Leader of the French student protests of 1968, Daniel Cohn-Bendit, recently emerged to declare “This financial crisis is for capitalist neo-liberals what Chernobyl was for the nuclear lobby”. Is it?
It’s important to note that we have been here before. Events like the Tulip Mania of 17th century Holland and the South Seas Bubble in Britain in the 18th century were what Karl Marx was referring to when he described the “commercial crises that by their periodic return put the existence of the entire bourgeois society on trial” back in 1848.
But it is capitalism that survived while the socialist alternative, tested to destruction in the Soviet Union, was consigned to Trotsky’s ‘dustbin of history’. This is because of its inbuilt mechanism for self correction which is what we are seeing now.
Capitalism, like socialism, is a philosophy of the creation and distribution of economic resources. In theory, capitalism directs resources to where they will generate the maximum economic return and with this increase in wealth wider society will prosper. But when these economic resources are directed towards enterprises which do not maximise return the market will pull them back and reallocate them. The initial contraction is painful, but the long run result is greater prosperity.
This is why George W Bush is wrong when he said “The market is not functioning properly” in his Presidential address. He was referring to the need for the US Congress to pass his bail out plan for the US banking industry.
US banks have made huge profits over the last few years lending money to people who were only marginally able to pay it back. These sub prime borrowers could only get into the market because, by 2004, the Federal Reserve had slashed interest rates to 1%. With inflation of around 2%, it paid to borrow. This was the period of misallocation.
But when this sub prime market fell into chaos it took the bankers who had feasted off it down too. Banks like Lehmann Brothers had billions of dollars of these sub prime loans on their balance sheets as assets. But when the repayments dried up the banks were left with properties they couldn’t sell and, as assets, their value collapsed and their balance sheets were spattered with red ink. This is the painful contractionary phase of the righting mechanism of capitalism.
But the plan Bush has put before Congress proposes spending $700 billion of taxpayers money in buying up these assets to enable ‘Wall Street’ to get back to providing credit for ‘Main Street’ to take out new mortgages in Florida or Michigan. By chucking a wrench into this self righting mechanism the Bush administration will ensure that economic resources will stay locked up in this unproductive economic enterprise.
It also means that the re-allocation towards more profitable areas will not happen. Despite what Bush says, echoing Cohn-Bendit and Marx, it isn’t the functioning of markets but of government interference which may cause greatest long term harm.
(Printed in London Student, vol 29 issue 2, 06/10/08)