The American economic model has been discredited and the American century has lasted but a few decades. These developments have and will further open up a new period in the struggle between capital and labor on the world stage and the US working class will have a major role to play as it re-connects with its militant traditions.
AFSCME Local 444, retired
With the possible collapse of the two giants of US mortgage financing, Freddie Mac and Fannie Mae, the world economy faces an uncertain future. What is certain is that the already indebted US taxpayer will be asked to foot some, and possibly all, of the bill.
Freddie Mac and Fannie Mae have liabilities of $5.3 trillion (five thousand billion) in mortgages, about 38 per cent of US gross domestic product and almost half of the US total mortgage market of $12 trillion. In addition, they also account for 70% of all new mortgages. Their collapse is unthinkable as the US mortgage market would screech to a halt prolonging an already disastrous situation in housing and worsen an already fragile global system. Non US investors hold around $1 trillion in debt issued by what are known as Government Sponsored Enterprises or GSE’s, and a loss of confidence in what up to now has been a relatively risk free home for the coupon clippers’ capital could result in a massive sell off adding to the crisis even more; things are not looking good.
This relatively risk free environment exists because it has been assumed by the coupon clippers that their investments were backed up by the US taxpayer as the GSE’s have a $2.5 billion line of credit with the US treasury. Surely it was impossible to lose without the US economy collapsing altogether; but that is not such a distant possibility anymore.
The present problem is simply explained; the two companies capital on hand is insufficient to support their liabilities, hence, the threat of insolvency looms. In order to keep them solvent they have to have an injection of capital in a period when the owners of it are refusing to let it go. Part of the already existing crisis is what the media refers to as a credit crunch but what is in actuality a strike of capital by those that own it; the capitalist class. So private capital is hard to come by. The coupon clippers need a sign from the government that their investments are safe and that it (the taxpayer) will cover them if they are to be expected to continue to buy Fannie and Freddie debt and not sell off what they already have.
Earlier this week, the US government re-assured the coupon clippers that their investments will be safe by promising to inject taxpayer money as needed as well as promising to use public money to buy a stake in the two enterprises. Numerous mouthpieces of capital, from imbeciles like McCain and Bush to the more astute theoreticians of the class, have made it clear that they cannot allow these behemoths to fail and will nationalize them (take them under state ownership) in total if necessary. The mere thought of this terrifies the bourgeois whose media and education system bombards us daily with the idea that the market is god and has the answer for all things.
An illuminating part of this debacle and one that confirms the power of socialist ideas and the appeal of collective action, is that there is already a plan afoot to nationalize the two enterprises if necessary. But this is a defeat for the ideology of the market that it is the answer to all things; that it is the solution to all our ills. So dangerous is the idea that such huge enterprises may have to be nationalized in order to survive that the term the government is using is “conservatorship”. Even Clive Crook of the Financial Times has a laugh at this one. “A plan to take over the enterprises exists,” he writes, But “Rather than nationalizing them—which would be un American and could be mistaken for socialism—they would be placed in “conservatorship”. It is the same thing, except that it could allow the government to pretend the GSE’s liabilities were not its own.” (FT 7-14-08) The other aspect here is an attempt to hide from the American working class the fact they we are being asked to pay for yet another crisis of capitalism; they took the profit in the good times and will leave us with the bill in as the well runs dry. Fannie and Freddie’s problems come on the heels of the Bear Stearns bail out and the nationalizing last week of IndyMac, the US’s second largest savings bank.
When socialists talk of taking in to public ownership the dominant corporations of society and running them under workers control and management or even nationalizing them within a capitalist economy, the “red scare” is hurled at us. We can hurl a scare at them. If it is OK to nationalize the debt of these companies, we can nationalize companies themselves. Unfortunately, the heads of organized Labor will pretty much remain silent on this issue or echo the solutions put forward by those who have caused the problem in the first place.
The US government pledge to protect the GSE’s and the coupon clippers’ investments has calmed things a bit but each day the crisis worsens; the two mortgage lenders lost 25% of their value today as investors took a hike. But even a total bail out will have serious consequences for the US and world economy.
A government takeover of Fannie and Freddie would add $5 trillion to the present US debt of $9 trillion and would also undermine confidence in the ability of the US to continue to pay its debts. This in turn would also increasing borrowing costs; it will also further undermine an already weakened US dollar. The US taxpayer is already overburdened with debt and is feeling the strain of increased food and fuel prices as well as all the consequences of the housing crisis and the predatory wars in Iraq and Afghanistan. The Freddie and Fannie crisis will strengthen an increasingly global view that the US model of rampant privatization has been totally discredited and that the US consumer cannot continue to be the consumer of last resort. This will have serious consequences for exporting countries like China that rely heavily on the US consumer to purchase its products.
This financial crisis is spreading and is now accompanied by a crisis in food and energy. The dramatic rise in food and energy prices is a serious threat to the stability of the world economic system-----of global capitalism. Global corn prices have risen 138% over the past three years while food prices as a whole have increased 83% during the same period. The bourgeois are extremely concerned about this. The problem with dramatic increases in the cost of food and oil is that there is not really an alternative to these commodities---people have to eat and stay warm; and oil is a crucial ingredient in the manufacture of many commodities as well as a necessary component in agricultural production. Food production is dependent on oil for fertilizer, machinery and the transportation of food in the world market.
There have been food riots in over 30 countries and fishermen, small farmers, wine producers, truckers and others have all participated in protests and demonstrations against rising fuel prices. The capitalist class is concerned that things will get out of hand. They are concerned not so much because people are starving, rather that instability and political action will interfere with profit taking.
Commenting on the food riots, Josette Sheehan, Executive Director of the World Food Program says that the protests are, “Stark reminders that food insecurity threatens not only the hungry but peace and stability itself.” She added that, “Only seven meals separated civilization from potential anarchy.” (FT 6-21-08).
The food crisis is much more acute in the emerging economies of the former colonial world as food consumption is a much higher percentage of family income than in the advanced capitalist countries.
Percentage of family income spent on food (Source: IMF)
US Brazil China Kenya Bangladesh
10% 20% 30% 50% 65%
Alongside the rise in food prices has been the rapid increase in the cost of energy connected obviously to the rising cost of oil. The head of Russia’s Gazprom as well as other experts in the field have predicted $500 a barrel oil by 2010.
The rising cost has forced governments in the emerging economies to lower or completely eliminate fuel subsidies. China has long shunned pressure to cut fuel subsidies which western capitalists feel distorts prices, but for these governments that compete in the global economy with a huge pool of low waged workers, fuel subsidies are used to keep a lid on social unrest. But China was forced to remove subsidies in June causing an immediate 18% increase in the price of gasoline and a 5% increase in the price of electricity.
Given the over consumption in the US, workers can cut back to a degree in response to food and gas prices. The US department of transportation reported that Americans drove 1.4bn fewer highway miles in April 2008 compared to 2007 while miles driven on all US roads during the same period declined 1.8%. The term “staycation” has become a popular noun to describe how fewer people are leaving home for their holidays these days. Americans aren’t known as global travelers but even the trip up to the lake is getting pricey. But this has its limits as public transportation in the US is dismal and many municipal systems do not have the capacity to cope with extra passengers.
But living in Bangladesh or other countries of the former colonial world where upwards of 50% or 60% of family income is spent on food leaves little room for maneuver. This is of grave concern to the coupon clippers as it is likely that the riots, protests and strikes will spread. There were demonstrations in Peru in July against free market policies and opposition to the market is growing throughout the world. It is inevitable that movements of this nature despite being wracked with confusion ultimately tend to draw political conclusions and seek alternatives to the present system. The ideas of socialism begin to re-emerge after being driven deep in to the consciousness since the collapse of the totalitarian regimes of the Stalinist world.
The assault on US living standards will intensify as a crisis not of our creation is shifted on to the backs of workers and the middle class. The argument that there is no money in society will be used to drive down wages, cut social services and will be used as an excuse by the heads of organized Labor to explain their refusal to lead a fightback and challenge the offensive of capital; but this false argument cannot hold up forever in the face of objective reality.
The situation is quite grim and highly explosive; police were called to an IndyMac branch today in Southern California as tempers flared between customers wanting to withdraw their money from the collapsed institution. One has to be cautious making predictions as global capitalism has massive resources and reserves but the present crisis is without doubt the worst since the great depression and could get worse yet. It is quite possible that we are at a turning point, particularly here in the US where the crisis is most acute and the class struggle has been relatively quiet by historical standards due to the complete capitulation of the leaders of the working class to the offensive of capital. At some point the damn will burst and we are certainly witnessing some serious cracks in the monolith.