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ISR Issue 62, NovemberDecember 2008 Capitalism’s worst crisis since the 1930s



By JOEL GEIER The United States and the world are now in the opening stages of the worst economic crisis since the depression of the 1930s. This crisis represents the greatest failure of the free market since the Second World War. For some time now, economists have argued that the market is self-regulating and self-correcting; this fantasy has been destroyed. The crisis has led to a run on the international banking system, a stock market crash, and has opened the door to what will be the longest and deepest recession of the post–Second World War period. This is not a typical cyclical crisis, which capitalism generally has every decade or so, but a systemic crisis, a crisis of the financial system, which provides money for the circulation of commodities, of trade, and of investment. There is no alternative, we were told, to the free market. What we are now told is that there is no alternative to government intervention and regulation. As Karl Marx pointed out many years ago, capitalist crises do not come about because of a shortage of goods or crop failures, but because of overproduction. This overproduction is not overproduction of things that are needed by people, but overproduction in terms of what can be sold profitably on the market. If products cannot be sold profitably, whether they are physical commodities or debt securities, profits cannot be realized, and the system goes into crisis, as lending and investment seize up. Workers are laid off, plants are closed, and the banks go bust, in a downward spiral. Capitalism’s only way out of the crisis is by lowering labor costs (wage-cutting) and the massive devaluation of capital, as businesses are destroyed and surviving capitalists swallow up the weaker businesses on the cheap. There has already been an enormous destruction of capital. In the last number of months, more than $7 trillion has been wiped off the U.S. stock market. Indeed, $1.1 trillion was wiped out in a single day on October 15. As of mid-October, $27 trillion had been erased from stock markets worldwide. Housing values in this country have already declined by $5 trillion; pension funds by $2.5 trillion; and bank write-offs are now at $600 to $700 billion and expected to be $1.4 trillion. Large, conservative, seemingly stable companies have disappeared. Lehman Brothers, which had been capitalized at $30 to $40 billion, has gone bankrupt, and AIG, which until a few months ago was capitalized at between $150 and $200 billion, required a $123 billion lifeline from the government to survive. This has led to a massive credit crunch. Banks and other financial institutions now no longer trust each other not to totter and collapse underneath the weight of toxic debt, and refuse to lend to each other, producing a credit meltdown affecting the entire global financial system. All of this is opening up a longer, deeper recession. In the U.S., profits, the motor force of the capitalist system, are now in free fall. They peaked in the third quarter of 2006, and already are down 29 percent, not counting the banks’ write-offs. The failing housing market, which was the catalyst for this current financial crisis, continues to decline. Housing prices are now down 23 percent nationally—and are down even further in California, Nevada, and Florida. One sixth of all homes are now under water—the mortgage is now greater than the value of the home. There are millions of unsold homes, and four million homes are expected to be in foreclosure; and this before the recession and layoffs have really begun to hit hard. Unemployment is already 6.1 percent, and economists are predicting that next year it may rise to 8 or 9 percent. In the last recession in 2001, unemployment peaked at 6.3 percent. In the last year, unemployment has gone from 7.3 million to 9.5 million people. The U.S. Department of Labor has reported that the rate of unemployment is 11 percent, if you count the 5 million “discouraged” workers who have recently stopped looking for work, and a portion of the 6.1 million involuntary part-time workers. Moreover, real wages have declined even before this recession has gotten under way. In the last year, weekly wages rose 2.8 percent, but after adjusting for inflation, they fell 2.5 percent. And the credit contraction has only just begun. Even if the latest moves of the European and American governments—who have decided at the eleventh hour to partially nationalize the banking system by injecting trillions of dollars into the banks—are successful, nonetheless the credit contraction, the rationing of credit, will continue. The government has stepped in to provide capital for the banks in order for them to continue to function. In the U.S., a plan to invest $250 billion in nine of the country’s largest banks superseded the previous plan to spend $700 billion of taxpayers’ money to buy the banks’ toxic debt. Nonetheless, all the banks are still holding huge amounts of mortgages and other loans at highly inflated asset prices. Even with the bailouts, they will have to sell off those assets in order to be able to raise capital. The banks are also being de-leveraged, that is, they are being forced to pay off some of their debt and to cut back on the risky loans they’ve made over the past several years. Rather than loaning ten times more than their capital, they were loaning thirty and forty times their capital; and in Europe the banks were leveraged at an even greater rate. There will have to be a protracted period of restructuring and recapitalization of the banking system. During this period there will be less money for loans for business investments and consumer purchases, which is only going to exacerbate the recession, leading to more corporate bankruptcies. This in turn will lead to more layoffs, higher unemployment, and a continued downward spiral. The restructuring of the banking system is not the only thing that will occur during this crisis. There are going be all sorts of industries—not just corporations, but industries—that will be on the verge of bankruptcy, such as auto, home construction, and the airlines. All those industries will have to be restructured through mergers and acquisitions, through leveraged buyouts, and through the sale of companies and assets at fire-sale prices. Capitalism’s only way out of this downward spiral, as in all capitalist crises, will be the massive devaluation of capital and a lowering of wage costs to the point where profits and investments are restored. An international crisis



Meanwhile, the international character of the recession will deepen it. Already, all of the advanced industrial countries—Germany, Italy, Britain, France, Japan are in deeper recession than the United States. The banking situation in Europe may be even worse in than in the U.S., because the housing bubbles in a number of countries were bigger, and because, as we have already mentioned, there was even more leverage in the European banking system than in the United States. The collapse of the commodities boom—prices of oil, copper, grains, and other commodities have declined dramatically since the summer of 2008—has thrown a number of emerging markets into chaos. In Russia, the stock market has crashed, and as of mid-October was down 60 percent from its peak. In a number of countries there have been currency collapses. The value of Brazil’s currency declined by 40 percent in the last two months, and Korea’s currency declined by 50 percent. Whole countries (of which Iceland is only the first) face the possibility of bankruptcy. The Baltic dry index—the cost of shipping commodities—dropped 80 percent from where it was just a few months ago. It is an indication of the collapse of world trade. This will be the first time since 1973 that all of the world has gone into recession at once. This will make the recession deeper, since it will be impossible for countries to export their way out of the crisis to countries that are still expanding. The origins of the crisis



The current crisis is a product of the contradictions of the twenty-five-year-long neoliberal boom, which started in 1982. The postwar boom ended in 1973, and from 1973 to 1982 there were three recessions in the United States. The restructuring that went on in the United States, and to a lesser extent internationally, with the introduction of neoliberal, free-market measures, led to a twenty-five-year-long boom. It is the contradictions of those neoliberal measures that have produced this crisis. The first contradiction to note was the creation of a giant debt bubble. The increase in debt during the Clinton and Bush years was staggering. Over the two decades preceding 2007, credit market debt roughly quadrupled from nearly $11 trillion to $48 trillion, far exceeding growth rates. To put it in perspective: according to the Wall Street Journal, since 1983 debt expanded by 8.9 percent per year, while GDP expanded by only 5.9 percent. The nation’s debt grew to enormous, unsustainable proportions starting with the Asian financial crisis of 1997–98. There are a number of elements that contributed to creating this debt bubble. The first is the use of monetary policy as a way to handle economic problems. When the Asian crisis arose, the United States pumped tremendous amounts of liquidity, of money, into the banking system, and cut interest rates dramatically, even though the nation was still in boom. This led to the creation of the dot-com bubble—the wild inflation of technology stocks—that burst in 2000. The second contradiction was that the United States became a buyer of last resort, establishing a trading system with Asia in which the Asian countries exported to the United States, which kept up spending through debt. The American balance of payments went from approximately $200 billion a year to $700 to $800 billion per year. All of this was borrowed. The U.S. government had a budget surplus under Clinton. But under Bush, with the tax cuts and war spending, the budgetary surplus disappeared, and the U.S. went from having a $250 billion government surplus in 2000–2001 to a $300 billion deficit in 2002. This stimulated the economy, but it meant that the United States became dependent on foreign capital, since the savings rate in this country had collapsed and was negative in the last years of this boom. Foreign capital, in particular from China, Japan, and the Middle East oil exporting countries, financed the American debt. When the dot-com bubble collapsed and recession came in 2001, Federal Reserve Chairman Alan Greenspan lowered interest rates to between 1 and 2 percent for three years. This led to massive asset inflation, particularly in housing prices.



An important factor contributing to the explosion of debt was the phenomenal increase in income inequality. The neoliberal boom was the result of a shift in the balance of class forces, in which the rate of exploitation was increased, real wages were depressed, and almost all wealth created went to capital. Some figures will indicate how dramatic the shift was. In 1973, GDP per person, in constant non-inflationary dollars, was $20,000 a year. By 2006, it was $38,000 a year—a more than 90 percent rise. Wages, however, in that same thirty-three-year period, declined. Real wages in 1973 were $330 per week; and in 2007, wages were $279—a decline of 15 percent. This shift of wealth from the working class to the capitalist class produced a tremendous amount of capital for potential investment. But in this last business cycle, that capital could not find all that many profitable outlets domestically. There was no expanded reproduction, no accumulation of capital in the U.S. during the 2000s. In this last business cycle, there were fewer factories at the beginning of the recession a year ago than there were in 1999. Instead of investing in new technologies, new plants and equipment, capitalists invested money overseas. Domestically, investments went to the most profitable industries—housing, construction, and finance. “In 1983, banks, brokerage houses and other financial businesses contributed 15.8 percent to domestic corporate profits,” writes James Grant in the October 18 Wall Street Journal. “It’s double that today.” These investments stimulated the housing and debt bubble. Between 2000 and 2005, housing prices increased by more than 50 percent, and there was a frenzy of housing construction. Banks and other financial institutions went on a mortgage-lending spree, creating a massive market in subprime mortgages—adjustable rate mortgages sold to borrowers with weak credit. There was also a big increase in housing speculation, with small investors buying second and third homes with the expectation that housing prices would keep rising and that these houses could be resold at a profit. Merrill Lynch estimated that in the first half of 2005, half of economic growth was related to the boom in the housing sector. Meanwhile, workers tried to maintain their standard of living despite the decline in real wages. In the 1980s and 1990s, they worked longer hours, took on more than one job, and increased the number of family members working. This could prop up household income to some extent. Yet even household income declined from 1998 through the boom of the 2000s. The only way to maintain living standards in the midst of declining wages was by borrowing against the rising value of their homes through home equity loans and mortgage refinancing. In the period of the last boom, homeowners took $5 trillion out of their home equity ($9 trillion since 1997), fueling an increasingly unsustainable debt structure that finally popped with the decline of inflated asset prices in housing.

The third contributing factor to this debt bubble was the deregulation of the banking system, which led to the creation of a shadow banking system. This shadow banking system grew to be bigger than the regulated, insured commercial banks, which through this shadow system, were able to keep all sorts of loans and investments off their books, Enron-style. In this shadow system, banks did not have to put up adequate capital reserves. As a result, they were able, through this unregulated system, to borrow thirty, forty, or fifty times above the value of their capital in order to invest in the stock market and in various new exotic debt products, such as collateralized debt obligations (CDOs), credit-default swaps (CDSs—essentially a form of insurance against debt default), and various other financial swindles, many of which were based on the packaging and repackaging of housing mortgages. These were bundled and sliced up into investment vehicles that contained a good deal of potentially toxic debt—$900 billion worth of subprime loans, for example. The unregulated banking system provided a lot of the credit for this asset inflation and in the creation of these new credit instruments, mortgage-backed securities like credit derivatives, CDOs and CDSs, led to a speculative mania that drove prices higher and higher. At the same time, these unregulated instruments were so complicated that no one really knew what they were really worth. This setup provided enormous profits to the banks at first. The feeding frenzy drove up asset prices, creating an environment in which everyone was eager to participate, setting the stage for the inevitable crash. The house of cards started to collapse when the housing market went south. The end of the debt-fueled trading system



The trading system that emerged out of the Asian crisis of 1998 was always unsustainable. What is remarkable is how long it continued. The current crisis now makes it impossible for it to continue. The United States developed an enormous trade deficit, which was financed through foreign borrowing of dollars, the international reserve currency. If the dollar weren’t the international reserve currency, it is unimaginable that this trade deficit could have gone on for so many years. Now that the world has entered recession, the U.S. is going to be running higher budgetary deficits. Those deficits will be increased also by the expansion of U.S. military spending, which has increased from $300 billion a year in 2000 to more than $800 billion a year now, if you include the supplemental costs for the wars in Iraq and Afghanistan. On top of this spending, the U.S. has introduced a hugely expensive bailout plan. That means it will in all likelihood be running deficits of three-quarters of a trillion dollars, and possibly more, in the coming years. Where will the money for that come? At the moment there is no savings in this country, though that may change dramatically. But it is highly unlikely that China, Japan, and other countries are prepared to continue to finance an American trade deficit to the tune of $700 or $800 billion a year when the balance sheet of American finances, the huge national debt, has gone from $5 trillion when Bush came into office to $11 trillion today. It is unlikely that the Chinese and others are going to continue to finance this debt—although at this point in time U.S. treasuries are still a safe haven. This is particularly true because China’s trade surplus is going to contract considerably as a result of the world recession. The Chinese population only consumes 35 percent of what it produces. The rest goes for reinvestment and export. China’s economy has the highest rate of exploitation in the industrial world. But its export markets are going to constrict—they’ve already started to decline. As a result, China’s desire to lend greater amounts to the United States is problematic, particularly if interest rates in the United States are low. The United States therefore can no longer continue to run an enormous trade deficit while it is building an enormous budgetary deficit, and sustain both of them on the basis of foreign borrowing. There will have to be a restructuring and reordering of the system. At the same time, the U.S. may become more dependent on direct foreign investment from countries like Japan and China that, as we’ve mentioned, have developed large cash reserves. That is what we mean when we say that this is not just a typical cyclical crisis of capitalism. All of the contradictions of the neoliberal boom have burst asunder and now have to be addressed. Government intervention



There has been some talk on the right that government intervention is “socialist.” Even Treasury Secretary Henry Paulson, after he agreed, in response to Britain’s bailout plan, to shift the government’s commitment from buying bad debt from the banks to injecting capital into them, said that “[G]overnment owning a stake in any private U.S. company is objectionable to most Americans — me included.” Living in the rarified world of bankers and speculators, he apparently has not seen the polls showing that a majority of Americans want single-payer health care and better social services. For those free market hacks who fear that the bailout plan represents some kind of creeping socialism, the words of a Financial Times editorial are instructive: Does this rescue mean the end of private financial capitalism? Of course not. Although the size of the crisis requires an exceptional response, this is but the latest in a long line of banking crises and state rescues. Nationally owned banks seem likely to be a reality in many countries for a decade. In the next great financial crisis—rest assured, there will be others—bank rescues with equity purchases may be a first step rather than a last resort. But stakes in banks will, eventually, be sold back to private investors. Governments—rightly—will regulate to avoid further crises. They will fail, and then be forced to act to pick up the pieces. There is no alternative. Modern capitalism needs well-functioning banks. Businesses and individuals need liquidity and an effective means of turning their savings into productive investments. But banks perform this function by making bets on the future. This is the purpose for which they exist—but it makes them inherently unstable. They tend to overextend themselves in the good times and are over-cautious in the bad, exacerbating booms and busts…. These leaders are not putting capitalism to the sword in favor of the gentler rule of the state. They are using the state to defeat the marketplace’s most dangerous historic enemy: widespread depression. And they are right to do so. The editorial goes so far as to admit that the boom-bust cycle is endemic to capitalism, and that credit, while it fuels and extends the boom, also makes the crisis worse. The old neoliberal mantra TINA—There Is No Alternative to free market capitalism—is now transformed into: There is no alternative to state intervention to save capitalism from its inevitable tendency toward crisis. Let us be very clear: State intervention to save capitalism from its own contradictions has nothing to do with socialism. The U.S. government is a capitalist government, staffed by political representatives of the capitalist class from the Democratic and Republican Parties. Paulson, for example, was once a top executive at Goldman Sachs. The government thinks in the same way the capitalist class does; it defends their interests, and it wears the same blinders. It was the government that deregulated the banking system, in particular under the leadership of Alan Greenspan (chair of the Federal Reserve from 1987–2006), Robert Rubin (treasury secretary under Clinton) and Lawrence Summers (treasury secretary in the last year and a half of the Clinton administration). Together, they deregulated the banks and defended the development of the unregulated debt trading system. It was the government and its policies that greased the wheels for this catastrophe. It presided over the redistribution of wealth from labor to capital, it gave enormous tax breaks to the rich, and it encouraged easy credit and debt spending. The government therefore bears as much responsibility for this crisis as the bankers do. The response of the government to the financial meltdown until mid-October, moreover, has been totally inadequate. This crisis has been unfolding for two years now, and for months the government refused to recognize the depth of the problem, taking action that was too little, too late. There have been five different ad-hoc rescue attempts, including cutting interest rates and opening up cheap credit lines to the banks, and the takeover of Fannie Mae and Freddie Mac. Paulson then allowed Lehman Brothers to go bankrupt, a move that triggered a deeper financial panic. This was followed by the bailout of AIG, leading up to Paulson’s $700 bailout plan to buy up the banks’ bad assets. Now comes the sixth attempt to stabilize the financial system—the decision in mid-October to recapitalize the banks and partially nationalize them—a plan initiated by British Prime Minister Gordon Brown. This might finally be the one that unfreezes banking loans. In their ad-hoc attempts to solve the crisis, officials took this to be a liquidity rather than an insolvency problem—a problem simply of getting money into the banking system so that the banks would loan. But the banks refused to loan to each other because they knew that other banks had assets on their books that were as bad as their own—and which might lead to defaults. This is called counterparty risk: banks are afraid that the other banks are on the verge of bankruptcy and so won’t give them loans. This aversion to risk reached a crescendo when Lehman Brothers was allowed to go bankrupt in mid-September. This is what led to the credit meltdown of late September into mid-October that roiled markets all over the world. The other problem with Washington policy makers is that they refused to put any floor under the housing crisis. When Bear Stearns went bankrupt last March, the New York Times ran an editorial and liberal economist Paul Krugman wrote a column arguing that while the government is right to defend the banking system, it cannot save the housing market because the housing market is overinflated. That has been the government policy at all points—and it is why it refused to do anything about foreclosures. However, it is the deflation of housing asset prices that has thrown mortgage-backed securities and other loans into crisis, and is why the banks are becoming insolvent. The government has tried to save the holders of the bad debt while allowing the cause of the bad debt problem to get worse. For months the government refused to recapitalize the banks. Instead, they said to the banks: we will take some bad assets off your books at inflated prices to give you some money. This is the worst possible way in which to try and restore lending. Banks can loan up to ten times the amount they are capitalized, whereas taking bad debt off their books does not have the same effect. The truth was that nobody understood what Paulson’s plan was and how it would work, and he could never explain it. British prime minister Brown denounced it as worthless. Paulson only decided to adopt the partial (and temporary) nationalization plan after Britain adopted it, and then Europe followed suit. Paulson therefore bears responsibility for the depth of this crisis. In a normal situation he would be forced to walk the plank. However, there is a total political vacuum in this country. The Bush administration did nothing; the Republicans in Congress are living in the nineteenth century; and the Democrats are afraid to do anything that might hurt their chances in the election—so they all do nothing. It has been Paulson and Fed chairman Ben Bernanke who have been filling the vacuum; and it has been Paulson who has been carrying out economic policy. Bernanke now claims that he was always for the recapitalization of the banks. Paulson and Bush vetoed it, however, on the grounds that it represented a partial nationalization; they did not want the government having stock in the banks. Paulson told the Senate Banking Committee: “There were some that said we should just go and stick capital in the banks, put preferred stocks… But we said, the right way to do this is not going around and using guarantees or injecting capital, and there’s been various proposals to do that, but to use market mechanisms.” Today Paulson is singing a different tune. Paulson’s version of the partial nationalization plan involves giving the banks cash without exercising control over how they spend it. Banks will have a relatively free hand to do with it what they please because the state is going to purchase non-voting shares. What we’re looking at, in the words of Multinational Monitor writer Robert Weissman, is public ownership without public control. Paulson’s new plan sets up minimal rules that require participating financial firms merely to discourage “unnecessary and excessive risks that threaten the value of the financial institution.” In essence, the same banks whose unregulated, profligate investing led us to this impasse are being entrusted again to “self-regulate.” What’s to stop them from using state funds, even as they continue to hemorrhage hundreds of billions of dollars, to pay off shareholders and executives rather than using them to restart lending? As Weissman notes, “The banks are not obligated to lend with the money they are getting. The banks are not obligated to renegotiate mortgage terms with borrowers—even though a staggering one in six homeowners owe more than the value of their homes.” If more evidence is needed of the reluctance of the state to exercise too much control over the banks, the insurance giant AIG, after the government took an 80 percent controlling stake in the company, is being permitted to spend millions lobbying Congress to ease some provisions in a new federal law establishing strict oversight of mortgage originators. So the government, at all points, has operated with the same blinders as the richest capitalists. It has been obvious for well over a year that we have been in an enormous financial crisis, the worst since the 1930s. Yet until now, the government has reacted on an ad-hoc, knee-jerk basis, allowing the problem to get bigger and bigger. The limits of state intervention



This is an international crisis, and yet there is no international government that can impose a coordinated response. There’s no government that’s going to protect all the banks internationally. Each state is attempting to save its own banks. Things have now come to such a juncture, however, that everyone is forced to act, and the scale of the crisis has forced them all to finally act in a similar way. Estimates are that the U.S. has so far committed $4 to $6 trillion in tax dollars to bailout efforts, and Europe has committed $2.3 trillion. But this isn’t so much cooperation as it is an attempt by each state to keep pace with its national rivals. Everyone understands to some extent what happened in the 1930s—that the recession became a world depression when the international banking system collapsed and states imposed beggar-thy-neighbor policies that further contracted world trade and deepened the world depression. Yet at the same time there are limits to what states can do because they also compete with each other. Each one only controls a small patch of an integrated world economy. State intervention can therefore mitigate the effects of the crisis, but it cannot prevent the recession. Until now, the only state that could have coordinated international action was the United States. But it failed to do so. Its plans were inadequate, and no one took them seriously internationally. Now, there is a consensus that only massive recapitalization and state guarantee of loans between banks can unlock the financial system. The British government is going a step further by guaranteeing not only bank deposits, but also all interbank loans. However, in the U.S., Paulson is refusing to do this. He is still trying to protect the shadow banking system. At the same time, what coordination there is seems to be taking place between the older developed nations, without including BRIC [Brazil, Russia, India, and China] or other developing countries. Some of the richer countries will find it relatively easier to withstand the strain, whereas many of the developing countries (other than China) will find it more difficult. As Lee Sustar writes in Socialist Worker, “Once the banks are effectively nationalized, the health of the financial system will depend on the fiscal situation in each country.” Smaller, more heavily indebted states, for example in Eastern Europe and Latin America, will have far less room to maneuver and may well face 1930s-style depression conditions. If the bailouts restore lending, as they may have done by the time this article appears, it will not mean that the crisis is over. For even though banks may start making loans again, they will be doing so with far less capital, since they’re still dealing with the losses from mortgage-backed securities. Lehman Brothers went down over the decline of commercial real estate, and AIG required an $85 billion bailout in mid-September (later expanded to $122 billion) to cover its credit-default swaps, and there will be other shoes to drop. There will be more bank losses related to auto loans, business and construction loans, and merger and acquisition loans. The entire credit structure was as bad in other areas as it was in housing. Many poor-quality loans, made without documentation or down payments, were extended to private equity firms and hedge funds. These loans are going to come due, and the banks are not going to be able to roll them over with new credit. As a result, all sorts of junk bonds and leveraged buyout deals are also going to go bankrupt. The entire banking system is being de-leveraged. Banks will no longer be allowed to make loans thirty or forty times the value of their capital. Instead, they will be held to a leverage ratio of ten. That means tight credit. Just as the asset inflation and credit bubble extended the boom, and contributed to the creation of an enormous amount of fictitious capital, the destruction of that fictitious capital, and the destruction of real capital, will prolong the slowdown. The impact of the crisis on the position of the U.S. in the world system



The United States—economically, militarily, and ideologically—is in decline. There is no longer a “Washington Consensus”—the dominance of the United States economically and ideologically in the world system. The U.S. is no longer in a position to dictate what the rest of the world must do. That world—a world in which the U.S. could dominate the world trading system and set its rules; in which it could dominate the world financially through its banks, which were the most powerful in the world—is gone. Militarily, the U.S. remains unchallenged; but the crisis puts greater economic strain on its ability to maintain this dominance. It is still militarily bogged down in Iraq and Afghanistan, in a losing situation in the Middle East that is costing it enormous amounts of money and is putting a great strain on the military. The U.S. does not have the wherewithal now to go after North Korea, or Syria, or other members of the so-called Axis of Evil. It cannot respond as it would like, except with hot air, to Russia’s reassertion of control over Georgia. What we are witnessing is the simultaneous collapse of the Washington Consensus and the Bush Doctrine, i.e., of the twin pillars of American economic and military policy. The U.S. ruling class will have to reexamine its policies and options. They are not being examined in the pre-election period. Instead, we are getting platitudes. This is true of both John McCain and Barack Obama and their respective political parties, because they want to avoid making any difficult decisions in the midst of this election. Nevertheless, everything is going to have to be reexamined. However, it is difficult to discuss how things will play out, because this economic crisis has just begun, and we do not yet know its impact on other countries. For example, the Russians felt emboldened to deal with American encroachments on what they considered to be their area of control, the former Soviet Union in Central Asia and the Caucasus, as a result of the enormous economic rise of Russia that resulted from the oil and commodities boom. The boom led Russia to hold more than $500 billion dollars in U.S. currency reserves, the third largest in the world after China and Japan. It thought it had the money to modernize its military. All that was true just a few months ago. The collapse of oil prices, however, has produced an enormous credit crunch in Russia, whose stock market is now one of the weakest in the world. In October 2008, it shut down three times in two weeks as a result of the banking crisis. So, whereas one could talk about a resurgent Russia some months ago, it is difficult now to discuss it in the same way. Similarly, the German finance minister, Peer Steinbruck, claimed at the end of September that the U.S. will no longer be the world’s financial superpower, and that there will now be a financially multipolar world. The following week, when the French proposed a joint bailout plan similar to Paulson’s plan, Germany refused to participate, which triggered a credit crunch in Europe. The Germans argued that the crisis was an American problem, not a German problem. The truth of the matter is that the banking system in Germany may be the weakest, because they had even greater leverage than the American banks. They have been carrying hugely overinflated assets. The fact that Germany finally pledged $679 billion to recapitalize its banks in mid-October is proof enough of the seriousness of its banking crisis. The position of the dollar is another question mark. Three months ago, the American dollar was collapsing; more recently, there has been an enormous dollar rally as the crisis has spread internationally. So the question is not just the effect of the crisis on the U.S., but also the impact of the crisis on each country, and how it positions them in relation to the others. We know there is going to be an enormous shift in the balance of forces internationally. We know that the United States had an exaggerated view of what its power was. This was what was behind the huffing and puffing of the neocons and the trumpeting of the Bush Doctrine—that the U.S. had the ability not just to preemptively invade, but to occupy countries at will. All that is now out the window. So there’s going to have to be an enormous rebalancing on the basis of the real relation of forces in the world. But it is impossible to say too much about how that will look at the beginning of this crisis because we are not just talking about the United States, but about how the crisis affects the rest of the world. Very clearly, however, there are going to be a large number of nationalist and protectionist conflicts. Even before this recession began, the Doha round of world trade talks had collapsed, due to the resistance of developing countries, led by China and India, against efforts of the G-8 countries to force greater openings in developing markets without offering any reciprocal concessions. Various countries are going to do whatever is necessary to protect themselves against their competitors. We don’t know how it’s going to play out. But we do know that just as there is going to be an attempt made to get the working class to pay for the crisis, which will create the possibility of greater resistance and class struggle, there will also be the attempt to get other nations to pay the price, and therefore for struggles between nations. Beyond those generalizations, it’s too early to say more. We will know much better in the coming months. The U.S. in the late 1980s and 1990s improved its competitive position in the world economy and attempted to assert its role as the sole superpower. Though it secured better rates of growth than its competitors in Japan and Europe over the past twenty-five years, it fell behind the growth rates of emerging nations like China, and in order to sustain its own economy it fell into debt. The result is that in the last decade, the United States has lost its competitive position on the world market. Now it will have to restructure, which will involve attempting to raise the rate of exploitation—increasing productivity while lowering wages and benefits even further. We’ve already seen it in the auto industry, where wages have already been cut in half in many cases. The United States will become a cheap labor country compared to its competitors. Auto wages in this country are probably about a third of what they are in Germany. The minimum wage is half of what it is in Britain, France, Germany, and Ireland. The contradictions of neoliberalism have increased the immiseration and the poverty of the American working class. And to get out of the crisis they are going to attack workers’ living standards even further. Questions raised by the crisis



The economic instability of this period is leading to political and ideological instability. Working-class consciousness is going to shift in response. Until now, people thought of this recession mainly in terms of the decline of the housing market, and then in the last year in the rise of food and gasoline prices. Now their pensions are being destroyed; that is, the savings of the American working class are being wiped out by the decline of housing prices, pension funds, and so on. People’s incomes are declining, and layoffs are mounting. Everyone knows we are in a crisis, and no one has confidence in the banking system or the government. Some people will be swept up by Obabamania, just for the hope of any change, because there is no faith in existing institutions or in the politicians. It would be hard to find another figure, aside from Obama, in which there are illusions. It isn’t that ordinary people were gung ho about the market—they accepted it, but they didn’t embrace it. Now they are seeing its total failure, and that government intervention is necessary. The state must intervene. That’s what the banks all say, and that’s what the capitalist class says, aside from increasingly marginal conservatives. There has been an enormous shift in terms of what was the prevailing free market ideology that the media and the universities all upheld. They promoted the idea that government intervention is bad, markets are good, and that unrestrained globalization was the answer. All of that is collapsing in front of our eyes. What is going to replace it? The immediate replacement will be traditional liberalism. The Democrats are going to sweep the elections. They are going to come up with an alternative economic plan. There will be programs for stimulating the economy through more unemployment benefits, more infrastructural spending. Overall, there will be a call for more shared sacrifice. The billionaires cannot make that call—you need the liberals and the Democrats to make that appeal. Until now, it has been the Bush administration that is held responsible for the war and for the economic disaster—the enemy has been the right wing. Now you’re going to have liberalism in power, and whatever it does not accomplish—in terms of easing layoffs, extending unemployment benefits, and stopping foreclosures—will reshape U.S. politics. The economic crisis does not mean that there are openings for only the Left. The Right will also grow. In Austria, the far Right emerged with 30 percent of the vote. In Italy, neofascists are in the coalition government introducing racist laws against Roma people (gypsies). In South Africa, there was a pogrom against refugees from other African countries. There will be a lot of nasty political moves by the Right, which will become a bigger danger. It won’t be the traditional Right, but new right formations that will organize around anti-immigrant racism, protectionism, and other forms of right-wing populism. On the other hand, there’s an enormous opening for a Left that has been marginalized for decades. The disaster of the free market makes it easier for us to argue about the failure of capitalism and the need for an alternative based on human needs. The free market, which supposedly triumphed in 1989 and brought us the “end of history,” has led to nothing but misery and the ruin of millions of people, who are mired in poverty, hunger, unemployment, and ill health, but thanks to the free-market mania of the past decades, face a shredded safety net that doesn’t begin to address these problems. People will also be forced to ask: what does government intervention mean when this is a government not of the workers, not of the masses of people, but a government that represents the interests of the owners, the bankers, and the industrialists? The state is being used for state capitalist purposes, in order to reorganize capital, even to curb some of its excesses. But its aim is to keep capitalism and its social relations going—relations in which labor is dominated and exploited for the profits of a few. Part of the restructuring will involve, as we’ve said, an even harsher attack on working-class living standards. At the same time, nationalization opens up space for us to argue against wholesale privatization, for the defense of public schools against privatization, and even to argue for nationalized health care. But we have to be clear that state capitalist nationalization—that is, the intervention of the state in order to prop up the bankers and the industrialists at our expense and without any democratic control over the process—is no great improvement over what went before. Liberals will accept that kind of state intervention. We must demand the kind of state intervention that will come only with mass pressure and control from below—intervention to improve health care, education, unemployment benefits, to prevent foreclosures, and so on. The Left has to operate on two levels. First, a Left has to be built, or rather rebuilt, in this country that is prepared to fight on every front in defense of working-class interests, whether it is against layoffs, against foreclosures, or against cuts in health care and social services. Second, the Left must be prepared to take part in any struggles to defend the interests of the working class, as well as creating a political and ideological alternative to the free market and its defenders, conservative or liberal. The Left must utilize the crisis to conduct an ideological offensive against capitalism and to argue for a socialist alternative. Joel Geier is an associate editor of the ISR