…but Make Mine Freedom (1948)!
Damn. Apparently there’s some kinda “financial crisis” going on. Meaning: the rich and powerful have had to resort to the always generous — in this case, US — corporate welfare state for a bailout. Y’know, just like poor folks do. Anyway, Paul Bowman done gone and invested some of his intellectual capital in explaining the ‘internal mechanics’ determining the seemingly crazy antics of finance capital, and I reckon his analysis is alright.
This is the first part of a series of articles investigating the capitalist financial markets from a critical perspective. With such a large topic it is tricky finding a route into the subject and a plan of enquiry. The chosen road is to start with a look at the financial markets, particularly focusing on the mechanics of some of the instruments that have led to a momentous transformation of the workings of global financial markets in the most recent decades.
At first sight, this approach may seem odd, perverse even, like examining the internal workings of a clock as a prelude to discussing the social relations of time. However this “inside-out” approach is justified by the fact that as well as a system of social relations, capitalism is also a system with internal mechanics. Those mechanics evolve in response to the historical development of struggles over exploitation, but what new directions the new mechanics make possible in terms of capitalist strategies, in turn, shape the new struggles of today and tomorrow. The next article in the series will place these market mechanics in their fuller historical context. But for now let’s start by investigating the mechanics of capitalist financial markets…
More blah on the ‘financial crisis’ is provided by the goddamned commies at the World Socialist Web Site:
US jobless rate soars as foreclosures break new record, Bill Van Auken, September 6, 2008 : “In a stark indication that the crises gripping the US housing market and the financial sector are spreading throughout the economy, unemployment figures for August rose far more sharply than expected, hitting a five-year high…”
US government’s over mortgage giants to stave off financial meltdown, Bill Van Auken, September 8, 2008: “In the biggest government intervention in the American economy since the Great Depression of the 1930s, the US Treasury Department announced Sunday that it is effectively nationalizing the two mortgage giants Fannie Mae and Freddie Mac…”
Record corporate bailout reveals the bankruptcy of American capitalism, Barry Grey, September 10, 2008 : “The US government takeover of the mortgage finance giants Fannie Mae and Freddie Mac has dealt a shattering blow to the ideology of market capitalism, which has been used for decades to justify a relentless assault on the working class and a vast transfer of wealth to the American ruling elite…”
US bailout of mortgage giants sets stage for wider financial crisis, Barry Grey, September 12, 2008 : “Since the Bush administration announced on Sunday the US government takeover of mortgage finance giants Fannie Mae and Freddie Mac, in the largest corporate bailout in American history, developments have underscored the profound and systemic nature of the crisis that precipitated the action…”
The Wall Street crisis and the failure of American capitalism, Barry Grey, September 16, 2008 : “The end of Lehman Brothers and Merrill Lynch, two of the largest Wall Street investment banks, one week after the government takeover of the mortgage finance giants Fannie Mae and Freddie Mac, marks a new stage in the convulsive crisis of American capitalism…”
US Federal Reserve announces $85 billion bailout of insurance giant AIG, Bill Van Auken, September 17, 2008 : “Following emergency consultations between the Federal Reserve, the US Treasury and the Democratic leaders of both houses of Congress, the Federal Reserve on Tuesday night announced a bailout of the Wall Street insurance giant American International Group (AIG)…”
Panic sell-off on Wall Street, Barry Grey, September 18, 2008 : “Collapsing confidence in the US and global financial system precipitated a panic sell-off of shares on Wall Street Wednesday, as all of the major indices registered drops in excess of 4 percent…”
The American “financial tsunami” hits Asia, John Chan, September 18, 2008 : “The American financial crisis has sent shockwaves throughout Asia over the past few days as governments, banks and corporations scramble to cope with plunging share prices, international financial turmoil and the prospects of a serious downturn in the US and other major economies…”
Europe gripped by fear of global crash, Stefan Steinberg, September 18, 2008 : “Europe’s ruling elite has reacted with shock and disbelief to what they fear will be the most serious crisis for world capitalism since the Wall Street Crash of 1929…”
Global financial storm hits Australian economy, Mike Head, September 19, 2008 : “The deepening financial turmoil in the United States and worldwide is sending tremors through the Australian banking system and share market, and shattering what remains of the claims that the local capitalist economy would be protected by booming exports to China and other Asian markets…”
Banks race to profit from US bailout, Barry Grey, September 23, 2008 : “The announcement of a virtually open-ended government bailout of Wall Street has set off a frenzied competition among the biggest banks and financial firms to grab the lion’s share of the super profits to be reaped from the program…”
The cavalry arrives:
US government to bail out Wall Street, Barry Grey, September 20, 2008 : “The Bush administration on Friday announced plans for a massive and unprecedented federal bailout of the US banking system. In separate appearances Friday morning, Treasury Secretary Henry Paulson and President Bush announced a series of measures to shore up collapsing financial markets and called on Congress to pass legislation next week to use, in Paulson’s words, “hundreds of billions” of taxpayer dollars to buy virtually worthless mortgage-backed assets that cannot be sold on the market from banks and other financial institutions…”
Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These “externalities” can be huge. That is particularly true for financial institutions.
Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole.
State capitalist institutions [are] designed in large measure to socialise cost and risk and privatize profit, without a public voice.
Hence the financial market “underprices risk” and is “systematically inefficient,” as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred – and also proposing solutions, which have been ignored.
The threat became more severe when the Clinton administration repealed the Glass-Steagall Act of 1933, thus freeing financial institutions “to innovate in the new economy,” in Clinton’s words – and also “to self-destruct, taking down with them the general economy and international confidence in the US banking system,” financial analyst Nomi Prins adds.
The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialise cost and risk and privatize profit, without a public voice.
That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.
~ Noam Chomsky, Viewpoints: Where now for capitalism?, BBC, September 19, 2008
On the demise of the Glass-Steagall Act:
After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.
On Oct. 21 , with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill’s effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.
On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.
Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill’s chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, “You’re buying the government?”