The political economy of crisis management in the heart of world capitalism

By Arindam Sen

May 2009 -- Do we see a faint glimmer of light at the -- still distant -- end of the tunnel? In March the housing market in the US stabilised somewhat and new claims for unemployment insurance stopped rising. Crisis-ridden US banks surprised everybody when they reported profits in mid-April, which was followed by a good stockmarket rally. But most other indices, including retail sales figures seem to suggest that such optimism might be premature. As late as March 31 the OECD released a very gloomy prognosis, predicting that the US economy would shrink by 4% this year and not grow at all next year.

Meanwhile, a great debate of sorts is raging over contradictory strategy options for crisis management, in the process revealing the class conflicts in US society -- both between the bourgeoisie and the working class, and among various sections of the bourgeoisie.

Two versions of the nationalisation slogan

“As free-market economists teaching at a business school [at New YorkUniversity's Stern School of Business] in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.” Thus wrote Matthew Richardson and Nouriel Roubini (the latter, nicknamed "Doctor Doom", is now admired for his almost uncanny capacity for making correct predictions) in the Washington Post on February 15, 2009. Pointing out that a long series of conventional piecemeal measures has failed to stop the rot, they called for a more decisive measure: “We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.”

What these scholars, as well as experts like Niall Ferguson, actually propose boils down to what Marx would have called "bourgeois socialism" -- nationalisation of the huge losses now, so as to ensure privatisation of profits when they are restored in future. Many of them uphold the 1992 Swedish model, where the government took over its insolvent banks, cleaned them up and re-privatised them. The whole responsibility was delegated to private bankers and managers, so the process proved remarkably smooth. Essentially, the US government is pursuing a similar course, with the difference that formal (even temporary) nationalisation -- or to use a less dreaded word, “receivership" -- is avoided. The US government has already committed, between guarantees, investment, recapitalisation, liquidity provision, about US$9 trillion to the financial system and has already spent more than $2 trillion of this huge provision. The US financial system has thus already entered a phase of de facto nationalisation with de jure private control. As a latest indication of such partial or backdoor nationalisation, the government is reportedly planning to convert some of its loans to big banks into common stock (known in India as equity shares). This would augment the capital of big banks by more than $100 billion without the government having to cough up any additional cash.

In contrast to this kind of bourgeois nationalisation, radical economists and activists are raising the demand for turning the whole banking system permanently into a public utility that would ensure the distribution of credit and capital in conformity with democratically established norms. The whole discussion has thus provided an opening for advancing broader strategies that lead up to a socialist alternative to capitalism.

The Geithner-Summers-Bernanke Plan

Absolutely opposed to even the bourgeois plan of ``nationalisation’’, the three musketeers of high finance are currently charging ahead with a four-part recovery program comprising the Public-Private Investment Fund (PPIF), the Term Asset Backed Securities Lending Facility (TALF), a fiscal stimulus package and the Homeowner Affordability and Stability Plan (HASP). The first two directly and the fourth plan in a roundabout way serve to extend the massive bailout of Wall Street, whereas the third one is designed to tone up the real economy too, often referred to as the Main Street.

ThePPIF, the government’s reply to the cry of nationalisation, is a twisted version of the failed TARP program launched in September last year by the Bush administration. Its purpose is to buy up as much as a half-trillion dollars of the US banks' toxic assets, with the government providing 85 per cent of the funds to willing private investors at low interest rates, and guaranteeing (through FDIC) any loss on the financial assets that banks will be unloading through public auctions. The special advantage of this program is that it can be taken care of administratively without seeking approval of Congress.

TALF on the other hand purports to support the issuance of asset-backed securities (ABS) collateralised by student loans, car loans, credit card loans, etc. In plain English, it is envisioned as a plan to resurrect the shadow banking system and the securitised asset markets that collapsed after 2007.

Together the two schemes have committed more than $2 trillion in bailout money including a second $200 billion injection to Fannie Mae and Freddie Mac now that they have run out of the $200 billion given them last August; another $60 billion for American Insurance Group (AIG), bringing its total receipts to more than $200 billion to date; tens of billions more for Citigroup and Bank of America; hundreds of billions more for brokers of commercial paper and money market funds, for foreign banks holding U.S. securities, for credit card company giants like American Express, for auto companies and so on.

The stimulus package: Too little, too late


Compared to the free flow of practically unlimited funds to the big thieves and robbers called financial institutions, the much-trumpeted Obama stimulus is a mere pittance. The $787 billion plan represents only a half-hearted attempt to tackle the consumption collapse and not a Keynesian spending program to turn around the economy. As much as 38 per cent of the stimulus is in the form of aid measures to offset job loss income with unemployment and medical costs assistance, food stamps, etc. These are necessary relief measures, but they will not create any jobs. Another 38 per cent of the stimulus is targeted for tax cuts, which will have no net effect on consumption. That leaves only 24 per cent for spending on potential jobs projects. Most important, out of the rather respectable total figure of $787 billion, the plan earmarks only $180 billion in total spending for the current year. And only $26 billion of that is allocated for job spending, which is estimated to create less than half a million new jobs compared to the 13 million new unemployed.

Moreover, sincestates cannot run deficits, in the face of falling revenues they are cutting vital services and raising taxes. This fiscal drag is wiping out about half of the current federal stimulus. In a word, the package is too small to create enough aggregate demand to raise the economy out of recession.

An interesting debate that came up soon after the economic stimulus bill was presented relates to its "buy American" clause. Critics at home and abroad allege that this would lead to a retaliatory protectionist spiral throughout the globe. Even someone like Pranab Mukherjee, India’s external affairs minister, said on the sidelines of the G20 summit in London that discouraging US firms from outsourcing or buying abroad was not in keeping with the spirit of global cooperation. The G20 meeting in Washington last year had underscored the "critical importance of rejecting protectionism and not turning inward in times of financial uncertainty", he pointed out. But supporters of the clause argued that such restrictions were necessary to reduce the leakage of the scarce funds used in bank bailouts and fiscal stimulus in the US to other countries. That is to say, unless such a clause was inserted, other nations would reap the harvest of market recovery achieved in the US at a high cost. According to Scott Marshall, chair of the Labour Commission of the Communist Party of USA, “basically the fiercest opposition [to the “buy American” clause] was from the National Association of Manufactures and the Chamber of Commerce. The reasons are obvious. A huge portion of their members have moved production overseas -- where they went for cheap labor and relaxed environmental standards – and then they re-import those goods. So they were very much against the provision to buy goods manufactured in the US." Ultimately a compromise was reached and the bill was passed in a toned-down version by stipulating that public procurement policies must comply with World Trade Organisation rules. However, allegations of protectionism remain rife, especially from abroad.

Another $275 billion has been committed to HASP, which will be used primarily to subsidise mortgage lenders and servicers so as to induce them to lower their interest rates on new mortgages. Here too, the main beneficiaries will be the big banks. Two thirds of all home loans in the US are serviced by Citi, JP Morgan Chase, Bank of America and Wells Fargo -- the same institutions that benefit from the PPIF.

The recovery plan as a whole is thus inordinately biased in favour of those who are largely responsible for the crisis. Taking advantage of that, the latter are back in the game again – this time displaying their great "innovativeness" in producing miniature profit bubbles.

US Banks: doctored accounts and magnified profits

With the huge -- and continuing -- infusion of taxpayers' money and acarte blanche from a collusive state to do whatever they wish to, the biggest banks have managed to report unexpected first quarter profits this April.

Several factors are responsible for this "pleasant surprise". One is the recent decision of the Financial Accounting Standards Board (FASB) to abandon “mark-to-market” accounting rules, which required banks to price ("mark") the toxic holdings to the current market price, that is, to honestly bear the losses. This change allows the banks to price these toxic assets arbitrarily and thus vastly inflate the value of illiquid home loans and other bad debts on their balance sheets. The banks have used this relaxation to the hilt. Besides, they benefitted from close to zero borrowing costs, i.e., interest rates, fewer competitors and massive bailout and subsidy programs. Moreover, they manipulated accounts in various ways (e.g., not properly providing for future loan losses) so as to minimise reported losses and maximise reported earnings. Another major factor lay in reduced costs resulting from mass layoffs: US financial firms have laid off more than 400,000 employees over the past two years.
In addition to the ``normal’’ or habitual urge of corporate houses to overstate profits, this time around it seems there is a very special motive behind it. When the government gave the banks astronomical amounts of taxpayer dollars, under popular pressure it had to impose certain minimal conditions like a cap on CEO compensation (remuneration, commission and parks). Even this much the high lords of finance are not prepared to tolerate. They are eager to re-assert their independence from, as one commentator aptly put it, the golden handcuffs of the taxpayer.

Based mainly on these doctored results, stock markets in the US -- and therefore also around the world, in most cases to a lesser extent though -- have witnessed an upward trend. More discerning observers, however, believe this is only a bear market rally (a sudden, short-lived rise in declining or bearish market) or "a dead cat bounce". There is also much scepticism about the financial sector earnings. As a New York-based analyst declares, "Bumper bank profits likely to run out of steam before too long” (Financial Times, April 18). It may be noted that on April 17, even as profit reports of big banks were pouring in, two more banks collapsed in US, bringing the total of bank failures this year to 25 -- the same number that failed during the whole of 2008.

Security’ dimensions of economic crisis

While taking recourse to all possible economic and political stratagems to shift the burden of the crisis onto the shoulders of the people, the US ruling class is certainly not forgetting the ultimate option -- the use of brute military power. In a news analysis posted in the Global Research website on February 14, 2009, Bill Van Auken gives us some interesting facts.

In testimony before the US Senate Committee on Intelligence on 12 February this year, Washington's new director of national intelligence, Dennis Blair, warned that the deepening world capitalist crisis could trigger a return to the "violent extremism" of the 1920s and 1930s. The remarkable assessment represented a striking departure from earlier years, in which a supposedly ubiquitous threat from al Qaeda terrorism topped the list of US concerns. And this was not the personal impression of a single individual but was presented on behalf of 16 separate US intelligence agencies.

"The globally synchronized nature of this slowdown means that countries will not be able to export their way out of this recession," Blair said. "Indeed, policies designed to promote domestic export industries—so-called beggar-thy-neighbor policies such as competitive currency devaluations, import tariffs, and/or export subsidies—risk unleashing a wave of destructive protectionism."

The committee's Republican vice-chair, Senator Christopher Bond of Missouri, expressed his concern that Blair was making the "conditions in the country" and the global economic crisis "the primary focus of the intelligence community".

 Blair responded that he was "trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about". It sounded like a rebuke and a warning to the senators that it was high time to ditch the ideological baggage of the past several years and confront the growing threat of radicalisation of the masses in country after country.

The testimony, we can add, reflects the dominant trend of thought in the US national security apparatus. A monograph published by the US Army War College late last year observed that one of the key contingencies for which the US military must prepare is a "violent, strategic dislocation inside the United States", which could be provoked by "unforeseen economic collapse". It may also be noted, and not just in passing, that in an unprecedentedly high representation of the senior officer corps within a Democratic administration, US President Barack Obama has selected three recently retired four-star military officers (including Blair) to serve in his cabinet.

Struggle for a “New” New Deal

While the US ruling class is taking all-round initiatives to tackle the crisis, the popular masses also have their own ideas about what needs to be done. They are angry about the lavish bonuses and golf outings indulged in by corporate honchos; they want to know why there is no improvement at all in the lives of the common people and want the government to fully disclose how taxpayer dollars are being used.

In this context the notion of a "21st-Century New Deal", rooted in the democratic national legacy of US, has emerged as a popular point of reference. However, as in the discourse on nationalisation, here too, illusions abound. Enamoured by Obama's rhetoric of hope and change, some people tend to see in some of his schemes (like the housing recovery proposal) the beginnings of something like the famous progressive project that helped fight the Great Depression of 1930s. But this is based on entirely wrong notions about both the new dispensation's economic philosophy as well as the historical trajectory of the New Deal[1] and the actual degree of its success.

In fact the real progressive New Deal was started only in mid-1930s with measures like the Works Progress Administration (WPA), unemployment insurance, the Wagner Act giving labour the right to organise; it came about only as a result of a powerful industrial unionisation movement.

This time too, nothing short of a mighty rebellion from below can force the current dispensation to stop the great robbery of taxpayers for bailing out the banking system and redirect the flow of state funds towards an adequate stimulus program. This demand has already become a rallying point of progressive economists and intellectuals writing and speaking in newspapers, magazines and on the electronic media, as well as workers and others organising various forms of protest. Of course, they still have a very long way to go and success will also depend on how the global crisis plays itself out and how the people of the world fight back.

[Arindam Sen is one of the editors of Liberation and is a central committee member of the Communist Party of India (Marxist-Leninist) Liberation. This article will appear in the May issue of Liberation.]

[1] Inaugurated by US President Roosevelt in 1933, for the first two years the New Deal focused on revitalising business and agriculture and efforts to stabilise the financial system. In 1935 the emphasis shifted to measures designed to assist labour and other urban groups. The National Labor Relations Board (NLRB) was set up to regulate industrial relations and it increased the power of unions to organise in factories where the bosses were used to resist unionisation. Mighty waves of working-class struggles developed across the US. Under its impact, social security measures were enacted in 1935 and 1939, to provide for old age and widows’ benefits, unemployment compensation, and disability insurance.

By the start of Roosevelt’s second term in 1937, some progress had been made against the depression. The gross output of goods and services reached their 1929 level. Unemployment was still high, and per capita income was less than in 1929. The economy plunged again in the so-called Roosevelt recession of 1937, caused by reduced government spending and the new social security taxes. To battle the recession and to stimulate the economy, Roosevelt initiated a spending program which served to tone up demand to some extent. Working hours were limited and minimum wages were set in some industries in 1938.

The New Deal never ended the Great Depression (as late as 1940, 15 per cent of the labour force was unemployed) though it certainly had a positive impact in the latter half of 1930s, particularly in the last couple of years in that decade. It merged into World War II, after which the US economy entered upon a phase of long boom.