There has already been an enormous destruction of capital. In the last number of months, more than $7 trillion has been wiped off the U.S. stock market. Indeed, $1.1 trillion was wiped out in a single day on October 15. As of mid-October, $27 trillion had been erased from stock markets worldwide. Housing values in this country have already declined by $5 trillion; pension funds by $2.5 trillion; and bank write-offs are now at $600 to $700 billion and expected to be $1.4 trillion. Large, conservative, seemingly stable companies have disappeared. Lehman Brothers, which had been capitalized at $30 to $40 billion, has gone bankrupt, and AIG, which until a few months ago was capitalized at between $150 and $200 billion, required a $123 billion lifeline from the government to survive. This has led to a massive credit crunch. Banks and other financial institutions now no longer trust each other not to totter and collapse underneath the weight of toxic debt, and refuse to lend to each other, producing a credit meltdown affecting the entire global financial system.
(...) The banks are also being de-leveraged, that is, they are being forced to pay off some of their debt and to cut back on the risky loans they’ve made over the past several years. Rather than loaning ten times more than their capital, they were loaning thirty and forty times their capital; and in Europe the banks were leveraged at an even greater rate.
(...) The current crisis is a product of the contradictions of the twenty-five-year-long neoliberal boom, which started in 1982. The postwar boom ended in 1973, and from 1973 to 1982 there were three recessions in the United States. The restructuring that went on in the United States, and to a lesser extent internationally, with the introduction of neoliberal, free-market measures, led to a twenty-five-year-long boom. It is the contradictions of those neoliberal measures that have produced this crisis.
(...) The first contradiction to note was the creation of a giant debt bubble. The increase in debt during the Clinton and Bush years was staggering. Over the two decades preceding 2007, credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion, far exceeding growth rates. To put it in perspective: according to the Wall Street Journal, since 1983 debt expanded by 8.9 percent per year, while GDP expanded by only 5.9 percent.
(...) The second contradiction was that the United States became a buyer of last resort, establishing a trading system with Asia in which the Asian countries exported to the United States, which kept up spending through debt. The American balance of payments went from approximately $200 billion a year to $700 to $800 billion per year. All of this was borrowed. The U.S. government had a budget surplus under Clinton. But under Bush, with the tax cuts and war spending, the budgetary surplus disappeared, and the U.S. went from having a $250 billion government surplus in 2000–2001 to a $300 billion deficit in 2002. This stimulated the economy, but it meant that the United States became dependent on foreign capital, since the savings rate in this country had collapsed and was negative in the last years of this boom. Foreign capital, in particular from China, Japan, and the Middle East oil exporting countries, financed the American debt. When the dot-com bubble collapsed and recession came in 2001, Federal Reserve Chairman Alan Greenspan lowered interest rates to between 1 and 2 percent for three years. This led to massive asset inflation, particularly in housing prices.
(...) The neoliberal boom was the result of a shift in the balance of class forces, in which the rate of exploitation was increased, real wages were depressed, and almost all wealth created went to capital. Some figures will indicate how dramatic the shift was. In 1973, GDP per person, in constant non-inflationary dollars, was $20,000 a year. By 2006, it was $38,000 a year—a more than 90 percent rise. Wages, however, in that same thirty-three-year period, declined. Real wages in 1973 were $330 per week; and in 2007, wages were $279—a decline of 15 percent.
(...) This shift of wealth from the working class to the capitalist class produced a tremendous amount of capital for potential investment. But in this last business cycle, that capital could not find all that many profitable outlets domestically. There was no expanded reproduction, no accumulation of capital in the U.S. during the 2000s. In this last business cycle, there were fewer factories at the beginning of the recession a year ago than there were in 1999. Instead of investing in new technologies, new plants and equipment, capitalists invested money overseas. Domestically, investments went to the most profitable industries—housing, construction, and finance. “In 1983, banks, brokerage houses and other financial businesses contributed 15.8 percent to domestic corporate profits,” writes James Grant in the October 18 Wall Street Journal. “It’s double that today.”
(...) These investments stimulated the housing and debt bubble. Between 2000 and 2005, housing prices increased by more than 50 percent, and there was a frenzy of housing construction. Banks and other financial institutions went on a mortgage-lending spree, creating a massive market in subprime mortgages—adjustable rate mortgages sold to borrowers with weak credit. There was also a big increase in housing speculation, with small investors buying second and third homes with the expectation that housing prices would keep rising and that these houses could be resold at a profit. Merrill Lynch estimated that in the first half of 2005, half of economic growth was related to the boom in the housing sector.
(...) Meanwhile, workers tried to maintain their standard of living despite the decline in real wages. In the 1980s and 1990s, they worked longer hours, took on more than one job, and increased the number of family members working. This could prop up household income to some extent. Yet even household income declined from 1998 through the boom of the 2000s. The only way to maintain living standards in the midst of declining wages was by borrowing against the rising value of their homes through home equity loans and mortgage refinancing. In the period of the last boom, homeowners took $5 trillion out of their home equity ($9 trillion since 1997), fueling an increasingly unsustainable debt structure that finally popped with the decline of inflated asset prices in housing.
(...) In this shadow system, banks did not have to put up adequate capital reserves. As a result, they were able, through this unregulated system, to borrow thirty, forty, or fifty times above the value of their capital in order to invest in the stock market and in various new exotic debt products, such as collateralized debt obligations (CDOs), credit-default swaps (CDSs—essentially a form of insurance against debt default), and various other financial swindles, many of which were based on the packaging and repackaging of housing mortgages. These were bundled and sliced up into investment vehicles that contained a good deal of potentially toxic debt—$900 billion worth of subprime loans, for example.
(...) Now that the world has entered recession, the U.S. is going to be running higher budgetary deficits. Those deficits will be increased also by the expansion of U.S. military spending, which has increased from $300 billion a year in 2000 to more than $800 billion a year now, if you include the supplemental costs for the wars in Iraq and Afghanistan. On top of this spending, the U.S. has introduced a hugely expensive bailout plan. That means it will in all likelihood be running deficits of three-quarters of a trillion dollars, and possibly more, in the coming years. Where will the money for that come? At the moment there is no savings in this country, though that may change dramatically. But it is highly unlikely that China, Japan, and other countries are prepared to continue to finance an American trade deficit to the tune of $700 or $800 billion a year when the balance sheet of American finances, the huge national debt, has gone from $5 trillion when Bush came into office to $11 trillion today. It is unlikely that the Chinese and others are going to continue to finance this debt—although at this point in time U.S. treasuries are still a safe haven. This is particularly true because China’s trade surplus is going to contract considerably as a result of the world recession.
(...) The Chinese population only consumes 35 percent of what it produces. The rest goes for reinvestment and export. China’s economy has the highest rate of exploitation in the industrial world. But its export markets are going to constrict—they’ve already started to decline. As a result, China’s desire to lend greater amounts to the United States is problematic, particularly if interest rates in the United States are low. The United States therefore can no longer continue to run an enormous trade deficit while it is building an enormous budgetary deficit, and sustain both of them on the basis of foreign borrowing. There will have to be a restructuring and reordering of the system. At the same time, the U.S. may become more dependent on direct foreign investment from countries like Japan and China that, as we’ve mentioned, have developed large cash reserves. That is what we mean when we say that this is not just a typical cyclical crisis of capitalism. All of the contradictions of the neoliberal boom have burst asunder and now have to be addressed.
(...) In their ad-hoc attempts to solve the crisis, officials took this to be a liquidity rather than an insolvency problem—a problem simply of getting money into the banking system so that the banks would loan. But the banks refused to loan to each other because they knew that other banks had assets on their books that were as bad as their own—and which might lead to defaults. This is called counterparty risk: banks are afraid that the other banks are on the verge of bankruptcy and so won’t give them loans. This aversion to risk reached a crescendo when Lehman Brothers was allowed to go bankrupt in mid-September. This is what led to the credit meltdown of late September into mid-October that roiled markets all over the world.
(...) Estimates are that the U.S. has so far committed $4 to $6 trillion in tax dollars to bailout efforts, and Europe has committed $2.3 trillion. But this isn’t so much cooperation as it is an attempt by each state to keep pace with its national rivals. Everyone understands to some extent what happened in the 1930s—that the recession became a world depression when the international banking system collapsed and states imposed beggar-thy-neighbor policies that further contracted world trade and deepened the world depression. Yet at the same time there are limits to what states can do because they also compete with each other. Each one only controls a small patch of an integrated world economy. State intervention can therefore mitigate the effects of the crisis, but it cannot prevent the recession.
(...) The U.S. in the late 1980s and 1990s improved its competitive position in the world economy and attempted to assert its role as the sole superpower. Though it secured better rates of growth than its competitors in Japan and Europe over the past twenty-five years, it fell behind the growth rates of emerging nations like China, and in order to sustain its own economy it fell into debt. The result is that in the last decade, the United States has lost its competitive position on the world market. Now it will have to restructure, which will involve attempting to raise the rate of exploitation—increasing productivity while lowering wages and benefits even further. We’ve already seen it in the auto industry, where wages have already been cut in half in many cases. The United States will become a cheap labor country compared to its competitors. Auto wages in this country are probably about a third of what they are in Germany. The minimum wage is half of what it is in Britain, France, Germany, and Ireland. The contradictions of neoliberalism have increased the immiseration and the poverty of the American working class. And to get out of the crisis they are going to attack workers’ living standards even further.
(...) On the other hand, there’s an enormous opening for a Left that has been marginalized for decades. The disaster of the free market makes it easier for us to argue about the failure of capitalism and the need for an alternative based on human needs. The free market, which supposedly triumphed in 1989 and brought us the “end of history,” has led to nothing but misery and the ruin of millions of people, who are mired in poverty, hunger, unemployment, and ill health, but thanks to the free-market mania of the past decades, face a shredded safety net that doesn’t begin to address these problems.