The Global Town Teach-In:
Building a New Economy and New Wealth through Democracy Networks,
Green Jobs and Planning and an Alternative Financial System
Time and Day: April 25, 2012, 12 Noon Eastern Standard
Webpage: www.globalteachin.com
Goals
The Global Teach-In is designed to address the general problems associated with the Triple Crisis and the need to address alternative security policies. The “triple crisis” can be defined by: economics (inequality, deindustrialization, mass unemployment, or the privatization and “de-democratization” of public goods), the environment (pollution, increased greenhouse gas emissions, and depletion of species) and reliance on unsustainable energy supplies (diminished stocks of cheap oil, use of oil in hard to get or insecure areas, and substitution of land used to grow food to supply alternative fuels). The need for alternative security policies involves the need to transcend costly “hard power” and traditional military strategies in an era in which growing debt, ecological threats, the opportunity costs of military spending and the rise of asymmetric warfare reveal the limits to the traditional national security model.
Policies and Alternative Institutions
The Global Teach-In will discuss policy and institutional solutions at the global, national and local levels. First, we will discuss how a Green New Deal would expand jobs, investments and research in alternative energy and mass transportation. These will provide a means for reducing carbon emissions, creating new sources of wealth and increasing living standards. Second, we will examine how Green planning can lead to the creation of metropolitan regions where residential and labor markets are more proximate, where housing is sustainable and affordable, where products are designed to be durable and recyclable, and where designs generally reflect user interests and needs. Third, we will examine a variety of ways in which alternative economic institutions have been developed that serve to promote locally anchored and sustainable communities (in terms of ecological impacts and the durability of employment). These ways include institutions and policies such as: cooperatives, community and socially minded banks, sustainable utilities, buy local and green procurement policies, electoral measures mandating clean energy, campaigns to patronize alternative economic institutions, green civilian conversion of defense and petroleum-dependent firms, and more equitable taxation and alternative budgetary policies.
Constituencies
The Global Teach-In has been supported by academic, professional, media, labor, peace and environmental organizations and individuals associated with these. We aim to promote a broad coalition among such groups and political leaders, entrepreneurs, trade unions and interest citizens to foster a dialogue about the need for a new, comprehensive global agenda that can be initiated through a series of related local actions. We will showcase “best practices” and barriers to extending alternative models.
Format and Ambitions
The Global Teach-In will promote local study and action circles prior to the broadcast to facilitate an agenda for questions to guide discussions.
The Event
The April 25th, 2012 broadcast will be followed by discussions within localities about how to address the agenda proposed by the teach-in. The Global Teach-In will promote links and synergies between diverse constituencies and projects to help each locality achieve its objectives. For example, money moved into community banks can fund cooperatives and green technology projects. Alternative utilities and energy can help power new mass transit systems. Electoral measures to mandate alternative or clean energy can build green markets.
The Global Teach-In will take place in multiple locations through face to face meetings linked to an electronic broadcast in the U.S. and Europe including: Ann Arbor, Belfast (UK), Boston, Los Angeles, Madison, New York, San Francisco, Stockholm (Sweden), Washington, D.C. We are also interested organizing other locations and we welcome your suggestions and ideas. Interested parties should contact us at: globalteachin@gmail.com. Thank you for your interest!
The global financial crisis that started with the bursting of the housing bubble in the U.S. in 2007 imposed both direct and indirect costs on the working and middle class populations. The direct costs are those associated with the bail-out of financial institutions, which will ultimately be borne by the taxpayers; the indirect costs are those associated with the ensuing economic crisis and the deep and prolonged recession that came in its wake, which, again, will be mostly borne by the working class population. While both costs lead to increasing deficits, and over time accumulating debt, of the federal government, they are of vastly unequal magnitudes. The direct cost (i.e., the costs associated with bailing out the financial institutions immediately after the crisis) is much smaller than the indirect cost (i.e., the cost, in terms of rising unemployment and government deficit if one considers the latter a cost, arising due to the recession); the contribution of the bail-out funds to the build-up of sovereign debt, in the US (and Europe), is minuscule compared to the contribution of the indirect cost (the widening gap between tax receipts and government outlays caused by the recession).
Many people on the left, by emphasizing the cost of bailing out financial institutions (and its contribution to sovereign debt build-up), target the wrong, and smaller, costs. There are two senses in which targeting the bail out funds is incorrect. First, the magnitude of those costs are small compared to the indirect costs. Second, if the direct costs had not been incurred, i.e., if the system continued to be organized around capitalist lines and the financial system had not been bailed out, the ensuing recession would have been deeper and hence the indirect costs, ultimately borne by the working and middle class people, even higher.
It is important to be clear that the workings of the financial sector under capitalism imposes enormous costs on the working and middle class people not only because it needs to be bailed out when the system hits the fan, as happened in 2008. The financial sector imposes much larger costs by the sheer magnitude of the externality of its actions on the working class, by the structural refusal to internalize the costs of its speculative activities, by increasing the financial fragility of the system when the bubble is inflating and ushering in the deep and prolonged recession that inevitably arrives when the bubble bursts. The direct cost of bailing out the financial system when the crisis breaks out is small compared to the indirect cost that comes from the externality of its casino-like activities. In fact, if the financial system had not been bailed out, the indirect costs would have been even higher because the recession would have almost certainly turned into a depression (of the magnitude that the world witnessed during the 1930s).
FIGURE 1: Time series plot of changes in the index of house prices in major US cities
Let us study the US economy and try to understand the difference between the direct and indirect costs of the financial crisis of 2008-09. Recall that the the housing bubble in the US started deflating from around late 2006 (Figure 1). The securitization process that had built itself on the shaky foundations of the housing bubble started unraveling within a year, and the financial crisis broke out in real earnest in 2008. The financial system went into panic, credit markets froze (as banks stopped lending to each other and to nonfinancial firms) and this sent shock-waves through the US government and the Federal Reserve circles. Monetary policy had already kicked in at least an year ago, with the Fed slashing short term interest rates and making liquidity available to the financial system (see Figure 2). But this was clearly not enough.
To unfreeze credit markets and deal with the growing panic, the US Treasury department adopted the Troubled Assets Relief Program (TARP) in early October 2008. The conceptualization of the TARP went through two rounds. In the first round, the US Treasury argued that the TARP should buy out the toxic assets (i.e., assets that drew its value from the housing market like mortgage backed securities, the collateraized debt obligations, etc., and were now more or less worthless) from financial institutions to restore confidence in the financial markets and prevent widespread bankruptcies. Very soon it became clear that this strategy would not work because it was impossible to ascertain the “true” value of the toxic assets. In other words, it was not clear at what price the assets should be bought for by the US Treasury. Hence, this strategy was abandoned and in the second round of iteration, TARP was conceptualized as a recapitalization program. This entailed lending money (or other liquid assets like Treasury bills) to financial institutions but in return taking ownership shares of those institutions.
The bail out of the financial institutions that we now talk about is precisely TARP as a method to recapitalize financial institutions, in particular banks, credit market institutions, the automobile industry and the insurance giant AIG, by injecting fresh capital into their balance sheets in lieu of ownership shares. How much money was involved? Initially, TARP was thought to involve $700 billion. But, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the maximum authorization for the TARP from $700 billion to $475 billion. The TARP ended on October 3, 2010 and had by then disbursed only a total of $411 billion. Of this, 77%, i.e., $318 billion, has already been recovered through repayments, dividends, interest and other income earnings of the US Treasury.
In fact, the part of TARP funds that was lent to banks has already been recovered with a profit: a total of $245 billion was invested in banks, and it has been recovered with a profit of about $20 billion. It is estimated that the overall cost of TARP, after all recoveries are taken into account, will amount to $70 billion, only about a tenth of the original amount of $700 billion. Hence, it is clear that the overall contribution of the TARP (the bailing-out of the financial system) to the deficit (and outstanding debt) of the US government is not large. The direct cost of the financial crisis, in terms of the funds required to bail out the financial system during the peak of the crisis, is not very large when compared to the indirect cost, to which we now turn.
The indirect cost arose because of the magnification of the effects of a downturn into a deep and prolonged recession, the magnification being caused by the fragility of the financial system. Unemployment rates went through the roof and continues to be at historically high levels despite the official end of the recession in the second quarter of 2009; the labour force participation rates have fallen due to discouraged unemployed workers dropping out of the labour force; the median duration of unemployment has increased to extremely high levels; the share of long term unemployed workers has grown to postwar highs (see Figure 3 and 4 for some details).
While it might be difficult to accurately quantify these losses, it seems clear that they are far higher than the $70 loss that the taxpayer will be saddled with due to the bail out of the financial sector. For instance, some studies suggest that about 7 million workers have been displaced from long-term employment during the Great Recession, only a subset of all workers who have been adversely hit by job losses. These 7 million workers will experience an income loss of about $774 billion over the next 25 years.
In a similar vein, the contribution of the direct investment from TARP to the growth of the fiscal deficit is small compared to the contribution due to the recession. Figure 5 plots the net outlays (i.e., net of interest payments of its debt) of the federal government, the receipts of the federal government and the difference between the two for the period 2006-2011. It can be seen from Figure 5 that the major jump in the deficit occurred between 2007 and 2009, a period during which it increased by about $1252 billion. This increase was the result of an increase in net outlays (i.e., expenditure) by about $788 billion and a fall in receipts of around $463 billion. Even assuming that the total $411 billion disbursed by the US Treasury for the TARP had occurred during that period (which it clearly did not), it is only about a third of the increase of the federal deficit during that period. Thus, close to (or more than) two-thirds of the increase in the federal government deficit was the result of non-bail out costs.
Looking at the plots of the outlays and receipts of the US federal government in Figure 5, we clearly see that the two series have diverged significantly since the start of the Great Recession. Even though net outlays (i.e., expenditures) have flattened out since 2010, receipts (i.e., tax revenues) have not picked up in any major way. Thus, the gap between the two continues to be big, in excess of $1000 billion every year. This huge gap is what lies behind the deficit and mounting debt of the US government, not the $70 billion that will be the net cost of the TARP. It is more or less certain that a similar account would be accurate for Europe also, i.e., the largest portion of the debt of Eurozone governments would be the result of indirect costs and not the direct cost of bailing out the financial sector during the crisis of 2008.
Conclusion
To conclude, let me summarize the argument. It is important to distinguish between the direct costs (i.e., bail out of the financial sector through the TARP) and indirect costs (rise in unemployment and the growth of the government debt due to the deep and prolonged recession) of the financial crisis and focus on the second rather than the first. This is because the second is much larger in magnitude than the first. In fact, it is not even clear that the first can be considered a cost because without bailing out the financial sector via recapitalization (or temporary and partial nationalization), the recession would certainly have been deeper, increasing the burden on the working people. In addition, concentrating on the second cost allows us to focus on the systemic aspect of the costs that the financial sector, in its speculative avatar, imposes on the working and middle class population of a country. This forces us to conceptualize an alternative that is likewise systemic in nature and goes beyond arguing against bail out of financial sector firms.
Deepankar Basu is an Assistant Professor in the Department of Economics, University of Massachusetts.
I never understood what the Occupy Movement aimed to achieve to begin with. Either it was too ambitious in aspiring to challenge corporate despotism or its goals were impossible to begin with. Not to mention it continues to be abstract and surreal as ever. I like to watch the protesters on TV who sometimes look innocent to me. The comparison with the Arab Spring by way of analogy is a completely wrong one. The comparison is not between apples and oranges since both are fruits but more like comparing a blue stocking with oxtail soup. Those who have traveled or at least have watched international movies with interest know for a fact that third world streets have a different character from those of the first world. Third world streets like third world life are filled with all too visible contradictions. The contradictions are disguised in the colonial economies of the west. The Occupy Movement and the Arab Spring are as distinct as Tahrir Square and Wall Street and the people who stand there.
That’s not the point however. What I fail to understand about the Occupy Movement is what exactly they intend to achieve with the “occupation”? If their aim is to make people aware of inequalities in society, the people already are in my view. If their aim is to challenge corporatism I don’t think this is going to happen by standing on a street. If the police eventually evacuated them, what do you want the police to do? To stand and watch the protesters as if it were a scene in the setting of a Hollywood film. Even if there were no police how long the standing around is expected to continue?
Seriously I’m suspicious of motives with which people arrive on a platform though I’m not cynical to the extent of doubting what the ones inspired with a sense of justice are capable of achieving. Definitely the Occupy Movement is not a prelude to a revolution of sorts. It is not a prelude either to political awakening because I’m certain that common people are conscious of the line of thought taken by the Occupy Movement. There are no lessons to be gained by its failure since not much was meant to be achieved by its success. I’m afraid very soon it’ll evacuate public memory as well and turn into one of those countless additions to youtube.com. Democracy in the western sense of the term with all its accompanying benefits in terms of being able to speak against authority without fear of getting killed or going to jail is the goal of Arab Spring. What is the goal of the Occupy Movement which is already happening within the parameters of an established democracy? The Haussmannized streets of carefully planned western cities will not allow for an armed insurrection of any kind. The European Revolutions of 1848 lead to a complete renovation of Paris and other cities making it possible for the state’s armed forces to brutally suppress any possibility of an uprising. If the Occupy Movement was peaceful and nonviolent it owed to lack of choice more than anything else. In principle I don’t think there could be peaceful movements. They are bound to be provocative in passive resistance as much as in active resistance.
If the goal of the movement is to fight inequalities it can demonstrate its true intentions in the politics of daily life. Western lifestyles which thrive on excess are anathema. The working classes irrespective of where they are from – ultimately they want those who speak of equality to work and live like the poor. Unless the protestors are one with those whom they claim to speak for, their movement will at best be cumulative acts of frustration put together. Only the discipline that comes with living, working and thinking like the masses can confront Wall Street who George Carlin refers to as the America’s “real owners.” Back in the 19th century when Jane Addams the prominent feminist and public philosopher went to meet Tolstoy, he not only called her an “absentee landlord” but asked her the question: “Do you think you will help the people more by adding yourself to the crowded city than you would by tilling your own soil?” This is not to disparage Jane Addams who is a unique woman and profound thinker in her own right but to say that the divorce between living like the poor and talking about them is more prominent with American forms of protest than perhaps with the European who might have a slightly more realistic view of life in relation to politics and change.
The fact that despite the growing poverty and unemployment no social revolt is possible in the United States is evident owing to the success of the propaganda machinery. The Steve Jobs phenomenon that occupied media attention says everything about the success of American propaganda. Suddenly Steve Jobs (who most people did not even hear of until he died) is the new hero for the young, right from Japan to India all the way to the Middle East (since he had a Syrian Sunni Muslim father who abandoned him by the way) and of course Europe and the United States. Steve Jobs like any other corporate warlord achieved his success through a combination of uncanny brilliance and ruthless elimination of competition. That’s how business empires are built – by eliminating the small in order to arrive at the big. Steve Jobs’ success is possible because he is a white guy and if the world knew that there is a Sunni Muslim Arab hiding beneath the whiteness it would have been harder for him to reach where he did.
For all their private suffering men like Jobs are contemptible to say the least. It amazes me therefore that so many people should want to be Steve Jobs without realizing that these are media manufactured heroes. These are not the blatantly impossible individual achievements that we see in the novels of Ayn Rand. These are facades that global capitalism needs to lead the educated masses to play their role in global exploitation of the poor. This “hero” making formula is used day in day out by American television and Hollywood while parroted by the rest of the world, with sportspeople or actors or business entrepreneurs in turns becoming heroes out of nowhere. All dropouts are not going to be Steve Jobs. Unfortunately most dropouts would like to believe that they could be so. That’s how propaganda works.
To date I attribute the success of American imperialism not to its military prowess which truly speaking is pretty pathetic given their poorly motivated cadres. The fact that they’ve been for so many years in Afghanistan and yet a barely armed but ruthless Taliban continues to gives them the shudder says everything about the so-called military power of the US. You need people to fight wars and not technology is a lesson that comes out rather well in the Afghanistan fiasco. Rather, it is to TV serials such as the globally popular “Friends” that America owes its real success. I’ve met people from various countries of the world who talk and think like those characters in the “Friends” sitcom. This is where we need to challenge American domination of the third world. At the same time that they are defeated economically and politically it is imperative that American hegemony be destroyed culturally as well to give alternate ways of expression a possibility to see the light of day.
The Occupy Movement if at all there is one in all sincerity should go to the small towns and take a walk through those parts of the cities that the poor inhabit. That’s where real America lives. Not in the universities and certainly not in the big cities. It is those small town Americans who are real harbingers of social and political change. The spaces that the media is not interested in – those are the spaces where real change is possible. To educate the poor and to selflessly work toward the uplift of the downtrodden classes – that’s the day the corporate world will begin to have sleepless nights.
Prakash Kona is an Associate Professor at the Department of English Literature, The English and Foreign Languages University (EFLU), Hyderabad.
Between 1948 and 1973, real GDP for the U.S. (measured in 2005 chained dollars) economy grew at a compound annual average rate of about 3:98 percent per annum; between 1973 and 2010, the corresponding growth rate was only 2:72 per cent per annum. While the 25 year period of high growth after the Second World War has, with some justification, earned the epithet of the “Golden Age” of capitalism, the period of relative stagnation since the mid-1970s has been characterized by heterodox economists as a neoliberal capitalist regime (Dum´enil and L´evy, 2004, 2011; Harvey, 2005; Kotz, 2009).
Three characteristics of neoliberal capitalism have attracted lot of scholarly attention. First is the marked trend towards growing financialization of the economy, by which is meant a growing weight of financial activities in the aggregate economy. Figure 1 presents some well-known evidence, for the period 1961-2010, in support of this claim. The top left panel plots the share of value added that is contributed by the FIRE (finance, insurance and real estate) sector in the value added by the total private sector of the U.S. economy: between 1961 and 2008, the contribution of the FIRE sector increased steadily from about 16 per cent to roughly 25 percent. The top right panel gives the share of financial sector profit in total domestic profit income in the U.S. economy, which shows a steady increase since the early 1970s (interrupted briefly in the early 1980s). It is only during the financial crisis in 2007-2008 that this share declined for a brief period; it is noteworthy that the share started a rapid ascent in 2009, and has recovered much of its loss since then. The two figures in the bottom panel provide evidence, for the period 1988-2009, of the growing size of the stock market: both stock market capitalization and total value traded, as a proportion of nominal GDP, has trended up since the late 1980s, providing clear evidence of the growth of financial relative to real activity.
The second notable characteristic of the neoliberal regime has been the veritable explosion of the flow of credit (and the build-up of the stock of debt) in the economy. One important dimension of the growth of credit has been the unprecedented increase in the credit flowing to (working class) households. Figure 2 presents evidence in support of both these claims by plotting the time series of outstanding debt (measured as total credit market liabilities) of three crucial sector of the U.S. economy: the nonfinancial business sector, the household sector, and financial business sector. While the business sectors display an increasing trend since the early 1960s (along with large fluctuations at business cycle frequencies), the household sector debt starts a secular rise since the early 1980s (with almost no business cycle fluctuations), and the financial business sector also displays a secular rise till the onset of the Great Recession. The last chart in Figure 2 plots the time series of the ratio of outstanding household debt and outstanding debt of the nonfinancial business sector. The ratio shows a clear upward trend since the mid-1970s, with household debt increasing from about 85 percent of nonfinancial business debt in the mid-1970s to about 140 percent just prior to the start of the Great Recession.
The third important characteristic of neoliberal capitalism has been stagnation of real wages for the bulk of the working class. In the face of rising productivity, this has entailed a massive redistribution of income away from working class households, leading to widening income and wealth inequality. Figure 3 presents evidence in support of this claim. The top panel plots an index of productivity (measured real output per hour) in the total nonfarm business sector of the U.S. economy. There is an increasing trend in productivity over time, with a marked acceleration in growth since the mid-1990s. This is in sharp contrast to the evolution of real wages of production and nonsupervisory workers plotted in the bottom panel, who comprise about 80 percent of the U.S. workforce. The hourly real wage has barely increased between the early 1970s and the late 2000s; the weekly real wage has in fact declined during this period.
The main question that this paper wishes to explore is the possible connections between the slowdown in economic growth on the one hand and the three characteristics of neoliberal capitalism on the other? Heterodox economists have been interested in this question for at least the last three decades, and the main contribution of this paper is to extend that literature by presenting a theoretical model to address this question. Building on and extending Foley (1982, 1986a), this paper develops a discrete-time Marxian circuit of capital model to analyze the link between financialization, nonproduction credit and economic growth. It is demonstrated that increasing financialization and the growth of household credit (a component of nonproduction credit) can reduce the growth rate of a capitalist economy. Hence, this paper offers a novel explanation, rooted in a Marxian circuit of capital macroeconomic analysis, for the slowdown of the U.S. economy during the neoliberal era.
Sanhati organized a panel in the Left Forum 2011 on “Left Movements in Contemporary India” (Pace University, New York City, March 18-20). Prominent Marxist activist from India Gautam Navlakha spoke on the Maoist movement. Along with him was Siddhartha Mitra, who spoke on the internally displaced in Khammam. The event was moderated by Deepankar Basu, who teaches economics at the University of Massachusetts, Amherst. Deepankar analyzed the contemporary political economy of India which gives a background for understanding the left movements in India.
The United States, like Germany, came late to the empire business. It did not aspire to informal Empire, but rather went to great lengths to undermine the existing empires to open them up for US business. Eric Louw tells the story very well.
In his account, the US was going to great lengths to undermine Britain’s Empire, especially India, even when those powers were allies during the Second World War. He attributes Chamberlain’s behavior in Munich to a justifiable fear that dependence on US support in fighting the Nazis posed a greater threat to the empire than the Nazis themselves. He shows that the US made good use of Gandhi in discrediting the British Empire.
Rather than going to the expense and trouble of maintaining a formal Empire, the US preferred finding compliant regimes in important venues. For example, the US could have kept Cuba as a colony, but it got what it needed much more cheaply by keeping friendly governments in place. In contrast, Puerto Rico, which was much smaller, would not pose much trouble as a territory controlled by the US.
The book does not seem to be intended as a radical critique. It does not discuss how this Pax (Pox) Americana proved to be a disaster, leaving people under the rule of Marcos, Mubarak, the Shah, and other such klepocrats and thugs I am anxiously waiting new chapter being written today in the streets of the Middle East.
Debt has had a crushing impact on the lives of those who must take student loans to finance their university education in the US. For tuition fees that have been so notoriously high in private universities now are rising in public universities so quickly they are far out-pacing inflation. Student loan debt in the US has been much higher than in Europe (with the exception of Sweden), though recent developments there would indicate that this gap may soon no longer exist (Usher).
We should also take into account the fraudulent way in which the loans have been administered by the banks and the vindictiveness with which those who have been unable to pay back have been pursued by collection agents. The most frustrating aspect of student loan debt being the legally toothless position the debtor is in, because government policy has relentlessly vested all the bargaining power in the hands of the creditors.
But however agonizing the situation of the indebted, the debt is growing. As of September 2010 total student loan debt amounted to $850 billion, having just surpassed credit card debt by about $20 billion for the first time. And it is rising at a catastrophic rate, e.g., by 25% in 2009 to meet the rising cost of tuition and other college fees. Even the Great Recession has not put an end to this financial explosion. On the contrary, while credit card debt has leveled off, student borrowing has continued to grow to cover the rising costs of living as well as the tuition fees, especially by unemployed workers who are “going back to school” to get a “better,” or at least some, job in the future.
Logic, therefore, makes the remission and abolition of student loan debt a necessary demand for the university student movement, especially in an era when the need for “an educated work-force” has become an institutional axiom. However, student loan debt abolition (for instance) was not a focus or prominent issue in the student mobilization that peaked last spring, especially in California. This constitutes an impasse for the movement, since meeting after meeting it has become clear that refusing the blackmail of the debt and calling for abolition of tuition fees are pivotal to every form of struggle on our campuses. Students holding three jobs to repay (or avoid) loans or taking as many credits they can fit in their schedules to reduce the length and cost of schooling, can neither be active in campus protests against budget cuts and the commercialization of education nor can they engage in self-education and the creation of “knowledge commons.”
In this contribution to the Edu-factory network’s discussion of debt I think beyond this impasse, asking why an organized debt abolition movement does not exist in the US and what needs to be done to assist its formation.
A first consideration is that the very conditions that would call for mass student protest against indebtedness have so far contributed to preempt this possibility. Even before the time to pay back is upon them, the debt has profound disciplining effect on students, taylorizing their studies and undermining the sociality / and politicization that has traditionally been one of the main benefits of college life (Read).
An even more important consideration is the fact that student loans are constructed so that students do not pay them back while they are students. Student loans are time bombs, constructed to detonate when the debtor is away from the campus and the collectivity college provides is left behind. Once we recognize this we can also see that there is a hard-fought struggle around the student loan debt throughout the US, but (a) it operates in a non-communal, micro-social, serial way, mainly through default; (b) it is a struggle that involves subjects other than students, taking off precisely once students cease to be students, for only after they leave the campus do the debt collectors show up at their doorsteps. In other words, while the visible student movement has not so far made debt abolition its goal another movement with that goal has been growing to a large extent underground. One former student after another is rejecting loan payments through default, but they are not publicly announcing it. “For fiscal year 2008 the default rate increased to 7.2 percent, compared with 6.7 percent in 2007 and 5.2 percent in 2006” after a long period of decline from 1990, when it hit a peak of 22.4%, and 2003, when it hit a trough of 4.5%. (NB: These somewhat misleading statistics are calculated according to “cohort” years. For example, the 2007 cohort default rate is the proportion of federal loan borrowers who began loan repayments between October 2006 and September 2007, and who had defaulted on their loans by the end of September 2008. Therefore, they dramatically underestimate the true default rate) (Lederman).
As typical of “invisible” movements, statistics fail us in drawing its proportions. We have no estimate, for instance, of how many have been driven to suicide or how many have been forced to go into exile due to their student debts. Nor do we have a measure of the social impact of the growing de-legitimation of the student debt machine. We can only speculate about the consequences of disclosures concerning the collusion between the university administrations (especially in the case of “for profit” institutions) and the banks, now commonly acknowledged in the media as well as in congressional investigations. For sure, blogs and web-groups are forming to share experiences and voice anger about student loan companies like the biggest one, the Student Loan Marketing Association (nicknamed “Sallie Mae”). On Google alone, there are about 9,000 entries under the rubric “Sallie Mae Sucks,” and another 9,000 under “Fuck Sallie Mae.” Browsing through the chat rooms, with their harrowing stories of wrecked lives and mounting frustration against the operations of Sallie Mae, makes it clear that the potential for a debt abolition movement is high. So far, however, most attempts that have been made to give an organizational form to this anger have largely demanded the application of consumer protection norms to the management of the debt.
A well-known example is StudentLoanJustice.org (SLJ.org) that systematically compiles testimonials on the subject, organized state-by-state, revealing in graphic detail the dread, disgust, and humiliation indebtedness generates. These testimonies also reveal why, despite their anger and despair, debtors hesitate to join in an open debt abolition movement. As the founder of SLJ.org, Alan Michael Collinge, points out that there are many obstacles to such course of action:
Even now, the barriers to inciting meaningful political action at the grassroots level are daunting, For one thing, facing large –often insurmountable– student debt is a highly personal matter. Many debtors are too embarrassed or humiliated even to tell their immediate family members and close friends about their situation, let alone join in a grassroots effort challenging the injustice of student lending laws.” (Collinge: 93)
The Kantian imperative that debts ought to be repaid cost what may is also weighing on the minds of the debtors despite the fact that the conditions imposed by student loans companies are often fraudulent and generally unfair. As mentioned, many of the developing student debtor organizations refuse to speak of “abolition.” What fuels their indignation is the arbitrariness and arrogance of the creditors’ management of the debt, not the debt itself. As the “content author” of the SallieMaeBeef.com web-site writes:
Allow me to make one thing clear. This site is not for people who chose not to make their payments. Choosing not to pay a debt is one’s own fault. Sallie Mae, like many companies, makes mistakes. I don’t fault them for that. What matters is how they resolve the problems. They did a terrible job resolving the mistakes they made with my account, and I found out that I was far from being the only person suffering because of THEIR mistakes. I also found that they allegedly prey on borrowers, trapping people into paying 2 to 3 times (sometimes significantly more) what they borrowed. There is simply no excuse for it. (www.SallieMaeBeef.com).
The very choice of the term “Beef” in the title of the organization suggests a complaint or a private dispute, not a demand or a public arraignment. SLJ.org, one of the most publicized student loan protest organizations, also rejects both individual or collective refusals to pay– witness what its founder writes of one of SLJ.org’s members, Robert, whose $35,000 debt became $155,000 through the ploys of the financial company which held his debt : “like most SLJ.org members, Robert absolutely agrees that he should pay what he owes, but he simply cannot deal with a debt of this magnitude” (Collinge: 19).
In other words, prominent anti-student loan debtors organizations re-affirm the principle of the student debt. They believe that the safeguards and regulatory oversight that apply to other consumer loans –mortgages, auto loans, and credit card charges–should be applied to student loans as well, which presently is not the case because of the repeated governmental actions taken to block this option.
*In 1998 Congress made the student loan “the only type of loan in US history non-dischargeable in bankruptcy” (Collinge: 14). This means that presently even after filing for bankruptcy and been reduced to the status of a pauper, a debtor is still deemed responsible for payment on student loans, cost what it may, perhaps even facing a charge of fraud and imprisonment, if some politicians have their ways.
*In 1998 all statutes of limitations for the collection of student loan debt were eliminated.
*Since the beginning of the federal student loan program in 1965, the freedom to change lenders in order to find better terms for a loan has been denied.
Once the commodity approach to education is accepted, the political strategy adopted becomes predictable. According to Collinge, “it is imperative that standard consumer protections be returned to student loans” (Collinge: 20). This means, for a start, that student loans should be made dischargeable in bankruptcy, should have a statute of limitations apply to them, and it should be possible to refinance them with other lenders. These are the demands put forward by SLJ.org since its formation in 2005, supported in varying degrees by a number of liberal politicians like Hillary Clinton, Ted Kennedy, Dick Durbin, and Congressmen George Miller and Danny Davis (see the Acknowledgements section of (Collinge: 151)).
Over the last five years this “consumer protections” strategy has produced significant legislative results addressing some of the grievances listed above. These include the passage of three major acts: The College Cost Reduction Act of 2007 (that halves the interest rate on federally subsidized loans and cuts lender subsidies and collection fees slightly), The Student Loan Sunshine Act of 2007 (that requires university officials to fully disclose any special arrangements between them and lending companies), and in 2010 the Student Aid and Fiscal Responsibility Act (SAFRA) (described below). For all these cautious legislative efforts however, SLJ.org and similar organizations have not achieved any of their major objectives. If we add the return to power, as Speaker of the House, of John Boehner, “by far the largest recipient of campaign contributions from student loan interests” (like Sallie Mae) and their most aggressive watchdog, we can conclude that the “consumer protection” approach to student debt has reached its limit. Indeed, when Boehner speaks of repealing the Health Care Bill (whose complete name is the “Health and Education Reconciliation Act”), he certainly alludes also to the education rider hidden in it, as much as to the parts of the bill dealing with health care.
What then are the prospects for the struggle against student loan indebtedness?
Clearly a premise for the rise of an openly organized student loan debt abolition movement is that the organized campus student movement and the student loan debtor movement off the campuses meet. Indeed, they need each other and will be in crisis as long as they remain separated. On the one side, the student movement activists cannot call for the liberation of education without confronting the debt peonage waiting for them and their fellows, and on the other, the student loan debtors movement must go beyond the limits of its stalemated “consumer protections” approach. The sense that a limit has been reached in this regard is indicated by the enormous interest generated in early 2009 by Robert Applebaum’s Keynesian proposal, “Cancel Student Loan Debt to Stimulate the Economy,” where he called for the government to forgive government student loans and pay back to banks and finance companies the outstanding private student loans (Applebaum).
The combination of an underground struggle involving millions of loan defaulters, intensified by mass unemployment and cuts in social spending, and the exodus of thousands of debtors fleeing the debt collectors hounding them, just as the campuses are becoming again places of mass, open agitation, has set the stage for a student loan debt abolition movement that Edu-factory network, for one, has been calling for.
It is the possibility of this encounter, I believe, that prompted Congress to pass SAFRA that was signed into law by President Obama on March 30, 2010. George Miller, the archetypal East San Francisco Bay liberal, surely had a sense of the political winds that were blowing when he introduced the bill into Congress in July 2009, just as the occupations at the UCAL campuses of Santa Cruz and Berkeley were being planned and a 32% tuition fee increase was being discussed by UCAL’s trustees. But he was certainly looking as well at the rates of defaulting loans and what they expressed in political terms, for I could not otherwise understand why its buffering attempt would take the form of a student loan debt reduction bill, when the student movement on the campuses was not openly calling for it.
SAFRA is full of diversionary and ameliorating moves in the struggle between debtors and creditors that attempt to cushion the impact of the Crisis on student debtors.
(i) it replaces the private institutions with the federal government as the creditor, by halting loan-guarantees to the banks –a major source of interest revenue for the latter at no risk to themselves. The billions of dollars that will be “saved” would be used to increase scholarships for low-income students (Pell grants);
(ii) it provides for a reduction of debt payments, from 15% to 10% of discretionary income;
(iii) it provides for more debtor-friendly “forgiveness” conditions (viz., the debt would be “forgiven” for those working in the “private” sector–if payments were made on time–in 20 years instead of the previous 25 years, and in 10 years for those in “public service,” including teaching and the military).
These more favorable conditions are meant to forestall an increase in default rates–for if the “crisis” continues and unemployment rates remain high, the student debt machine is bound to collapse and will force a “bail out” of student loan debtors similar to Applebaum’s “Cancel Student Loan Debt to Stimulate the Economy” proposal. They are also meant to prevent an escalation of student activism on the campuses and above all to keep the two movements divided. Whether SAFRA will succeed in doing this is not something we can foresee at this stage. We can, however, see some steps that appear necessary to build an abolition movement besides the obvious one of bringing both movements together in a national student loan abolition convention.
Building a student loan debt abolition movement also requires that we reframe the question of the debt itself. A first step must be a political house cleaning to dispel the smell of sanctity and rationality surrounding debt repayment regardless of the conditions in which it has been contracted and the ability of the debtor to do so. Most important, however, from the viewpoint of building a movement is to redefine student loans and debts as involving wage and work issues that go to the heart of the power relation between workers and capital. Student debt does not arise from the sphere of consumption (it is not like a credit card loan or even a mortgage). To treat student loans as consumer loans (i.e., deferred payment in exchange for immediate consumption of a desired commodity) is to misrepresent their content, making invisible their class dimension and the potential allies in the struggle against them.
Student debt is a work issue in at least three ways:
Schoolwork is work; it is the source of an enormous amount of new knowledge, wealth and social creativity presumably benefiting “society” but in reality providing a source of capital accumulation. Thus, paying for education is for students paying twice, with their work and with the money they provide.
A certificate, diploma, or degree of some sort is now being posed as indispensable condition for obtaining employment. Thus the decision to take on a debt cannot be treated as an individual choice similar to the choosing to buy a particular brand of soap. Paying for one’s education then is a toll imposed on workers in exchange for the possibility, not even the certainty, of employment. In this sense, it is a collective wage-cut.
Student debt is a work-discipline issue because it represents a way of mortgaging many workers’ future, deciding which jobs and wages they will seek, and their ability to resist exploitation and/or to fight for better conditions (Williams).
The overarching goal of capital with respect to student loan debt is to shift the costs of socially necessary education to the workers themselves at a time when a world market for cognitive labor-power is forming and a tremendous competition is already developing between workers. Employers’ refusal to massively invest in education in the US is not, in fact, a misreading of its class interests as theorists like Michael Hardt maintain (Hardt). It is the result of a clear-cut assessment of the new possibilities opened up by globalization, starting with the harvesting of educated brains as well as muscles from every part of the world. Capital’s strategic use of student loan debts to enforce a harsher work-discipline and force workers to take on more of the cost of their reproduction makes the struggle for debt abolition one that necessarily affects all workers. Accepting the student debt is accepting a class defeat, for it is certainly marks a major set back with respect to the 1970s when education was still largely financed by the state.
Certainly university teachers (like myself and many readers) and our unions and associations must take an active role in the abolition of student loan debt. For we are on the frontline, but in a compromised position, because we must “save the appearances” and pretend that for the university, cultural formation is of the essence, while we know that the student loan money is the source of much of the university’s budget and that the future debt peonage of many of our students “pays” our wages today (Federici). Just as, hopefully, most professors would object to be paid by a university whose revenue was the product of slave labor, so too must we object to having our students pay us at the cost of their post-graduation bondage.
Finally, debt in general is constructed to humiliate and isolate the debtor (Caffentzis). But demands for its abolition can be unifying, because it is everybody’s condition in the working class worldwide. Student loan debt, credit card debt, mortgage debt, medical debt: across the world, for decades now, every cut in people’s wages and entitlements has been made in the name of a “debt crisis” of one sort or another. Debt abolition, therefore, can be the ground of political re-composition among workers. If this is the path it takes with respect to student loan debt, the student movement in the US will experience a decisive turning point and opening out to many allies beyond the campus.
Bibliography
Applebaum, Robert (2009). Cancel Student Loan Debt to Stimulate the Economy. www.forgivestudentloandebt.com. Accessed December 10, 2010.
Caffentzis, George (2007). Workers Against Debt Slavery and Torture: An Ancient Tale with a Modern Moral. UE Newspaper (July).
Collinge, Alan Michael (2009). The Student Loan Scam: The Most Oppressive Debt in U.S. History–and How We Can Fight Back. Boston: Beacon Press.
Federici, Silvia (2010). Political Work with Women and as Women in the Present Conditions: Interview with Silvia Federici. Maya Gonzalez and Caitlin Manning. Reclamations. Issue 3 (December). www.reclamations.org. Accessed on Dec. 10, 2010
Hardt, Michael (2010). US education and the crisis. Liberation (Dec. 2).
Lederman, Doug (2009). Economy Sinks, Default Rates Rise. Inside Higher Education. September 15. www.insidehigheredu.com/news. Accessed December 10, 2010.
Read, Jason (2009). University Experience: Neoliberalism Against the Commons. In Towards a Global Autonomous University: Cognitive Labor, The Production of Knowledge, and Exodus from the Education Factory. Edited by the Edu-factory Collective. New York: Autonomedia.
Usher, A. (2005). Global Debt Patterns: An International Comparison of Student Loan Burdens and Repayment Conditions. Toronto, ON: Educational Policy Institute.
Williams, Jeffrey (2009). The Pedagogy of Debt. In Towards a Global Autonomous University: Cognitive Labor, The Production of Knowledge, and Exodus from the Education Factory. Edited by the Edu-factory Collective. New York: Autonomedia.
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.
