson said there would be no more bailouts until President-elect Barack Obama took office. But after Citi’s stock plunged, its Director, Robert Rubin (who preceded Paulson at Treasury, worked with him at Goldman Sachs, and is a key Obama adviser), called to tell him he had to act.
(Originally called First National City Bank, then Citibank and Citigroup, we will refer to it hereafter as “Citi,” the name on its logo.)
Obama’s choice for Treasury secretary, Timothy Geithner, head of the Federal Reserve Bank of New York, played a crucial role in the negotiations.
The government will guarantee up to 90% of $306 billion in Citi-held residential and commercial real estate loans and other assets. In exchange, the government will get $27 billion of preferred stock with no voting rights.
“It strikes me as unbelievably generous,” said a former Fed official.
Citi is the biggest so far of the institutions said to be “too big to be allowed to fail.” What’s more, it’s the broadest in scope to earn this label, with more than $2 trillion in assets and operations in 107 countries, and with tentacles in virtually every sector of the economy.
In the last two years the company has made announcements of job cuts totaling 75,000. By this November its stock market value had dropped to $21 billion, down from $244 billion two years prior.
Its major competitors – whose own stocks have crashed in recent weeks – Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley, have similarly deep roots in the country’s economy. The Big Three automakers, for instance, owe more than $100 billion to bankers and bondholders, who are increasingly nervous about being paid back. And auto parts suppliers and individual car owners own dozens of billions more.
So it’s not surprising that the Washington Post reported that regulators drafted the Citi plan with an eye to using it as a template for future bailouts of other banks.
New Federal credit measures
Aware that measures taken so far had not unfrozen credit markets, on November 25th the Federal Reserve and Treasury committed up to $800 billion to bolster securities based on homes, cars, and tuition.
None of the money goes directly to homeowners or individual debtors. What’s more, the $600 billion in securities backed by the new funds are only those of Fannie Mae and Freddie Mac’s, which excludes the vast majority of homeowners. And the spillover drop in rates for homeowners in general won’t help the almost 12 million unable to refinance because they owe more than their home is worth.
The $200 billion backing securities based on car and student loans and credit card debt will only cover securities based on newly-issued consumer debt.
But one analyst told the Post that the new program proved the government had become “the go-to place” for aid. Said NYU economist Nouriel Roubini: “The Fed and other central banks that used to be the ‘lenders of last resort’ have become the ‘lenders of first and only resort.’”
Involving itself in consumer debt, even via the circuitious route of backing securities, mean the Fed and Treasury have come close to becoming “a government bank,” said the Post. The paper added: “Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.”
In the same vein, New York Times business columnist Floyd Norris noted: “Since the government has a printing press, it need never be short of dollars.
But, he warned: “As the nation’s obligations rise into the trillions, at some point investors may begin to question whether a government running huge deficits can also credibly promise that the dollar will not lose its value. Such a worry conceivably could push up the very low interest rates the Treasury now pays to borrow from foreign investors to foot an ever-larger rescue bill.”
Bloomberg Totes Up the Tab
The week of Thanksgiving a media frenzy began after Bloomberg News totaled up all the money given or promised to banks and corporations, arriving at a figure of $7.76 trillion. This figure is more than ten times the $700 billion in the Paulson Plan, and about half the value of all the goods and services produced annually in the US. Commentary on the report claimed that the figure surpassed the combined cost of the Lousiana Purchase, the Marshall Plan, the New Deal, the Korean, Vietnam, Iraq and Afghanistan wars, NASA’s moon missions, and the S&L crisis.
The figures in these comparisons were adjusted for inflation, but are still misleading as they do not take into account growth in GDP. Thus, for instance, the Louisiana Purchase’s cost represented a bigger percentage of the country’s much smaller economy at the time, and the same (to lesser degrees) for the other programs cited.
The $7.76 trillion figure includes both the $1.4 trillion already spent, and the much larger portion only promised. What’s more, the latter amount includes not just actual loans or cash infusions but also guarantees. This is not to say that all or a big portion of these promises won’t be fulfilled, and even the guarantees have a real fiscal cost to the taxpayers who must stand behind them. It also includes investments, which certainly won’t earn as big a return for the government as it would for private investors, but is nevertheless not a 100% gift – except in political terms.
Still, these huge amounts should fuel outrage. Most obviously they prove the money is there for more direct aid to individual debtors and, through funding of jobs and services, to the whole working class.
And such aid is becoming a dire necessity, even a matter of life or death, for the millions threatened by the impact of a crisis nowhere close to reaching bottom, and likely to drag on for years.
In November news came out of misery spreading in every part of the country, in every type of workplace. The elderly, the disabled, children are all being denied services or kicked out of centers and group homes, and the workers staffing them laid off. The number of Americans on food stamps reached a record high of 30 million in November, and food pantries’ traffic is mushrooming, even as their funding is shrinking. Reports came out showing the US, with already the greatest income inequality and poorest healthcare quality among developed countries, has sunk even further behind.
Yet the safety net woven over time since the New Deal has been hacked to pieces, with some of the biggest chunks taken out by the long knives of the Clinton Administration. As a result millions who would previously have been eligible now can’t get welfare, food stamps, unemployment or other government benefits and services.
And there are more cuts to the safety net coming: On November 25th Obama announced that his budget director would go through the Federal budget “line by line” to find places to cut. At the same time he announced he was going back on his promise to repeal President Bush’s tax cuts for the rich, allowing them to stay in place until the end of 2010.
Oh say, can you see?
What’s more, the dawn’s early light is shining none too brightly on any part of these secrecy-enshrouded giveaways.
On November 18th Fed head Ben Bernanke declared:“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting. We think that’s counterproductive.”
In its efforts to come up with a giveaway total, Bloomberg had to file a Freedom of Information request, and filed a federal lawsuit seeking to force disclosure of which banks were borrowing under the new programs and what collateral they put up.
How Real Are the Losses?
We mentioned above the uncertainty about how much the bailout will end up costing (and in any case there are many more programs, each costing hundreds of billions, sure to be announced in coming months). But equally uncertain is the reality of the trillions in corporate debt, assets and value which these bailouts are supposedly protecting.
It is estimated that the crisis has erased $23 trillion, or 38%, of the value of the world’s companies, a figure based on drops in value of corporations on the world’s stock exchanges.
Yet 38% of the world’s productive resources have not been physically destroyed. Nor has the $223 billion wiped off Citi’s balance sheets in the last two years led to the destruction of an equivalent stock of goods. No-one can anyone reasonably claim that the dozens of trillions in the credit default swap market, or the hundreds of trillions said to be tied up in derivatives worldwide, have any meaningful correlation with the $55 trillion in global GDP.
True, an ever-growing percentage of the world’s capacity for producing goods and service is sitting idle. But what is the real connection between this and the vast sums of money under discussion?
This question is crucial since one section of the ruling class will try to recoup as much of these trillions as they can at workers’ expense. On the other hand, other capitalists will try to get much of these sums written off the books as part of the purging process, described below, which is essential for capitalism to dig itself out of a crisis of this depth.
Understanding where these astronomical figures come from requires a look at the concept of “fictitious capital,” which Marxist economist David Harvey defines as “money thrown into circulation as capital without any material basis in commodities or productive activity.” Ironically its origins lie in the development of the credit system and of corporation stocks, both used in normal times by profitable companies to fuel ordinary activities.
Capital raised by such means are used for investment purposes, i.e., to generate surplus value. But once such debt or stocks is created, they are in turn traded to reallocate claims on ownership of the given company, and the market in them begins to take on a life of its own – especially in periods when the underlying corporations lose productive outlets to invest the money for which such credit was originally designed.
Thus, says Marx, “With the development of interest-bearing capital and the credit system, all capital seems to double itself, and sometimes treble itself, by the various modes in which the same capital or even the same claim on a debt, appears in different forms in different hands. The greater portion of this ‘money-capital’ is purely fictitious.”
What’s more, as corporations became more self-financing over the course of the 20th Century, the role of banks or stock markets as gatherers of money for investment purposes dramatically shrank. The revival of banks’ role in investment in the latter part of the century came primarily not to facilitate investment in new manufacturing or services, but in order to fuel credit-based purchases by consumers to prop up tottering production. This new wave of credit in turn became the base of a pyramid of financial instruments, each layer of which garnered profits from the one below it – until the entire house of cards crashed.
However Marx reminds us not to ignore the exaggeration in the sums attached to reports of troubled capital markets: “To the extent that the depreciation or increase in value of this paper is independent of the movement of value of the actual capital that it represents, the wealth of the nation is just as great before as after its depreciation or increase in value.”
In the same vein, he writes that although “the public stocks and canal and railway shares had been depreciated, unless this depreciation reflected an actual stoppage of production and of traffic on canals and railways, or a suspension of already initiated enterprises, or squandering capital in positively worthless ventures, the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital.”
The same could be said of comparisons between the real resources of the country, or world, today, and the trillions quoted in the Bloomberg account.
Note also that Marx includes in his list of caveats the possibility of capital squandered in worthless ventures. So it’s not irrelevant that trillions are being wasted on derivatives, and more trillions squandered to bail out the wastrels, especially as capital will try to make workers pay the price of as much of this as they can.
Is a “stimulus package” the solution?
In November, 387 economists cosigned a letter to Congress calling for quick passage of a new stimulus package “on the order of 2-3% of GDP ($300-$400 billion).” This amount is pretty modest in comparison to the amounts discussed above, and in any case is similar to the amount proposed by Obama and Congressional Democrats. And their justification for such a measure shows they see it as reinforcing, not threatening, the system: “The sharp falloff in demand means there is little reason to fear enlarged deficits will raise interest rates and deter private investment. It is far more likely that an effective stimulus package will promote investment by improving prospects for higher sales and profits.”
But how can investment be promoted when the banks are sitting on the money given them by the government for lack of productive opportunities?
Keynesian measures, in the downturn portion of the five to seven year business cycle, or a longer-term (25 or more years) depressive wave, can moderate the speed and extent of the decline, and even attenuate some of the accompanying misery. But it can’t address the underlying causes of those downturns. In fact the mushrooming public and private debt since World War I, and even more so since World War II, has been one long effort by capital and its states to ward off systemic collapse. So a few hundred billion more is not going to make a difference.
What’s more, in the long run Keynesian measures only work to the extent there is unused capacity in the economy. Once that evaporates, Keynesian stimulus measures lead to greater inflation and public debt and deficits – the price for both of which is dumped on the working class – and which lead to withdrawal of funds from debtor countries (today, the US) by countries who have been propping up their trade and currency.
What’s more, in a deep, once-in-a-century crisis of the type we are now experiencing, no amount of stimulus can on its own restore the rate of profit to a point where new investment massive enough to end the crisis can take place.
Among the events needed for such a massive increase in the profit rate are the wholesale destruction of existing overcapacity in productive facilities and depletion of inventories, as well as an attack on the working class sufficient to break its ability to resist any and all efforts to raise the amount of surplus value extracted from it.
Cleary the ruling class has begun efforts to carry out some of these measures. The mergers and wiping of bad assets off the books as is already taking place among huge banks, and the mergers and shedding of manufacturing capacity such as has already occurred in steel, and seems in the offing in auto, are examples of the devalorization of capital referred to. The current attacks on auto and public sector workers are probes by the ruling class to see if it can get away with a classwide onslaught driving down all wages and benefits to a qualitatively lower level.
Whether such attacks can be successful depends on the will and power of the two contending classes.
But such epic events also open the eyes of workers to the possibilities latent in the system for escaping its web. In describing the massive destruction of capital required for the rulers to escape a crisis, and the resulting concentration, Marx adds that “The contradiction between the social power into which capital develops and the private power of the individual capitalists over production becomes ever more irreconcilable, and yet contains the solution of the problem, because it implies at the same time the transformation of the conditions of production into general, common, social, conditions.” That is, to the possibility of, and need for, socialism.
And the events described above certainly raise such a possibility. The concentration of capital in a crisis which leads to greater monopolization in the banking sector, which then, as the crisis deepens, requires the assumption of their functions by the state, shows to all who can see that the formal, if not yet the political, conditions for their taking over by society as a whole are present.
Nationalize the Banks!
In his “The Impending Catastrophe and How to Combat It,” Lenin makes clear why capitalism makes nationalization of the banks both possible and necessary.
“The banks,” writes Lenin, “are the principal nerve centers of the whole economic system. Banks are so closely and intimately bound up with trade and industry that without ‘laying hands’ on them nothing can be accomplished.”
To overcome this, Lenin argues, “Only the amalgamation of all banks into one would make it possible to exercise real control… to know where and how millions and billions of rubles flow. Only control over the banks would make it possible to organize real and not fictitious control over all economic life.”
This is required among other reasons because Lenin’s Russia was experiencing a “lack of transparency” like today’s, and a corresponding need for workers to force open the books of the exploiters.
Takeover of the banks, says Lenin, is only be the prelude: “The banks and the more important branches of industry and commerce have become inseparably merged. It is impossible to nationalize the banks alone.” Industry and commerce as well must be taken over, a task greatly eased by the creation of one public, worker-run bank.
Today such measures are necessary to wipe out the trillions of dollars of fictitious capital (at the ruling class’s expense), and gain an accurate accounting of the physical and human resources really available to society, but sitting idle. Such measures alone will allow workers to set up a rational, planned, democratic system of accounts to fund the goods and services needed.
That’s why in the Workers’ Action Program proposed by Socialist Action we say:
Open the capitalists’ books so we can determine what has been stolen, hidden or squandered! Nationalize the entire banking system under workers’ control, and merge them into one public, worker-managed institution! Make the banks, corporations and ruling class pay the full price of the crisis!
For worker’s control of corporations in manufacturing and mining, energy, and transportation!