Economy

Last week US Treasury Secretary Henry Paulson unveiled a dramatic plan to arrest the present financial crisis and prevent future economic catastrophe. It is to cost $700bn. It sounds like a breathtaking break from neo-liberal philosophy. It’s not really. Neo-liberalism was always a giant lie. Homeless people don’t matter. People in danger of losing their jobs in a recession don’t matter. But, when it comes to banks and billionaires, self-reliance is for the birds. These people are hapless bums.

The capitalist system is in the throes of the worst financial crisis since the Great Depression. This is the view not only of the billionaire George Soros, but also of the International Monetary Fund, the custodian of the capitalist system, and all the serious capitalist commentators.

After a week of turmoil on financial markets, on Saturday 20 September President Bush said he was proposing to spend $700bn of taxpayers’ money to buy the rotten mortgage assets held by the banks on Wall Street. He said he was doing this to help the average American family with their homes and jobs.

Financial markets in Wall Street, New York, the City of London and all over are in turmoil. In just 24 hours, two out of the four largest investment banks in the US have disappeared. All this confirms what Marxists have always maintained: capitalism does not operate in a smooth and steadily increasing way to progress. It operates violently, lopsidedly, in cycles of boom and slump. Now more banks are set to fail and there will be more misery in the financial markets. Working people are also set to suffer as massive job losses are announced.

Written in August, one year after the beginning of the credit crunch, this article explains how that earthquake in the global financial system has left banks, insurers, pension and municipal funds, hedge funds and private equity companies tottering and falling. Collateral damage has been immense and the after-shocks are still to come.

The Financial Times has hailed the effective takeover of Fannie Mae and Freddie Mac by the US government as “what could become the world’s biggest ever financial bail-out.” Treasury secretary Henry Paulson has promised he will pump in ‘unlimited liquidity.’ Don’t you wish the government would grant you unlimited liquidity? When it comes to the food and fuel bills of the poor and the working class, the British and American governments find that the cupboard is bare. But now it’s not bare. Predictably markets all over the world have breathed a sigh of relief. Fannie and Freddie have effectively been nationalised – and big business...

Fannie Mae and Freddie Mac may sound like two characters out of the old West, but Fannie Mae is the Federal National Mortgage Association and Freddie Mac is the Federal Home Mortgage Corporation and they're both in big trouble. The big two have liabilities of $5.3trillion outstanding. This is as big as the entire US national debt, which has ballooned under Bush's stewardship.

Hedge funds are in the news again. They don't much like being in the public gaze. We wonder why. Does their speculation cause prices to go up? Do they drive firms into bankruptcy so workers lose their jobs? These are the questions being asked. Let's see what they get up to.

The immediate cause of the sliding dollar is not far to seek. It’s the US deficit with the rest of the world. Last year the USA imported nearly twice as much as it exported. Their current account deficit stands at 6% of national income. If a country is spending more than it’s earning, then it has to pay for the difference.

Under capitalism if there is no profit, there is no production even if people need things or services. Therefore, over the last 25 years there has been a massive expansion of the unproductive sectors of the capitalist economy, i.e. a massive increase in fictitious capital. This is now expressing itself in what may be the worst crisis for more than 30 years.

Last month 100,000 American private sector workers lost their jobs. This is the third monthly rise in the unemployment figures in a row. Everything indicates that the USA is now in recession. As it is the biggest single market in the world, this will inevitably have a big impact on the rest of the world.

Last Thursday it was Carlyle Capital Corporation. On Friday it was the turn of Bear Stearns, the fifth largest bank in the USA. The American Central Bank, the Fed, is due to meet this week to talk about interest rates. Most likely they will cut them again. The trouble is, the more they slash rates the more people can smell the fear.

Republication of the article is timely. In 2007 the sub-prime mortgage bubble finally burst. The financial crisis has already had a knock-on effect on the banks through the credit crunch. The capitalist world stands on the threshold of recession.

In 2006 the world's richest two percent of adults owned more than half the global wealth, while half the world's population own only one percent. In 2007 the World Wealth Report estimated the total wealth of rich individuals at $37.2 trillion! While this wealth accumulates for a small minority, the vast majority of humanity is seeing its living standards plummet. In these figures we see another picture: the growing tensions between the classes that will lead to social upheaval and revolution on an unprecedented scale.

Transcript of Alan Woods' speech on the world political and economic perspectives for year 2008 at a meeting of the leadership of the International Marxist Tendency on January 13, 2008. You can also listen to the speech here.