10-02-08, 8:00 am
You don’t need a weatherman to know which way the wind blows!,” Bob Dylan famously sang in 1965. And no one now debates that there is indeed an economic crisis upon us. Note that after at least 20 years of gridlock in Congress, an unprecedented “bipartisan consensus” has arisen to give Treasury Secretary Henry Paulson a “blank check” with which to save Freddie Mae and Freddie Mac – the quasi-public mortgage institutions created under New Deal and Great Society legislation which insure or own nearly half of all home mortgage assets in the United State. It passed by a bigger majority than the resolution giving Bush the authority to go to war in Iraq – near unanimity.
Finance capital is, in a word, scared to death.
The mortgage meltdown, by itself, will amount to upwards of $2 trillion in lost value in the US alone. But while the major media are biting their nails over Wall Street, the “tail” of this free-fall among mortgage bankers in the real economy is going to be very wide and broad. Few American workers, or workers anywhere in the world, will be spared sacrifice, and many will face ruin.
In reality, however, a mortgage relief bill just passed by Congress will bring little relief to those facing foreclosure. Nearly one-third of those who qualify for protection are expected to face foreclosure again under the harsher terms of their re-negotiated loans. I agree with others who have argued that Fannie Mae and Freddie Mac should not be allowed to fail. Nor should the Fed and Treasury departments spare necessary efforts to avert a financial collapse and its horrendous implications. But for all those of us who live primarily by selling our labor, we must struggle for policies that provide relief and protection directly to working-class homeowners, or there may be no protection for us at all.
Furthermore, the US economy is today perhaps the most globalized economy in the world. For this reason, It is possible that any federal efforts will simply be swamped by the task at hand, especially if too many external and internal threats combine against it simultaneously.
Even with unprecedented government intervention, the credit squeeze on investment banks and brokers is still strangling growth. The first wave of foreclosures has struck. Financial losses are already far greater than those inflicted by Katrina. Millions of homes have now fallen below the value used to back the original mortgages, and before this is over banks may collapse by the hundreds.
A consolidation and restructuring of global finance capital proportional to the scale of its recent losses is already underway. This process, left untouched by reform, could result in even greater economic (and political) power in the hands of even smaller numbers than before.
The truth is, no one knows how bad it will get. Consumers can no longer come to the rescue. They are tapped out on credit and losing existing jobs in exchange for ones with less pay, or they cannot find new work at all. Even if the consumer could come to the rescue – the price of gas has made the trip unaffordable. If you still have a job, getting to work in rural and suburban areas is now a very expensive proposition. The US automobile, airline, trucking and railroad industries all face serious restructuring – with far-reaching implications for the economy and workers.
Steeply rising energy costs are compelling technological and economic restructuring faster than nearly any event short of a general mobilization for war. The changes are being passed on to every sector of the economy at typhoon-speed, arriving simultaneously with the credit meltdown.
Many cite speculation as the source of enormous oil price spike, and there is volatile speculation in commodities like oil. However, unlike the mortgage bubble, no one is hoarding oil. Hoarding is a key indicator of speculative “frenzies”, in which investors become intoxicated with the belief that rising stock prices will never end. This is known in economics as “the greater fool theory,” i.e., there is always someone more foolish than you who will buy at an even more foolish price!
Regardless whether one accepts that the world is running out of oil, and some experts do not, it is indisputable that demand is rising faster than the development of new sources. Drilling off the east coast or in Alaska will not change this equation. Barring an amazing breakthrough, the cheap energy, automobile- based vision of economic development imposed on us by 75 years of politicians bought-and-paid-for by the auto and oil industries is simply at an end.
I could go on – from the worldwide food riots generated by the Bush “ethanol fix” for reducing dependence on foreign oil; to the broken, but very expensive US health care system that is a huge drag on manufacturing and small business expansion; to the huge costs involved in preparing for and recovering from disasters related to global climate change; to the collapse of the 7-year “Doha Round” of World Trade Organization (WTO) negotiations to redress the crushing inequities in globalization and trade.
A Many-Sided Crisis
Despite the scale and complexity of the economic threats, there are some counter-tendencies: Massive federal credit intervention has so far prevented the collapse of the financial market.
Exports stimulated by the falling dollar are having a positive, but probably temporary effect. The falling dollar is a mixed blessing, especially in recession – it saves a few jobs, but at the cost of higher overall prices.
The purchase, at bargain prices, of large stakes in US companies and financial institutions by oil-rich, dollar-reserve-holding nations, from Qatar to China. This is one of the most visible reflections of the international aspect of the current restructuring process.
Indeed, one of the most important international consequence of the current crisis is that global capital will be restructured in a way that profoundly reduces the US share of global assets relative to the emerging economies of China, India, Brazil, and – for better or worse – oil producing nations.
Clearly more intervention domestically is needed. There is not much disagreement among economists that the biggest stimulus to economic recovery is putting money in the hands of the lower-income consumers. Now that the tax rebate checks have mostly been spent, the best actions that could be taken now include massive federal efforts to reduce the pressure on the housing, income, energy, health, education and transportation fronts. New actions should specifically aim to help people remain in their homes, create jobs and training programs, invest in renewable energy, and repair the country’s dilapidated infrastructure.
On the mortgage-credit-housing meltdown, the key is to give the victims themselves a seat at the negotiating table, where who pays what and who has to move are being decided. The bank, the assessor, the sheriff, and the scavengers of foreclosed properties are already there – but homeowners threatened with foreclosure and renters facing eviction are not. For example, West Virginians are debating empowering counties to seize abandoned McMansions and convert them into more affordable multi-unit dwellings.
The goal is simple: improve the terms of the mortgage, or at least minimize the loss. The hardest part is getting beyond “it’s the individual’s problem” to “it’s a problem that concerns us all.”
On energy, everyone but the oil companies thinks there needs to be large scale intervention in energy policy.
On energy, everyone but the oil companies think there needs to be large scale national intervention in energy policy. The labor movement's program is a good example:
• Investment in infrastructure repair that uses energy efficient products and clean energy alternatives. • Investments in mass transit. • Investments in building an alternative energy sector.
But also consider the following proposal by Alan Blinder, a former Federal Reserve Board member. It is the kind of reform that meets the multi-sided test. Action on it could be initiated at any level from local to national, even international. Blinder recommends a “cash for clunkers” program where the government buys up the oldest, most polluting vehicles at above market price, and scraps them. If done successfully, it performs a remarkable public policy triple-play – stimulating the economy, improving the environment, and reducing income inequality, all at the same time. Here’s what it would do:
• Promote a cleaner environment. The oldest cars, especially those in poor condition, pollute far more per mile driven than newer cars with better emission controls. • Offers more equal income distribution. Most clunkers are owned by lower- income people. So if the government bought some of these vehicles at above-market prices, it would transfer sustained purchasing power where most effective. • Acts an an economic stimulus. With almost all the income tax rebates paid out, and the economy weakening, “cash for clunkers” could be a timely part of a broader stimulus in 2009 (along with other investment listed above).
Another example from economist Dean Baker directly addresses a practical, economic means of enforcing speculation reform: tax it.
A modest tax on all financial transactions will impose a serious penalty on those who actively speculate in oil futures, or any other commodity, while having almost no impact on those who use the market for hedging.
It can also raise an enormous amount of money. A 0.02 percent tax on the sale or purchase of commodity futures, and a comparable sized tax on options and other derivatives, could easily raise more than $10 billion a year, even assuming large declines in trading.
If a comparably small tax were applied to all financial transactions, including stock and bond trades, the revenue could exceed $150 Billion a year, a take that is equivalent to 10 percent of the federal income tax.
Such a tax would be extremely progressive because the overwhelming majority of trading is done by the wealthiest people. State lotteries are subject to taxes as high as 30 percent. Why shouldn’t we tax gambling on oil futures at a rate of 0.02 percent? A financial transactions tax could hugely increase productivity in the financial sector by restoring it to its proper function as an intermediary between borrowers and lenders. That would be great for the economy and the country, but really bad news for the Wall Street crew.
The Road to Recovery
Economists are divided about the underlying dimensions of the current crisis. Is it an accidental concurrence of shocks aggravating the normal business cycle? Or is it something more profound? Under capitalism, business cycles reflecting changes in supply and demand are well-known. Many, but not all, economists have been persuaded there are independent, stronger, “longer wave” cycles of financial expansion, collapse, consolidation, and expansion, which are inseparably connected to revolutions in technology, their deployment, and their consequent impact on the division of labor throughout society. These technological revolutions have generally advanced human productivity, wealth and the average standard of living. But they have also stimulated very uneven and unequal distributions of wealth and welfare as well, tendencies which themselves are countered with waves of public intervention, each cycle dictating significant, often radical shifts in public vs. private roles.
There is much evidence that we are in the “collapse” phase of a long wave that began at the peak of the late 1990’s tech boom. The “bubbles” since then, especially the mortgage “security innovation” one, are evidence of capital seeking refuge until the next round of true innovation emerges. The essence of public intervention and reforms in this process must thus be directed at market failures (like health care), the provision of the ever-expanding domain of “public goods” (infrastructure and intellectual property), protecting workers dislocated in the process from ruin, and investing in the education required for all to assume productive roles in the next expansion.
--John Case is a member of the Communist Party's economics commission.
