Tuesday, September 16, 2008

The sound of raining bullshit


Hank Paulson tells us that the system is sound. The Daily Telegraph is sure that the chimera known as the "free market" is still "our best hope". Anatole Kaletsky of The Times believes that the fundamentals are sound and that the worst of the crisis is to be spent outside the 'real economy' in the surreal financial sector. And, as a special treat for British workers, the governor of the Bank of England says that his Monetary Policy Committee is now "firmer in its belief that a period of muted economic growth is necessary to dampen pressures on wages and prices and return inflation to target." Yes, you read that correctly! They're keeping interest rates high to beat the shit out of wages and depress the economy, right in the middle of a global downturn, right when deflation is the vogue threat. Ten'll get you five, this is driving a further wedge right into the heart of a government that is already collapsing before our eyes. A few days ago, the good governor directly intervened in policymaking by warning the government not to raise spending on public services for fear that this would reduce the credibility of the government's fiscal rules on borrowing in the eyes of investors. Well, isn't he sweet?

First thing. I hate to remind everyone, but this crisis is rooted in the fundamentals. Take an example. One reason why hedge funds aren't hurting so much today is because the credit default swaps on the Lehman Brothers securities brokers soared in value over the last few days before it declared bankruptcy. Why is that? A credit default swap (CDS) is, essentially, insurance taken out on debt you are owed if you think the borrower might default. You then might insure the CDS by taking out a further, derivative, CDS on that, if you think the institution providing the first CDS might itself default. The CDS will end up on the market like everything else, being bought and sold, generally by hedge funds because of their more secure position. The value of the CDS will increase as the company on whom the original protection was taken out becomes more and more likely to default on its debts. So, those who retained investments in Lehman Brothers despite the warning signs (such as George Soros), got burned, but most hedge funds, adhering to catholic investment doctrine, actually withdrew before the climax anyway, and probably even made something from Lehman's collapse. So far, it just looks like the conventional story: the rich man's betting club collapses on itself, with some winners and losers, and the challenge is to prevent the whole thing from "spilling over into the real economy".

But, of course, what caused Lehman Brothers to default on its debts was its exposure to the subprime market, and this is where we get down to those fundamentals. Lehman Brothers brokered in securities - to a large extent, mortgage-backed securities (MBS). A single MBS might consist of thousands of mortgages bundled together, which can be bought and sold on the market at extraordinary profit for as long as there is a boom. The subprime MBS market was always risky, but when the MBS market was worth trillions, having doubled between 2001 and 2003, it looked much more attractive than it does now. And at any rate, in order to generate more value out of relatively sluggish economic growth, many companies turned to the riskier investments because of the promise of greater rewards. But what caused the massively inflated value of the MBS market in the first place also contributed to the stock market bubbles we have seen before and after the 2000-1 recession. Households with incomes depressed on account of the clobbering of labour unions and of neoliberal policies designed to repress wages, had to rely on relatively inexpensive credit to meet their needs. As house prices went up, they could use their homes as collateral for increasing indebtedness. Without the staggering amount of private debt built up by US households through the 1990s and 2000s, the system would have collapsed much earlier, because there would not have been sufficient demand to sustain it. But that debt also provided the basis for a stupendous stock market bubble, and with it a massively inflated MBS market of the kind that tempted poor old Lehman Brothers to sin. The story of the collapse of Lehman Brothers is a story of weak fundamentals. The weaknesses of the 'real economy', far from originating in the financial sector, were conducted into the financial sector and then amplified.

Second thing. The news can't talk sensibly about this, because they can't talk about class. They implicitly favour the capitalist purview in their focus, but they cannot directly address the issues involved. That is why no one relying on the papers and the television for enlightenment is going to have a clue what is going on. You receive one staccato bulletin after another - it's Black Monday in New York, Oh Shit Tuesday in Tokyo, Nuclear Dawn Wednesday in Moscow... You get human interest, dramatic footae, soft focus interviews, political soundbites, wonkery, etc., and if you put it all together, you still walk away befuddled. In fact, the best explanation you are likely to end up with is that some banks made some horribly bad bets on mortgages for poor people (and, therefore, what? - poor people shouldn't have mortgages?). To talk realistically about this crisis is to talk about what has happened to wages and profits for thirty years, the contours of class struggle and the associated political projects (socialism, social democracy, neoliberalism, etc), as well as the basic mechanism of exploitation behind that. To talk realistically about the issues raised by this crisis is also to talk about class, and particularly the impact on working class people. You can't understand why those who gain most from the system suffer least when it fails, while those who gain least suffer most unless you at least mention the fact that there is such a thing as highly concentrated class power in the society. You certainly can't understand the government and Bank of England's decision to restrict consumption in response to the crisis without seeing a preemptive strike against the bargaining power of labour (this obsession with wage pressures). This conflict of interests, this class struggle, is expressed a little bit more openly in the German media because the unions there are building up for a big fight to seriously enhance take-home pay and have the resources to combat the dominant narrative about the threat of inflation. One could go on, but at every point where an issue like this comes up, the news media tends to become curiously cryptic.

But just because the media doesn't recognise the very distinct working class interests that arise at this juncture doesn't mean that they aren't going to make themselves felt in a very serious way. The co-ordinated pay revolt planned by unions, provided it is pushed for in a big way by union members, could potentially be massive. And this is not just an 'economic' struggle. This menacing climacteric, with a global economic downturn dovetailing with intensified inter-imperial competition and looming climate chaos, raises all sorts of political questions. In the short term, it demands a clear formulation of what kind of programme we would actually need from the government in contrast to what we're actually getting; in the medium-term, it raises the question of how we are to express our interests politically when the official party of organised labour is busily waging the class war on behalf of capital; and, in the long term, it adds grave importt to the much more fundamental questions raised by the anticapitalist movement. Can we continue to live with this system, given its obvious perils and injustices, or do we have the means to build an alternative kind of society? But who would ask such a question when the system is sound and the free market remains the one and best hope?