It is an extremely uncomfortable time for the engineers and believers of free market ideology. The imaginary structure of flawless efficiency and everlasting qualities of the system, carefully built by them over centuries, more so after the collapse of ‘Socialism’ in USSR, has come down crashing bit by bit in front of their very eyes. ‘Wall Street’, the Mecca of global finance capitalism, seems to be churning out tearful never-ending stories of death and destruction of pristine infallible institutions – who, till recent past, were considered as ‘Trojan Horse’ to pulverize whatever ‘useless’ remnants of Socialist ideas were there in the world. Alas! What a worst of time it is!
STRUCTURE OF US CAPITALISM: 1945 to 1980
The story of endless greed and lust for money on the part of finance capitalists like fund managers, CEOs is only a part of the whole gamut of story; a story that has its root in the metamorphosis in the nature of American Capitalism over the period of last sixty years. This entire period can be divided into two roughly equal halves of thirty year each. In the first thirty years, the US was the undisputed global capitalist leader in manufacturing industry based on his industrial might. This was so even when the European manufacturing industries were gaining strength after the ravage of Second World War via “Marshall Plan” of 1947. This was preceded by Bretton Woods Agreement of 1944 that established IMF and World Bank – the twin vehicles of new international monetary system. The consolidation of IMF and World Bank was made possible in a milieu in which the new system of American production was exported through out the whole of capitalist world in an environ of post war boom that ushered in huge expansion of rate of profit for the capitalists. This expansion continued up to the end of 1960s, after which such rate of profit began to decline giving rise to new phase of crisis of global capitalism especially its US variety. This was followed by crash landing of Bretton Woods system of fixed exchange rate of $35 per ounce of gold in 1971-73 due to huge pressure of ‘petro-dollar’ seeking redemption/ conversion into gold which put unbearable pressure for the US to sustain fixed exchange rate regime. This gave birth to floating exchange rate regime again. The US economy never fully recovered from this shock despite its central role in global capitalist economy even throughout 1970s, as the competing system of global socialist economy led by USSR was still showing dynamism. This was the period when many newly liberated third world countries like India was following a path of self-reliant economy based on nationalization of important segments of economy that gave birth to Public Sector Behemoths viz. Nationalised Banks, Insurance, Coal, Steel, Energy Sector, Railways adding fuel to economic engine of growth in India and elsewhere. Hence, these economies were, to a significant extent, outside the sphere of influence of global capitalism led by the US that compounded their problems of market and hence production and stagnation.
BEGINNING OF TRANSMUTATION IN 1980: FULL BLOWN FROM 1990 ONWARDS
This crisis for US economy continued upto 1980s (though there was slight recovery in rate of profit from 1982 onwards) that saw the huge “savings and loan crisis” towards the end of 1980s necessitating closure of more than 1,000 savings and loans institutions wiping out $160 billion in the process. This prompted John Kenneth Galbraith, the famous US economist (who was also once the American Ambassador in India), to pronounce that this signified the “largest and costliest venture in public misfeasance, malfeasance and larceny”. One wonders, had he been alive, what would have been the comments of Galbraith seeing the latest American swindling and bail out costing more than $1 trillion of public money so far! The decade of 1980s ended with stock market collapse in the US and elsewhere in October 1987 and setting of recession by 1990.
The decade of 1990s saw a unique strengthening of transmutation in the character US capitalism. This was as much aided by the collapse of Socialism in Eastern Europe and in USSR as also by the need to shift the base of US manufacturing industries to China, India, East and South East Asia to tap the vast cheap pool of global labour force to arrest the pattern of declining rate of profit for the capitalists. In a harmonious lock step with this trend, the US economy veered more towards financialisation duly aided by technological and communication revolution, a trend visible since the last part of nineteenth and early part of twentieth century. But at that time, finance capital, which was born by the fusion of bank capital and industrial capital, was at its nascent stage and it had a country-specific character viz. American finance capital, British finance capital, Dutch finance capital etc. The finance capital of late twentieth and early twenty first century transformed into truly international finance capital, though under total domination of the US capitalists backed up by his titanic military might. This transformation, being the fountainhead of change of motion to a new global order of trampling of democratic values everywhere under the leadership of US imperialism, however, sits at the root of current global crisis of finance capital.
In this phase, the finance capitalists, already inebriated with the drink of huge accumulation of capital by digesting the surplus value through boundless exploitation of labour, devised a novel means to bypass the hazards of material production. Marx had aptly summarized this new tendency of capitalism, capturing it at its nascent stage, through his inimitable intellectual prowess. In Volume II of Capital, Marx said that for the possessor of money capital (banks and financial institutions), “ the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” (Ref: "Circuit of money capital", sub title: "The Circuit as a whole", Chapter I, p. 58, “The Capital”, Progress Publications, original publication: 1956, reprinted edition: 1986.). What was described as “periodic” by Marx has now become the permanent mechanism of accumulation and reproduction of capital.
The following data from US economy capture the above trend quite well. In 1982, profits of financial companies constituted barely 5% of total corporate profits after tax in the US. The same for financial companies in 2007 became 41%, even though their share of corporate value added rose only from 8% to 16%. Simultaneously, the leveraging process described below assumed gigantic proportion on a global scale. In 1980, the global financial stock was roughly equal to world GDP. By 1993, it was double the size of the latter. However, by 2005, it had risen to 316% of global GDP. The population of the beastly financial products has grown to gigantic levels that are beyond the competence of any system or force to deal with. The sheer collective size of these modern financial instruments is terrifying. According to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to $516 trillions in 2007 that is over 500 per cent in five years! The total derivatives are more than ten times the global GDP [$50 trillion]; some seven times the world’s estimated real estate value [$75 trillion]; more than five times the world’s stock values [$100 trillion]; more than 33 times the US GDP [$15 trillion] or the US money supply [$15 trillion]; 172 times the US federal budget [$3 trillion] — it can go on. The size of this ‘global virtual economy’ is indeed chilling. Worse, it unpredictably targets, yet accurately eliminates, the distant and the unwary as the Collateralized Debt Obligations (CDOs) did. It is so fragile that it can expose (and indeed exposed through US Sub-prime crisis) the fragility of the global financial system. This has spawned huge dangers for the US and for the rest of the world, pushing the former into the quagmire of recession. IMF estimates in early April 2008 said that the total loss from US sub-prime related assets calculated till then was about $1 trillion. This is further ballooning manifold now once other speculative instruments like “Credit Default Swaps (CDS)”, which is $62 trillion strong, and other sub-prime loans advanced in 2004-05 and afterwards started crashing.
BUBBLE: HOW WAS IT FORMED?
This new phase of manifestation of convulsive crisis of global finance capital began in the last couple of years with the bursting of ‘real estate/housing bubble’ through explosion of sub-prime crisis. Sub-prime lending was a novel vehicle for skillful swindling invented by finance capitalists through endless credit expansion mechanism popularly known as ‘leveraging’. In leveraging, a Bank’s loan and investment books are much, much bigger than its capital base. (For example, the typical leveraging ratio for commercial banks is in the order of 1:10, while for investment banks, it is to the tune of 1:30; meaning against a capital of, say, Rs.1, a Bank is advancing/investing Rs.10, while against the same amount of capital of Rs.1, an investment bank is advancing/investing Rs.30). In sub-prime lending, clients with doubtful repaying capacity are brought under the whole programme of expansion of bank credit umbrella, mostly for housing loans, through a unique mechanism called ‘Securitisation’, structured on ‘originate and distribute’ model. Under such a model, mortgage providing financial institutions make funds available for purchase of real estates like home/apartment and then they immediately sell these loans/mortgages off to other financial companies, collecting a fee for having originated the mortgage. Then the next set of financial institutions, for example, investment banks like Lehman Brothers (which collapsed recently), would arrange the mortgage debts to be aggregated, sliced and diced into various packages of marketable Bonds to be sold off to other institutions. This is called ‘securitisation’. However, all these are done against the loan pool originally created. Often these second sets of institutions add cash to make the loan pool more attractive, so that the Bonds can be sold at a higher price. If we suppose the original mortgage loan was earning an interest of, say, 5%, these Bonds or securities would earn, say, 3%, they give a spread or income of clear 2% to the investment banks like Lehman. Naturally, by selling the original loans and then structured Bonds, both first and second set of institutions raise money and free capital to be invested once again in this and other fashion. However, this seemingly endless jugglery continues as long as the original debtor continues to service his debt. The moment this original debtor defaults because of several reasons like income deflation, retrenchment, economic recession etc. the whole wheel begins to clog affecting gradually all other branches of finance and economy. The collapse of Bear Stearns, the giant American investment bank, in early part of this year was the beginning of this endless saga of annihilation. This was followed by the collapse of other ‘jewels’ of global finance on both sides of the Atlantic. The list includes Northern Rock of Britain, Freddie Mac, Fannie Mae (two Government Sponsored Institutions i.e. GSI), now famous 158 year old Lehman Brothers, Merrill Lynch, Washington Mutual, and finally American International Group (AIG), the biggest insurance company of the world, all belonging to USA and its famous Wall Street. This painful effect, when juxtaposed against the fact dished out in “The Financial Times” that the compensation of major executives of seven largest US banks totaled $95 billion over the past three years, even when these banks recorded a loss of $500 billion, gives the true nature of appropriation of surplus value of labour in capitalist economy.
THE COLLAPSE AND REMEDY: IS THERE A WAY OUT?
That the gigantic outgrowth of financialisation of the US and global capitalist economy was to crash land today or tomorrow was clearly visible to many, save and except those daydreamers who continued to keep unshakable faith in the dynamism of free market or on prospect of reformation of capitalism to a more humane system. Today the situation is such that inspite of announcements and operationalisation of a possible combined, biggest-ever rescue package in American history of more than 8 trillion dollar so far of tax-payers’ money to bail out troubled American financial firms leading to their virtual nationalisation, the US economy and its deeply troubled financial sector continue to elude confidence. The situation is same for other advanced capitalist economies as well as all of them continue to suffer from serious contagion effect of global financial crisis. As a result, the crisis is leading to unprecedented job losses in all the capitalist countries with the US expected to axe more than 2 million jobs in 2008 alone followed by similar losses in Great Britain, France, Germany, Australia, Canada and a host of other developing countries. ILO estimated that by the end of 2009, the total job losses related to the crisis would be around 20 million across the globe. It is now acknowledged that USA, European economies and Japan are already in recession. The workers and the ordinary people have enormously suffered due to this financial meltdown. The pension funds worth 2 trillion dollars in the US alone have disappeared. More than 16 trillion dollars have been lost in the stock markets. In the recent G-20 summit meeting held at Washington, the world leaders led by Mr. Bush and his G-7 allies, including his associates like Dr. Manmohan Singh from world’s largest democracy, could not exhibit any sign of confidence to come out of this crisis in the near future, save and except showing their badly shaken ritualistic faith in free market capitalism to dupe the world public opinion.
But, things are really not favouring these cronies of capitalism. Worldwide, every day new data and evidence of their complicity with this unprecedented squander of peoples’ money by the few finance capitalists are coming to light. Interestingly, famous writer, Balzac’s maxim that ‘behind every great fortune lies a great crime’ is proving to be a fitting epitaph of global finance capital. A recent survey by the “Wall Street Journal”, the mouthpiece of global finance capital, reveals that CEOs of major US financial and real estate firms converted tens of millions of dollars of overvalued stock into cash prior to the eruption of the current financial crisis, even as the corporations run by them were approaching ruin. Of the 120 publicly traded firms the Journal analyzed, CEOs cashed out a total of more than $21 billion from 2003 to 2007. The list is a who’s who ranging from Richard Fuld, CEO of Lehman Brothers (amassing $185 million including salaries and bonuses), James Cayne of Bear Stearns (collecting more than $163.2 million), to Maurice Greenberg of AIG (collecting $132.8 million between 2003 to 2005 alone) to name a few. In any case, these CEOs, who, with full complicity of ruling class, have led their companies and global capitalism as a whole onto the brink of disaster with their outright criminality, did not do these out of their own greed alone. This pathetic state of affairs reflect the narrowing horizon and historical decline of global finance capitalism, in which, the accumulation of fabulous wealth long ago lost whatever connection it had to the creation of real value.
So, if capitalism has to find an answer to current problems within its own boundaries, the root of this cancerous growth of finance capital, which has now spread like wildfire to real sectors as well, is to be arrested by switching over to a set of policy prescriptions suggested by John Maynard Keynes. This includes more public spending by the govt. to create necessary demand in the economy, controlling the flow of speculative finance in and out of country (in the language of Keynes, “Finance has to be necessarily national”), putting necessary purchasing power into the hands of vulnerable sections of the society like working class and peasantry by strengthening ‘right to collective bargaining’ (according to the latest “Global Wage Report, 2008-09”, ILO) so that the workers and peasants increase their share in national wealth, thereby generate effective demand in the economy, more stress on land reforms and small-scale peasant agriculture with necessary support from the govt. in form of cheap credit, subsidized inputs, assured market etc. so that the peasants are not ruined as they are today pushing them to commit suicides in lakhs round the globe. But even this modicum of change to save human society is encountering serious obstacles from votaries of free market, as they feel that this may impair their privileged position and right to appropriate surplus value from boundless exploitation of labour. So, the common people led by the working class have to wage a relentless struggle even to save the capitalist democracy from a ruinous course. But while carrying out this immediate task, we will have to constantly educate ourselves and the mass about the futility of this path – which can at best act as a ‘temporary pain killer’ rather than holding any promise for ‘curing the disease’. For this, Socialism, a system where men do not prosper by exploiting other men, is the ultimate cure.
GLOBAL CRISIS AND INDIA
Expectedly, the crisis has not spared even the Indian financial sector, as banks like ICICI, SBI, HDFC, PNB and others have likely exposure of more than $450 million to these tainted US institutions as per reliable estimate. Moreover, the failed institutions like Lehman Brothers have reportedly significant exposure on Indian real estate sector. Surprisingly, at a time when the global experience shows to adopt a more cautionary approach to foreign investments, the Central Govt. is reportedly considering relaxing FDI norms in several sensitive sectors including in Insurance, Banking, Retail Trade and the three-year mandatory lock-in period for repatriation of FDI of foreign investment banks on a case-by-case basis so that these failed banks can clear up their dues elsewhere at the cost of Indian economy. The govt. is also actively considering to hike FDI norms in insurance from 26% to 49%, bring in amendments to Banking Regulation Act to confer proportionate voting rights to foreign investors in Indian private sector banks, likely to be followed by similar such amendments for public sector banks, trying to pass the PFRDA bill to privatize and allow hard earned, life-long savings of the employees for investments in stock market etc. So, Indian govt. is stubbornly refusing to shun the problematic path of neo-liberalism when globally the efficacy of this path is being increasingly questioned. Though, after sustained pressures exerted by the Left and democratic forces, the govt. has recently announced a package of Rs. 30,500 crore for revival of Indian economy, the total allocated amount is roughly equal to only 0.5% of the GDP – grossly inadequate to meet the extant challenges. There are also no provisions to confer adequate amount of money to the troubled Indian agriculture sector on which more than 70% of Indian population depend. The global crisis has, by now, seriously started to affect Indian economy. For the first time in last 15 years, the country’s Index of Industrial Production (IIP) has slipped into negative growth territory with a 0.4% year-on-year decline in October 2008 with 10 out of 17 industries showing negative growth rates. However, it appears that the Indian financial sector is mostly saved because of glorious resistance put up by the patriotic forces like the Left and democratic forces and TUs putting up road blocks to unbridled opening up of Indian financial sector. The critiques of any movement of the working people should bear in mind that the Indian working class, who organized no less than 12 National Strikes from 29 September 1991 to 20 August 2008, have been executing their supreme national duty in insulating our national economy from the predatory onslaught of global finance capital. It is also heartening to note the tremendous response to the ongoing joint campaign of the bank, insurance, state and central govt. employees against further relaxation to open up Indian economy to foreign capital.
It is encouraging that a gradual yet steady realization is dawning on the working people about the true nature of capitalist accumulation. There is no doubt that the entire framework of neo-liberal economy now encounters its worst crisis of credibility since its birth. Unfortunately, it is happening at a time when the international socialist camp is weak and fragmented. However, this is no solace for finance capital, as the working class round the globe, getting emboldened with renewed ideological vindication of the philosophy of Marxism, have been challenging neo-liberal economy and its cradle, imperialism exuding with new found confidence. This challenge is bearing fruitful results in country after country in Latin America, Asia, Africa and hopefully it can now have its ripple effect in Europe and America too. It is time that the trade union and democratic movement inject proper political consciousness in working people to break the yoke of capitalist exploitation to bring in a new crimson dawn of Socialism from the womb of today’s ruin and squalor left over by finance capital.
The author is General Council Member, BEFI.