Protest Against the Indian Government’s “Operation Green Hunt”
Where: At the Consulate in New York City (3 East 64th Street)
When: On August 13 at 11 a.m.
Contact: communications [at] sanhati [dot] com
NEW YORK CITY – Sanhati, and other organizations and individuals, are organizing a protest against the Indian government’s insidious war, named “Operation Green Hunt,” which has been unleashed on the inhabitants of the forested regions of East-Central India. The protest will approximately coincide with Indian Independence Day (August 15) to emphasize that the promises of independence have remain largely unfulfilled for a large section of the population, including the tribal peoples.
In its current phase, this war is concentrated primarily in the forested regions of East-Central India, stretching from the states of Chhattisgarh to Jharkhand and West Bengal. This region is home to significant amounts of natural resources.
Big corporations, both Indian and foreign, are plundering these natural resources for quick profits and plan to continue doing so while paying almost no attention to the enormous environmental and human costs inherent in their ventures. The state and central governments continue to welcome these big corporations with open arms by signing an unknown number of memoranda of understanding with them—whose details have been kept secret. A recent report by the Ministry of Rural Development, on the other hand, described these trends as one of the biggest land grabs since the time of Columbus.
Yet these forested areas house not only natural resources. This region is home to a large section of India’s roughly 100 million Adivasis (i.e., the tribal population). Using all means at their disposal, the Adivasis resisted the government’s efforts to forcibly drive them from their ancestral lands. Drawing on the Fifth Schedule of the Indian Constitution, which is devoted to Adivasi rights and provisions for their protection, Adivasi activists challenged the government’s expropriations.
Instead of addressing the genuine grievances of the Adivasis, the Indian government has cracked down on their legitimate protests in violation of the letter and intent of the Indian Constitution. Peaceful resistance movements across this region have been met with police brutality and military might; this forced the arming of a section of the resistance movement. State-assisted vigilante groups like the Salwa Judum in Chhattisgarh and Harmad Bahini in West Bengal were a response of the state to the armed resistance of the Adivasis.
When that failed, Operation Green Hunt—a further escalation and militarization of the State’s response—emerged. Such militarization is facilitated by the Indian government’s military cooperation with the United States and Israel.
Sections of civil society have been urging the central government to stop Operation Green Hunt and begin negotiations with the diverse people’s organizations opposing the looting of natural resources. The response of the government to the idea of dialogue has in general not been encouraging in view of the plans of increased militarization, human rights abuses committed by the security forces, suppression of dissenting voices, and abductions and killings of the leaders of people’s organizations.
In this context, Adivasis in India, and all the people who are with them in this struggle for freedom from exploitation and oppression, need your support. Join us to protest against Operation Green Hunt and the increasing violence of the Indian State on democratic movements on August 13, 2010 at 11 a.m. in front of the Indian Consulate in New York City.
Oppose the biggest land grab since Columbus!
Oppose Operation Green Hunt!
Oppose the war on people!
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Sanhati (www.sanhati.com) is a forum of activists, professionals, workers, academics and intellectuals that stand in solidarity with peoples’ struggles against corporate capital and for the upholding of democratic rights in India. The group strives to be an integral part of the international search for alternatives to the capitalist social order.
Contact: communications [at] sanhati [dot] com
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Background Note
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India Shining, so claimed the BJP-led government. Today, the Congress-led regime might boast that it successfully increased annual economic growth from 5.6% to 8.3% in the last six years, while criticizing the previous BJP-led alliance.
Between the 5.6% and 8.3%, there lurk other stories. About three-quarters of India’s people live on less than Rs. 20 per day, while almost half of the women in India are still illiterate and about 80% of households do not have access to safe drinking water.
Between 1997 and 2006, there lurk other stories. Nearly 170,000 farmers committed suicide by drinking pesticide because they could not keep up with demands to repay their loans. In addition to the agrarian crisis, whatever little access the poor had to common property resources has come under increasing attack by the Indian government in the guise of Special Economic Zones (SEZs) and other “development” projects related to mining, industrial development, information technology parks, and so forth.
Immeasurable stories such as these are grafted onto the underbelly of neo-liberal economic “development” in India. A recent report, penned by the Indian Ministry of Rural Development, described these trends as the biggest land grab since Columbus. In truth, it wouldn’t be hard to keep citing official statistics revealing not only the shadows within the Shining India myth, but huge pockets of darkness. To be perfectly honest, none of this is new. If there is one image of India that has persisted in the Western media, it is the image of bone-thin, bare-bodied children with swollen bellies, scavenging for food-crumbs in trash-cans next to stray dogs and wild birds.
But something has changed in the last five years.
India, like many other parts of the world, has seen the emergence of a whole spectrum of mass movements challenging the global neo-liberal onslaught in many different ways. These movements are not attempts to “brainwash” the masses by English-spouting city-bred students or intellectuals with romantic dreams of social change. On the contrary, these movements are being led by the very people who have been persistently excluded from reaping the benefits of development and growth – in short, the people who live in the pockets of darkness within the so-called shining India.
The proverbial aam aadmi has spoken. The oppressed of India have shown an unwillingness to stay oppressed for eternity, despite the policy of the government to “kill the poor and not the poverty.” These struggles are primarily about defending their lands, rivers and homes from corrupt officials and swindlers. Moreover, these movements have demonstrated that not only has the government failed to deliver on the promises of the basic rights of the Indian constitution itself, the interests of the most economically disadvantageous people have seriously been compromised by its almost total and unconditional submission to the interests of corporations like Mittal, Vedanta, Tata, Essar, Salim, Jindal, and POSCO.
Instead of improving governance while addressing dissent and discontent in an inclusive way, as be-fitting any democratic government, the Indian government has unleashed severe state violence. The government of India has launched an insidious war nicknamed Operation Green Hunt. While the terror initiated by the government since 2009 is by no means unique in view of the history of the state repression across India (e.g., West Bengal, Orissa, Kashmir, the Northeasten states, Punjab, and Andhra Pradesh), Operation Green Hunt is unprecedented both for its array of military force and its media mobilization.
Since last year, more than 100,000 military and paramilitary troops have been sent into Adivasi (i.e., indigenous) areas. Moreover, it was recently announced that 36 battalions of Indian Reserve Forces will be added to the 105 already raised, along with 16,000 more “Special Police Officers” (civilians trained and armed by the government) bringing their total strength to 30,000. Through this new military campaign, which almost brings to mind histories of colonial occupation of land, the military “occupiers” are to gradually spread into one “sanitized” area after another.
Some additional relevant facts:
Twenty Warfare Training Schools are being built in India.
Prime Minister Manmohan Singh recently spent $18 billion in the US to buy huge amounts of military supplies and munitions. This included state-of-the-art global positioning systems and night-vision-capable automatic rifles.
Drones are being purchased from Israel and the Israeli Mossad is training Indian police as snipers. The aim of the training is to enable assassination of the leaders of diverse mass movements. The recent murder of the Communist Party of India (Maoist) spokesperson Azad, who was also the party’s emissary for negotiations on a ceasefire, clearly reflects one aspect of the government’s modus operandi (i.e., targeted killings).
According to numerous reports, dozens of indigenous people are being killed each week in the Adivasi regions.
The Communist Party of India (Maoist) has been declared India’s “gravest internal security” threat and has been banned. Bans have also been imposed on other democratic organizations on the claim that they are frontal” organizations of CPI (Maoist) and the witch hunt against these civil rights activists continues unabated.
The last few months have seen the arrests of increasing numbers of media personnel, journalists, writers, and intellectuals who have shown the slightest sympathy to people’s struggles in the Adivasi heartland. The discussions within the ranks of the police forces in the state of Chattisgarh as to whether the Booker Prize winning writer Arundhati Roy is to be charged under an “anti-terrorism” law following the publication of her essay Walking With the Comrades is a case in point.
The state of Gujarat has joined Operation Green Hunt by alleging that “Maoists” are attempting to expand their networks into Gujarat and in particular the tribal regions of South Gujarat. Several activists have been arrested. This witch-hunt of the Gujarat police amounts to a systematic effort by the state government to suppress all manner of dissension and opposition.
Operation Green Hunt includes widespread incidents of rape committed by the security forces. Recently, about 50,000 women tried to march into Jhargram town in West Bengal to protest against these rapes (see photograph above). The marchers included school students in uniform, teachers, housewives and even many elderly women. Widespread rape is a progeny of Operation Green Hunt.
The Armed Forces Special Powers Act (AFSPA), one of a number of anti-democratic Acts, continues to give Indian troops immunity from civil legal action and promotes human rights violations. The Naga People’s Movement for Human Rights has aptly observed that this Act is a systematic tool of the Indian government that contributes to terrorizing and dehumanizing civilian populations. This Act also protects security personnel in Kashmir guilty of killing and torturing the people of the valley.
The Indian state, in other words, has declared war on its own people. It has declared war precisely on those sections of the population who have always been at the receiving ends of multiple forms of systemic and institutional oppression. Instead of addressing the genuine grievances of Adivasis facing forcible displacement and dispossession, the Indian government has cracked down on their legitimate protests in flagrant violation of the letter and intent of the Indian Constitution.
Foreseeing the disastrous impact that Operation Green Hunt will have on the common people in those regions, different sections of civil society have called for a dialog between the state and various sections of the resistance, including the CPI (Maoist) and different people’s organizations, involved in struggles in the Adivasi regions. Several attempts to make progress in these efforts failed, with different politicians, bureaucrats and security officers continuously attempting to scuttle negotiations.
A glimmer of hope had risen due to the civil society initiative represented by Swami Agnivesh, with the Union Home Minister and Azad, as spokesperson of CPI(Maoist), responding to him in a letter detailing the suitable conditions under which a dialog might begin. It is reported that Azad was on his way to consult other members of CPI (Maoist) in order to decide future steps for proceeding with this initiative when he was allegedly abducted and killed, thus throwing the possibility of negotiations into disarray. The murder of a spokesperson of a political organization, with which dialog is supposedly being planned at this crucial juncture, raises serious doubts regarding the government commitment to such a dialog.
In this situation, the activists in India need your presence support. Join us to protest against Operation Green Hunt and the increasing violence of the Indian State on democratic movements on August 13, 2010 at 11 a.m. in front of the Indian Consulate in New York City. We have chosen August 13, as this date roughly coincides with Indian Independence Day, when the country became a sovereign nation-state following its colonial occupation by Great Britain. We would, therefore, like to record our protest and remind the public that the promises of the Indian independence have not only remain unfulfilled, but the current Indian government has resorted to military repression to quell democratic dissent in a way uncannily similar to the erstwhile British “overlords.” We invite all in diaspora, the international community of media activists, human rights workers, academics and intellectuals and artists to join us.
A front-page report in Sunday’s New York Times, detailing the skyrocketing rise in food stamp use, provides a far different picture of America at the end of 2009 than the complacent assurances of economic “recovery” voiced by Wall Street and the Obama administration.
The Times conducted a statistical analysis of food stamp use by county, in an effort to present a more detailed social portrait of the 36 million people currently on the food stamp rolls. “They include single mothers and married couples, the newly jobless and the chronically poor, longtime recipients of welfare checks and workers whose reduced hours or slender wages leave pantries bare,” the report noted.
Among the significant findings:
In 239 counties, more than a quarter of the population receives food stamps.
In more than 750 counties, at least one in three African-Americans receives food stamps.
In more than 800 counties, more than one-third of all children depend on food stamps.
In 62 counties, food stamp rolls have doubled over the past two years.
In 205 counties, food stamp rolls are up by two-thirds.
The geographical dispersal of the mounting social need for food is staggering, from traditional centers of poverty such as rural Appalachia and inner-city urban ghettos to the suburbs built up in the Sunbelt in the last two decades. The map showing the counties where food stamp usage is growing most rapidly includes the affluent Atlanta suburbs, most of the state of Florida, most of Wisconsin, western and northern Ohio, and most of the Mountain West, including large swathes of Nevada, Utah, Arizona, Wyoming, Colorado and Idaho.
While unemployment is the main trigger of rising food stamp usage, the immediate economic cause varies widely, from the collapse of the housing bubble in the southwestern states and Florida, to the collapse of the auto industry in the Great Lakes region, to the layoffs sweeping through white collar America as the recession worsens.
The Times notes the impact on affluent suburban areas, long dominated by the Republican Party, where food stamp usage has more than doubled since the official start of the slump in December 2007, such as Orange County, California and Forsyth County, Georgia. Food stamp use has grown more slowly, in percentage terms, in cities like Detroit, St. Louis and New Orleans, but only because so much of their populations were already living in poverty and receiving food assistance when the slump began.
All these figures significantly understate the level of social deprivation. An estimated 18 million people who are eligible for food stamps do not receive them, partly because of institutional barriers like inadequate outreach services, particularly to immigrant communities—the state of California reaches only half of those eligible—and partly because of the social stigma attached to receiving “welfare,” especially in suburban areas where impoverishment has been a sudden and recent event.
According to a study by Thomas A. Hirschl of Cornell University and Mark R. Rank of Washington University in St. Louis, half the children in America will depend on food stamps at some point during their childhood. The figure rises to 90 percent for black children. The study was published this month in the Archives of Pediatrics and Adolescent Medicine.
Since it is based on analyzing 29 years of data, the latter study gives a picture of the levels of social need during a period when unemployment averaged well below the 10.2 percent mark hit last month. A protracted period of double-digit unemployment—now widely predicted by business and government economists—will make more and more children dependent on federal aid to meet their basic nutritional needs.
The findings of both these studies confirm the conclusions of a US Department of Agriculture survey released November 16 that found 49 million Americans, including 17 million children, were not consistently getting enough food to eat in 2008. The vast majority of the 17 million families struggling to put food on the table had at least one employed worker in the household, but with wages too low to ensure basic necessities. The level of food insecurity was the highest since the USDA began keeping records in 1995.
These figures demonstrate that for American working people, the social reality today is the worst since the Great Depression. Some 30 million people are unemployed or underemployed. Nearly 50 million lack health insurance. Nearly 50 million have difficulty feeding themselves and their children. Some 40 million live below the official poverty line, and the figure would rise to 80 million if a realistic family budget were used as the yardstick.
Young people face the greatest challenge. According to a Pew Research Center report issued last week, 10 percent of adults under 35 have moved back with their parents due to the recession. More than half of men 18 to 24 were still living with their parents, and 48 percent of young women. The proportion of young people with jobs—46 percent—is the lowest since records began in 1948.
These figures are an indictment of American capitalism and its criminal sabotage of the productive forces of society. How is it possible that in a country whose agriculture is so productive that it can literally feed the world, tens of millions of people struggle to feed their children and themselves? It is because production and distribution take place on the basis of private profit, and feeding hungry children is far less profitable for the ruling elite than speculation in the financial markets.
These figures are also an indictment of the political representatives of big business in the Obama administration and the Democratic and Republican parties. Apparently hunger, like unemployment, is viewed by Obama merely as a “lagging indicator”—something that the American people simple have to endure, but not a crisis, not even a cause to lift a finger.
Having funneled trillions into the financial system, to ensure a return to profitability and seven-figure bonuses on Wall Street, and set his course for military escalation in Afghanistan at the cost of countless billions, Obama is now declaring that his top domestic priority is deficit reduction. After Wall Street and war, there will be little or nothing left over to meet the needs of hungry children—or their parents.
In an advertisement on its pages, the US business daily, The Wall Street Journal, proudly proclaimed ‘Hyatt has great news’. The paper was pleased to announce that copies of the paper would henceforth be available for our reading pleasure if we stayed at a Hyatt hotel.
Unfortunately, at about the same time last month, the news about Hyatt was anything but great. The international hotel chain was being accused of treating its cleaning staff unfairly, and the company was doing a poor job defending its actions.
ADDING TO JOBLESSNESS
It all began as a simple decision to outsource. The company decided that, as of end August, it would lay off about 100 of its housekeeping staff from three of its hotels in Boston and give the cleaning contract to a firm in Atlanta, called Hospitality Staffing Solutions. The objective, of course, was to cut costs. Hyatt’s corporate revenues had fallen by about 18 per cent during the first half of the year. Its Boston hotels had also experienced revenue shortfalls, with the recession forcing people to cut back on their travel. So the company, faced with “these unprecedented economic challenges” (in the words of its manager), took the efficient managerial decision of handing over the cleaning contract to an outside firm and laying off its employees.
Early September, the news started leaking out. It turns out that the employees who had been laid off were paid about $15 (Rs 705) an hour while the cleaning contractor’s employees were going to be paid $8 (Rs 376) an hour. That made sense, right? Cutting cleaning costs by almost 50 per cent!
But when you put paper and pencil together, knowing that an employee is expected to clean about 20 rooms in an eight-hour work day, you would quickly figure that Hyatt was looking to save about $3 (Rs 141) per day in cleaning costs for a room that it probably charges its guest about $175 (Rs 8,225) to sleep in. Well, any saving is a saving in these hard times, you would say.
But these were fairly low-level staff, some of whom had been working at the hotel for close to 20 years. At a time when the nation’s unemployment was touching 10 per cent it was not going to be easy for them to find another job. But that wasn’t all. The local paper also reported that these employees had been asked to train some other persons to do their job and were told that those being trained would fill in during vacations. Only later did they realise that they were training their replacement.
SYMPATHY FOR EMPLOYEES
That seemed to touch a raw nerve and the local reaction was swift and bitter. The Governor of the state said he planned to direct state employees to boycott the hotel unless it took the employees back.
A couple of professional groups which were planning to host seminars or conferences at the hotel cancelled plans. Although the laid-off employees were not members of a union, a local union that normally represents hotel workers announced that it would rally in their support and picketed the properties.
The hotel chain was clearly caught off-guard. It first announced that it would help the dismissed workers find other jobs, retrain them if necessary, and extended their health care for three months.
It vehemently denied that the training of the replacements was done secretly. But you must wonder about a company’s well-paid human resources personnel who would think of a scheme as this. Meanwhile, the public indignation spread and even the city taxi union announced a boycott and refused to service the chain’s locations.
Something else started happening. The company announced that the laid-off employees would be offered work with another Hyatt contractor, a Chicago-based firm called United Service Cos. And they will be paid the wage they received at Hyatt till the end of the year.
The contractor was confident that the employees would almost surely be able to find some other job after that. (In other words, quieten down and everything would be forgotten in a few months.)
MISJUDGING PUBLIC MOOD
Clearly, Hyatt was completely missing the point. The company believed that if it found work (at least temporarily) for those who had been laid off, everything would be back to normal.
On the other hand, the public reaction to the cleaning staff being replaced by contract labour at lower wages was only the event on which was riding a whole lot that was perceived as wrong with modern management. Any lay-off, and especially due to outsourcing, is a sore subject, especially at a time when unemployment is rising, even while everyone is claiming that recession is over.
A lot of mid-level management personnel, currently laid off and looking for work in corporate America see their work being given to cheaper personnel, within the company or outside, and can empathise with the Hyatt employees. Yet, corporations that are penny-pinching seem to be able to find enough money to continue to pay lavish top-management salaries and bonuses.
Newspapers crow that productivity is at an all-time high — what that essentially means is that fewer people are being used to produce the same or more output.
There must be something fundamentally wrong with a measure that undermines human capital. On top of it all, when Hyatt (allegedly) made those employees train their replacements, it just seemed morally wrong.
To compound its misfortune, Hyatt’s reluctance to meet with the press to present its side of the story, and its tendency to hide behind corporate press releases did not go down well. Even when the company sensed that its response to the situation was less than exemplary, it did not know how to say it.
Look at this: “Contrary to the way our actions have been characterised by many, we did attempt to implement this staffing change in a respectful manner and many of the assertions that have been made are false. We do, however, recognise and regret that we did not handle all parts of the transition in a way that reflects our organisation’s values.”
And the final irony: Business Week, a US business magazine recognised Hyatt as among “the best places to launch a career” about the same time as the layoffs. Of course, the magazine was referring to entry-level workers in the company’s corporate training programme, not entry level housekeepers.
Rising continuously for the last 30 months, the official unemployment rate in the US economy crossed over to double-digit territory in October 2009. According to figures released recently by the US Bureau of Labour Statistics, the official unemployment rate in the US was 10.2 percent in October 2009; this is the first time in 26 years that the official unemployment rate has crossed 10 percent in the US. But the official measure is a gross underestimation of the reality of joblessness in the US. A more sensible measure, which takes into account the “discouraged” and part-time workers, stood at 17.5 percent!
The November 6, 2009 Fact Sheet from the Economic Policy Institute, a progressive think tank in the US provides more interesting facts about the US economy, especially relevant for working-class people; below I provide some of the entries from the above fact sheet as a summary of important facts about several neglected dimensions of the US economy:
Historical context
• Current unemployment rate (October 2009): 10.2%
• Current underemployment rate, including people who have been unable to find full-time work and are working either
part time or not at all: 17.5%
• Number of consecutive months of job loss during this recession: 22
• Last time the United States saw 10.2% unemployment: April 1983
• Number of months double-digit unemployment lasted during the 1980s recession: 10
• Peak rate of unemployment during the recession in 2001: 5.5%
• Number of months that passed after the 2001 recession had officially ended before unemployment peaked, at 6.3%: 19
Current recession
• Ratio of job seekers to job openings when the current recession began: 1.7 to 1
• Ratio of job seekers to job openings today: 6.3 to 1
• Total number of jobs lost during the current recession: 8.1 million
• Number of people who have been unemployed for more than six months: 5.6 million
• Jobs needed to return to pre-recession employment levels when population growth is factored in: 10.9 million
Demographic data
• Current unemployment rate for black workers: 15.7%
• Current unemployment rate for Hispanic workers: 13.1%
• Current unemployment rate for white workers: 9.5%
• Current unemployment rate for men: 11.4%
• Current unemployment rate for women: 8.8%
• State with the highest unemployment: Michigan, 15.3%
• State with the lowest unemployment: North Dakota, 4.2%
• State showing the largest portion of job loss during this recession: Arizona, 10%
• Unemployment rate among black workers in Michigan: 23.9%
• Unemployment rate among white workers in Michigan: 13.7%
• Unemployment rate for college-educated workers: 4.7%
• Unemployment rate for workers who did not complete high school: 15.5%
Related economic data
• Number of Americans with no health insurance in 2008: 46.3 million
• Number of Americans projected to have no health insurance by 2010: more than 50 million
• Percent of U.S. population living in poverty in 2008: 13.2%
• Percent of U.S. children living in poverty in 2008: 19%
• Percent of African American children living in poverty in 2008: 34.7%
• Portion of African American children expected to be living in poverty in the coming years, as a result of higher unemployment: more than half
“So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.”
That was Casey B. Mulligan, Professor of Economics at the University of Chicago, writing in the New York Times on October 09, 2008 about what he then considered to be a robust economy. The official unemployment rate for the economy that Professor Mulligan was writing about, the U.S. economy, steadily climbed since he shared his wisdom with the world; according to the latest figures released by the U.S. Bureau of Labour Statistics, the official unemployment rate stood at 9.8 percent in September 2009. Despite the best wishes of Professor Mulligan and his colleagues at the University of Chicago, the unemployment rate has decided to move in the opposite direction. According to all sensible estimates, it will cross 10 percent by the end of 2009 and stay close to that figure for the next year. Even this high figure for the official unemployment rate does not capture the true degree of labour under-utilization currently afflicting the U.S. economy. A more comprehensive measure of labour under-utilization that takes account of discouraged workers who have dropped out of the labour force and part-time workers who are searching for full-time employment stands at 17 percent!
What is of course interesting is that the school of macroeconomics popularised by Professor Mulligan’s distinguished colleagues at the University of Chicago and elsewhere known as the Real Business Cycle (RBC) view of macroeconomics does not even recognize existence of unemployment. In case you have missed that, let me state it again: for the RBC view of macroeconomics, unemployment, as we understand that term, is a fiction; it does not exist. So, how does this strand of macroeconomics view the fluctuations of employment that goes with the typical business cycle? Here is the story they tell.
Every worker derives “utility” (don’t ask what that means) both from consumption and leisure. Now, to finance consumption expenditures, she must work because that is how she can earn her wage income. By working, of course, the worker gives up precious leisure and so experiences dis-utility (again, don’t ask what that means or how it can be measured). It is, therefore, the balancing of the extra – marginal in the language of economists – utility derived from the next unit of consumption and the dis-utility associated with giving up that last bit of leisure that determines whether the worker wants to work or not and for how many hours a week (say).
But the worker, as every other agent in the RBC models, are endowed with enormous computing powers; they not only look at the present, they also peer into the depths of the infinite future. It is thus that the balancing of marginal utility and dis-utility takes on an inter-temporal dimension. Depending on the changing incentives to work in different time periods, the worker decides how much labour to supply, i.e., how many hours she wishes to work. The level of employment, and by definition unemployment, is therefore, in the RBC view, driven by changes in the incentives to work; employment is a choice that workers make. There is no unemployment, only equilibrium fluctuation of employment chosen by workers inter-temporally balancing the marginal utility of consumption against the dis-utility of work. According to this view, then, unemployment occurs because workers decide not to take up the offers they get, i.e., when unemployment is observed it is because the workers choose to remain unemployed.
There is a hidden assumption here: enough jobs are available to workers, in the first place, to choose from. What if enough jobs are not available? How will workers then choose from jobs that are not even available? Would it then still be possible to claim that fluctuations in unemployment are merely the result of inter-temporal optimization exercises on the part of workers balancing marginal utility of consumption against the dis-utility of work. Evidently not. So, how would we test whether the RBC view of unemployment is borne out by facts? If unemployment is “chosen” by workers, as the RBC view claims, then the number of job seekers and job openings should not deviate too much from each other and certainly not for prolonged periods of time; if, on the other hand, unemployment is forced on workers by the hiring decisions of capitalists, the the ratio of job seekers to job openings should increase secularly during recessions. What does the evidence in this regard show?
The Chart plots, for the U.S. economy, the ratio of (a) number of job seekers, and (b) the number of job openings. In December 2000, the ratio was close to 1; thus, in December 2000, every worker looking for a job had, on average, a job available. In December 2007, when the Great Recession started, the ratio stood at 1.7, i.e., on average, every job opening had 1.7 job seekers. As the recession progresses, the ratio climbed steadily and by August 2009, it stood at 6.3. Hence, in August 2009, every job opening had, on average, about 6.3 job seekers. Thus, the ratio continually increased for 20 months, and will possibly continue to do so for the next few months. What do you say, isn’t that evidence in support of the RBC view?
Toronto, October 2, 2009 – Steve Williams is co-director of the California based group POWER: People Organized to win Employment Rights, which since the late 1990’s has been one of the most important Worker’s Action Centres in the U.S., and co-authour of the book Towards Land, Work and Power: Charting a Path of Resistance to U.S.-led Imperialism.
Part 1
• Moderated by Stephanie Ross – Prof. Labour Studies, York University.
• Sam Gindin – Visiting Packer Chair in Social Justice at York University.
“THE dictatorship has been defeated. The joy is immense. And yet, there still remains much to do. We won’t deceive ourselves by believing that everything will be much easier from now on; perhaps it will be much more difficult.”
This is what Commander in Chief Fidel Castro told the people on January 8, 1959, the day of his entry into Havana. Many people could never imagine the immense challenge that they would live to experience.
Suffice it to say that just a few days later, Fidel proclaimed the right to self-determination in terms of relations with the United States and immediately, the aggressions, attempts on his life and anger on the part of U.S. politicians began, evidence of which can be seen in speeches and articles of the time, as in an editorial of Time magazine, the mouthpiece of the most conservative sectors, entitled: “Fidel Castro’s neutralism is a challenge for the United States.”
But the Cuban people could not be neutral in the face of the United States. The triumph of the Revolution that January 1959 signified for the Cuban nation, for the first time in its history, the real possibility of exercising the right to self-determination. From that moment on, neither the U.S. president, Congress nor its ambassadors could continue making decisions on what could or could not be done in Cuba. The bitter dependence had been brought to an end; a dependence that saw U.S. governors and ambassadors enjoying a degree of power in Cuba that was far greater than the actual power that they had – with respect to decision-making – within the U.S. federal government or in relation to any of the 50 states that make up the U.S.A.
When full national independence was achieved, the Revolution began to exercise that right by immediately applying the program that Fidel had announced during the Moncada trial of 1953 and which is contained in his historic self-defense speech History Will Absolve Me.
Cuba established the economic and social regime that it believed was most just and established a socialist state with participatory democracy, equality and social justice.
The country’s economy was characterized by limited industrial development, essentially depending on sugar production and a latifundia agricultural economy, where landowners controlled 75% of the total arable land.
Most of the country’s economic activity and its mineral resources were managed by U.S. capital, which controlled 1.2 million hectares of land (a quarter of the productive territory) and most of the sugar industry, nickel production, oil refineries, the electricity and telephone services and the majority of bank credits. Likewise, the U.S. market controlled approximately 70% of Cuban imports and exports, within a system of highly dependent volumes of exchange: in 1958, Cuba exported products worth 733 million pesos and imported 777 million pesos worth of goods.
The prevailing social picture was characterized by a high unemployment and illiteracy, a precarious healthcare, social assistance and housing system for the vast majority of the population, as well as abysmal differences in living conditions between urban and rural populations. There was a high degree of polarization and unequal distribution of income; in 1958, 50% of the population earned just 11% of total income, while a 5% minority controlled 26%. Racial and gender discrimination, begging, prostitution and social and administrative corruption were widespread.
Addressing the social and economic problems in Cuban society could no longer be put off and could only be resolved if the Cuban people had control of their own wealth and natural resources. Thus, using the 1940 Constitution and in line with international law, Cuba exercised its right to take control of these resources and assumed total responsibility for this action. The island paid compensation to all nationals from third countries (Canada, Spain, Britain, etc.) with the exception of U.S. nationals, given that that government rejected the provisions outright and transformed the Cuban government’s decision into a pretext for unleashing a war unprecedented in the history of bilateral relations between the two nations.
Not only did the Revolution hand over land to campesinos who, up until then, had been subjected to semi-feudal conditions of production and forced to live in extreme poverty, but it also determined that that all the country’s resources should be allocated to national economic development and improving the material and living conditions of the population. To give just one example, in the 1980s alone, approximately 60 billion pesos were allocated to the construction of productive and social facilities.
The process of industrialization underway paved the way for economic and productive diversification. Under the Revolution and up until the economic crisis which began with the disintegration of the Soviet Union and the East European socialist bloc between 1989 and 1991 – what we in Cuba call the Special Period – the country’s capacity for producing steel grew 14-fold, fertilizer increased six-fold, the oil refining industry quadrupled (not counting the new refinery in Cienfuegos), the textile industry grew seven-fold, tourism three-fold, to mention but a few. The state also created complete ranges and new industries such as machinery, mechanics, electronics, the production of medical equipment, a pharmaceutical industry, construction materials, a glass industry and ceramics, as well as making investments to increase and upgrade the sugar, food and light industries. In addition to these endeavors, we have the development of biotechnology, genetic engineering and other branches of science.
The country has also made great efforts in terms of improving its infrastructure. Electricity generation has risen eight-fold and water storage capacity has increased 310 times, from 29 million cubic meters in 1958 to nine billion-plus cubic meters today. There has been diversification with respect to roads and freeways and modernization of ports and other areas. Social needs have been covered fairly well, except for housing, which has been Cuba’s biggest problem.
The progressive growth and diversification of productive potential and the application of a widespread social program has allowed the nation to confront the problem of unemployment. In 1958, with a population of six million inhabitants, approximately one third of the economically active population was unemployed. Of this figure, 45% of the unemployed lived in rural areas while, out of 200,000 women in work, 70% were employed as domestic servants. Today, with 11 million inhabitants, the number of people in work is in excess of 4.5 million. Over 40% of workers are women and today they represent more than 60% of the nation’s technical and professional sectors.
In 1958, the number of illiterate and semi-illiterate people in Cuba stood at two million. The average academic level of 15-plus year-olds was third grade, more than 600,000 children did not attend school and 58% of teachers were unemployed. Just 45.9% of school-age children were enrolled and half of them did not attend classes. Only 6% of those enrolled finished elementary education. Universities were available to just 20,000 students.
The education sector received immediate attention from the revolutionary government. Its first task was to develop a masse literacy campaign with the participation of the population. An extensive network of schools was constructed throughout the country and more than 300,000 teachers and professors were in fulltime employment in this sector. The average academic level for those aged 15-plus year-olds rose to ninth grade. One hundred per cent of school age children are enrolled in schools, some 98% complete elementary education and 91% complete junior high. One in every 11 citizens is a university graduate and one in eight has technical-professional qualifications. There are 650,000 students in the country’s universities today and all education is free of charge. Education and vocational skills are also guaranteed for 100% of children with physical or mental disabilities, who attend special schools.
The precarious situation in 1958 with respect to public health was characterized by an infant mortality rate of 60 per 1,000 live births and a maternal mortality rate of 118 per 10,000. The mortality rate for those suffering from gastroenteritis was 41.2 per 100,000, and from tuberculosis, 15.9 per 100,000. In rural areas, 36% of the population suffered from intestinal parasites, 31% from malaria, 14% from tuberculosis and 13% from typhoid. Life expectancy at birth was estimated at 58.8 years.
Around 61% of hospital beds and 65% of the nation’s 6,500 doctors were concentrated in the capital. In the other provinces, medical coverage was one doctor for every 2,378 inhabitants and there was just one hospital for all the country’s rural areas.
Today, healthcare is free of charge and Cuba has more than 70,000 doctors, providing coverage of one for every 194 inhabitants. Almost 30,000 of them are providing services in over 60 different countries. A national network of more than 700 hospitals and polyclinics has been created. Thanks to a widespread vaccination campaign (every child currently receives vaccines against 13 different illnesses) diseases such as polio, diphtheria, measles, whooping cough, tetanus, rubella, mumps and hepatitis B have been almost entirely eradicated. The infant mortality rate is 5.3 for every 1,000 live births and life expectancy exceeds 77 years.
There is also a series of advanced medical services that are not considered as “basic” in the international arena, and are provided completely free of charge, such as intensive care units in pediatric and general hospitals, cardiovascular surgery, transplant services, special perinatal care, treatment for chronic renal failure, and special services for occupational and physical rehabilitation.
The revolutionary state did not focus its attention solely on economic and social measures. It also embarked on efforts to establish an internal legal system to facilitate the right to self-determination via the population’s direct participation in discussions, analyses and the passing of the country’s principal laws. The most notable of these was the 1976 Constitution, supported by 97% of Cubans aged 16 and over through a referendum, as well as other momentous laws like the Penal Code, the Civil Code, the Family Code, the Children and Young People’s Code, the Labor and Social Security Code and many others.
Likewise, the self-determination of the Cuban people is expressed through the right to defend the nation against foreign aggression. Today, more than four million Cubans – workers, campesinos, and university students – are organized in militia groups have access to weapons in their campuses, factories and in rural areas.
However, since 1959, Cuba has had to confront the hostility of 10 U.S. administrations that have attempted to limit its right to self-determination through the use of aggression and the unilateral imposition of a criminal economic, commercial and financial blockade.
One of the universally accepted principles of international law is that state cannot be allowed to coerce another in order to deny it the right to exercise its sovereign rights. Article 24 of the UN Charter states that, in the context of international relations, nations must refrain from using threats or force against the territorial integrity or political independence of any state.
Over the past 45 years, the United States has prohibited any trade with Cuba, including foodstuffs and medicines; it cancelled the Cuban sugar quota; prohibited its citizens from traveling to Cuba via the imposition of heavy sanctions; prohibited the re-export of U.S. products or items containing U.S. components or technology to Cuba from third countries; prescribed that banks in third countries should maintain Cuban bank accounts in dollars or use that currency in their transactions with the Cuban nation; has systematically intervened to prevent or hinder trade with or financial assistance to Cuba on the part of governments, institutions and citizens from other countries and international organizations.
In the 1960s these reprisals forced Cuba to structurally reconstitute its economic relations when and establish its essential markets in countries in the former East European bloc – specifically in the Soviet Union – which meant that the country had to embark on an almost total re-conversion of its industrial technology, means of transport, and provisions, etc.
When Cuba lost its natural markets in Eastern Europe, the U.S. government intensified its blockade via the 1992 Torricelli Act, which used the pretext of “democracy and human rights” to prohibit U.S. subsidiaries located in third countries and subject to the laws of those nations from engaging in commercial or financial operations with Cuba (particularly in respect to food and medicines), and punishing these by prohibiting the entry into U.S. ports for 180 days of vessels transporting goods to or from Cuba or on behalf of Cuba, measures that – given their extraterritorial nature – do not just prejudice Cuba but also harm the sovereignty of other nations and the international freedom of transportation.
On March 12, 1996, the U.S. government passed the Helms-Burton Ac, further aggravating relations between the two countries and assuming the right to sanction citizens of third countries in U.S. courts, as well as determining their expulsion or denying them and their families entry visas into the United States, with the aim of hindering Cuba’s efforts to recover its economy and hampering its possibilities of securing a greater insertion in the international market. That was also a way of attempting to pressure the Cuban people into relinquishing their efforts of self-determination.
More recently, it has adopted the Bush Plan, an attempt to transform Cuba into a colony through an annexationist program and the sibylline intention to intervene via a pretext of “transition,” a scenario in which the State Department would entrust one of its leaders as “governor,” when the Cuban revolutionary state disappears. This plan, with which George W. Bush decided “to precipitate the day when Cuba becomes a free country,” has intensified the blockade and pressure on the Cuban people by repressing family relations between Cubans resident in the United States and their families on the island; grants million-dollar resources to terrorist groups in Miami, as well as to mercenary subordinates in the U.S. Interests Sections in Havana; and promotes formulas to destabilize the country and redouble international pressure on the island.
That hostility on the part of the U.S. has included other notorious manifestations of aggression, ranging from the military aggression through the Bay of Pigs in 1961, the dirty war carried out by counterrevolutionary gangs heavily supplied by the U.S. CIA, bacteriological warfare on agricultural crops (sugar, tobacco, and citric fruits), animals (swine fever), and humans (hemorrhagic dengue), to sabotage plans, bombings using pirate planes, and assassination attempts on the country’s principal leaders.
The actions of terrorist organizations executing military attacks on Cuba from U.S. territory are notorious, and are publicized and fomented by the Miami media. Groups are constantly recruiting adventurers who are willing to head off to Cuba as agents and saboteurs, who openly declare that they have no fear whatsoever of being brought to justice in U.S. courts.
That is why Cuban patriots have had to leave aside their personal interests to serve those of the nation, even sacrificing their family relationships, in order to infiltrate the ranks of those terrorist groups in order to discover their activities and, with this information, prevent the bloodshed of Cuban and U.S. people. They are willing to pay the price of the political irrationality of the U.S. government, as is the case of the five Cuban heroes unjustly incarcerated in U.S. jails for combating terrorism.
The above is compounded by the heavy military mechanism created by the United States around Cuba and its constant tension-generating activities, as well as the illegal occupation of the Guantánamo Naval Base on Cuban territory (today converted into a horrific prison camp), a part of Cuba rented out by force to the United States in the early 20th century and which the U.S. government refuses to return.
In the early 90’s, with the disappearance of the Soviet Union, isolated and reviled by the international reaction, Cuba absorbed the terrible blow of losing the bulk of its markets in a matter of months and an abrupt descent in its gross domestic product. But the island confirmed that it shone with its own light and that it had never been a satellite of anyone, given that it was able to face that juncture on account of the extraordinary resistance of the majority of Cubans, who have acted on the basis of authentic motivations, values and ethical principles.
The Cuban people have made a conscious decision to support the country’s leadership, not only because they identify the system with their own interests, but also because of the responsible manner in which the state took on the crisis, reorganized its forces and designed a recovery strategy, despite the U.S. blockade and conditions imposed by its European allies.
The sacrifices provoked by that situation have been hard, but it has been possible to endure them because of the undisputed social advances attained, because of the confidence deposited in the country’s leading institutions and because of people’s appreciation that their government is not a decadent one or one that is in management crisis or lacking in strategies, but has confirmed that the population has remained at the center of all its work, even in the most difficult circumstances.
Fifty years have gone by and the liberation process has reached this point following the same direction indicated that night, 50 years ago, when Fidel, speaking to the huge crowd awaiting him in what was the dictatorship’s headquarters, affirmed that everything could be more difficult in the future, because we would have to fight to make the Revolution.
That is the challenge of the struggle currently underway to eradicate vices and exalt virtues, with Fidel as a soldier of ideas serving as a compass in the fight for freedom and independence.
Cuba’s enemies are backing their all on the opposite of that. In this world, where politics is a caricature, they cannot comprehend that, in its thinking and action, this Revolution is a process of continuity, and that Fidel will continue to be the leader of the Revolution of today and tomorrow, because, beyond responsibilities and titles, he will continue to be the counselor of ideas to which we will always have recourse, because he has transcended political life to insert himself in an intimate way in the family life of the vast majority of Cubans.
When the 250 workers at the Republic Windows and Doors factory in Chicago were told that the plant was shutting down, they decided to take matters into their own hands. On Friday, December 5, the workers occupied their factory in an act that echoes the sit-down strikes of the 1930s in the US and the occupation of factories during the 2001 crisis in Argentina.
"They want the poor person to stay down. We’re here, and we’re not going anywhere until we get what’s fair and what’s ours," Silvia Mazon, 47, a formerly apolitical mother and worker at the factory for 13 years told the New York Times. "They thought they would get rid of us easily, but if we have to be here for Christmas, it doesn’t matter."
The workers are demanding that they be paid their vacation and severance pay, or that the factory continue its operations. They were given only three days’ notice of the shut down, not the 60 days’ notice which is required under federal and state law.
On Friday, fifty of the workers at the plant — taking shifts in the occupation — sat on chairs and pallets inside the factory and were supplied with blankets, sleeping bags, and food from supporters. Throughout the takeover, workers have been cleaning the building and shoveling snow while protesters gathered in solidarity outside waving signs and chanting.
The occupation of the factory — which produces heating efficient vinyl windows and sliding doors — is taking place in the midst of a massive recession, with the rate of unemployment in the US at a 15 year high, and with 600,000 manufacturing jobs lost in this year alone. As another indicator of the economic crisis, 1 in 10 Americans — a record of 31.6 million — are now using food stamps.
The factory workers are protesting the fact that the Bank of America received $25 billion in the recent $700 billion government bailout, and then went ahead and cut off credit to Republic Windows and Doors, resulting in the subsequent closing of the factory.
"The bank has the money in this situation," said Mark Meinster, a representative of the United Electrical, Radio and Machine Workers of America, the union to which the factory workers belong. "And we are demanding that Bank of America release the money owed to workers who have earned it and are entitled to it." On Monday Illinois Governor Rod Blagojevich announced that, in support of the workers, the state will temporarily stop doing business with Bank of America.
President-elect Barack Obama also announced his support: "When it comes to the situation here in Chicago with the workers who are asking for their benefits and payments they have earned, I think they are absolutely right . . . what’s happening to them is reflective of what’s happening across this economy."
Rev. Jesse Jackson delivered turkey and groceries to the workers, saying, "These workers are to this struggle perhaps what Rosa Parks was to social justice 50 years ago. . . . This, in many ways, is the beginning of a larger movement for mass action to resist economic violence."
Occupy, Resist, Produce: Argentina’s 2001 Crisis
Argentina’s crisis was similar to the current recession in the US in the sense that in December of 2001, almost overnight, Argentina went from having one of the strongest economies in South America to the one of the weakest. As the occupation of the factory in Chicago indicates, there are some tactics and approaches used in Argentina to combat economic crises that could be applicable in the United States.
During Argentina’s economic crash, when politicians and banks failed, many Argentines banded together to create a new society out of the wreckage of the old. Poverty, homelessness, and unemployment were countered with barter systems, alternative currency, and neighborhood assemblies which provided solidarity, food, and support in communities across the country.
Perhaps the most well known of these initiatives were the occupation of factories and businesses which were later run collectively by workers. There are roughly two hundred worker-run factories and businesses in Argentina, most of which started in the midst of the 2001 crisis. 15,000 people work in these cooperatives and the businesses range from car part producers to rubber balloon factories. Though the worker occupation of Republic Windows and Doors is different in many respects to examples of worker occupations in Argentina, it is worth reflecting on the strikingly similar situations in which workers in both countries found themselves, and how they are fighting back.
The Chilavert book publisher in Buenos Aires offers one example of workers taking back a bankrupt factory to operate it as a worker cooperative. "Occupy, resist, and produce. This is the synthesis of what we are doing," Candido Gonzalez, a long time Chilavert worker explained to me during a visit to his bustling publishing house, with printing presses clamoring away in the background. "And it is the community as a whole that makes this possible. When we were defending this place there were eight assault vehicles and thirty policemen that came here to kick us out. But we, along with other members of the community, stayed here and defended the factory."
Candido didn’t attribute Chilavert’s success to any politician. "We didn’t put a political party banner in the factory because we are the ones that took the factory. All kinds of politicians have come here asking for our support. Yet when the unions failed, when the state failed, the workers began a different kind of fight. . . . If you want to take power and you can’t take over the state, you have to at least take over the means of production."
Back in Chicago, at a time when politicians have failed to respond appropriately to one of the worst US economic crises in history, the occupation of the Republic Windows and Doors factory is a reminder that desperate times call for fresh approaches to social change.
"We aren’t animals," Republic Windows and Doors employee Apolinar Cabrera, 43, told reporters. Cabrera is a father of two, with another child on the way, and has been an employee at the factory for 17 years. "We’re human beings and we deserve to be treated like human beings."
Benjamin Dangl is the author of The Price of Fire: Resource Wars and Social Movements in Bolivia (AK Press). The book includes many stories of workers, families, and activists throughout Latin America working together to build a new world in the face of economic crises.
National news networks CNN, MSNBC and Fox News, as well as Chicago news media, are reporting on the following dramatic developments involving UE members in Chicago.
Members of UE Local 1110 who work at Republic Windows and Doors are occupying the plant around the clock this weekend, in an effort to force the company and its main creditor to meet their obligations to the workers. Their goal is to at least get the compensation that workers are owed; they also seek the resumption of operations at the plant. All 260 members of the local were laid off Friday in a sudden plant closing, brought on by Bank of America cutting off operating credit to the company. The bank even instructed managers at Republic to refuse to pay workers their earned vacation pay and the severance pay they are owed under the federal WARN Act, since they were not given the legally-required notice that the plant was about to close.
Below are some links to ongoing news coverage of this story:
Bank of America, the country’s second largest bank, has received $25 billion in taxpayer money as part of the $700 billion government bailout of the financial industry. The public was told that this bailout was necessary in order to keep credit flowing and prevent the loss of jobs. Yet the very-well-paid executives at Bank of America have actually cut off credit and forced the closing of Republic where workers were, at least up until Friday, producing energy-efficient doors and windows.
Jobs with Justice, the national worker rights coalition, is asking people to sign an online letter to Bank of America, demanding that they provide the needed credit to keep Republic Windows and Doors open – or at a minimum, that they pay workers the money they are owed. Please go to this link to support this important struggle.
UE Local 1110 members, along with community supporters, picketed and rallied in front of Bank of America’s main Chicago branch on Wednesday, December 3. They chanted, “You got bailed out, we got sold out!” Local 1110 President Armando Robles told the news media, “Just weeks before Christmas we are told our factory will close in three days. Taxpayers gave Bank of America billions, and they turn around and close our company. We will fight for a bailout for workers.”
To support the members of Local 1110 in their courageous fight, send checks payable to the UE Local 1110 Solidarity Fund, to: UE, 37 S. Ashland, Chicago, IL 60607. Messages of support can be sent to leahfried@gmail.com. For more information, call the UE Chicago office at 312-829-8300.
UE has already contacted Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, and will soon be in touch with Sen. Chris Dodd (D-CT), chair of the Senate Banking Committee, regarding Bank of America’s apparent abuse of its public obligations under the federal banking bailout.
The long term story, as I have already indicated, is a story about the rise and (possible) fall of neoliberalism. The Golden Age of Capitalism – the two and a half decades after the second World War – drew to a close by the late 1960s and global capitalism entered a period of structural crisis. The process of general capital accumulation is largely driven by current and expected trends of profitability of capital (measured by the rate of profit). When the rate of profit declines the process of capital accumulation slows down, heralding a period of crisis of capitalism. The rate of profit had peaked in the early-to-mid 1960s in both Europe and the USA; thereafter, the rate of profit continued to decline for the next decade and a half falling from a high of about 20 percent to a low of around 10 percent.
Structural Crisis of Capitalism
Why did the rate of profit fall during this period? The falling profit rate goes to the heart of capitalism and shows up deep contradictions in the process of economic growth and technical change that accompanies capitalist development. The technological dynamism of capitalism is driven by competition between capitals to increase profits by reducing the cost of production. When the share of wages in national income is high, there is a strong incentive for capitalists to reduce the amount of labour required for production. The Golden Age of Capitalism, being a period of regulated and welfare capitalism, had ensured high and rising real wages and therefore maintained a high and relatively constant share of wages in national income. That provided the incentive for adopting labour saving technical change, i.e., adopting new techniques of production that required less and less labour per unit of output. Labour saving technical change increased the productivity of labour.
But the increasing productivity of labour came at a cost: falling productivity of capital or the output-capital ratio (the ratio of output to capital). Labour saving technical change, which increased labour productivity, was only achieved by replacing labour with capital, i.e., more and more labour was replaced by more and more machines in the process of production. This is one of the characteristic features that we often observe with capitalist development: mechanization and the increasing capital intensity of production. The use of more and more machines that increased labour productivity meant that every unit of output now required less labour but more capital; thus labour productivity increased but capital productivity fell.
This is the pattern of technical change, whereby labour productivity increases but capital productivity falls, that accompanies capitalist development during significant periods of time. This is also the way Marx had described the pattern of technical change under capitalism in his discussion of the process of general capital accumulation in Volume 1 of Capital. That is why economists Gerard Dumenil and Dominique Levy has called this pattern “trajectories a la Marx”, while Duncan Foley and Thomas Michl has called it Marx-biased technical change. But what has this pattern of technical change got to do with the falling rate of profit?
The rate of profit is defined as the ratio of profits to the total stock of capital and can be decomposed as follows:
rate of profit = (profit/capital) = (profit/output)*(output/capital)
Thus we see that the rate of profit is the product of two crucial ratios: (1) the share of profits in output, and (2) the productivity of capital. The share of profits in output, though high, had remained relatively stable through the Golden Age of Capitalism; this is a typical pattern observed under capitalism (other than for the neoliberal period). The productivity of capital, on the other hand, fell because of Marx-biased technical change leading to a sharp fall in the rate of profit, and ushering in a period of crisis for capitalism. The sharp decline in the rate of profit meant a decline in the revenues accruing to all sectors of the capitalist class, especially the top fraction. The neoliberal counterrevolution, the sharp turn in economic and social policy around the mid-1970s, was the response of the upper fraction of the capitalist class to their declining income and power (a more detailed development of this argument can be found in Dumenil and Levy, 2004).
Neoliberal Response as a Prelude to Crisis
The neoliberal turn largely managed to achieve what it had set out to. Profit rates started moving up and the revenue accruing to capital, especially the top fraction of capital associated with the financial sector, increased enormously. But it was a period of unmitigated disaster for the working class. Unemployment rates rose across the capitalist world, wages stopped growing (or slowed down considerably) in real terms, social welfare expenditures were gradually cut down, unions and other working class organizations were “busted”; in short, the social power and revenue accruing to the working class was severely restricted. It was a true counterrevolution which restored the power and privilege of the ruling class.
The two figures below demonstrate this in vivid terms. Between 1950 and 1973, real wages had increased at an annual compound rate of 2.61 percent, closely following the phenomenal growth of labour productivity which grew at an average annual compound rate of 2.70 percent. The next 25 years stand in stark contrast to this. Between 1974 and 1999, labour productivity grew at 1.62 percent per annum while real wages grew at only 0.92 percent per annum. Thus, even though labour productivity growth had slowed down significantly, it was still growing at close to twice rate at which real wages increased. This created a stupendous growth in profit incomes and created the source of finance that was to submerge the US working class in debt for the next four decades.
A crucial aspect of the neoliberal turn was the deregulation of sundry aspects of the economy, including, most importantly, the domain of operation of finance. The last great crisis of capital during the Great Depression had brought forth several important changes and new developments in the regulatory framework of capitalism. One by one, each of these laws relating to the operation of finance, both domestically and internationally, were whittled down or even outright overturned. Thus, the burgeoning profit income and the shredding of all regulation together created the supply of debt finance in the US economy. The demand for debt arose from a working class facing stagnant wage incomes but long used to growing consumption expenditures. The net result was the largest build-up of debt in the US economy since the Great Depression. During the beginning of the Great Depression total debt was about 300 percent of US GDP; in early 2008, total debt in the US economy was touching 350 percent of GDP. It was this huge debt build-up resulting from three decades of neoliberal economic policies that created a systemically fragile financial superstructure which imploded, leading to a credit freeze, when the housing bubble burst (I have borrowed parts of this argument from Wolf, 2008).
(Concluded.)
References:
Dumenil, G. and D. Levy. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. Harvard University Press.
Wolff. R. 2008. Capitalism Hits the Fan. Available here.
The medium term story of the evolving financial crisis begins at the end of the last century. With the bursting of the dot-com bubble at the end of the 1990s, possibilities of a long recession hovered on the horizon. The Federal Reserve, the Central Bank of the US, moved in with the tools of monetary policy to ease the slowdown. The target for the federal funds rate, the key short-term interest rate that the Fed monitors as part of it’s monetary policy tasks, was gradually lowered from over 6 percent per annum to a little below 2 percent within a span of about an year. Lowering interest rates to engineer a soft-landing for a slowing economy is a natural thing to do: reducing the cost of borrowing funds is a key way the Central Bank can affect the level of investment and consumption (especially of durable goods) expenditures and thereby boost the level of aggregate demand in a slowing capitalist economy. With finance in command, this normal and natural move had a perverse effect.
The effects of the falling federal funds rate gradually cascaded from the short-end to the longer end of the asset market, lowering interest rates on all kinds of contracts. One of the key long-term interest rates affected by this very sensible move of the Fed was the interest rate charged on various kinds of mortgage loans (loans to finance the purchase of homes). With mortgage interest rates falling, consumers not only started purchasing new homes with new mortgage loans but also refinancing their old mortgages. With the demand for mortgage loans increasing, and the increase sustained by a low-interest rate regime, house prices started picking up. Very soon, i.e., within a year or two, economists started noticing a bubble in house prices. There were several indicators of a house price bubble. For instance, the Case-Shiller house price index for 10 US cities – a commonly used price index for houses – increased rapidly since the early 2000s. Even more tellingly, the price-to-rental ratio of houses went through the roof. Between January 2000 and April 2006, the rental of an average house did not increase at all; during the same period, price of an average house increased by about 70 percent, sending the price-to-rental ratio on an upward spiral.
The fact that the price-to-rental ratio increased rapidly gave a clear indication that a house price bubble was building up. People were, in other words, purchasing houses not because of the service provided by a house but because of speculative motives. A rough proxy for the value attributed by consumers to the service provided by a house is the rental rate; since this was not increasing, it meant that people were not valuing the real service provided by the house. But prices of houses were shooting up giving an indication of an increasing demand for houses (relative to supply). Most of this demand was clearly arising from speculative motives; many of the house purchases were for the purpose of selling them off at a later date to reap capital gains (i.e., the profit derived from the difference between the selling and the buying price of the asset). Thus, the rise in prices was not driven by “fundamentals” (i.e., increase in the intrinsic value of the service provided by houses) but largely by speculative motives of capital gains; that is precisely what leads to an asset price bubble and that is what happened.
Sub-prime Mortgage Market
A run of a couple of quarters of rising house prices was very soon incorporated into the expectation formation mechanisms of financial markets. As has been observed over and over again in history, rising asset prices very soon creates irrational expectations that prices will keep rising, rising certainly in the foreseeable future if not forever. Such periods of rapidly rising expectations, feeding primarily on itself, have been labelled as “manias” by economists studying periods of asset price boom-and-bust. Prominent examples of such economists are Charles P. Kindleberger and Hyman P. Minsky, coming, as they are, from very different political traditions. In the context of the early twenty-first century US economy, the unprecedented house price bubble created grounds for the emergence of predatory lending and the sub-prime mortgage market. The sub-prime mortgage market was the market for mortgage loans to less-than-creditworthy borrowers at very high interest rates that often came with hidden but onerous terms. (Useful material on predatory lending and the subprime mortgage market can be found here)
A financial innovation that indirectly helped the emerging sub-prime mortgage market and the practice of predatory lending was “securitization”. Securitization, in the context of the mortgage market, meant pooling together hundreds and thousands of mortgage loans together and then selling bonds on that pool of mortgages. Investors buying those bonds – the mortgage backed bonds – received the income stream, both the principal and the interest, entailed by the mortgages as the mortgage borrowers serviced their debt. Securitization required that the entities, usually investment banks like Bear Stearns or Merril Lynch, that were issuing (i.e., selling) mortgage backed securities (the mortgage backed bonds or other kinds of assets backed by the mortgage pool) needed ownership of the pool of mortgages against which those mortgage backed securities were being issued. Thus, the entities that issued the mortgage backed securities went out and bought mortgage loans from the originators of the mortgages, i.e., those who sold the mortgage loan to the borrower, like Country Wide Financial (the largest mortgage seller in the US prior to the financial collapse).
The fact that mortgage loan originators had a market where they could sell off the mortgage loans they had originated created perverse incentives for the originators. Typically mortgage loan originators do a thorough screening to assess the financial background of applicants before making loans. With the emerging market for selling off mortgages, the effort at screening was reduced to zero. Things actually went even further. Since mortgages could be sold off at good prices to the investment banks, the mortgage loan originators had a incentive to start engaging in predatory lending, i.e., push mortgage loans on persons who they knew would not be able to sustain the payments entailed by the loan. Since the originator did not have to bear the risk of failure associated with non-payment of mortgage loans, they had no incentive to make prudent loans. All they had to do was to force some gullible working class person to agree to the sub-prime loan and then turn around and sell it off to some investment bank in Wall Street. Thus, the market for sub-prime mortgages proliferated, driven by rising demand coming from the Wall Street investment banks. And why were investment banks so eager to buy these sub-prime mortgages? To answer this question, let us look a little more closely at the process and results of “securitization”.
Securitization
Securitization is the division, repackaging and dispersal of debt, earning huge fee income for the entity (usually an investment bank) that is undertaking this process. The process starts with some commercial or investment bank buying a swathe of mortgages, some prime, some sub-prime, from smaller financial institutions and pooling them together. Each mortgage, recall, entails a stream of future payments; so the pool of mortgages, entails some specific stream of future payments. Various categories or “tranches” of bonds, arranged according to their risk characteristics, are then issued against the pool of underlying mortgages, i.e., against the stream of future payments entailed by the pool of mortgages. Investors who buy these bonds (mortgage backed securities) then have the claims on the mortgage payments coming through month after month after month; if some mortgage fails i.e., payments stop the lowest category (i.e., most risky) bondholder loses first, the losses travelling up the tier of the bonds.
Let us look at a specific example: Bear Stearns Alt-A Mortgage Pass-Through Certificate. This is how this mortgage backed security worked. Bear Stearns bought 2871 mortgages from different mortgage originators for a total of $1.3 billion; this mortgage pool had mortgages that had been originated in different parts of the US, each worth on average for $ 450,000. Bear Stearns then pooled these diverse mortgages and issued 37 different bonds against that pool of mortgages; these bonds were called the Alt-A Mortgage Pass-Through Certificates. Alt-A stands for a very specific kind of mortgage: a mortgage where the originator does not ask any questions about the financial situation of the borrower before making the loan. It is not even ascertained whether the person taking the loan has a stable employment or not! Two additional players come into the picture: credit rating agencies and insurance companies.
Since many investors had an idea that the mortgage backed bonds were risky investments, they required some “independent” rating agency like Standard & Poor’s or Moody’s to ascertain the riskiness associated with investing in those bonds. This is one of the typical functions of credit rating agencies: to ascertain the riskiness (i.e., risk of default) of bonds and assign a credit rating to it; credit ratings run from AAA/Aaa (least risky) to C/D (in default). There were two problems with the involvement of credit rating agencies in the whole securitization process. First, there was an acute shortage of reliable information about the mortgages in the underlying pool; recall how the mortgages in the pool had originated in very different geographical locations, had been offered to very different income categories of people. Most importantly, very little information was collected about the financial standing of the borrowers (especially in Alt-A mortgages). So, despite their best efforts, the credit rating agencies could not come up with realistic risk assessment of the bonds issued against the pool of mortgages. The second problem was even more serious: a conflict of interest. Who paid the fees to the credit rating agencies? The same investment banks that issued the mortgage backed bonds; thus, there was a real incentive for the rating agencies to underplay the risk and certify most of the bonds as “investment grade”. That is more or less what happened, as we now know.
The other player in the securitization process was an insurance provider; since investment in mortgage backed securities (and other related assets) carried some risk investors wanted insurance against default. The instrument that was used to provide insurance for such transactions was the credit default swap (CDS), a derivative financial instrument. Suppose an investor bought bonds worth $1 million; then, to insure herself against the possibility of default she could buy CDS from some financial firm like AIG on those bonds. The insurance premium that she had to pay, called the CDS rate or spread, was typically in the range of 1-2 percent of the value of the bonds, $1 million in this case. She would thus pay $ 20,000 (if the CDS rate was 2 percent) and the CDS contract would protect her against default for the period of the validity of the contract (typically a few years). In the bonds were to go into default the firm that had issued the CDS would have to pay her the amount of her losses.
There were several problems with the CDS market. First, it was an over-the-counter (OTC) market and did not operate through an exchange; hence the possibility of monitoring or regulating this market were negligible. All the contracts were bilateral contracts and no one other than the two parties to the exchange could, in principle know the details of the contract. Second, unlike traditional insurance contracts, there were no reserve requirements. Thus, the financial entity selling the CDS was not required, by law, to hold any reserves against the CDS issued, unlike traditional insurance. So, if the CDS were to actually come due there was no guarantee that the firm that had issued the CDS would be in a situation to make good it’s side of the contract. Third, the most bizarre aspect of the CDS market was that the investor buying the CDS was not required to hold the underlying assets.
This third aspect is truly incredible and led to a veritable explosion of speculation. Let us think about this for a minute. It meant that if I believed GM would fail three years down the line, an investor could buy $10 million worth of CDS on GM bonds by paying a fee of $200,000 (assuming a CDS rate of 2 percent); and this the investor could do even though she did not hold any GM bonds. If GM actually failed and her bet was correct she could make $10 million on an investment of $200,000, a phenomenal 49 fold return! One could never expect to make such return by actually holding the bonds, and so investors started making huge bets using the credit default swaps instead of investing in bonds and stocks. By the end of 2007, the CDS market had grown to about $ 55 trillion (about 4 times US gross domestic product).
But who bought the asset backed securities? Who bought the CDS? International investors of all kinds. Around the late 1990s, there was an enormous pool of footloose, speculative capital in the global financial arena. The East Asian crisis, the Russian crisis and several other developing country crises freed up finance for investment in the US; and these investors wanted high returns even if that meant holding risky assets. That is precisely what the Wall Street investment banks were busy churning out: highly risky but high-return investments in the form of the asset backed securities and other more exotic assets. Hedge funds, pension funds, sovereign country funds and other large institutional investors lapped up the exotic assets which promised high returns.
But the whole edifice was built on very shaky foundations. This highly-leveraged investment game could remain profitable if either of two conditions were met: (a) mortgage payments kept coming in, and (b) house prices kept moving up. If mortgage payments stopped coming in, the property could be taken over and sold; hence sub-prime mortgages remained profitable investments even when the borrower was almost certain to default as long as house prices kept moving up. In the middle of 2006 house prices stopped rising and foreclosures started piling up; and then the whole process, the whole speculative game, started unravelling.
To the Short-term once again
With the medium term story more or less under our belts, let us return once more to the short term story and ask: why did Bear Stearns fail? Why did Lehman Brothers fail? Why was Fannie and and Freddie nationalized? What caused the near-collapse of AIG? Bear Stearns and Lehman Brothers went under for very similar reasons: they could not keep borrowing to finance their positions. Towards the end of it’s life, Lehman was rolling over close to $ 100 billion a month to finance it’s investments in real estate, stocks, asset-backed securities, bonds and other financial assets. When news of foreclosures started pouring in, investors became convinced that Lehman had big holes in it’s balance sheet because of it’s exposure to the sub-prime mortgage market. They refused to lend it money; thus it’s cost of borrowing went up, it’s stock prices plummeted and it’s credit rating was dropped. With no other option left, it had to file for bankruptcy on September 15, 2008.
Fannie Mae and Freddie Mac were government supported entities (GSEs) that were created to help low-income homeowners get easy access to the mortgage market. They were meant to guarantee mortgages and was supposed to finance this operation by issuing it’s own bonds which were implicitly backed by the US government. It is now clear that they did not stick to this mandate of theirs. Instead, they used the subsidized loans that they could get from the market (due to the implicit government guarantee) to invest in mortgage backed securities which were backed by pools of sub-prime mortgages. When the sub-prime mortgages started failing, these institutions started losing asset values and it became clear by mid-2007 that they could not sustain the mounting losses. At that point the government stepped in to explicitly guarantee their debt (because it was spread far and wide in the global financial system) which finally culminated in their nationalization.
AIG, the largest insurance company in the US, got into serious trouble because of the credit default swaps that it had written. Around mid-September, about $ 57 billion of insurance contracts that it had written, in the form of CDS, required it to raise serious money. The CDS were all written on bonds linked to pools of sub-prime mortgages and as the sub-prime market worsened, the possibilities of the CDS payouts coming due increased. Because of the possible losses that it could incur, credit rating agencies downgraded AIG. The way the CDS contracts were written, a credit downgrade required AIG to demonstrate that it was capable of making good on it’s contracts; this required it to immediately “post collateral” to the tune of $ 15 billion; if it failed to post collateral, it would be considered bankrupt. Since it did not have that amount of reserves and could not borrow from a tightening credit market, it had to approach the Fed for funds.
Bubble bursts: Delevarging and Deflation
An aspect of the whole build-up that made the unravelling especially painful was the stupendous amount of leverage in the financial system. When the bubble was inflating every investment was so hugely profitable that investors borrowed heavily for investing. This was especially true of the investment banks whose leverage (i.e., ratio of debt to equity) was about 30:1 by 2007; thus, for every dollar of equity these institutions had borrowed 30 dollars. And a large part of the borrowing was at the shortest end of the market. This meant that the investment banks had to continuously borrow from the market (usually roll over their debt) in order to keep financing their assets and investments. This made the system extremely fragile because any serious problem would lead to painful deleveraging (i.e., forcibly reducing debt by various means often involving serious financial loss) and possibly even asset price deflation.
As foreclosures picked up speed, house prices started moving down. Defaults on mortgage payments and falling house prices meant that the mortgage backed securities started losing value. Often this meant that when lenders came knocking on the doors for their funds, assets had to be sold at short notice and at low prices to cover debt payments coming due. A rush to sell assets often led to a further fall in the value of assets, even those not linked to mortgage backed securities, leading to worsening balance sheets in wider and wider circles. With bonds losing value and even facing default, the CDS contracts suddenly started coming into effect. Since CDS issuers like AIG had not held any reserves for such contingencies, they got into greater and greater difficulties as bonds insured by CDS contracts started failing.
Falling assets values meant that financial firms faced greater difficulty in borrowing from the market, partly because the value of assets that they could offer as collateral had already fallen. Falling collateral value often lead to increasing costs of borrowing in terms of higher interest rates. Difficulty is accessing funds gives another push to sell off assets to cover debt payments, taking the spiral one step down. Deleveraging and an asset price deflation and a string of failures and rescues really led the financial system, in mid-September 2008, to completely lose faith in itself; it is this severe loss of confidence that manifested itself in the credit freeze, the center piece of the short-term story.
Before we move on to looking at the global economic crisis from a medium term perspective, i.e., before we take a look at the phenomenon of the house price bubble and associated speculation that created the grounds for the current credit crisis, it might not be amiss to focus on what can be done in the short-run to deal with the real consequences of the economic crisis: the deep and prolonged recession that the US economy will undoubtedly be pushed into. Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending; businesses cut 240,000 jobs in October alone, the highest figure in 14 years. The financial storm, comprising a severe credit crisis and even a possible banking crisis, worsened the slowdown further. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. A direct and aggressive boost to aggregate demand is the only way to prevent the current recession from becoming a depression. Why is that so?
In any capitalist economy, such as the US economy, the level of aggregate economic activity and employment is determined, in the short run, by the level of aggregate demand, and fluctuations in employment and output are accordingly determined by fluctuations of aggregate demand. Aggregate demand is defined as the sum total of all expenditures on goods and services produced in the economy. Macroeconomists divide total expenditure that make up aggregate demand into four categories: consumption expenditure, investment expenditure, government expenditure and net export expenditure. Consumption expenditure is the total spending by households on durable and non-durable goods, and also services; investment expenditure is the total spending by firms on plant, equipment, machinery and inventories, and the residential investment expenditures by households; government expenditure includes the total spending by local, state and federal government agencies on goods and services (excluding transfer payments); and net export expenditure is the net amount that foreigners spend on buying goods and services produced in the domestic economy.
BEA figures released for the third quarter show that every component of aggregate demand emanating from the private sector of the US (or foreign) economy either declined or slowed down when compared to the second quarter. In real terms, consumption expenditure decreased by 3.1 percent, the steepest decline since 1980 when the US economy was in the grip of a severe recession; during the previous recession in 2001, consumption expenditures had not even declined. Investment expenditures, other than those devoted to maintaining inventories, have also declined. Real nonresidential fixed investment expenditures decreased 1.0 percent in the third quarter, in contrast to an increase of 2.5 percent in the second. Expenditures on nonresidential structures increased by 7.9 percent, compared with a much higher increase of 18.5 percent in the last quarter; expenditures on equipment and software decreased 5.5 percent. Real residential fixed investment decreased 19.1 percent, compared with a decrease of 13.3 percent in the second quarter. Demand emanating from the external sector has a similar story to tell: even though exports registered a positive growth, the growth had slowed down considerably falling from 12.3 to 5.9 percent.
This is hardly surprising. With credit drying up, home equity vanishing and layoffs increasing, working-class households cannot be expected to increase their expenditures on the purchase of goods and services; a continued decline in the stock markets, coupled with increasing volatility will make matters worse. A recent survey in the US showed that consumer confidence was at it’s lowest value in 40 years, and so it is almost certain that consumption expenditure will not rise in the foreseeable future. Neither will export expenditures rise to shore up aggregate demand because most of the economies in the world are either already into a recession or are rapidly slowing down. Nor can firms be expected to increase their expenditures on plant and machinery and equipment. And the problem here is more than a credit freeze: even if the credit markets were to ease due to government intervention, which it is adamantly refusing to do, firms might not be willing to expand their operations because they face sagging demand. Capitalist firms produce to make profits; if they expect markets to be down and demand to fall, they will cut back and not increase their expenditures even if the cost of financing goes down.
That leaves us with government expenditure as the only source for increasing aggregate demand. In the midst of possibly the worst economic crisis since the Great Depression, the US government needs to aggressively step up it’s expenditure on goods and services; since private expenditures, either of firms or of households, cannot be expected to increase in the short-term, aggressive fiscal intervention seems to be the only way the US government can prevent the economy from sliding into a decade long L-shaped recession that was Japan’s fate in the 1990s. Moreover, such expenditures are warranted even from a long-term perspective of economic growth. Rebuilding the crumbling public infrastructure like roads and bridges, improving and widening the ambit of the public transport systems in US cities, jump-starting the movement towards green technologies, making health care available to all working-class Americans, increasing the unemployment benefit substantially, investing in the educational infrastructure makes both short-term and long-term sense. It will help boost aggregate demand in the short run and prevent a slide into a prolonged recession, and in the long run it will build the physical and human capital to help take the US economy into a higher growth trajectory.
Two alternatives to boost the economy, which are often brought up in this context, also seem to have lost their efficacy: tax breaks and monetary policy. Tax breaks have already been tried out and does not seem to have worked; reeling under mountains of debt, the tax break (or refund) cheque is often used by households not for making new purchases but for reducing the outstanding debt. The second alternative, monetary policy action, is also rapidly reaching the point where it will become totally ineffective. For it is almost certain now that the US economy is already stuck in what John Maynard Keynes long ago called a liquidity trap, a situation where the Central Bank can no longer boost aggregate demand by reducing interest rates. The Fed has already reduced the target federal funds rate to 1 percent and reducing it further to 0 percent, the lowest it can go, will possibly not help. Even if confidence in the financial system is restored and nominal interest rates lowered, this might not increase borrowing by firms because of their bleak forecast of falling demand for the goods they produce. Monetary policy has reached it’s limits; the only option to ward off a severe recession and decrease the pain on the working class seems to be aggressive fiscal intervention in terms of direct expenditure on goods and services by the US government.
The fact of Democrat Barack Obama being the clear favourite in the US presidential race has been the source of a range of progressive expectations. But beyond the immense symbolic import of the moment, it is debatable whether an Obama win will radically alter US paradigms, more so abroad than at home.
That said, even the purely symbolic significance of the event is truly momentous. In a country where racial segregation is still within living memory, and deprivation for ethnic minorities still a reality, having the first black President would still send out a clear signal of change within the US.
Indeed, the Democratic Party, on the face of it, seemed to represent sweeping change in this election, what with Obama’s intense fight for the nomination being with the first-ever female candidate, Hilary Clinton.
There will certainly be a welcome move away from the George Bush legacy, with many Americans seeing it has having endangered their constitutional rights and battering the image and prestige of the US abroad.
Obama has been able to project a transformative aura, giving rise to hopes of a break with the neocon tradition of trampling over international institutions and increasing global strife.
However, even as an Obama presidency might rethink some foreign policy issues like Iraq and relations with Latin American nations, there is unlikely to be any structural readjustment in Washington’s policies. India can hardly get a President as keen as George Bush was on cementing strategic partnerships.
And there is hardly any variation between the Democrat and Republican positions on critical, and deeply divisive, issues like the larger West Asian policy. Indeed, Obama has had to singularly disavow any possibility of change here.
It is also indicative of the more disturbing aspects of the public consensus in the US that Obama had to repeatedly insist that he was, indeed, not a Muslim. Breaking away from the lobbyism that so deeply shapes US politics, as well as from the hold of the military-industrial complex, would need much more than Democratic symbolism.
Even though the credit crisis attained dangerous proportions only in mid-September, it had already announced itself in the early part of the year with the collapse of Bear Stearns, one of the five famed investment banks that defined Wall Street; today none of those five investment banks – Bear Stearns, Goldman Sachs, Lehmann Brothers, Merril Lynch and Morgan Stanley – exist, an indication of the depth of the crisis. Faced with a fierce run on it’s dwindling reserves and it’s stock plummeting, Bears Stearns was forced to sell itself off to J P Morgan Chase (one of the largest commercial banks in the US) on March 16, 2008. The next three months could be best described in terms that the police often use in India: tense but under control. On July 01, the next piece of bad news emerged and shattered the uneasy calm: Country Wide Financials, the largest mortgage seller in the US, collapsed and was acquired by Bank of America (one of the largest commercial banks in the US). Following closely on the heels of this event, IndyMac bank failed – the second largest bank failure in US history – and was taken over by the Federal Deposit Insurance Corporation (FDIC), one of the institutions responsible for monitoring the health of the banking system in the US. IndyMac was, unsurprisingly perhaps, part of the Country Wide financial family.
Things started speeding up in September. On September 08, Freddie Mac and Fannie Mae, the two government supported enterprises (GSE) operating in the mortgage market was nationalized, with assets of the two entities totalling to more than $ 5 trillion. On September 15 another of the five famed investment banks, Lehmann Brothers, filed for bankruptcy; Lehmann’s assets were a little over $ 600 billion and this made it’s bankruptcy filing the largest in US history. Next day, the Fed stepped in with a $ 85 billion loan to prevent American International Group (AIG), the largest insurance firm in the US from going under. These two events, Lehmann’s bankruptcy filing and AIG’s rescue, sent shock waves through the world financial system. The result was a rapid erosion of faith in the financial system leading to a veritable credit freeze: financial institutions stopped lending, to other financial institutions, to businesses and to consumers.
The next thirty six hours, from the morning of September 17 to the evening of September 18, accelerated the credit crisis to extremely dangerous proportions and convinced the US Treasury and the Federal Reserve that government intervention of unheard magnitudes (at least since the Great Depression) would be necessary to prevent total financial collapse. Ben Bernanke, the chairman of the Federal Reserve (the US Central Bank), was famously reported as saying, at one point during this 36 hours, that if the government did not save the (financial) markets now there might not be any financial markets in the future. So, what happened during those crucial 36 hours?
The crucial 36 hours
The first indication of a severe stress in the financial system was a shooting up of credit default swap (CDS) rates, especially on Morgan Stanley and Goldman Sachs (two of the famed five Wall Street investment banks) debt, during the early hours of September 17. Credit default swaps are insurance contracts that can protect bondholders against the possibility of default. For example if an investor has bought bonds worth $ 1 million issued by firm A, then the investor can also buy CDS – typically issued by financial institutions like large commercial banks, investment banks or insurance companies – to protect herself against a possible loss resulting from firm A defaulting on it’s bonds; the premium that the investor pays for the CDS is called the “rate” or “spread” and it is typically around 2% of the amount insured (the “notional value”). So, in the case of this example, the investor would pay $ 20,000 to buy CDS and if firm A were to go under, then the “counterparty” to the CDS contract (i.e., the financial institution that issued the CDS to the investor) would step in to pay the investor $ 1 million and the interest on that amount.
CDS rates (i.e., the premiums that are paid on the insurance contracts) are, thus, an indication of the market’s belief about the possibility of default of some institutions; CDS rates on bonds issued by firms are typically low when the market thinks the probability of default of those firms are low and high when the market thinks the probability of default are high. Thus, on the morning of September 17, when CDS rates went through the roof, this provided evidence of severe loss of faith in the financial system.
When investors lose faith in the financial instruments issued by private parties, they turn back to those issued by the government and that is what happened when CDS rates multiplied by close to a factor of five. Investors let go of private financial instruments like hot bricks and rushed into US government securities, a phenomenon often described as “flight to safety”. The US government, i.e., the US Treasury department, issues three primary kinds of securities: T-bills, T-notes and T-bonds (where the “T” stands for Treasury), where bills mature in less than a year, notes mature between one and ten years and bonds are of longer maturities than a decade. When investors lost faith in the private financial system, they rushed in to US T-bills, the short-run heavily-traded ultra-safe US government securities. This huge rush into T-bills pushed up the price of T-bills and drove the yield (i.e., interest rate) on T-bills down. At one point in time, during this 36 hour period, the yield on T-bills was pushed down all the way to zero (the lowest it can ever go to) implying that investors were willing to hold T-bills even though the nominal return was zero and real returns were negative (because the inflation rate was positive).
As private investors were madly rushing into the safety of US T-bills, another important event was unfolding in the mutual funds market. Money market mutual funds (MMMF) are financial institutions that have become popular over the last three decades, especially in the US. They typically work as follows: investors put their money in MMMF’s by purchasing shares in the MMMF’s stock; thus the MMMF becomes a mechanism for pooling huge amounts of money and then using those large sums for investing in a very diversified portfolio of financial assets, thereby making the investments extremely safe. Thus MMMF’s were, till September 17, thought to be as safe as a deposit account in a commercial bank, and the added advantage was that the money invested in MMMF shares would give a positive rate of return as opposed to a deposit account which is usually non-interest bearing. On September 17, one of the oldest and largest MMMF’s, Reserve Primary Fund, “broke the buck”, i.e., it made losses on it’s investments such that it could not guarantee a positive return to it’s shareholders. Every dollar invested in Reserve Primary was now, by it’s own admission, worth less than a dollar. This was an unheard of event and as news of Reserve Primary Fund’s losses spread, investors started pulling money out of MMMFs.
This had a very negative consequence for the real economy because of the serious involvement of MMMFs in the commercial paper (CP) market. Businesses typically need to constantly borrow short-term funds to keep their operations going; these borrowed funds go towards funding payroll, paying suppliers, maintaining inventory, etc. Firms, at least the big ones, usually borrow short-term funds in the US by issuing commercial paper (which is essentially a bond with a short maturity of about a week or a month). Who buys commercial papers? The most active institutional investors in the CP market are the MMMFs; some of the largest chunks of commercial papers are bought by the MMMFs. So when the MMMFs faced an increasing spate of withdrawal, in the wake of Reserve Primary Fund’s breaking the buck, they stopped buying commercial paper. This, essentially, meant that the CP market ground to a halt. Thus businesses were no longer able to borrow the short-term funds that they need to keep operating. The economy, by all means, shut down.
Adding to and going hand-in-hand with these processes were the growing problems in the interbank (lending) market. Commercial banks typically lend and borrow banking system reserves (roughly the sum of currency in the banks’ vaults and the amount they hold in their account with the Central Bank) among themselves for very short periods, usually overnight periods. The interbank lending market that is most closely watched is the London interbank market and the rate at which loans are made in this market is the London Inter Bank Offered Rate (LIBOR). The most important characteristic of loans in the interbank market is that they are unsecured, i.e., they are not backed by collateral. Thus, a bank can get a loan in the interbank market only if other banks consider it financially sound; thus when the LIBOR jumps up suddenly it provides evidence that the largest and the best banks in the world have lost faith on each other. On September 17, the LIBOR shot up giving indication of increasing strain in the interbank market.
It was these sets of events – CDS rates shooting up, closing down of the CP market, increasing strain in the interbank market – that spooked the US administration and convinced them of the necessity of the most extensive government intervention in the financial markets since the Great Depression. These crucial sets of events were precipitated by the string of big financial failures that the US economy had witnessed over the first two weeks of September: the failure of Fannie and Freddie, the bankruptcy of Lehmann and the near-collapse of AIG. It was these failures that led to a rapid loss of faith in the financial system and heralded a full-blown credit crisis. And why did Fannie and Freddie and Lehmann and AIG fail? All these financial institutions failed because at crucial points in time they could no longer raise money from the market to finance their assets, i.e., they could not borrow money or roll over their short-term debt; financing, for these institutions, had dried up. And why did financing dry up for these big and reputed financial institutions? Because each of these, in their own ways, were exposed to the subprime mortgage market and took huge losses when the subprime mortgage market started unravelling. As news of these failures spread, investors, fearing losses, became increasingly unwilling to lend money to these institutions.
The global economic crisis currently underway is, by all accounts, the deepest economic crisis of world capitalism since the Great Depression. It is necessary for the international working class to understand various aspects of this crisis: how it developed, who were the players involved, what were the instruments used during the build-up and what are it’s consequences for the working people of the world. This understanding is necessary to formulate a socialist, i.e., working class, response to these earth shaking events. In a series of posts here on Radical Notes, I will share my understanding of the on-going crisis as part of the larger collective attempt to come to grips with the current conjuncture from a socialist perspective, to understand both the problems and the possibilities that it opens up.
The Big Story
The current crisis can possibly be fruitfully understood if measured against different time scales: the short-term, i.e., in terms of days and weeks; the medium-term, i.e., in terms of months and years; and the long-term, i.e., in terms of decades. This analytical compartmentalization into three different time periods is useful because it demonstrates how long-term trends silently but inexorably created the conditions for the medium-term problem to explode into the short-term problem that has buffeted the economy since mid-September, 2008.
In the short-term, the current financial meltdown is a severe credit crisis, a situation whereby financial institutions have become unwilling or unable to lend and borrow among themselves thereby freezing the flow of credit in the entire economic system; this credit freeze is largely fuelled by a serious loss of faith in financial institutions and in the financial system as such and came to the fore most forcefully in the middle of September, 2008. It is also possible that the credit freeze, and the underlying loss of faith, might explode into a full-blown banking crisis: banking panic leading to run on even healthy and solvent banks.
In the medium-term, the crisis is the unravelling of a stupendously leveraged speculative bubble on real estate that built itself up for about seven years from the beginning of this decade (and century); this speculative bubble was mediated by fancy financial instruments fashioned by Wall Street, running all the way from sub-prime mortgages, asset backed securities (ABS) and mortgage backed securities (MBS), collateralized debt obligations (CDO) to credit default swaps (CDS); this speculative bubble led up to and culminated, when it finally burst in the middle of 2007, in the credit crisis that the US, and gradually the global, economy finds itself in.
From a long-term perspective the present crisis is, of course, more than just about Wall Street and finance and banking; it is a full-blown crisis of the neoliberal turn in capitalism inaugurated the 1970s. Neoliberalism (or the neoliberal counterrevolution) was a response to the structural crisis of capitalism that emerged in the late 1960s. It was a response from the point of view of the upper fraction of the capitalist class, a fraction especially dominated by financial interests. The neoliberal counterrevolution ushered in a capitalism firmly under the sway of finance capital; the neoliberal policy turn was geared towards breaking the power of labour vis-a-vis capital that had gradually built up during the two decades after World War II. The result was stagnant real wages, slow but growing productivity, and hence growing profit incomes especially of the financial sector, increasing financialization and a deregulated economy for finance to operate in.
Stagnant wages created the demand for debt from a working class used to growing consumption spending; huge profit incomes and the shredding of all regulation on finance created the supply. The result was a growing role of debt in the lives of the working class which, over time, led to a huge debt overhang on the entire economy. As the ratio of outstanding debt to income rose, with stagnant incomes for the majority, the financial fragility of the entire system increased; and it is this systemically fragile financial architecture that finally cracked under the weight of the bursting housing bubble. Thus, the long-term build-up of debt in the US economy resulting from the neoliberal counterrevolution, which increased the financial fragility of the system, created the conditions in which the bursting of various asset price bubbles could lead to a severe credit crisis and loss of faith in the entire financial system.
Impact on the Real Economy
Real GDP figures released by the US Bureau of Economic Analysis (BEA) on October 30 indicated that the US economy was in the midst of a slowdown even before the financial storm hit the world economy in the middle of September. Real GDP in the US contracted at an annual rate of 0.3 percent for the third quarter (i.e., for the months of July, August and September), led by a sharp fall in consumer spending. The financial storm, comprising a severe credit crisis and even a possible banking crisis, will only deepen the slowdown and might even push the US and the rest of the world into a prolonged and painful recession, possibly even a decade long L-shaped recession like the one that Japan witnessed during the lost decade of the 1990s. In such a scenario, fixing the financial mess, dealing with the credit freeze, averting a possible run on the commercial banking system and restoring confidence in the financial system will not be enough to prevent a plunge into a deep, prolonged and painful recession; addressing the credit crisis is necessary but not sufficient to deal with the grave crisis in the real sector. An aggressive fiscal intervention by the US government and other governments around the world, in terms of direct expenditure on goods and services, will be necessary to prevent the slide into a prolonged recession. It is in the interests of the working class to push for such intervention even as it works towards re-building it’s political, social and economic institutions.
It is time to take stock. The centrality of the American economy to the capitalist world – which now literally does encompass the whole world – has spread the financial crisis that began in the U.S. housing market around the globe. And the emerging economic recession triggered in the U.S. by that financial crisis now threatens to spread globally as well.
Capitalism has had an incredible run – politically and culturally as well as economically – since the stagflation crisis of the 1970s. The resolution of that crisis required, as economists put it at the time, ‘reducing expectations’ of the kind nurtured by the trade union militancy and welfare state gains of the 1960s. This was accomplished via the defeats suffered by trade unionism and the welfare state since the 1980s at the hands of what might properly be called capitalist militancy. This was accompanied by dramatic technological change, massive industrial restructuring alongside labour market flexibility and the over – all discipline provided by ‘competitiveness.’
That discipline brought with it an enormous increase in economic inequality, the spread of permanent working class insecurity and the subsumption of democratic possibilities to profitable accumulation. But this did not mean capitalism was no longer able to integrate the bulk of the population. On the contrary, this was now achieved through the private pension funds that mobilized workers savings, on the one hand, and through the mortgage and credit markets that loaned them the money to sustain high levels of consumer spending on the other. At the centre of this were the private banking institutions that, after their collapse in the Great Depression, had been nurtured back to health in the postwar decades and then unleashed the explosion of global financial innovation that has defined our era.
The question begged by the current crisis is whether capitalism’s capacity to integrate the mass of people through their incorporation in financial markets has run out of steam. That the fault line should have appeared in ‘sub-prime’ mortgage loans to African-Americans is hardly surprising – this has always been the Achilles’ heel of working class incorporation into the American capitalist dream. But an economic earthquake will actually only result if there is a devaluation of working class assets in general through a collapse of housing prices and the stock and bonds in which their retirement savings are invested.
The state and financial crises
We are by no means there yet. The role being played to prevent just this by the Federal Reserve, very much acting as the world central bank in light of the global implications of a U.S. recession, should once and for all dispel the illusion that capitalist markets thrive without state intervention. It was through the types of policies that promoted free capital movements, international property rights and labour market flexibility that the era of free trade and globalization was unleashed. And this era has been kept going as long as it has by the repeated coordinated interventions undertaken by central banks and finance ministries to contain the periodic crises to which such a volatile system of global finance inevitably gives rise.
The Fed has repeatedly poured liquidity into its financial system at the first sign of trouble. The question is whether the capacity of the system to go on integrating ordinary Americans though the expansion of investor and credit markets in this way has reached its limit. This was indeed suggested by the Bush administration’s sudden (non-military) Keynesian turn with a $150 billion fiscal stimulus. However, that fiscal stimulus at the federal level may be undone at the state level, especially with municipal government cutbacks, given their massive dependence on property taxes. The way financial institutions that specialized in selling risk insurance on municipal bonds were enveloped in the credit crisis has further compounded the problem. This indeed brings to mind the extent to which it was municipal governments that were on the front lines of the Great Depression.
But while the U.S. may very well move into a recession, which even when it ends may mark the beginning of a new era of slower growth, this is very different from a Depression. While there is no doubt that mortgages in black communities and for the working poor more generally will be tightened, it seems most likely that banks, competing for markets, will continue to extend credit to working families more generally. we need to remember that the top twenty per cent and their families are extravagant consumers. While growing inequalities are grotesque, the left has consistently underestimated the extent to which the rich can sustain overall spending. The ‘correction’ in the dollar (alongside the strength of U.S. manufacturing in the higher-tech sectors) has already led to offsetting growth in markets abroad; U.S. exports have been growing at double-digit rates over the past few years.
Finally, the U.S. state may revive its capacities for substantive infrastructural spending, if only to stimulate the construction industry now that the housing boom is over. Indeed, even from the perspective of competitiveness and accumulation there is a long-neglected need to rebuild U.S. infrastructure – as the collapsed levies of New Orleans and the collapsed bridges of Minneapolis dramatically showed. The type of state intervention that brought us financial globalization is not well suited to this, but this crisis may finally force some renewal of state capacities in this respect, even within the overall framework of neoliberalism.
Finance and Neoliberalism
There is an understandable tendency on the left to take hope in capitalism’s current dilemmas. The extreme liberalization of finance (and along with it the era of neoliberalism) seems discredited. Finance today appears as no more than high-flying speculation – absurdly wasteful and ultimately not sustainable. U.S. corporations remain profitable, but with the credit crunch, who will buy the goods? Discredited as well, it therefore appears, is the U.S. capacity to keep its own house in order, never mind lead the process of globalization. Yet before we assume that the openings created by this crisis place us on the verge of a matching new oppositional politics, we need a more careful reading of our times. While the new openings provide the space for a new politics, we need to soberly appreciate the problematic link between such openings and a radical response.
To begin with, as immoral and irrational as finance might seem, financialization has been absolutely essential to the making and reproduction of global capitalism. Second, the growing consensus that finance must be re-regulated is hardly an attack on finance or neoliberalism more generally. Rather, it is about the engineering of finance so it can continue to be ‘innovative’ in the service of both itself and non-financial capital. Third, whatever problems the U.S. currently faces, its dominance will not fade because of a crisis in housing or a lower exchange rate; it does us no good to underestimate the staying power of the American capitalist empire.
It is not only finance but capitalism in general that rests on speculation. Behind a new firm or a new product rests the ‘speculation’ that it can be sold at a cost and price that generates profit. Behind the distinction between finance and the ‘productive sector’ is therefore something else: the notion that finance speculates in pieces of paper, not in providing goods or real services; it is a parasitic drain on the economy, not a constructive addition to it.
The problem with this line of thinking is that it mistakes what is rational from the perspective of certain moral criteria with what is rational within capitalism. The financial system is necessary to capitalism’s functioning. The discipline finance has imposed in the neoliberal era on particular capitalists and workers has forced an increase in U.S. productivity rates by way of increased exploitation, the more efficient use of each unit of capital, and the reallocation of capital to sectors that are most promising – all from the standpoint of profits, of course.
The penetration by American finance of foreign countries and the inflow of foreign capital into the U.S. has given the U.S. access to global savings, shored up its role as the greatest global consumer and reinforced the U.S. state’s power and options. Especially important, financial markets have come to provide non-financial corporations with mechanisms for managing their risks, and comparing and evaluating diverse investment opportunities in a highly complex global economy. Absent this role, globalization – at least to the extent we have experienced it – would not have been possible. Finally, as emphasized earlier, the ‘democratization’ of American finance has given workers access to finance as savers and debtors, thereby contributing to their integration into, and dependence on, each of capitalism and finance.
This does not mean that the explosion of finance is not a highly contradictory process. Highly volatile financial markets inevitably generate financial crises. Rather, it shifts the question from whether financialization is irrational to whether its contradictions can be managed insofar as the crises can be contained. What working classes do in this context will be crucial to answering this question.
The Dialectics of Regulation
Finance cannot exist without regulation and the U.S. financial sector, even before the latest crisis, was the most heavily regulated of any section of the U.S. economy. In fact, the dynamics of finance cannot be understood apart from how regulation shapes financial competition, how banks and other financial institutions try to escape or reshape that regulation, and the state’s subsequent counter-responses. The current dilemma for American regulatory institutions lies in how to re-regulate finance so as to overcome its costly and dangerous volatility without undermining finance’s needed innovative capacity.
We need to be clear that this is about re-engineering finance to strengthen capital accumulation, not control it in the name of a larger public interest. To place democratic regulation of finance on the agenda would require asking: ‘regulation for what purpose?’ and so would mean going far beyond finance itself. It would mean raising the fundamental question of social control over investment and therefore get to the heart of power in a capitalist society.
In the context of the failed promises of the past quarter century and the current crisis, to see the above issue go completely unmentioned in the Democratic primary debate may not be surprising given the absence of even a trade union campaign around this, but it bespeaks an impoverishment of American politics that in fact goes all the way back to the New Deal. The issue of economic democracy that had been placed on the political agenda alongside the New Deal’s public infrastructure projects was set aside for the remainder of the century after the FDR administration’s self-described ‘grand truce with capital’ in the late 1930s.
It will, therefore, not do to resort to the abstractions and obfuscations of calling for ‘re-regulation’ or a ‘new, new deal.’ It is the undemocratic power of private control over investment that needs to be put on the agenda.
American Empire in Crisis
Four particular aspects of the limited fall-out from the present crisis demand more serious reflection on the left. First, the fact that this crisis surfaced in the context of strong profits and low debt loads in the non-financial sector is important, and this accounts for the limited damage thus far.
Second, it is notable that despite the IMF calling this the most serious banking crisis since the Great Depression, we have not seen a series of banks failures. This is certainly linked to the interventions of the U.S. Fed, but it also speaks to the strength of private U.S. financial institutions. In no other country could such a crisis have unfolded without massive financial bankruptcies.
Third, it is especially worthy of note that no major state saw an opportunity in the crisis to challenge or undermine the American state. Rather, their integration into global capitalism meant that they identified this crisis as their crisis as well. They effectively recognized the U.S. central bank as the world’s central bank and cooperated with it in coordinating internationally repeated provision of liquidity to the banks. As in the previous instances of financial crises during the 1980s and 1990s, this reproduced and extended the American state’s leading role in managing global capitalism.
The fourth, and most important factor is the remarkable ‘imperial flexibility’ the U.S. has by virtue of the weakness of its working class. Had, for example, U.S. workers insisted on higher wages to compensate for rising food and oil prices and the devaluation of their homes and taken advantage of the competitive space offered by a falling dollar, the Fed would have had to cope with the fear of inflation and this might have meant higher rather than lower interest rates. And that could very well have aggravated the crisis and risked a financial meltdown. But rather than the working class demanding more, it in fact showed restraint or, in the case of the autoworkers, accepted the greatest concessions the union has ever made.
The more important question is, therefore, not the economics of crisis but its politics. How will the working class respond to the crisis? If credit continues but becomes more costly; if the loss of private pensions, negotiated health care, and the devaluation of homes force people into having to reduce consumption to shore up their savings; if food and oil prices leave less discretionary spending – if this is the near-term future, will workers rebel? Or will workers once again tighten their belts to preserve what is left from their past gains? And if frustrations are expressed politically, will the politics be limited to a longing for the good-old days before the crisis or before Bush?
Absent what Alan Sears, at the recent Great Lakes Graduate Students Conference at York, called ‘an infrastructure of resistance’, any opposition that does surface is most likely to be localized and contained rather than built on. A coherent alternative is no just a set of economic policy proposals but a political movement that can develop the popular appreciation and capacities for radical democratic control over investment. There should be no illusion that a recession, or even a depression, will necessarily bring the issue of economic democracy back onto the U.S. political agenda. It would require a transformation of American politics to do so – and that, like the current economic crisis, would as well have global implications.
Sam Gindin teaches political economy at York University. Leo Panitch teaches political economy at York University and is editor of The Socialist Register.
A view that is very popular among the votaries of capitalism rests on the alleged efficiency of the financial markets of a “well functioning” capitalist economy. Financial markets, it is claimed, provide the prime mechanisms for channeling funds from savers to the most efficient investment projects, thereby increasing the overall efficiency of the economy. Lack of well-developed financial markets are often interpreted as markers of underdevelopment and economic stagnation. That this is not always the case, that financial markets are unusually prone to “irrational exuberance”, that financial booms and busts are part of the regular functioning of financial markets if often forgotten by this fundamentalist viewpoint.
A more nuanced version of this view is marked by a more measured view towards financial markets. Proponents of this view start by asserting that the financial system is composed of two parts: financial markets and the web of interdependent financial institutions. They recognize the fact that financial markets, by themselves, are often unable or unwilling to perform several important functions (like collecting, processing and disseminating reliable information about borrowers; providing liquidity services; offering deposit and check-writing facilities) required for the smooth functioning of an advanced capitalist economy. Hence, they recognize the important role of institutions, especially financial institutions (like commercial banks, insurance companies, mutual funds, etc.), within the architecture of advanced capitalism. But very often they also go on to assert that the financial system works best if left to itself; that government intervention in the financial system creates unnecessary inefficiencies. When confronted with the evidence of endemic instability of the financial system, they argue that crises and problems have led, over the years, to the development of a host of institutions that are capable of dealing with such episodes; it is both unnecessary and undesirable for the State to regulate the financial system, they claim.
A closer look at the history of the financial system in the US – the leading capitalist nation today – will demonstrate that such a view is seriously misleading; the government has always had to intervene to put the financial house in order. In fact one can go further and assert that the financial system cannot properly function without supervision at crucial moments by the State, if not constant supervision. Let me illustrate this with three well-known historical instances when the State had to step in to deal with the endemic instability of the financial system in the US. These historical instances are important, apart from illustrative purposes of this article, for at least two more reasons. One, they are the defining interventions in the financial system of the US; the financial system as we know it today has been largely shaped by these interventions and the institutions created at those moments. Two, they destroy the facile opposition that is often constructed, both by the Right and even some on the Left, between private capital and the State; the State is an institution created to protect the interests of capital as a whole even though, on occasion, it has to act against some capitals (some firms or industries or even some sectors of the economy). These instance demonstrate clearly that even when the State acted against some financial firms or sectors it was doing so to save and strengthen the capitalist system.
The first major instance of government intervention stands at the very foundational moment of the modern financial system in the US. The unregulated banking industry in the US led to massive bank failures in the late 19th century: waves after waves of bank failures where savers lost their deposits and lenders could not borrow to meet their needs; this led the Congress to create the Federal Reserve System (the Central Bank of the US) in 1913.
Within less than two decades we come to the second major intervention: creation of the FDIC. In the late 1920′s, the US economy was into the biggest downturn it had ever faced: the Great Depression. During this traumatic period, there were thousands of bank failures again (along with a huge stock market crash) and confidence in the whole financial system was greatly eroded. The Congress again stepped in to create the FDIC (Federal Deposit Insurance Corporation) which was meant to deal with the problems that the unregulated banking industry could not handle: bank runs.
The third major intervention (also made around the time of the Great Depression) had been to restrict competition in the banking industry (i.e., to force some form of branching restrictions across geographical regions) and also to restrict the areas into which a commercial bank could enter (basically to separate commercial and investment banking to prevent conflict of interest).
The last instance of government intervention is important because over the last few decades, these laws and the supporting institutions have been generally nibbled away at. For instance, the Glass-Steagall Act of 1933 had created a “wall” separating commercial and investment banking; from the 1970s onwards the growing power of finance has been continuously trying to attack and change this very important law. Finally in 1999, the Gramm-Leach-Bliley Financial Services Modernization Act repealed the Glass-Steagall Act!
The effects are already coming to the fore in the form of major banks’ (like J P Morgan Chase’s) involvement in financial frauds and other irregularities (see the Spring 2007 issue of Dollars & Sense). For instance, Chase was one of the banks which had systematically assisted Enron in its accounting frauds. It had also, in its role as an underwriting agent – one of the main functions of an investment bank – sold Enron stocks to the public knowing full well that Enron was in bad shape. This is precisely the kind of “conflict of interest” that the Glass-Steagall Act was meant to take care of. Now that it has been thrown out, we can expect many more instances of such irregularities.
The bottom line is that I do not share in the optimism about the US financial system (which many people seem to harbour), nor do I think that there is any evidence for such optimism. To suggest that the US financial system has managed to take care of the problems of instability is to willfully ignore well-known empirical evidence. Here are a few: the Savings and Loan (S&L) crises through the 1980′s, the wave of bank failures in the late 1980′s, the stock market crash of 1987, the LTCM scandal in 1998 (when the Fed had to step in to bail out a major financial firm), the dotcom bubble and bust, the imminent meltdown in the sub-prime mortgage market …one could go on and on; but let us look a bit more closely at only two of these well-known episodes of financial trouble: the LTCM fiasco and the sub-prime mortgage meltdown currently underway in the US.
LTCM (Long Term Capital Management), a very famous financial firm of the late 1990s in the US had been feted by Wall Street as one of most technologically sophisticated financial firms in existence; after all it had offered close to 40% annual returns for two years in a row and had towering figures from theoretical finance among its founding members. It was a “hedge fund” formed in 1994 and had, among its founder member two Nobel laureates in Economics: Myron Scholes and Robert Merton. Within four years LTCM was on the verge of collapse! More details about the the rise and fall of LTCM can be found here (there are lots of useful references at the end of this article; among others, there is a very nice PBS documentary on the whole episode which is worth watching.)
A little note about “hedge funds” might not be inappropriate at this point. A “hedge fund” is, to be brief and simple, a financial institution which pools the money of a few very rich individuals and then invests it around the world to make huge profits. Membership to hedge funds is not open; it’s stocks don’t trade in the financial markets; it is always very secretive about how it invests and also about who its investors are. Usually the smallest amount of money that is required by an individual to become part of a hedge fund (i.e., an investor who is one of the many whose money has been pooled into the hedge fund) is $1 million. In most cases, it is much higher. If we look at hedge funds from the point of view of ordinary citizens, we cannot escape the well-known (and increasingly well-recognized) fact that they are notorious for creating instability in financial markets, especially in the low and middle income economies. Their huge size and ability to move funds very rapidly gives them undue power and influence over small and medium economies (now even large economies are facing the music of hedge funds), whose macroeconomic stability is severely jeopardized by their investment strategies.
Coming back to the stunning LTCM collapse, it is important to remember that the Federal Reserve Bank of New York had to step in to arrange credit for its bailout. If the Fed had not intervened to bail out the tottering giant, it might have led to a asset price deflationary spiral leading to a string of failing firms and lost jobs and lost output and macroeconomic instability. For the purposes of this essay, it is merely necessary to note that the financial system could not deal with this problem on its own!
Let us now move on to the second story, a story that is still unfolding: the sub-prime mortgage lending crisis in the US. Referring to the sub-prime mortgage meltdown that is currently underway in the US, a recent report by the Centre for Responsible Lending has estimated that more than 1 million low-income families have lost their homes on net (i.e., after accounting for those who have gained home ownership) over the past nine years. Have the banks and financial firms that created this crisis lost much? It is doubtful whether the banks originating the mortgages, the focus of all the attention in the mainstream press, have really lost anything.
Let me remind readers that the “sub-prime” mortgage meltdown refers to the market for mortgage loans (i.e., loans for buying real estate) supposedly for low-income households without good credit histories. The rule of the game, as it evolved over the last decade, was that the house that is bought with the mortgage loan is used as collateral for the loan so that whenever a family fails to make a single monthly payment (there might be a little variation on this), it leads to “foreclosure” and the bank that had made the loan takes possession of the house to recoup its losses.
But why the term “sub-prime”? The attribute of “sub-prime” comes from the fact that most of these loans made on this market are at above-average (much above the market interest rate for mortgages) interest rates and at very onerous terms; the term contrasts this market with the “prime” mortgage market where loans are available at much lower interest rates. In most cases, these “sub-prime” loans are made in bad faith because the concerned families are “convinced” of the suitability of high-interest rate and “coaxed” into the loans at unreasonable terms. More often than not big banks use various kinds of methods to consciously keep out low-income families from the “prime” mortgage market (where they might have got loans at reasonable rates and terms); most of these families, needless to say, are either African-American or Latinos. Once, in this way, these families have been pushed out of the “prime” mortgage market and into the “sub-prime” market, the same banks turn into loan sharks and strip the low-income families to their bones. It is, therefore, hardly surprising that many families are unable to meet the monthly payments of the mortgage and lose their house and most of their life’s savings. That is what has been documented by the Centre for Responsible Lending and that is what is creating havoc in the lives of many working-class Americans.
These are but two small instances of the operation of financial system under advanced capitalism; one can very easily multiply them ad nauseum. The evidence, if one cares to look, strongly suggests that the US (or any other capitalist economy for that matter) will have to learn to live with inescapable instability; these episodes are as much part of life under capitalism as are economy-wide business cycles. Of course, under capitalism, the overwhelming cost of these episodes of financial and other forms of instability will be always borne by the working people. Hence, all political formations claiming to represent the interests of the working people must vociferously argue for the regulation of the financial system without taking recourse to the false opposition between the State and capital.
The proposed Employee Free Choice Act (EFCA) is considered as an important milestones for the trade union movement in the U.S. Though the bill has been passed in the U.S. House of Representatives with an overwhelming majority of 241 to 185 votes, its fate in the Senate is still uncertain. Even if it is passed in the Senate, it has been mentioned time and again that President George Bush will veto it.
If the EFCA becomes a law, it will be a landmark victory for the unionized labor in the U.S. because it will allow workers to form unions by simple card check rather than going through the time consuming electoral process. Under the current law, the process of unionization is rather cumbersome. The typical way in which workers show interest in unionization is by signing the union authorization cards; and these state that each worker authorizes the union to represent them for the purpose of collective bargaining. The union can petition the NLRB for an election once 30 percent of the members of a bargaining unit have signed the cards. The board notifies the employer. At this point, the employer is free to recognize the union or consent to an election. If employer consents to an election, then the board will set a date for election. In the meantime, the employer is free to try vigorously to get the workers to vote against the union. This whole process of going through election is a time consuming process and it gives ample time to the employers to go for union busting techniques which includes both semi-legal and illegal tactics.
According to the proposed EFCA, it would enable working people to bargain for better wages, benefits and working conditions by restoring workers’ freedom to choose for themselves whether to join a union. It would:
* Establish stronger penalties for violation of employee rights when workers seek to form a union and during first-contract negotiations.
* Provide mediation and arbitration for first-contract disputes.
* Allow employees to form unions by signing cards authorizing union representation.
Under the proposed EFCA bill, if it becomes law, the Act would require the NLRB to certify a union as the exclusive representative of employees without an election where “a majority of the employees in a unit appropriate for bargaining has signed valid authorizations.” This is where the major criticism against the bill has been lodged. According to the so-called neoliberal proponents of freedom and choice, getting away with secret ballot will mean taking away the voting rights of the workers. They argue that changing the current system of voting to card checking will mean possibilities of foul treatment of the workers who are not supportive of the union by the union. Definitely, lots of hypothetical situations can be created, but perhaps the proponents of this line of view are incompetent to grasp the fact that formation of unions is not an individual decision, rather it is a collective decision based upon a strong sense of solidarity. If this is the case, it is very unlikely that the union will threaten or coerce the anti-union employees. In reality facts are other way round. Often employers resort to anti-union practices to stop the process of unionization. These facts can be made clearer by the study carried out by Cornell University scholar Kate Bronfenbrenner. She found that
* Ninety-two percent of private-sector employers, when faced with employees who want to join together in a union, force employees to attend closed-door meetings to hear anti-union propaganda; 80 percent require supervisors to attend training sessions on attacking unions; and 78 percent require that supervisors deliver anti-union messages to workers they oversee.
* Seventy-five percent hire outside consultants to run anti-union campaigns, often based on mass psychology and distorting the law.
* Half of the employers threaten to shut down partially or totally if employees join together in a union.
* In 25 percent of organizing campaigns, private-sector employers illegally fire workers because they want to form a union.
* Even after workers successfully form a union, in one-third of the instances, employers do not negotiate a contract.
Given the above scenarios, it seems clear that the arguments for opposing the EFCA based upon delimiting freedom and choice are not only misplaced, but also mischievous. The Act will ensure that the workers can express their choice more easily under the protection of law. Not only this, the Act will also ensure proper penalties against any violation of the employee rights when workers seek to form a union and during first-contract negotiations. No doubt the EFCA will go a long way in ensuring these desirable changes.
