http://socialistworker.org/2008/09/19/capitalism-on-trial
my everyday bloopers,worries,joys and struggles..
Saturday, September 20, 2008
Friday, September 19, 2008
Wednesday, September 17, 2008
a little lesson on history...
The Great Depression
The Great Depression was the world-wide economic slump which began in the US following the wall street crash of October 1929, and put hundreds of millions out of work across the capitalist world throughout the 1930s.
After a decade of unprecedented boom in the U.S., known as the “Roaring Twenties”, the US economy had run out of steam. Despite an exceptional level of productivity, US workers could no longer support the enormous mass of fictitious capital created by speculation on the share market and unsecured bank loans. At that time, there was very little government regulation and no practice of government intervention in finance. Share prices began to slip as profitability declined and on 29 October 1929 share prices on Wall Street collapsed catastrophically, setting off a chain of bankruptcies and defaults which spread across the world. Factories and businesses closed, workers plunged into poverty in millions, houses and farms were repossessed, crops which could not be sold were dumped into the sea. By late 1932, share prices had fallen to 20 percent of their 1929 value and 11,000 of the United States’ 25,000 banks had collapsed, manufacturing output had fallen to half its 1929 level, and 25 to 30% of workers throughout the world were unemployed and with no means of support, roamed the country in search of work. In the US, the uncontrolled development of the early 1920s had reduced vast tracts of land to a dust bowl, and farmers unable to sell their produce, unable to repay their bank loans were evicted and with their families joined the human flood of misery.
The Great Depression spread rapidly from the US to Europe and the rest of the world as a result of the close interconnection between the United States and European economies after World War I. The United States had emerged from the war as the major creditor of postwar Europe, whose national economies had been greatly weakened by the war itself, by war debts, and, in the case of Germany by the need to pay war reparations. So when the US economy slumped, credits and loans were called in and whole national economies were thrown immediately into bankruptcy. Germany and Great Britain, which were the most deeply in debt to the US were hardest hit: nearly 40 percent of the German workforce was unemployed by 1932. Britain was less severely affected due to the continuing benefits of its Empire, but its industrial and export sectors remained seriously depressed until the beginning of the War.
There had been plenty of economic slumps before the 1930s, in fact economies rose and fell on a roughly ten year “business cycle”, but the Great Depression was so much worse than anything that had come before precisely because it was world-wide; previously one or another country had been affected by slump but in other parts of the world the economy would be OK, so countries could always pull themselves up again once the “business cycle” was completed –speculative value had been wiped out and stocks had been exhausted, and demand picked up again. By the 1920s, particularly as a result of American loans to Europe after World War One, the world had begun to develop towards a single market, and the “ when America sneezed, the world caught a cold”.
With domestic markets obliterated, countries wanted to dump their produce onto markets in other countries, to make a profit however small or at least recover some of their costs. To defend their own markets against saturation by this practice of dumping, every country in the world put up tariff barriers and quotas to block foreign imports. With widespread bank failures and bankruptcies, international trade was possible exclusively on the basis of gold. The US dollar was fixed at US$35/oz., but other countries such as Germany suffered hyper-inflation and their currency was worthless. By 1932, the total value of world trade had halved. With no possibility for export, no chance of credit, there was no way out.
The suffering and senseless wastage of human life –dumping of food in the sea, closure of factories while millions were left rotting in idleness -turned large numbers of workers to communism; in Europe huge street battles were being fought between million-strong fascist and communist parties. Unemployment was unknown in the USSR, a fact which was made widely known to the workers of the West. With unemployment so high and workers terrified for their jobs, Communists oriented their work to the unemployed, but the unemployed were a very fluid and mobile population, and while some very large movements were built, it was difficult to build an organised party. This was the period which Stalin had characterised as the “Third Period”, a period of intense class struggle, and Communist Parties appealed to the unemployed with slogans for uncompromising revolutionary struggle.
In late 1932, Franklin D. Roosevelt was elected US President with widespread popular support for the New Deal – to introduce universal welfare, protect workers’ rights, and for the government to take a leading role in the economy and clamp down on destructive business practices.
To millions of workers queuing at soup kitchens or labouring for near-starvation wages, the USSR was looking very much like a workers’ paradise. By the late 1930s, as the job market began to pick up with the beginning of recovery in the U.S., mainly as a result of the New Deal measures, partly through the normal processes of the business cycle, and especially the escalating war-spending in Europe, the organised workers’ movement began to show real signs of readiness to overthrow the institutions which had overseen all this misery. Unemployment was still at 15% at the beginning of World War Two and only the urgent need to crush Fascism in Germany and Japan postponed a worldwide revolutionary upsurge.
The war brought an immediate end to unemployment as factories fired up for the weapons trade and business flourished again as the remaining unemployed were sent off to war. Never again however could the laissez faire doctrine of leaving everything to the market be taken seriously. The name of John Maynard Keynes would be associated with the new economic doctrine which emphasised the role of government in regulating demand and containing unemployment with public works programs.
Keynes proved that market forces would continue to throw the world into deeper and deeper crises unless the government used its power to stabilise demand by controlled public spending. Keynes famously said that there was no wage low enough that a starving person would not be prepared to work for it. Consequently, unless the government provided a “safety net” and regulated employer practices, there would always be extreme poverty and misery. Further, Keynes showed that the market was by itself unable to provide the expensive infrastructure needed for economic growth and the government had to play a role in infrastructure development.
By the end of the war, in most of the industrialised countries of the Allied powers, workers were organised into unions and these unions were mainly led by Communists.
The Great Depression was the world-wide economic slump which began in the US following the wall street crash of October 1929, and put hundreds of millions out of work across the capitalist world throughout the 1930s.
After a decade of unprecedented boom in the U.S., known as the “Roaring Twenties”, the US economy had run out of steam. Despite an exceptional level of productivity, US workers could no longer support the enormous mass of fictitious capital created by speculation on the share market and unsecured bank loans. At that time, there was very little government regulation and no practice of government intervention in finance. Share prices began to slip as profitability declined and on 29 October 1929 share prices on Wall Street collapsed catastrophically, setting off a chain of bankruptcies and defaults which spread across the world. Factories and businesses closed, workers plunged into poverty in millions, houses and farms were repossessed, crops which could not be sold were dumped into the sea. By late 1932, share prices had fallen to 20 percent of their 1929 value and 11,000 of the United States’ 25,000 banks had collapsed, manufacturing output had fallen to half its 1929 level, and 25 to 30% of workers throughout the world were unemployed and with no means of support, roamed the country in search of work. In the US, the uncontrolled development of the early 1920s had reduced vast tracts of land to a dust bowl, and farmers unable to sell their produce, unable to repay their bank loans were evicted and with their families joined the human flood of misery.
The Great Depression spread rapidly from the US to Europe and the rest of the world as a result of the close interconnection between the United States and European economies after World War I. The United States had emerged from the war as the major creditor of postwar Europe, whose national economies had been greatly weakened by the war itself, by war debts, and, in the case of Germany by the need to pay war reparations. So when the US economy slumped, credits and loans were called in and whole national economies were thrown immediately into bankruptcy. Germany and Great Britain, which were the most deeply in debt to the US were hardest hit: nearly 40 percent of the German workforce was unemployed by 1932. Britain was less severely affected due to the continuing benefits of its Empire, but its industrial and export sectors remained seriously depressed until the beginning of the War.
There had been plenty of economic slumps before the 1930s, in fact economies rose and fell on a roughly ten year “business cycle”, but the Great Depression was so much worse than anything that had come before precisely because it was world-wide; previously one or another country had been affected by slump but in other parts of the world the economy would be OK, so countries could always pull themselves up again once the “business cycle” was completed –speculative value had been wiped out and stocks had been exhausted, and demand picked up again. By the 1920s, particularly as a result of American loans to Europe after World War One, the world had begun to develop towards a single market, and the “ when America sneezed, the world caught a cold”.
With domestic markets obliterated, countries wanted to dump their produce onto markets in other countries, to make a profit however small or at least recover some of their costs. To defend their own markets against saturation by this practice of dumping, every country in the world put up tariff barriers and quotas to block foreign imports. With widespread bank failures and bankruptcies, international trade was possible exclusively on the basis of gold. The US dollar was fixed at US$35/oz., but other countries such as Germany suffered hyper-inflation and their currency was worthless. By 1932, the total value of world trade had halved. With no possibility for export, no chance of credit, there was no way out.
The suffering and senseless wastage of human life –dumping of food in the sea, closure of factories while millions were left rotting in idleness -turned large numbers of workers to communism; in Europe huge street battles were being fought between million-strong fascist and communist parties. Unemployment was unknown in the USSR, a fact which was made widely known to the workers of the West. With unemployment so high and workers terrified for their jobs, Communists oriented their work to the unemployed, but the unemployed were a very fluid and mobile population, and while some very large movements were built, it was difficult to build an organised party. This was the period which Stalin had characterised as the “Third Period”, a period of intense class struggle, and Communist Parties appealed to the unemployed with slogans for uncompromising revolutionary struggle.
In late 1932, Franklin D. Roosevelt was elected US President with widespread popular support for the New Deal – to introduce universal welfare, protect workers’ rights, and for the government to take a leading role in the economy and clamp down on destructive business practices.
To millions of workers queuing at soup kitchens or labouring for near-starvation wages, the USSR was looking very much like a workers’ paradise. By the late 1930s, as the job market began to pick up with the beginning of recovery in the U.S., mainly as a result of the New Deal measures, partly through the normal processes of the business cycle, and especially the escalating war-spending in Europe, the organised workers’ movement began to show real signs of readiness to overthrow the institutions which had overseen all this misery. Unemployment was still at 15% at the beginning of World War Two and only the urgent need to crush Fascism in Germany and Japan postponed a worldwide revolutionary upsurge.
The war brought an immediate end to unemployment as factories fired up for the weapons trade and business flourished again as the remaining unemployed were sent off to war. Never again however could the laissez faire doctrine of leaving everything to the market be taken seriously. The name of John Maynard Keynes would be associated with the new economic doctrine which emphasised the role of government in regulating demand and containing unemployment with public works programs.
Keynes proved that market forces would continue to throw the world into deeper and deeper crises unless the government used its power to stabilise demand by controlled public spending. Keynes famously said that there was no wage low enough that a starving person would not be prepared to work for it. Consequently, unless the government provided a “safety net” and regulated employer practices, there would always be extreme poverty and misery. Further, Keynes showed that the market was by itself unable to provide the expensive infrastructure needed for economic growth and the government had to play a role in infrastructure development.
By the end of the war, in most of the industrialised countries of the Allied powers, workers were organised into unions and these unions were mainly led by Communists.
Wall Street Collapses
As the Dow hemorrhages, Wall Street firms are betting on which one will bite the dust next, and Federal Reserve Chairman Ben Bernanke probably wishes he could leave as the next administration sets up shop, no one is proposing the long-term solution to the banking crisis: regulating the industry.
The Fed was right to turn Lehman Brothers away from its window during those final moments of doom on Sunday night. As such, the resulting $613 billion Chapter 11 filing, the largest bankruptcy in U.S. history (WorldCom dropped to second with a mere $104 billion in assets) was secured.
It was wrong to back the $30 billion bailout of Bear Stearns in March, which facilitated JPM Chase's acquisition of Bear. It should not be the Fed's responsibility, or the government's, to back investment bank speculation. Instead, regulators should have been more vigilant as speculation outpaced available capital, and transparent quantification of risk went out the window.
However, it should be the government's job to stabilize the financial system; the question is how. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates have the slightest clue. Neither a blame game nor desperate piecemeal fixes will work. This is not about Republican or Democratic policies, but systemic bipartisan deregulation. Only a quick bout of sweeping and decisive regulation can fix what's broken.
In 1932, three years after the 1929 stock market crash, the banking system last stood at a brink of implosion. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House. The country was struggling through a Great Depression unleashed by the forces of unregulated economic greed. FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933.
Decisively, the Glass-Steagall Act forced institutions within the banking community to pick a side. If you want to deal with the population at large, take their deposits, give them a safe place for their savings and make reasonable loans for which you are as responsible as the borrowers -- terrific. As a commercial bank, you will have the newly established Federal Deposit Insurance Corporation (FDIC) backing your depositors. We, the federal government, will regulate you.
If you want to raise capital through speculative investors at home or overseas -- fine. But as an investment bank, you don't get our backing and you don't get to mix it up with citizens' lives or use their capital to fund your trading activities.
That simple premise, the pristine logic of the Glass-Steagall Act, not only kept consumer and speculative capital from intertwining within the same institution; it simplified the ability to understand the activities of all financial organizations. Transparency was not perfect, but it was more easily accomplished.
Lehman Brothers got a taste of the intent of Glass-Steagall. Its demise is ugly, not just because of its 156-year history, the 25,000 employees who are suddenly without jobs, or the long list of institutions to which Lehman owed money that will be slugging it out in bankruptcy court.
It is ugly because it underscores the supreme gutlessness of the executive and congressional branches of government. Bernanke is desperately trying to figure out how to save the banking industry from itself. Treasury Secretary Hank Paulson can't wait until the election saves him from himself. And the presidential candidates are giving Wall Street, and each other, a barrage of verbal shellacking.
None of this changes the playing field.
The catalyst for this current crisis may be the housing market -- not because individual borrowers slightly overleveraged, but because the entire banking industry massively overleveraged. The larger culprit is the killing of Glass-Steagall, which paved the way for this recklessness.
Yet, rather than considering the massive risks of merging commercial and speculative banking interests, given the overwhelming evidence, federal officials actually pushed for Bank of America's $50 billion all-stock takeover of Merrill Lynch, rather than questioned it.
I worked on Wall Street, at Lehman and Bear and Goldman Sachs. Take my word for it: You cannot merge risk management systems more quickly than this economic crisis can continue to unfold. It is technologically impossible.
This knee-jerk move follows the same dangerous green-lighting of mega-mergers that began when Citigroup took over Salomon Brothers after Congress killed Glass-Steagall in November 1999, and continued with Chase taking over JPM and recently Bear Stearns.
The Fed wants to avoid another huge failure in Merrill Lynch by pushing it under the rug of Bank of America. That is bad policy. Bank of America cannot possibly have a clue about the extent of Merrill's potential losses. This commercial bank taking over a speculative giant is much more dangerous than Lehman Brothers tanking. The Fed was within all of its rights and sanity to say no to Lehman's plea for a bailout. But it won't be able to do the same thing with Bank of America, which, unlike Lehman or Bear, is responsible for the accounts of millions of customers -- real people with real money on the line.
The speculative nature of the industry, in which commercial and investment banks can borrow beyond their abilities to repay, is a threat to national economic security. It requires a serious exit strategy.
There is no easy answer, but there is only one solution -- and it lies polar opposite to the Bank of America-Merrill Lynch merger logic. The only real way to stabilize the financial industry is to take it apart, quantify and separate its risks, and begin again. We can do this. FDR did it. The market is larger now, and more global. That is not an excuse for inaction; it belies a screaming need for useful action and meaningful regulation. Period.
The Fed was right to turn Lehman Brothers away from its window during those final moments of doom on Sunday night. As such, the resulting $613 billion Chapter 11 filing, the largest bankruptcy in U.S. history (WorldCom dropped to second with a mere $104 billion in assets) was secured.
It was wrong to back the $30 billion bailout of Bear Stearns in March, which facilitated JPM Chase's acquisition of Bear. It should not be the Fed's responsibility, or the government's, to back investment bank speculation. Instead, regulators should have been more vigilant as speculation outpaced available capital, and transparent quantification of risk went out the window.
However, it should be the government's job to stabilize the financial system; the question is how. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates have the slightest clue. Neither a blame game nor desperate piecemeal fixes will work. This is not about Republican or Democratic policies, but systemic bipartisan deregulation. Only a quick bout of sweeping and decisive regulation can fix what's broken.
In 1932, three years after the 1929 stock market crash, the banking system last stood at a brink of implosion. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House. The country was struggling through a Great Depression unleashed by the forces of unregulated economic greed. FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933.
Decisively, the Glass-Steagall Act forced institutions within the banking community to pick a side. If you want to deal with the population at large, take their deposits, give them a safe place for their savings and make reasonable loans for which you are as responsible as the borrowers -- terrific. As a commercial bank, you will have the newly established Federal Deposit Insurance Corporation (FDIC) backing your depositors. We, the federal government, will regulate you.
If you want to raise capital through speculative investors at home or overseas -- fine. But as an investment bank, you don't get our backing and you don't get to mix it up with citizens' lives or use their capital to fund your trading activities.
That simple premise, the pristine logic of the Glass-Steagall Act, not only kept consumer and speculative capital from intertwining within the same institution; it simplified the ability to understand the activities of all financial organizations. Transparency was not perfect, but it was more easily accomplished.
Lehman Brothers got a taste of the intent of Glass-Steagall. Its demise is ugly, not just because of its 156-year history, the 25,000 employees who are suddenly without jobs, or the long list of institutions to which Lehman owed money that will be slugging it out in bankruptcy court.
It is ugly because it underscores the supreme gutlessness of the executive and congressional branches of government. Bernanke is desperately trying to figure out how to save the banking industry from itself. Treasury Secretary Hank Paulson can't wait until the election saves him from himself. And the presidential candidates are giving Wall Street, and each other, a barrage of verbal shellacking.
None of this changes the playing field.
The catalyst for this current crisis may be the housing market -- not because individual borrowers slightly overleveraged, but because the entire banking industry massively overleveraged. The larger culprit is the killing of Glass-Steagall, which paved the way for this recklessness.
Yet, rather than considering the massive risks of merging commercial and speculative banking interests, given the overwhelming evidence, federal officials actually pushed for Bank of America's $50 billion all-stock takeover of Merrill Lynch, rather than questioned it.
I worked on Wall Street, at Lehman and Bear and Goldman Sachs. Take my word for it: You cannot merge risk management systems more quickly than this economic crisis can continue to unfold. It is technologically impossible.
This knee-jerk move follows the same dangerous green-lighting of mega-mergers that began when Citigroup took over Salomon Brothers after Congress killed Glass-Steagall in November 1999, and continued with Chase taking over JPM and recently Bear Stearns.
The Fed wants to avoid another huge failure in Merrill Lynch by pushing it under the rug of Bank of America. That is bad policy. Bank of America cannot possibly have a clue about the extent of Merrill's potential losses. This commercial bank taking over a speculative giant is much more dangerous than Lehman Brothers tanking. The Fed was within all of its rights and sanity to say no to Lehman's plea for a bailout. But it won't be able to do the same thing with Bank of America, which, unlike Lehman or Bear, is responsible for the accounts of millions of customers -- real people with real money on the line.
The speculative nature of the industry, in which commercial and investment banks can borrow beyond their abilities to repay, is a threat to national economic security. It requires a serious exit strategy.
There is no easy answer, but there is only one solution -- and it lies polar opposite to the Bank of America-Merrill Lynch merger logic. The only real way to stabilize the financial industry is to take it apart, quantify and separate its risks, and begin again. We can do this. FDR did it. The market is larger now, and more global. That is not an excuse for inaction; it belies a screaming need for useful action and meaningful regulation. Period.
Subscribe to:
Posts (Atom)