Wall Street Collapse? Another Crisis of Capitalism

I wish I had the ability to be shocked when I hear about a ‘deep crisis’ that can cause staggering losses (a cyclical crisis of capitalism), a $700 billion bailout for private sector cronies and John McCain canceling a 2-3 hour debate appearance as a publicity stunt to resolve this crisis (as if, his presence would make a difference. Admittedly, he has a weak economic understanding). But I digress.

It’s not like a major financial crisis was unexpected in the near future. Political economists have been making predictions about the fall of the U.S. dollar for quite some time; this Wall Street financial collapse is just a start. Oil prices are dropping, Asian markets are coming down even immigration is down (ALIPAC must be happy; they are happily blaming immigrants for the meltdown too). Actually forget the contemporary political economists and politicians trying to pinpoint the source of this crisis; revisit the blog favorite Karl Marx, who held that the internal contradictions within capitalism as a system would create cycles of boom and slump, that over time would become more untenable as social forces opposing it built up, eventually leading to an overthrow of the system. What are these internal contradictions?

1. The tendency of the rate of profit to fall

2. The concentration of capital

3. Rise in unemployment

4. Overproduction or Underconsumption (crisis of realization)

5. Collapse of credit

6. Bigger firms buying out smaller and weaker firms (in this case, the government bailing out)

7. Crisis ‘solved’ till the next inevitable cycle

Do these predictions of more than 150 years ago sound familiar?

With incredible balance of trade deficits, deficit spending on a permanent war economy that created little general demand for goods and services, a tightened money market, less money for investment and lending, rising inflation rates combined with subsequent job and income loss, inability to buy or payback loans … It doesn’t take one to be a Marxist or an Political Economy expert to state that ‘the economy’ is not in a good health – a discourse that I have problems with as I will explain soon.

As a temporary fix to this crisis of capitalism, the government will probably buy distressed mortgages at deep discounts from banks and other institutions. Band-aids do wear off eventually.

Under the internal contradictions of capitalism, Marx proposed that there is a tendency at some time in the capitalist process for the rate of profit to fall. Given that, firms try to cutback leading to a rise in unemployment. This does little to solve the problem given that more numbers unemployed means mean more people with less buying power leading to the problem of overproduction or under-consumption, collapse of credit and downfall of weaker firms.

The gambling on Wall Street is explained not only by greed, but by the need to break from the falling rate of profit and salvage failing industries like real estate. Obviously, when you strip people of their buying power and tighten the money supply at the same time leading to little credit availability, goods and services that are produced won’t be sold, which only results in a business and industry downfall.

In my personal opinion, the U.S. recession should be allowed to run its course. America needs to seriously reconsider its priorities. A permanent war economy with MASSIVE CONSUMPTION ON BORROWED MONEY, with wealth concentrated at the top, is not sustainable. For example, the drop in oil prices comes as a result of less consumer demand, or rather, perceptions of inability to consume Oil. But in the long run, that is a GOOD thing — we need to move towards alternative energy for the sake of this planet and if a few bankrupt companies is what it takes to reverse course, count me in! As Baudrillard would argue, ‘postmodern’ society consists an explosion of signs and symbols that encourage an individual to merely services the needs of the productive system while believing in the illusion that s/he is servicing her/his needs and wants. Wake up! It is about time that the 5% of the world’s population that uses the most energy and creates the most waste, learns through experience and cuts back on consumption that is eating it alive.

But an economic and trade re-alignment and balance of power shift is still some ways off. As long as developing nations like China are manufacturing economies, they would come to the rescue of the U.S. dollar as they depend on U.S. (over)consumption for its own gross profits. Anyone else think this interdependency is a tad-bit problematic?

That was my short PE take of the current on-goings.

A central problem with this ‘crisis of capitalism’ and how it is portrayed and spoken about lies with discourse. ‘The economy’ is treated as some sort of independent sphere, that has feelings, mood-swings, given an invisible spatiality recognized only through symbolic gestures and institutions. It is merely seen a system that organizes production, distribution, and consumption of goods and services, treating human beings as isolated species who are not part of the process. Speech acts and utterances reduce the complex web of inter-relationships–human relationships–to matters of financial transactions. Such a reductionist and alienated approach allows for questions of value in terms of HOW much but never questions its own central assumptions as to WHY? Poverty is a mere by-product as is environmental pollution. The second-shift of women is never part of GDP calculatons. Things have value in an economy only so far as they have exchange value. Rendering ‘use value’ as ineffective allows for a more estranged and alienated governing of laws.

And to thrown in Foucault just for the sentence, since the judges of normalcy are everywhere, guess what? A crisis of capitalism cannot be normal. The economy is treated as a person that is ill, in need of medication or else it would face certain collapse. The U.S. government then acts as a ‘superhero’ doctor to save the economy from this collapse, making some potions to prolong an ailing organism.

Given below is a short summary of how the Feds have tried to fix the crisis of capitalism in terms of business cycles time and again. And failed miserably each time.

Bailouts that have failed (Courtesy: Times of India)

The 1907 panic
In October that year, a run on the Knickerbocker Trust after it failed to corner the market in United Copper shares caused panic on Wall Street. Stocks plummeted, threatening major banks with failure. The calming influence came not from the Fed—which did not exist—but from banker John Pierpont Morgan, who organized a consortium of bankers to provide funds to prop up banks and buy up stocks.
Great Depression, 1930s
Some 9,000 banks failed after a stock market collapse triggered severe restriction of credit, massive loan failures and “runs” by depositors to withdraw funds. President F D Roosevelt’s first act after his 1933 inauguration was to declare a 3-day bank holiday to cool things off. He later signed into law the Glass-Steagall Act, creating Federal Deposit Insurance Corp (FDIC), to restore depositors’ confidence in banks.
Commonwealth Bank, 1972
This was the first bank with over $1 billion in assets to be bailed out. Being essential to Detroit’s inner city, so FDIC provided $36 million in loans—never to be repaid.
First Pennsylvania, 1980
Established in 1782 as one of the first US private banks, First Penn was among many banks in the 1970s made insolvent by high deposit interest rates that outstripped earnings from loweryielding assets. It was FDIC’s first large-scale bailout.
Continental Illinois, 1984
Once the seventh-largest US bank, Chicagobased Continental Illinois National Bank and Trust was deemed “too big to fail” and remains the largest commercial bank taken over by the Fed and FDIC. The $40 billion-asset bank became insolvent due to bad oil and gas exploration loans.
Bear Stearns, 2008
US Fed and treasury brokered a weekend deal for JPMorgan Chase & Co to buy Bear Stearns at a rock-bottom price, with the Fed agreeing to guarantee $29 billion in Bear Stearns assets taken on by JPMorgan.
Fannie Mae, Freddie Mac, 2008
The government seized control of mortgage finance firms Fannie Mae and Freddie Mac to stabilise them after massive falls in their share price made it impossible for them to raise needed capital to sustain mounting mortgage losses.
AIG, 2008
Fed stepped in to rescue AIG, one of the world’s largest insurers, with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9% stake in AIG