US$700 billion dollars is twice the combined debt of the world’s poorest 49 countries.

By Tony Iltis

October 11, 2008 -- “Meltdown” is a word that one hears a lot on the news these days.

Despite the US$700 billion government bailout of banks in the US, similar (albeit smaller) bailouts in Europe, and various forms of state intervention in the finance industry on both sides of the Atlantic, sharemarkets worldwide are in free fall. Comparisons with the Great Depression of the 1930s are common. Homelessness and unemployment are rising and are set to increase dramatically.

Meanwhile, more quietly but even more relentlessly, another meltdown is occurring: that of the polar icecaps. According to the Western world’s establishment politicians and corporate media, the way to avert catastrophic climate change lies in setting up elaborate emissions trading schemes and carbon markets: that is, relying on precisely the mechanisms that have created the economic meltdown!

Superficially, the crisis has created a dramatic reversal in the orthodoxy of Western economic policy. After decades of preaching the virtues of deregulation of financial markets, privatisation of public assets and the superiority of the “hidden hand of the market” over government involvement in the economy, Western governments are now spending gargantuan amounts of public money intervening in the economy.

Following the US government’s nationalisation of the mortgage institutions Freddie Mac and Fannie Mae and insurance giant AIG, and its unpopular $700 billion bailout of the banks, British PM Gordon Brown announced a £50 billion (US$89 billion) bailout for British banks, including partial nationalisations, with a further £450 billion being earmarked should the banks need more.

Likewise in Germany, France, Belgium, the Netherlands, Ireland and Luxembourg, massive state interventions and partial nationalisations are on the agenda.

In Iceland, where a globally oriented finance industry dwarfs domestic economic activity, the three largest banks have been taken over by a government desperately trying to stop the country becoming bankrupt. Iceland’s stock exchange has closed.

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There has also been mutual recrimination between the governments of Iceland and Britain. The British government has condemned Iceland for not guaranteeing the deposits of British individuals and institutions in Iceland’s banks, including about £2 billion from British local councils. Iceland, for its part, has charged that the British seizure of Icelandic bank assets (using anti-terrorism laws!) has contributed to the crisis.

Iceland is currently negotiating a 4 billion euro bailout from Russia.

‘Hidden hand’ still reigns

However, the failure of this expensive government intervention to halt the global collapse of sharemarkets — and remove the spectre of a massive downturn in production, fuelling unemployment and poverty — reflects that the old orthodoxy has not, in fact, been overturned. The thrust of the “emergency” economic interventions has been to pump money into the finance industry in the hope that this will encourage the banks to restart the flow of credit to productive industry. The “hidden hand of the market” still reigns.

At the heart of the crisis is speculation on debt. With US wages remaining static since 1973, while the cost of living has risen considerably, consumer spending (and therefore corporate profits) have been maintained by a credit-fuelled economy.

Furthermore, deregulated financial markets created a huge industry based on repackaging and reselling debts, creating incomprehensible investment options (“collateralised debt obligations”, “credit default swaps”). In the US these “products” grew to a value of US$64 trillion — five times the annual output of the US economy.

There are nationalisations and there are nationalisations. Under the various bailouts, the assets that governments are taking over are the so-called “toxic assets” — precisely those ecomomic “products” that have proved to be worthless.

A more rational response would be to simply put the banks under state ownership.

For their former owners, who have made countless billions, compensation should not even be considered — criminal charges would be more appropriate.

What $700 billion could achieve

It is worth considering what the $700 billion spent on bailing out the US banks could have been spent on. Less than $200 billion would end poverty in the US.

The widespread hostility of the US working class to the bailout reflects that while money can be found to protect billionaires’ profits from “toxic assets”, no assistance has been forthcoming for those who’ve lost their homes through “toxic” variable interest rate mortgages.

Earlier this year, US President George Bush vetoed legislation to give medical coverage to 9 million poor children in the US, on the grounds that such expenditure, less than $6 billion, was “useless”!

Seven hundred billion dollars is twice the combined debt of the world’s poorest 49 countries. Underpinning world poverty is the fact for every dollar spent on Western aid to the Third World, $25 are paid back as debt servicing. Currently, global inequality condemns 11 million children to death each year due to lack of healthcare, sanitation, food and water. Ten billion dollars — a 70th of the bailout — would be sufficient to save these lives.

Six billion dollars would provide basic education for the whole world, while $9 billion would provide water and sanitation, $12 billion reproductive health for all women and $13 billion adequate nutrition and healthcare.

Along with increasing inequality within nations, the doctrine of neoliberalism (reliance the “hidden hand of the market”) has more than doubled the wealth gap between rich and poor countries.

Much trumpeted debt relief and aid programs (such as the “Millenium Development Goals”) make any assistance dependent on poor countries following International Monetary Fund (IMF) diktats to privatise and deregulate their economies for the benefit of Western corporations.

Privatising and commodifying basic services such as water and sanitation, and the removal of food and fuel subsidies, literally means misery and death for millions.

The IMF’s offer of similar “assistance” to Western countries in response to the current financial crisis should be treated with trepidation by workers and poor people in these countries.

War spending

While the $700 billion bailout dwarfs Western social expenditure and international development aid, it is itself dwarfed by spending on the military. Since the 2003 invasion of Iraq, the US has spent $3 trillion on the war alone. The $1.339 trillion annual global military expenditure is, as much as the bailouts, assistance to the corporate elite.

Not only do corporations make direct profits through the arms trade, and increasingly privatised military infrastructure, military force ensures Western corporations’ access to the world’s resources and the labour of its people.

With excuses for the Iraq war (weapons of mass destruction and involvement in the 9/11 attacks) long discredited, it is difficult to disguise that the real reason for the invasion was to corner the fossil fuel market. The centrality of fossil fuels to the Western-imposed global economic system raises the question of the other meltdown: global warming.

Both crises have the same source: the profit-driven capitalist economy. Even when the economy was apparently booming, it was incongruous that finding solutions to the climate crisis was tasked to economists, such as Sir Nicholas Stern in Britain and Professor Ross Garnaut in Australia.

It should now be considered insane for the market to solve the problem of climate change when it has proved spectacularly incapable of solving the problems of the market! It is necessary to redefine what is meant by “the economy”.

Mainstream economists have claimed that speculators trading incomprehensible financial products based on debt are creating wealth. The financial meltdown has proved these claims fraudulent.

Wealth is actually created by people working to make goods and services. The corporate rulers of the world take this wealth rather than create it.

With a large increase in unemployment looming due to the financial collapse it is worth remembering that the solutions needed to avert catastrophic climate change are labour intensive: for example, wholesale conversion of entire economies to renewable energy, sustainable agriculture and public transport instead of private car-based transport.

More than 150 years ago Karl Marx and Frederick Engels, explaining that the working class, as the creators of wealth, could, if they took control of society, create a world without poverty, inequality or oppression, said, “We have a world to win”.

Today it could be added that we also have a world to lose.

[Tony Iltis is a member of the Democratic Socialist Perspective, a Marxist organisation affiliated to the Socialist Alliance of Australia. This article first appeared in Green Left Weekly.]