Not the death of capitalism, but the birth of a new order

The free-market model has been discredited and now its champions are panicking at what might emerge in its wake

Comments (50)

Seumas Milne
The Guardian,

Thursday October 23 2008

Article history

As the dust of the credit crash clears and the real world recession kicks in, the ideologues of capitalism are scaring themselves with spectres. "He's back," the Times warned its readers on Tuesday over a portrait of Karl Marx. Not only are sales of his masterwork Das Kapital booming, but the virus of the newly fashionable revolutionary has, it seems, spread to the heart of the capitalist camp: the French president Nicolas Sarkozy has had himself photographed leafing through its pages while Marx's analysis of capitalism has been hailed by everyone from the German finance minister to the Pope.

In the US, John McCain has been lashing out at Barack Obama for his supposed "socialism", the High Tory writer Simon Heffer excitedly dubbed the state bail-out of the banks "neo-sovietisation", and the BBC broadcast a prime-time debate last week on whether the crisis signalled the "death of capitalism". Meanwhile the Economist, the Pravda of the neoliberal ascendancy, has been trying to mobilise true believers for a fightback: "Economic liberty is under attack", its current issue thunders. "Capitalism is at bay, but those who believe in it must fight for it."

Of course, they are running ahead of themselves in a panic. If Marx's central ideas about class and exploitation were really taking hold across the western world, you can be sure the mainstream media wouldn't be running quirky, cartoonish pieces and debates about them, but something much more ferocious and alarming.

It's certainly true that the events of the past few weeks have exposed deregulated capitalism as bankrupt and its ruling elites as greedy and inept. But it is the free-market model, not capitalism, that is dying. That is reflected in public opinion: a Financial Times-Harris poll conducted across the advanced capitalist world this month found large majorities believe the financial crisis has been caused by "abuses of capitalism", rather than the "failure of capitalism itself" - only in Germany did the proportion blaming capitalism as a system rise to 30%.

As Sarkozy has pronounced: "Laissez-faire is finished." It is not Marx who has really been rehabilitated in short order, but John Maynard Keynes, out of dire necessity. In the wake of the largest-scale acts of state economic intervention in capitalist history, politicians are now having to make a virtue of it. "Much of what Keynes wrote still makes sense," the chancellor Alistair Darling declared at the weekend, as he announced plans to bring forward large capital projects and the prime minister defended higher borrowing to counter falling demand.

The symbolic significance of this official return to Keynesianism shouldn't be underestimated. It's 32 years since the then Labour prime minister Jim Callaghan bowed the knee to monetarism, nearly three years before Margaret Thatcher came to power, and announced to his party conference: "We used to believe that we could spend our way out of a crisis, but I tell you ... it is no longer possible." Faced with financial collapse and the threat of a full-scale economic depression, such fancies have now had to be consigned to the dustbin of history.

But claims that the current crisis signals the end of capitalism or the birth of a new socialism simply set up a straw man and divert attention from what is in fact at stake. If we're talking about socialism as a systemic alternative, that is clearly not currently on the agenda in the heartlands of capitalism - or elsewhere, with the arguable exception of Latin America. And both its post-communist collapse of confidence and the weakening of the working class as a social and political force make it difficult for the left to take full advantage of capitalism's stark failures.

That has led some, such as the historian Eric Hobsbawm, to conclude that the main beneficiaries of the crisis will be the right, as in the 1930s. There's certainly a danger of growing support for rightwing populism on the back of mass unemployment; but if the new enthusiasm for Keynesian intervention and public ownership can be channelled to protect those most vulnerable to the crash - rather than make them pay the price for it, as now seems more likely - that need not be the case.

What the crisis is bound to do is increase the demand for alternatives both within capitalism and beyond it. It has already discredited the economic model that has dominated the world for a generation at a cost of endemic instability, rampant inequality and environmental devastation. In its defence of free-market capitalism this week, the Economist argued that, in the past 25 years of market liberalisation, hundreds of millions of people have been lifted out of absolute poverty and speculated that this decade may see the fastest growth of income per head in history.

But most of that growth and poverty reduction has been in China's state-directed and still heavily publicly-owned economy, while India's lesser capitalist success story is so grotesquely unequally distributed that the proportion of its children who are malnourished - at 47% a global leader - has remained almost unchanged for a decade. For the rest of the world, growth was faster and far more equally shared in the postwar decades of Keynesianism and socialism.

An opportunity has now opened up for those political leaders prepared to use this meltdown to reshape the economic system, from Obama to Hugo Chávez. It's often said that the left has no alternative model after the implosion of communism and traditional social democracy. But in reality no economic and social model, left or right, has ever come pre-cooked: all of them - from Soviet power to the Keynesian welfare state and Thatcherite-Reaganite neoliberalism - have grown out of ideologically driven improvisation in particular historical circumstances. Marx himself famously offered no blueprint.

Instead, the pressure to respond to economic need - as in the New Deal or postwar Europe - will shape the way the new economic order develops. Already, the forms of intervention have been sharply different from past crises, with bank nationalisations offering a potentially powerful new economic lever. We are no doubt heading into a new kind of capitalism as well as a period of growing support for more far-reaching social alternatives. But what form it takes will be decided by pressure, from above and below.

s.milne@guardian.co.uk

Money as an illusion

Have a look at a video entitled Money as Debt http://video.google.com/videoplay?docid=-9050474362583451279

Borrowers agree to work for years to repay the interest to the banks- effectively rendering themselves slaves to the bank for a certain time. (I've done it myself.) For these reasons, lending at interest - or usury - was for centuries reviled by every major religion and by great philosophers such as Plato and Aristotle. It's still forbidden by Islam and when Rowan Williams, the Archbishop of Canterbury, talked recently about Britain learning from sharia law, there's evidence to suggest that debt-free money was one of the things he had in mind.

What mystifies me is why the government doesn't simply create more debt-free money instead of borrowing from banks itself, with the result that taxpayers must meet the interest payments - more than all defence spending put together and not much less than the total amount spent on the NHS.

Gratifyingly, it turns out that a (still rather small) cross-bench group of MPs has put down a motion calling on the government to do exactly that - to issue "green credit for green growth". Among other things, they recommend "that the Treasury should use its powers to create non-interest bearing money so as to fund activities to combat climate change along the lines developed by the submission of the Forum for Stable Currencies."

By the way, I'm not going to pretend that the film is short. It's 47 minutes long. But perhaps that's how long it needs to be, to explain the many questions that are thrown up by this complex topic. I very strongly recommend that you download it and watch it when you can. I'd be delighted to hear what you think - but please do watch the film first!

John-Paul Flintoff

CDC - the next big problem?

In the week of the crash in 1929, Wall Street fell by 23 per cent. Last week, it fell by 18 per cent, London and Frankfurt by 21 per cent and Japan's Nikkei by 24 per cent. Every major financial centre's interbank market is frozen. Trust and confidence have collapsed; the global system is paralysed on a scale that now surpasses 1929. There is a combination of a worldwide bank run, seizure of credit markets and collapse of asset values that could plunge the globe into a depression. This is history's joke: the crisis of capitalism long predicted by communists and socialists who are no longer able to take advantage of it.

The scale of what is happening is scarcely credible. On Wednesday morning, the UK government committed itself to an unparalleled £500bn of extra support for Britain's paralysed financial system - up to £50bn of capital, guarantees for £250bn of lending between banks and additional injections of cash. This is the biggest, most comprehensive and best-thought-through operation of its kind mounted by any Western government since 1945. It was rewarded for its pains by a further 10 per cent fall in stock market prices, a further freezing of the already crisis-stricken interbank markets and, most ominously of all, the beginnings of a run on sterling.

One government can do so much; the British plan was simply swept to one side by what is now a financial pandemic which only a global response can address. G7 finance ministers, at last jointly aware of the gravity of the crisis, attempted to produce such a response in their five-point plan announced at the meeting of the IMF and World Bank in Washington on Friday night.

The proposals are distressingly broad brush and hardly add to the markets' knowledge. It is no longer news that governments do not intend to let a major bank fail, nor that they will protect depositors, inject capital from taxpayers, free up liquidity and do whatever is necessary to keep the system going. At best, I fear it will temporarily hold the line; at worst, it will be ignored as platitudinous.

The problem is that the markets no longer have any faith that the world financial system they helped create has any future. The model is bust. It is encouraging that both the Americans and Germans are now moving towards what they considered ideologically unthinkable a fortnight ago - they are preparing to follow the British lead, take big public stakes in banks and offer guarantees to the interbank market.

But while this is a necessary condition for stabilisation it is not sufficient. What needs to happen on top is an assault on the dark heart of the global financial system - the $55 trillion market in credit derivatives and, in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments. This is a market more than twice the size of the combined GDP of the US, Japan and the EU. Until it is cleaned up and the toxic threat it poses is removed, the pandemic will continue. Even nationalised banks, and the countries standing behind them, could be overwhelmed by the scale of the losses now emerging.

This market in credit derivatives has grown explosively over the last decade largely in response to the $10 trillion market in securitised assets - the packaging up of income from a huge variety of sources (office rents, port charges, mortgage payments, sport stadiums) and its subsequent sale as a 'security' to be traded between banks.

Plainly, these securities are risky, so the markets invented a system of insurance. A buyer of a securitised bond can purchase what is in effect an insurance contract that will protect him or her against default - a credit default swap (CDS). But unlike the comprehensive insurance contract on your car which you have with one insurance company, these credit default contracts can be freely bought and sold. Complex mathematical models are continually assessing the risk and comparing it to market prices. If the risk falls, the CDSs are cheap; if the risk rises - because, say, a credit rating agency declares the issuing company is less solid - the price rises. Hedge funds speculate in them wildly.

Their purpose was a market solution to make securitisation less risky; in fact, they make it more risky, as we are now witnessing. The collapse of Lehman Brothers - the refusal to bail it out has had cataclysmic consequences - means that it can no longer honour $110bn of bonds, nor $440bn of CDSs it had written. On Friday, the dud contracts were auctioned, with buyers paying a paltry eight cents for every dollar. Put another way, there is now a $414bn hole which somebody holding these contracts has to honour. And if your head is spinning now, add the three bust Icelandic banks. They can no longer honour more than $50bn of bonds, nor a mind-boggling $200bn of CDSs.

The implications are global. The UK government might have frozen Icelandic assets in Britain to get some compensation for the losses, but we are only part of the story. Austrian, Danish and Finnish banks all hold near valueless Icelandic bonds on which they will have bought CDSs from heaven knows whom - Deutsche Bank? A two-bit hedge fund in Dubai? Lehman Brother? Kaupthing? Shareholders in Barclays and RBS are rightly concerned; the two banks hold a stunning $2.4 trillion of CDSs each - more than the UK's GDP.

We don't know their exposure to Iceland and Lehman Brothers, but with such enormous credit derivative books it would be amazing if there were none. While every bank tries to pass the toxic parcel on to somebody else, the system has to find the money. So will compensation for the near valueless contracts and thus now uninsured debt ultimately be made - and by whom? And because nobody knows - not the regulators, banks or governments - who owns the swaps and whether they are credit-worthy, nobody can answer the question. Maybe holders of insurance policies will get the cash due to them, but will that weaken somebody else? The result - panic.

This is the ultra-dangerous downward vortex in which the system is locked. It is why share prices are plummeting. As recession deepens, there will be defaults on securitised bonds and the potential collapse of more banks outside the G7 ring-fence. Nobody knows what proportion of the $55 trillion of credit default contracts that have actually been written will be honoured and who might bear losses running into trillions of dollars. Buying new contracts to insure against default has become prohibitively expensive. Securitisation, and insuring against risk, has effectively ceased. And because the markets don't know where the losses will fall, banks cannot borrow from each other except overnight or from their central bank. Credit flows are at a standstill. Property prices are plummeting. A famous economist, Hyman Minsky, foretold that unregulated finance capitalism inevitably ends in a meltdown and slump. The world is facing a Minsky moment.

One element of the necessary response is in the making - giving banks access to unlimited taxpayers' capital, guaranteeing interbank lending and pumping cash into the system. I suspect that only majority government control of the West's major banks will now stabilise matters. But that is not enough. The markets no longer believe in the financial market structures they have invented. As a result, the US Fed, the European Central Bank, the Bank of Japan and Bank of England must become not just lenders, but insurers of last resort, providing the insurance contracts that the markets have stopped. Governments must write CDSs themselves.

In future, the global credit derivative markets will need to be organised into regulated, licensed exchanges rather than conducted in a way that made the Wild West look tame. We will need a global authority to supervise the credit derivative markets, write insurance contracts and stand ready to guarantee that contracts are settled. And we will need a global, independent credit rating agency to assess risk objectively. More immediately, there needs to be deep co-ordinated cuts in interest rates; last week's half per cent cut was useful but inadequate.

I don't know whether politicians and their advisers can move as quickly as they need in so many areas and collaborate across so many countries to restore stability. Most of those who should be leading the world's recovery are, politically speaking, numbered among the politically walking wounded or dead; either near the end of office like George Bush, in a fractious coalition like Angela Merkel, or leading a dysfunctional party like the weak Taro Aso of Japan.

Without collaboration and leadership, we face disaster. On Friday, there were terrifying signs that the contagion was spreading to the foreign exchange markets: for example, the Australian dollar dived 20 per cent against the yen over the week; sterling fell 3 per cent against the dollar. If investors start to think that politicians cannot control the situation and the necessary international action falls short of what is required, then Britain has got neither the GDP nor financial firepower to support the scale of capital flight and financial losses that will hit the City of London.

The pound could fall at least the 30 to 40 per cent that currencies fell during the Asian financial crisis. London could become the centre of the rout. If so, it will not just be complete nationalisation of the banks we will be considering but the reimposition of capital and exchange controls.

For 30 years, greedy, callow, ignorant financiers, supported by no less callow politicians from all the political parties, have proclaimed the wonders of financial innovation and how proud we all should be of the City of London. The price tag for their behaviour is an economic calamity. We should never have bought such snake oil. The consolation in these dark times is that we never will again.

Obama's speech on the economy

Full text of Barack Obama's speech on the economy

Barack Obama
guardian.co.uk,
Monday October 13 2008 19.13 BST
Article history

We meet at a moment of great uncertainty for America. The economic crisis we face is the worst since the Great Depression. Markets across the globe have become increasingly unstable, and millions of Americans will open up their 401(k) statements this week and see that so much of their hard-earned savings have disappeared.
The credit crisis has left businesses large and small unable to get loans, which means they can't buy new equipment, or hire new workers, or even make payroll for the workers they have. You've got auto plants right here in Ohio that have been around for decades closing their doors and laying off workers who've never known another job in their entire life.
760,000 workers have lost their jobs this year. Unemployment here in Ohio is up 85% over the last eight years, which is the highest it's been in sixteen years. You've lost one of every four manufacturing jobs, the typical Ohio family has seen their income fall $2,500, and it's getting harder and harder to make the mortgage, or fill up your gas tank, or even keep the electricity on at the end of the month. At this rate, the question isn't just "are you better off than you were four years ago?", it's "are you better off than you were four weeks ago?"
I know these are difficult times. I know folks are worried. But I also know this – we can steer ourselves out of this crisis. Because we are the United States of America. We are the country that has faced down war and depression, great challenges and great threats. And at each and every moment, we have risen to meet these challenges – not as Democrats, not as Republicans, but as Americans.
We still have the most talented, most productive workers of any country on Earth. We're still home to innovation and technology, colleges and universities that are the envy of the world. Some of the biggest ideas in history have come from our small businesses and our research facilities. It won't be easy, but there's no reason we can't make this century another American century.
But it will take a new direction. It will take new leadership in Washington. It will take a real change in the policies and politics of the last eight years. And that's why I'm running for president of the United States of America.
My opponent has made his choice. Last week, Senator McCain's campaign announced that they were going to "turn the page" on the discussion about our economy so they can spend the final weeks of this election attacking me instead. His campaign actually said, and I quote, "if we keep talking about the economy, we're going to lose". Well Senator McCain may be worried about losing an election, but I'm worried about Americans who are losing their jobs, and their homes, and their life savings. They can't afford four more years of the economic theory that says we should give more and more to millionaires and billionaires and hope that prosperity trickles down to everyone else. We've seen where that's led us and we're not going back. It's time to turn the page.
Over the course of this campaign, I've laid out a set of policies that will grow our middle-class and strengthen our economy in the long-term. I'll reform our tax code so that 95% of workers and their families get a tax cut, and eliminate income taxes for seniors making under $50,000. I'll bring down the cost of health care for families and businesses by investing in preventative care, new technology, and giving every American the chance to get the same kind of health insurance that members of Congress give themselves. We'll ensure every child can compete in the global economy by recruiting an army of new teachers and making college affordable for anyone who wants to go. We'll create five million new, high-wage jobs by investing in the renewable sources of energy that will eliminate the oil we currently import from the Middle East in ten years, and we'll create two million jobs by rebuilding our crumbling roads, schools and bridges.
But that's a long-term strategy for growth. Right now, we face an immediate economic emergency that requires urgent action. We can't wait to help workers and families and communities who are struggling right now – who don't know if their job or their retirement will be there tomorrow, who don't know if next week's paycheck will cover this month's bills. We need to pass an economic rescue plan for the middle-class and we need to do it now. Today I'm proposing a number of steps that we should take immediately to stabilise our financial system, provide relief to families and communities, and help struggling homeowners. It's a plan that begins with one word that's on everyone's mind, and it's spelled J-O-B-S.
We've already lost three-quarters of a million jobs this year, and some experts say that unemployment may rise to 8% by the end of next year. We can't wait until then to start creating new jobs. That's why I'm proposing to give our businesses a new American jobs tax credit for each new employee they hire here in the United States over the next two years.
To fuel the real engine of job creation in this country, I've also proposed eliminating all capital gains taxes on investments in small businesses and start-up companies, and I've proposed an additional tax incentive through next year to encourage new small business investment. It is time to protect the jobs we have and to create the jobs of tomorrow by unlocking the drive, and ingenuity, and innovation of the American people. And we should fast track the loan guarantees we passed for our auto industry and provide more as needed so that they can build the energy-efficient cars America needs to end our dependence on foreign oil.
We will also save one million jobs by creating a jobs and growth fund that will provide money to states and local communities so that they can move forward with projects to rebuild and repair our roads, our bridges and our schools. A lot of these projects and these jobs are at risk right now because of budget shortfalls, but this fund will make sure they continue.
The second part of my rescue plan is to provide immediate relief to families who are watching their paycheck shrink and their jobs and life savings disappear. I've already proposed a middle-class tax cut for 95% of workers and their families, but today I'm calling on Congress to pass a plan so that the IRS will mail out the first round of those tax cuts as soon as possible. We should also extend and expand unemployment benefits to those Americans who have lost their jobs and are having a harder time finding new ones in this weak economy. And we should stop making them pay taxes on those unemployment insurance benefits as well.
At a time when the ups and downs of the stock market have rarely been so unpredictable and dramatic, we also need to give families and retirees more flexibility and security when it comes to their retirement savings.
I welcome Senator McCain's proposal to waive the rules that currently force our seniors to withdraw from their 401(k)s even when the market is bad. I think that's a good idea, but I think we need to do even more. Since so many Americans will be struggling to pay the bills over the next year, I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009. This will help families get through this crisis without being forced to make painful choices like selling their homes or not sending their kids to college.
The third part of my rescue plan is to provide relief for homeowners who are watching their home values decline while their property taxes go up. Earlier this year I pushed for legislation that would help homeowners stay in their homes by working to modify their mortgages. When Secretary Paulson proposed his original financial rescue plan it included nothing for homeowners. When Senator McCain was silent on the issue, I insisted that it include protections for homeowners. Now the Treasury must use the authority its been granted and move aggressively to help people avoid foreclosure and stay in their homes. We don't need a new law or a new $300bn giveaway to banks like Senator McCain has proposed, we just need to act quickly and decisively.
I've already proposed a mortgage tax credit for struggling homeowners worth 10% of the interest you pay on your mortgage and we should move quickly to pass it. We should also change the unfair bankruptcy laws that allow judges to write down your mortgage if you own six or seven homes, but not if you have only one. And for all those cities and small towns that are facing a choice between cutting services like healthcare and education or raising property taxes, we will provide the funding to prevent those tax hikes from happening. We cannot allow homeowners and small towns to suffer because of the mess made by Wall Street and Washington.
For those Americans in danger of losing their homes, today I'm also proposing a three-month moratorium on foreclosures. If you are a bank or lender that is getting money from the rescue plan that passed Congress, and your customers are making a good-faith effort to make their mortgage payments and renegotiate their mortgages, you will not be able to foreclose on their home for three months. We need to give people the breathing room they need to get back on their feet.
Finally, this crisis has taught us that we cannot have a sound economy with a dysfunctional financial system. We passed a financial rescue plan that has the promise to help stabilise the financial system, but only if we act quickly, effectively and aggressively. The Treasury Department must move quickly with their plan to put more money into struggling banks so they have enough to lend, and they should do it in a way that protects taxpayers instead of enriching CEOs. There was a report yesterday that some financial institutions participating in this rescue plan are still trying to avoid restraints on CEO pay. That's not just wrong, it's an outrage to every American whose tax dollars have been put at risk. No major investor would ever make an investment if they didn't think the corporation was being prudent and responsible, and we shouldn't expect taxpayers to think any differently. We should also be prepared to extend broader guarantees if it becomes necessary to stabilise our financial system.
I also believe that [the] Treasury should not limit itself to purchasing mortgage-backed securities – it should help unfreeze markets for individual mortgages, student loans, car loans, and credit card loans. And I think we need to do even more to make loans available in two very important areas of our economy: small businesses and communities.
On Friday, I proposed [a] small business rescue plan that would create an emergency lending fund to lend money directly to small businesses that need cash for their payroll or to buy inventory. It's what we did after 9/11, and it allowed us to get low-cost loans out to tens of thousands of small businesses. We'll also make it easier for private lenders to make small business loans by expanding the Small Business Administration's loan guarantee program. By temporarily eliminating fees for borrowers and lenders, we can unlock the credit that small firms need to pay their workers and keep their doors open. And today, I'm also proposing that we maintain the ability of states and local communities that are struggling to maintain basic services without raising taxes to continue to get the credit they need.
Congress should pass this emergency rescue plan as soon as possible. If Washington can move quickly to pass a rescue plan for our financial system, there's no reason we can't move just as quickly to pass a rescue plan for our middle-class that will create jobs, provide relief, and help homeowners. And if Congress does not act in the coming months, it will be one of the first things I do as president of the United States. Because we can't wait any longer to start creating new jobs, to help struggling communities and homeowners, and to provide real and immediate relief to families who are worried not only about this month's bills, but their entire life savings. This plan will help ease those anxieties, and along with the other economic policies I've proposed, it will begin to create new jobs, grow family incomes, and put us back on the path to prosperity.
I won't pretend this will be easy or come without cost. We'll have to set priorities as never before, and stick to them. That means pursuing investments in areas such as energy, education and health care that bear directly on our economic future, while deferring other things we can afford to do without. It means scouring the federal budget, line-by-line, ending programs that we don't need and making the ones we do work more efficiently and cost less.
It also means promoting a new ethic of responsibility. Part of the reason this crisis occurred is that everyone was living beyond their means – from Wall Street to Washington to even some on Main Street. CEOs got greedy. Politicians spent money they didn't have. Lenders tricked people into buying home they couldn't afford and some folks knew they couldn't afford them and bought them anyway. We've lived through an era of easy money, in which we were allowed and even encouraged to spend without limits, to borrow instead of save.
Now, I know that in an age of declining wages and skyrocketing costs, for many folks this was not a choice but a necessity. People have been forced to turn to credit cards and home equity loans to keep up, just like our government has borrowed from China and other creditors to help pay its bills.
But we now know how dangerous that can be. Once we get past the present emergency, which requires immediate new investments, we have to break that cycle of debt. Our long-term future requires that we do what's necessary to scale down our deficits, grow wages and encourage personal savings again.
It's a serious challenge. But we can do it if we act now, and if we act as one nation. We can bring a new era of responsibility and accountability to Wall Street and to Washington. We can put in place common-sense regulations to prevent a crisis like this from ever happening again. We can make investments in the technology and innovation that will restore prosperity and lead to new jobs and a new economy for the 21st century. We can restore a sense of fairness and balance that will give ever American a fair shot at the American dream. And above all, we can restore confidence – confidence in America, confidence in our economy, and confidence in ourselves.
This country and the dream it represents are being tested in a way that we haven't seen in nearly a century. And future generations will judge ours by how we respond to this test. Will they say that this was a time when America lost its way and its purpose? When we allowed our own petty differences and broken politics to plunge this country into a dark and painful recession?
Or will they say that this was another one of those moments when America overcame? When we battled back from adversity by recognising that common stake that we have in each other's success?
This is one of those moments. I realise you're cynical and fed up with politics. I understand that you're disappointed and even angry with your leaders. You have every right to be. But despite all of this, I ask of you what's been asked of the American people in times of trial and turmoil throughout our history. I ask you to believe – to believe in yourselves, in each other, and in the future we can build together.
Together, we cannot fail. Not now. Not when we have a crisis to solve and an economy to save. Not when there are so many Americans without jobs and without homes. Not when there are families who can't afford to see a doctor, or send their child to college, or pay their bills at the end of the month. Not when there is a generation that is counting on us to give them the same opportunities and the same chances that we had for ourselves.
We can do this. Americans have done this before. Some of us had grandparents or parents who said maybe I can't go to college but my child can, maybe I can't have my own business but my child can. I may have to rent, but maybe my children will have a home they can call their own. I may not have a lot of money but maybe my child will run for Senate. I might live in a small village but maybe someday my son can be president of the United States of America.
Now it falls to us. Together, we cannot fail. Together, we can overcome the broken policies and divided politics of the last eight years. Together, we can renew an economy that rewards work and rebuilds the middle class. Together, we can create millions of new jobs, and deliver on the promise of healthcare you can afford and education that helps your kids compete. We can do this if we come together, if we have confidence in ourselves and each other, if we look beyond the darkness of the day to the bright light of hope that lies ahead. Together, we can change this country and change this world. Thank you, God bless you, and may God bless America.
Printable version
Send to a friend
Share
Clip
Contact us
larger smaller

How to make ‘bank socialism’ politically acceptable

by Tito Boeri

The leaders of the eurozone finally agreed on a plan. It is a very ambitious rescue plan, as it should be, to stop the self-fulfilling prophecies that brought us to the brink of another Great Depression. But the plan should now be made acceptable also to European citizens.

In the next couple of weeks we shall see how effective these extreme measures are in reducing the spread between Euribor and the ECB refinancing rate. If they are successful, there will be no need to implement these measures. If they are not, public debts in the eurozone are bound to skyrocket. If they only partly succeed in reassuring markets, there will be sizeable outlays to the banking sector. The insurance on the interbank market is potentially very costly – before the crisis the overnight volumes in many Euro countries were of the order of 1-2 per cent of gross domestic product – while the bank recapitalization plans commit so far up to 20 per cent of the eurozone GDP and this share is bound to increase further as national plans are unveiled and countries are forced to raise capital to match the core tier one levels of UK banks (too bad that there was no cross-country co-ordination in this respect!).

Is public opinion in the EU ready to accept such potentially massive transfers of resources from the taxpayer to the banking sector? True, it is mainly gross debt that will increase. By selling assets later on, net public debts may actually go down when the crisis is over. It is also true that in saving the banking system we ultimately save our economies and million of jobs. Nonetheless, there is a non-negligible risk that plans committing large resources to bank rescues will find strong opposition in national parliaments.

Paradoxically, the opponents to “bank socialism” will come mainly from the ranks of the former supporters of the socialisation of the means of production. So far the crisis has contributed to reduce wealth inequalities in Europe. This is due to the relatively low participation of households in financial markets and the relatively low take-up of pension schemes. Based on micro data on wealth assembled in the Luxembourg Wealth Study project, it can be estimated that a reduction of 40 per cent of stock prices significantly reduces wealth of about 6 per cent of Italian families, compared with almost 30 per cent of families in the US. The average wealth loss for those hit by the fall in stock prices is also lower in Italy (roughly 5 per cent compared to almost 10 per cent in the US). No doubt, measures dealing with the stock market crash will be perceived as measures benefiting the top deciles, Wall Street against Main Street, and this even more so in Europe than in the US.

Another reason why these measures will be hard for public opinion to swallow is that the eurozone package postponed much-advertised measures to “punish the bankers”. There is a clear sequencing in the international package: first, rescue financial systems in order to restore confidence in the markets; next, work on avoiding that all this happens again. This was the right thing to do. Mixing up the two phases could backfire, as the priority is currently to anchor expectations to a scenario without domino effects like those that followed the failure of Lehman Bros. However, are European citizens ready to accept measures rescuing banks, giving public money to bankers while deferring the punishment for those who were earning up to $50m (Richard Fuld’s compensation in 2007) and for banks that were before the crisis making profits amounting in some cases (e.g. Unicredit and Banca Intesa) to almost 0.5 per cent of GDP? Are they ready to accept all this after having observed in the last ten years a huge increase of income inequalities driven by the richest 1 per cent of the population (whose share in total income more than doubled in countries like the US)?

Economists have, in the last few weeks, been rather successful in inducing governments to come to terms with the financial crisis. At times of extraordinary politics, they were taken extraordinarily seriously by policymakers, forcing many of them (including George Bush and Angela Merkel) to make embarrassing U-turns. Economists should now be equally effective in addressing the political constraints to the rescue plans and devising ways to involve European citizens in the benefits of this plan. Here are three options to be considered.

First, there is an alternative way to punish banks and bankers that can be operated immediately: increasing competition in the banking sector. After experiencing a major liquidity crisis, banks will compete more to attract savings from the households. Removing barriers to competition in the retail sector is important for this competition to drive down profit margins and improve services for citizens. More contestability should also be allowed. Ms Merkel’s initial reluctance to accept a European initiative stemmed from a fear that other countries might get their hands on German banks. The way out of the crisis will involve a fair amount of bank restructuring. National protections against mergers and acquisitions could severely hamper this process and hence should be removed as soon as possible.

Second, governments have not been at all active in Europe in providing support to low-income families with mortgages. True, the problems are not as acute as in the US, but the increase in Euribor rates (to which often monthly mortgage rates are indexed) is significantly increasing the number of poor families facing difficulties in meeting their payments. Temporary relief schemes for these families should be devised as long as the rates decline. They should be narrowly targeted to minimize costs and moral hazard problems applied to a large population, but they should be implemented.

Third, there is also scope for implementing tax reductions for low-wage earners. These measures would kill two birds with one stone. They would increase popular perception of progressiveness in taxation, thereby reducing opposition to the iniquities of bank socialism. At the same time, they would help anchor expectations of a moderate output fall: the current lack of confidence is also driven by the belief that the crisis will now spread to firms and households, leading to a deflationary trap. Tax deductions for low-income earners have the advantage of acting on both sides, demand and supply. They increase demand as they target the households with the highest propensity to consume and increase supply because induce more people to work without increasing companies’ labour costs. As these measures could reduce the informal sector, they would also have a limited impact on the budget.

JUSTICE STUDENT HUMAN RIGHTS NETWORK

The Autumn edition of the JUSTICE Student Human Rights Network electronic bulletin will be published shortly, but in the meantime we want to let you know about an upcoming event as well as details of vacancies at JUSTICE.

Upcoming event

We are pleased to announce a new event for the JUSTICE Student Human Rights Network.

On Saturday 15 November we will be running a morning event at BPP Law School called Human Rights in Practice: An Introduction. Click to find out more and download the programme.

To reserve a place please email jshrn@justice.org.uk. An email will be sent confirming your place. Places are limited and bookings will be on a first come first served basis. A reserve list will be run if necessary.

Please forward this email to your friends, colleagues and contacts who may be interested in this event. Any questions or comments please email jshrn@justice.org.uk.

For more information on the JUSTICE Student Human Rights Network visit our website.

Vacancies at JUSTICE

Senior Legal Officer (EU)
We are currently recruiting for a Senior Legal Officer (EU). Fuller details are on our website here. The closing date is 20 October. Please forward this on to anyone who may be interested in this position.

Internships
There are three internship vacancies. As well as advertising for two winter interns to start in early 2009 (one working on criminal justice, the other on human rights – see here for more information) we are seeking the following:

Intern sought to assist JUSTICE's director, Roger Smith, in working on the anticipated Constitutional Reform Bill and other issues of policy as well as to provide some administrative assistance in the office. This would be suitable for someone willing to work for a continuous full-time period of six weeks or more or for someone who could offer a set number of days each week over a longer period. The work will involve research on elements in the bill and, if it is delayed, other matters on which JUSTICE is lobbying. It will also require providing daily assistance to Liz Pepler, JUSTICE's finance officer and administrator, on such matters as answering the phones, answering calls to the door and dealing with post. The post requires a knowledge of law and an understanding of the constitution and, therefore, a law degree or equivalent. To apply send a CV and covering letter to Roger Smith at rsmith@justice.org.uk by 1 November. This post is unpaid but JUSTICE will pay an allowance of £3 a day for lunch and will reimburse reasonable travel costs within the London area.

JUSTICE is an independent, UK based charity which seeks to advance access to justice, human rights and the rule of law.


R Give us feedback and ideas for developing the network – by e-mailing jshrn@justice.org.uk
R Forward this e-mail to friends and colleagues who might be interested
R Subscribe to the network to make sure you get the next bulletin and information of activities. Email jshrn@justice.org.uk. This is also the address to use if you wish to unsubscribe.
R Support JUSTICE, by becoming a member

DPP chief Sir Ken Macdonald attacks Big Brother state surveillance

The Director of Public Prosecutions has given a warning of the dangers of plans for a massive expansion of “Big Brother” state surveillance and of the growth of a “security state”.

Sir Ken Macdonald, who heads the Crown Prosecution Service, said that the “enormous powers of access to information” that technology had given the state should be used with great care.

He told an audience in London last night: “We need to take very great care not to fall into a way of life in which freedom’s back is broken by the relentless pressure of a security state.”

Technology, he added, was of critical importance to the struggle against serious crime and used wisely, could protect society.

Related Links
Fears over 'Big Brother' database
You can’t escape: it’s spy web, plan B
Sir Ken Macdonald: 'We are determined to do more ourselves'

It gave “the state enormous powers to access to knowledge and information about each one of us. And the ability to collect and store it at will; every second of every day, in everything we do.”
But Sir Ken, giving the inaugural Crown Prosecution Service lecture in London, called for “level-headedness and legislative restraint”.

He said: “We need to understand that it is in the nature of state power that decisions taken in the next few months and years about how the state may use these powers, and to what extent are likely to be irreversible.

“They will be with us forever,” he said. “And they in turn will be built upon on.

“So we should take very great care to imagine the world we are creating before we build it. We might end up living with something we can’t bear.”

Sir Ken, who steps down at the end of this month after five years as Director of Public Prosecutions, did not refer directly to the latest Government surveillance plans.

But his comments will be taken to mean the Home Secretary Jacqui Smith's plans for a new “super database” that will allow Government officials to monitor people’s every online move.

The Government is examining ways to collect and store records of phone calls, e-mails and internet traffic. Without the right to monitor the flow of internet messaging, the police and security services would have to consider a “massive expansion of surveillance”, she said.

A three-month consultation is planned for the new year.

Sir Ken, who described his period as DPP as a “relentless prosecutorial struggle against terrorism”, acknowledged that the country faced “very significant risks.”

But he said he regarded people’s rights as priceless. The best way to face down security threats was to strengthen our institutions, rather than degrade them.

“Our struggle has been absolutely grounded in due process,” he added. “We all know that this has worked. Our conviction rates for terrorism cases is in excess of 90 per cent — unmatched in the fair trial world.”

He reminded his audience that when he took up his appointment, “some questioned my suitability on the grounds that I had, in my career at the Bar, defended terrorists of almost every hue.”

But he had made clear that his period of DPP and the “relentless struggle against terrorism” would be grounded in respect for historical norms and “for our liberal constitution”.

He added: “So we have been absolutely right to resist, whenever they have been suggested, special courts, vetted judges and all the other paraphernalia of paranoia.”

Earlier in his speech Sir Ken also gave warning about turning back the clock by giving back to the police the job of charging suspects.

There have been recent calls for a return to police charging on the ground that the role of the prosecutor in the process added to police red tape.

But the CPS’s role in charging, which was assumed under his period of office, made it “more likely that investigations will comply with the rules and that occasional abuses of police power will be avoided.

“We make it less likely that the state will bring cases which shouldn’t be brought and which are not justified by the evidence.”

From Times Online
October 21, 2008

The great implosion: Capitalist finance system nears meltdown

Editorial, Socialism Today, October 2008

PDF version

Over recent years, we have often been accused of being 'catastrophists'. This is because we predicted that the debt-driven bubble economy, dominated by high-profit, high-risk finance capitalism, would at a certain point collapse, resulting in a serious downturn in the world economy. As a review of our articles will show, we have never proclaimed a 'catastrophe' at every point, but have presented a careful, balanced analysis of each stage of development. And our analysis is now being amply borne out.

Unfortunately, some on the left succumbed to the idea that the world capitalist boom, based on accelerated globalisation and ultra-free-market policies, could continue indefinitely. The events of recent weeks, following the collapse of the US housing bubble and the severe repercussions of the subprime mortgage crisis, have completely changed the picture. Now the headlines in the serious capitalist press are 'catastrophist'. "Capitalism in convulsion", read a headline in the Financial Times (20 September).

George Bush's attempted multi-billion dollar rescue of the financial system, wrote John Plender, is "at the cost of inflicting severe damage on the US model of free-market capitalism". (Financial Times, 20 September) After the government-financed bail-outs and takeovers of Bear Stearns, Fannie Mae and Freddie Mac, American Insurance Group, etc, it has become commonplace to refer to the 'socialisation' or 'nationalisation' of financial institutions. In reality, the colossal debts of reckless, predatory finance capitalism are being offloaded onto the shoulders of the working class.

When US treasury secretary, Hank Paulson, announced his $700 billion Troubled Asset Rescue Programme, the commentator, Paul Krugman (a liberal Democrat), commented: "Comrade Paulson is taking over the commanding heights". One financial trader, Bill Perkins, a free-marketeer, placed an advert in the New York Times. It shows Bush, Paulson and Federal Reserve chairman, Ben Bernanke, the 'new communists', raising an American flag on the grave of 'private enterprise' and 'capitalism'. Perkins believes that failed banks should be allowed to collapse, and not be bailed out at the taxpayers' expense. "I think it's a kind of trickle down version of socialism or communism", he said. "You have the government nationalising more institutions than Venezuela". (Guardian, 25 September)

For a few days, however, Bush, Paulson and Bernanke were facing the prospect of a new 1929-type crash of the financial system. If they allowed it to happen, as the Federal Reserve and the government did in 1929, it would threaten the survival of the capitalist system. From a capitalist standpoint, they had no choice but to intervene to try to stabilise the financial system. Whether Paulson's package succeeds remains to be seen. There is a chain of crisis that is far from played out.

Nevertheless, the accumulation of state-finance bail-outs and de facto nationalisation, and now the $700 billion rescue plan, is a shattering blow to the prestige of US capitalism and the ideology of the free market.

Nationalisation by the Bush regime, of course, does not mean real 'socialism'. Their aim is to use the state's resources, including a massive increase in public debt, to stabilise capitalism and prepare the ground for a recovery at a later date. The bill for the bail-outs will be handed to the working class, who contribute the biggest share of taxes to the US government. Moreover, millions of working-class families have been ensnared by crooked finance companies into the subprime mortgage trap, and many are now losing their homes. Millions will face unemployment and poverty wages as the financial crisis pushes the US economy deeper into recession.

Real socialism would mean the taking over of the finance sector and the commanding heights of the economy by a government of the working class, to be run democratically under the control of those who produce the wealth. Democratic planning would replace the anarchy of the market. Production would be to meet the needs of society, not the profits of the few. Nevertheless, as Karl Marx and Friedrich Engels pointed out, even nationalisation measures carried out by the capitalist state for its own ends demonstrate the redundancy of private ownership and the possibility of an alternative, more advanced economic system.

Domination of finance capital

Many are now blaming the current crisis on the 'greed' and 'fear' of bankers, hedge fund managers, traders on financial markets, and so on. These people have undoubtedly played a predatory, parasitic role. Their speculative activities have concentrated wealth and profits into the hands of a tiny, super-rich minority. Last year, for instance, the average chief executive in the finance sector gained an income 275 times that of an average worker. Their egotistical motives, however, are a symptom of the system, not the cause of developments.

Over the last 30 years, the capitalist class in the US, Britain and elsewhere moved away from investing in productive activity, the production of goods and services required by the majority of people. They sought higher levels of profitability in the finance sector, both in the advanced capitalist countries and in China and other developing economies. The defeats of the working class in the 1980s, followed by the collapse of Stalinism in the Soviet Union and Eastern Europe, allowed the capitalist class to intensify the exploitation of the working class, especially in the neo-colonial countries of the underdeveloped world. The capitalist system as a whole became increasingly parasitic.

That was the basis on which the parasitic finance capitalism became dominant. It was allowed free scope by globalisation and ultra-free-market (neo-liberal) policies. But the growth of grotesque inequality, with the worldwide reduction in the share of wealth taken by the working class, increasingly restricted the market for capitalism. The capitalist class, especially those operating on the Anglo-US model, have sustained relatively high levels of growth on the basis of ever growing volumes of debt. In 1980, global debt was approximately equal to global GDP. Since then, however, global debt has ballooned to over 3.5 times global output. At the same time, finance capitalism, the channel through which this debt is traded for profit, took around a third of capitalist profits.

This trend, as we have pointed out many times, was unsustainable. It was only a matter of time before the whole edifice collapsed. That is what is happening now. The shadow banking system, the network of unregulated investment banks, hedge funds, and the banks' own off-balance sheet vehicles, has imploded. The shadow network was developed to bypass the regulated commercial banks. But the major banks, which still form the core of the finance system, have not escaped the crisis of liquidity and capital availability. Derivatives, a whole array of exotic financial instruments that were supposed to spread if not abolish risk, have indeed turned out to be "financial instruments of mass destruction", as the old-fashioned financier, Warren Buffett, warned.

There will be a profound reaction in the US and internationally to the capitalist crisis and the state bail-out of rotten finance capital. Apart from the economic contradictions, the crisis will undoubtedly produce a monumental scandal of corrupt practices, fraud and theft on an even bigger scale than the earlier Enron scandals. Workers will be forced to organise and fight against the effects of capitalist crisis. These events will create fertile ground for the growth of interest in genuine socialism and Marxism.

Countdown to meltdown

Events in September marked a new, critical stage of the crisis in the global finance system. The world was brought to the brink of a 1929-type collapse.

On 7 September, the US treasury was forced to step in and take over the direct running of Fannie Mae and Freddie Mac, the two giant government-sponsored mortgage providers. This followed the government intervention in July, when it guaranteed their $5 trillion mortgage debt in return for shares in these institutions - in effect, a partial nationalisation. Even that failed to stabilise these giants. Paulson's 'bazooka' had not proved enough to reassure foreign investors, particularly Asian central banks, which have been selling off Fannie and Freddie bonds. A complete takeover by the government, effectively nationalising the institutions, was the only measure left.

Then (14-15 September) Lehman Brothers and Merrill Lynch, two of the five giant Wall Street investment banks, faced bankruptcy. Other Wall Street banks refused to intervene without a government undertaking to guarantee Lehman and Merrill toxic assets. Paulson and Bernanke refused. They had come under tremendous political pressure to avoid handing out any more taxpayers' dollars. Moreover, free marketers were demanding that they avoid creating further 'moral hazard', that is, sending out another signal that reckless speculators would be protected from their own folly by the assurance of a government bail-out. By refusing to back a government rescue of Lehman and Merrill, Paulson and Bernanke hoped to send a message that there would be no more Bear Stearns-type government-sponsored bail-outs for failing banks. Lehman Brothers filed for bankruptcy, and Barclays International and other vultures began to cherry-pick the potentially profitable Lehman assets. Merrill Lynch, on the other hand, rushed to sell itself to the Bank of America, a deposit bank with much greater capital reserves.

Paulson and Bernanke, however, made a monumental miscalculation. They thought they could draw a line, but their refusal to back a rescue of Lehman or Merrill triggered a general slump in bank shares. This signalled that a whole swathe of banks were about to follow Lehman and Merrill into the dust. Among the most threatened were the two remaining investment banks, Morgan Stanley and Goldman Sachs. The whole 'shadow banking system', the unregulated, debt-financed, highly speculative network of investment banks and hedge funds, was imploding. Because of their multiple links with the major banks, which also operated off-balance sheet investment vehicles, the investment banks threatened to bring down many other institutions. If Paulson and Bernanke had backed a rescue of Lehman and Merrill, it would not have stopped the rot (as the subsequent bankruptcy of Washington Mutual shows), but by standing back as Lehman and Merrill sank, they accelerated the pace of the banking crisis.

In Britain, HBOS (Halifax-Bank of Scotland), a major bank and mortgage provider, faced bankruptcy. It was only saved by a rapid marriage of convenience, pushed by the Bank of England, with Lloyds TSB.

The failure of Lehman and Merrill had an immediate knock-on effect on the short-term money market. Money market funds, used by the banks to finance their short-term borrowing, have usually been regarded as almost as safe as cash. A key aspect of the credit crunch was the seizing up of this short-term money market, as banks hoarded cash and avoided making any potentially risky loans to other banks. Despite the Federal Reserve's drastic interest rates cuts, the inter-bank lending rate, usually fractionally higher than the Fed's rate, has soared to an unprecedented level. Reeling under the impact of the Lehman and Merrill bankruptcies, the severe credit crunch turned into a complete paralysis of this vital money market.

The Federal Reserve, cooperating with other major central banks, was forced to pump $180 billion into the global banking system (on this occasion, currency swaps, dollars for euros, pounds, etc). In the following few days, they pumped in another $100 billion into the system, and the central banks of Britain and Japan, and the European Central Bank also pumped in additional liquidity. Moreover, the Fed and other central banks agreed to accept a wider range of securities as collateral for the loans, including shares, company bonds, etc, in other words, much more risky assets than the government bonds they had previously insisted on. (Since then, more liquidity in the form of short-term loans have been pumped in by central banks.)

Paulson had allowed Lehman and Merrill to collapse, but faced with the possible collapse of a giant insurance company, American Insurance Group (AIG), the government was forced to step in. The AIG crisis was triggered by the downgrading of its security status by a rating agency. This threatened to trigger a run on AIG's shares, thus further depleting its capital reserves. The problem was not with AIG's massive insurance business in the US, Europe and Asia. The crisis arose from its involvement in the shadow banking system through its worldwide business in credit default swaps, a form of insurance used to guarantee the investment grade status of a wide range of securities (mortgage-backed securities, company bonds, municipal bonds, etc). AIG had issued $447 billion of such insurance (including $300bn to European institutions).

The downgrading of AIG's credit status automatically meant a downgrading of securities insured by AIG-issued credit default swaps. This would, in turn, create problems for any finance house using AIG-insured securities as collateral for their own borrowing. In other words, a collapse of AIG would mean a huge increase in the quantity of toxic debt in the global finance system. The losses would be absolutely staggering (one estimate is that it would mean at least $180bn for the global financial sector). At the same time, AIG's collapse would also mean the collapse of its worldwide insurance business. To avoid a catastrophic crash, Paulson was forced to step in by guaranteeing $85 billion of AIG assets in return for preference shares in the insurance company.
During the critical week, 15-19 September, world stock exchanges plunged. The government bail-out of AIG failed to stabilise share markets. At the same time, the price of oil, which had been tending to fall over recent weeks, began to rise - probably due to a panicky buying of oil futures. Paulson and Bernanke evidently realised that they were faced with a stark 1929 situation. If they stood aside, there would undoubtedly be a collapse of the global finance system which, in turn, would provoke a major slump in the world capitalist economy. Having learned the lessons of the 1929 crash, when the Federal Reserve and the US government stood aside and allowed the financial dominoes to collapse, Paulson and Bernanke decided that they had no choice but to step in to save the capitalist system.

On 19 September, Paulson announced his Troubled Asset Relief Programme (Tarp), a $700 billion 'plan' to place a floor under collapsing financial institutions and re-stabilise the US and world banking system. Paulson's announcement averted a global crash, at least for the time being. But it is really a palliative measure that will not in itself overcome the credit crunch and the paralysis of the banking system.

As we go to press, there is news of the bankruptcy of Washington Mutual, the biggest bank failure in US history. WaMu was seized by the regulator (25 September) and sold to JP Morgan Chase.

European banks have also been hammered by their huge losses from toxic subprime mortgage securities. The hardest hit is the Swiss bank, UBS, which has made total write-downs of around $50 billion (more than Merrill Lynch). The Financial Times has commented that many European banks are now not only 'too big to fail', but "too big to save". "For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to about €200 billion (more than Fannie Mae) or more than 80% of the gross domestic product of Germany. This is simply too much for the Bundesbank or even the German state..." (European Banking Lives on Borrowed Time, Financial Times, 24 September)

Paulson's package

After the crisis with Lehman Brothers and Merrill Lynch, and the seizing up of the short-term money market (despite continuing, massive injections of liquidity by the Federal Reserve and other central banks) Paulson was forced to announce (18 September) a rescue package, the Tarp. Without giving any details, Paulson proposed to spend $700 billion of taxpayers' money to establish a toxic waste dump for the unsellable securities still on the books of financial institutions.

A reported $500 billion of losses have already been written off, but some estimates put remaining securities from the housing market at a further $1,000 billion. Global stock exchanges immediately revived following Paulson's announcement. Almost immediately, however, congressional leaders, both Democrat and Republican, began to protest at the sweeping character of Paulson's rescue plan and the extraordinary powers that he was claiming as treasury secretary.

Paulson proposed that the treasury secretary should be given (initially for two years) unlimited powers to buy securities from anyone at any price according to his discretion. Moreover, he was claiming immunity from any kind of action by courts or administrative agencies of the government. Initially, he proposed buying the securities from US banks only, but soon widened this to include the US subsidiaries of foreign banks.

If this were accepted by Congress, Paulson would be the most powerful treasury secretary in US history. On its cover, Newsweek dubbed him 'King Henry'. In effect, the treasury secretary would become the economic executive of US capitalism, with no oversight (merely reporting to Congress twice a year), a rival source of power to the presidency itself.

Like Bush after 9/11, Paulson, backed by Bernanke, is attempting to use the threat of global financial collapse to get rapid congressional approval of his proposals without a thorough discussion of their content. Paulson, for instance, is demanding the package should be 'clean', meaning that it should not be encumbered by any proposals such as the government acquisition of shares in exchange for buying toxic debt, or limits on the remuneration of bankers, or relief to homeowners facing foreclosure. Keen to bail out bankrupt bankers, Paulson brutally rejects the legitimate claims of home-buyers.

Paulson is proposing to pay something near the face value of toxic securities, over 60 cents in the dollar, as opposed to their current market value of 20 or 30 cents. Moreover, a variety of banks, finance houses and other companies are lobbying to widen the scope of the rescue. For instance, there are demands for municipal bonds, credit card debt and car-purchase debt to be included. Wall Street firms are already looking forward to the fees they hope to collect from being drawn in to administer the operations of Paulson's programme.

It is hardly surprising, then, that the heads of finance companies are enthusiastic about Paulson's proposals. However, some free-market Republicans have vehemently denounced the plan as the 'socialisation of debt'. Senator Jim Bunning, a Republican from Kentucky, proclaimed: "The free market for all intents and purposes is dead in America". He said that Paulson's plan would "take Wall Street's pain and spread it to the taxpayers... It's financial socialism, and it's un-American".

Democrat leaders, on the other hand, are demanding measures to help distressed homeowners. Paulson has rejected this demand on the grounds that the bundles of toxic securities are too complex to allow the reduction of individual homeowners' payments. "The banking and securities industries... are fighting the change with all their might, as they did when it came up with the housing bill that was adopted in July". (International Herald Tribune, 24 September)

Paulson's current proposal is completely different from the measure used to rescue the savings and loans banks (thrifts) in the early 1990s. At that time, the US government effectively nationalised the failing thrifts, and sold off their remaining assets over a period, before returning the thrifts to private ownership. The robust growth of the economy after 1994 restored the value of mortgaged property and allowed the government to recover part of the cost of the rescue.

A similar measure was taken by the Swedish government after the collapse of the housing bubble in 1991-92. The government nationalised a large section of the Swedish banking sector, cutting out the shareholders of these failed institutions and, subsequently again, any sellable assets were sold off and the banks were later returned to the private sector. The rescue, however, cost about 4% of Sweden's gross domestic product (though some of this was recovered over time). The US capitalist class, however, would undoubtedly strongly resist full-scale nationalisation of the US banking sector.

The current Paulson rescue proposal, costing around $700 billion, is the equivalent of about 5% of GDP. However, Paulson has no intention of taking over the failed US banks, merely bailing them out by buying up their toxic debts, thus allowing them to replenish their capital and carry on as usual. Paulson is not even demanding shares in the banks in return for buying their bad debt.

Will Paulson get congressional approval for his package? Given the strength of congressional opposition, there is likely to be some delay, and Paulson may be forced to accept some modifications, particularly to the extraordinary, unchecked powers he is claiming. However, faced with the threat of further falls in financial markets and the possibility of new convulsions, it seems likely that Congress will accept the package in one form or another before dispersing for the November elections.

A socialist alternative

Paulson claims that people do not care who owns the banks. Millions of homeowners, however, will care that the government is using taxpayers' money to bail out the banks which have sold and securitised toxic mortgages while millions are facing penal interest rates and the threat of foreclosure. In fact, millions of Americans are already incensed at Paulson's plan.

Community organisations, unions, and all those who defend the interests of working people should demand that, instead of the nationalisation of finance capital's toxic assets and bad debts, the banks and financial institutions (insurance companies, hedge funds, etc) should be nationalised and run in a democratically planned way under workers' control and management. Compensation for small shareholders and depositors should be on the basis of need only.

The banking sector should be run to promote the interests of industries providing goods and services needed by the majority of the population, not funding the speculative activities of a hyper-rich minority of financiers. The banks should provide cheap mortgages for personal home buyers (with a ceiling to exclude luxury houses for the wealthy). They should also provide cheap credit to small businesses and small farmers serving the needs of local communities.

Such measures, of course, would for many raise the question of ownership and control of wider sectors of the economy, and the need for democratic planning to replace the anarchy of the market and the naked pursuit of personal profit. The US government, for instance, is currently considering a package of state-guaranteed loans to the big auto companies, Ford, Chrysler and GM. These corporations are in deep crisis and should also be taken over and run under democratic workers' control and management to meet the needs of society.

Unions and community groups should totally oppose all foreclosures. Where dodgy mortgages have been sold through fraud or deception, they should be cancelled. Home buyers who cannot meet their mortgage repayments should have the right to rent the property at an affordable, social rent. Where, through foreclosures and the bankruptcy of builders and property companies, there are empty houses, state and municipal government should take over unoccupied homes and rent them out at affordable rents. Decisions regarding mortgage defaults, foreclosures, and home owners' rights in general, should be taken not by government officials or bankruptcy courts, but by popular, elected committees which will safeguard the rights of working people.

A new period

If passed by Congress, Paulson's package, probably with some modifications, may avert a financial crash. There will still be serious wrangles over the detailed measures to be implemented. However, the rescue plan will not in itself revive the finance sector. The US housing crisis, the root of the credit crunch, is far from over. Huge losses in the financial sector mean that the credit crunch will continue for years, even if the toxic waste is taken over by the government.

The rescue of the finance sector will not avert a recession in the US economy, which is already gathering pace. Moreover, the US slowdown, combined with financial crisis in many other economies, is pushing the world towards an economic downturn. There is now a sharp recession in the European economies. Japan, after a weak recovery in recent years, has once again lapsed into zero growth. China, still seen as a dynamo of the world economy, is expected to slow down from 11-12% growth to around 8% during 2008. Though 8% is relatively high, this would have serious effects within China, economically and politically.

The underlying crisis of capitalist production and profitability has been postponed several times since the 1980s through a series of financial bubbles that have fuelled debt-based consumer spending in the US and elsewhere (driving the production of cheap goods in China and other low-cost economies). But now is the time of reckoning. The collapse of the extreme debt mountain almost certainly means a prolonged period of weak growth in the world capitalist economy. Undoubtedly, there will still be an economic cycle, but it is not likely that there will be a return to the kind of global boom that was experienced between 2001-07.

The recent phase of accelerated globalisation and unfettered neo-liberal policies is drawing to a close and an entirely new period of developments is opening. Massive state intervention in the finance sector has wider implications for trade, international currency flows and industrial policy. There will be even deeper tensions between the major capitalist powers. Prolonged stagnation, punctuated by weak recoveries and renewed recession, will provoke social crisis and mighty political struggles. The economic crisis of capitalism is also an ideological and political crisis, and this unavoidably places Marxism back on the political agenda.

Here's How to Fix the Wall Street Mess ...from Michael Moore

Alex,10,told his Dad that he was interested in camels.His Dad gave him a book.About two weeks later Dad asked Alex what he thought of the book
Alex said 'Well it's like this Dad.This book tells me more about camels than I ever wanted to know'

I hope that you do'nt feel the same way about this mailing list and the crisis!!

Friends,

The richest 400 Americans -- that's right, just four hundred people -- own MORE than the bottom 150 million Americans combined. 400 rich Americans have got more stashed away than half the entire country! Their combined net worth is $1.6 trillion. During the eight years of the Bush Administration, their wealth has increased by nearly $700 billion -- the same amount that they are now demanding we give to them for the "bailout." Why don't they just spend the money they made under Bush to bail themselves out? They'd still have nearly a trillion dollars left over to spread amongst themselves!

Of course, they are not going to do that -- at least not voluntarily. George W. Bush was handed a $127 billion surplus when Bill Clinton left office. Because that money was OUR money and not his, he did what the rich prefer to do -- spend it and never look back. Now we have a $9.5 trillion debt. Why on earth would we even think of giving these robber barons any more of our money?
I would like to propose my own bailout plan. My suggestions, listed below, are predicated on the singular and simple belief that the rich must pull themselves up by their own platinum bootstraps. Sorry, fellows, but you drilled it into our heads one too many times: There... is... no... free... lunch. And thank you for encouraging us to hate people on welfare! So, there will be no handouts from us to you. The Senate, tonight, is going to try to rush their version of a "bailout" bill to a vote. They must be stopped. We did it on Monday with the House, and we can do it again today with the Senate.

It is clear, though, that we cannot simply keep protesting without proposing exactly what it is we think Congress should do. So, after consulting with a number of people smarter than Phil Gramm, here is my proposal, now known as "Mike's Rescue Plan." It has 10 simple, straightforward points. They are:

1. APPOINT A SPECIAL PROSECUTOR TO CRIMINALLY INDICT ANYONE ON WALL STREET WHO KNOWINGLY CONTRIBUTED TO THIS COLLAPSE. Before any new money is expended, Congress must commit, by resolution, to criminally prosecute anyone who had anything to do with the attempted sacking of our economy. This means that anyone who committed insider trading, securities fraud or any action that helped bring about this collapse must go to jail. This Congress must call for a Special Prosecutor who will vigorously go after everyone who created the mess, and anyone else who attempts to scam the public in the future.

2. THE RICH MUST PAY FOR THEIR OWN BAILOUT. They may have to live in 5 houses instead of 7. They may have to drive 9 cars instead of 13. The chef for their mini-terriers may have to be reassigned. But there is no way in hell, after forcing family incomes to go down more than $2,000 dollars during the Bush years, that working people and the middle class are going to fork over one dime to underwrite the next yacht purchase.

If they truly need the $700 billion they say they need, well, here is an easy way they can raise it:

a) Every couple who makes over a million dollars a year and every single taxpayer who makes over $500,000 a year will pay a 10% surcharge tax for five years. (It's the Senator Sanders plan. He's like Colonel Sanders, only he's out to fry the right chickens.) That means the rich will still be paying less income tax than when Carter was president. This will raise a total of $300 billion.

b) Like nearly every other democracy, charge a 0.25% tax on every stock transaction. This will raise more than $200 billion in a year.

c) Because every stockholder is a patriotic American, stockholders will forgo receiving a dividend check for one quarter and instead this money will go the treasury to help pay for the bailout.

d) 25% of major U.S. corporations currently pay NO federal income tax. Federal corporate tax revenues currently amount to 1.7% of the GDP compared to 5% in the 1950s. If we raise the corporate income tax back to the level of the 1950s, that gives us an extra $500 billion.

All of this combined should be enough to end the calamity. The rich will get to keep their mansions and their servants, and our United States government ("COUNTRY FIRST!") will have a little leftover to repair some roads, bridges and schools.

3. BAIL OUT THE PEOPLE LOSING THEIR HOMES, NOT THE PEOPLE WHO WILL BUILD AN EIGHTH HOME. There are 1.3 million homes in foreclosure right now. That is what is at the heart of this problem. So instead of giving the money to the banks as a gift, pay down each of these mortgages by $100,000. Force the banks to renegotiate the mortgage so the homeowner can pay on its current value. To insure that this help does no go to speculators and those who have tried to make money by flipping houses, this bailout is only for people's primary residence. And in return for the $100K paydown on the existing mortgage, the government gets to share in the holding of the mortgage so that it can get some of its money back. Thus, the total initial cost of fixing the mortgage crisis at its roots (instead of with the greedy lenders) is $150 billion, not $700 billion.

And let's set the record straight. People who have defaulted on their mortgages are not "bad risks." They are our fellow Americans, and all they wanted was what we all want and most of us still get: a home to call their own. But during the Bush years, millions of them lost the decent paying jobs they had. Six million fell into poverty. Seven million lost their health insurance. And every one of them saw their real wages go down by $2,000. Those who dare to look down on these Americans who got hit with one bad break after another should be ashamed. We are a better, stronger, safer and happier society when all of our citizens can afford to live in a home that they own.

4. IF YOUR BANK OR COMPANY GETS ANY OF OUR MONEY IN A "BAILOUT," THEN WE OWN YOU. Sorry, that's how it's done. If the bank gives me money so I can buy a house, the bank "owns" that house until I pay it all back -- with interest. Same deal for Wall Street. Whatever money you need to stay afloat, if our government considers you a safe risk -- and necessary for the good of the country -- then you can get a loan, but we will own you. If you default, we will sell you. This is how the Swedish government did it and it worked.

5. ALL REGULATIONS MUST BE RESTORED. THE REAGAN REVOLUTION IS DEAD. This catastrophe happened because we let the fox have the keys to the henhouse. In 1999, Phil Gramm authored a bill to remove all the regulations that governed Wall Street and our banking system. The bill passed and Clinton signed it. Here's what Sen. Phil Gramm, McCain's chief economic advisor, said at the bill signing:

"In the 1930s ... it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets. "We are here today to repeal [that] because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom. "I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality."

This bill must be repealed. Bill Clinton can help by leading the effort for the repeal of the Gramm bill and the reinstating of even tougher regulations regarding our financial institutions. And when they're done with that, they can restore the regulations for the airlines, the inspection of our food, the oil industry, OSHA, and every other entity that affects our daily lives. All oversight provisions for any "bailout" must have enforcement monies attached to them and criminal penalties for all offenders.

6. IF IT'S TOO BIG TO FAIL, THEN THAT MEANS IT'S TOO BIG TO EXIST. Allowing the creation of these mega-mergers and not enforcing the monopoly and anti-trust laws has allowed a number of financial institutions and corporations to become so large, the very thought of their collapse means an even bigger collapse across the entire economy. No one or two companies should have this kind of power. The so-called "economic Pearl Harbor" can't happen when you have hundreds -- thousands -- of institutions where people have their money. When you have a dozen auto companies, if one goes belly-up, we don't face a national disaster. If you have three separately-owned daily newspapers in your town, then one media company can't call all the shots (I know... What am I thinking?! Who reads a paper anymore? Sure glad all those mergers and buyouts left us with a strong and free press!). Laws must be enacted to prevent companies from being so large and dominant that with one slingshot to the eye, the giant falls and dies. And no institution should be allowed to set up money schemes that no one can understand. If you can't explain it in two sentences, you shouldn't be taking anyone's money.

7. NO EXECUTIVE SHOULD BE PAID MORE THAN 40 TIMES THEIR AVERAGE EMPLOYEE, AND NO EXECUTIVE SHOULD RECEIVE ANY KIND OF "PARACHUTE" OTHER THAN THE VERY GENEROUS SALARY HE OR SHE MADE WHILE WORKING FOR THE COMPANY. In 1980, the average American CEO made 45 times what their employees made. By 2003, they were making 254 times what their workers made. After 8 years of Bush, they now make over 400 times what their average employee makes. How this can happen at publicly held companies is beyond reason. In Britain, the average CEO makes 28 times what their average employee makes. In Japan, it's only 17 times! The last I heard, the CEO of Toyota was living the high life in Tokyo. How does he do it on so little money? Seriously, this is an outrage. We have created the mess we're in by letting the people at the top become bloated beyond belief with millions of dollars. This has to stop. Not only should no executive who receives help out of this mess profit from it, but any executive who was in charge of running his company into the ground should be fired before the company receives any help.

8. STRENGTHEN THE FDIC AND MAKE IT A MODEL FOR PROTECTING NOT ONLY PEOPLE'S SAVINGS, BUT ALSO THEIR PENSIONS AND THEIR HOMES. Obama was correct yesterday to propose expanding FDIC protection of people's savings in their banks to $250,000. But this same sort of government insurance must be given to our nation's pension funds. People should never have to worry about whether or not the money they've put away for their old age will be there. This will mean strict government oversight of companies who manage their employees' funds -- or perhaps it means that the companies will have to turn over those funds and their management to the government. People's private retirement funds must also be protected, but perhaps it's time to consider not having one's retirement invested in the casino known as the stock market. Our government should have a solemn duty to guarantee that no one who grows old in this country has to worry about ending up destitute.

9. EVERYBODY NEEDS TO TAKE A DEEP BREATH, CALM DOWN, AND NOT LET FEAR RULE THE DAY. Turn off the TV! We are not in the Second Great Depression. The sky is not falling. Pundits and politicians are lying to us so fast and furious it's hard not to be affected by all the fear mongering. Even I, yesterday, wrote to you and repeated what I heard on the news, that the Dow had the biggest one day drop in its history. Well, that's true in terms of points, but its 7% drop came nowhere close to Black Monday in 1987 when the stock market in one day lost 23% of its value. In the '80s, 3,000 banks closed, but America didn't go out of business. These institutions have always had their ups and downs and eventually it works out. It has to, because the rich do not like their wealth being disrupted! They have a vested interest in calming things down and getting back into the Jacuzzi.

As crazy as things are right now, tens of thousands of people got a car loan this week. Thousands went to the bank and got a mortgage to buy a home. Students just back to college found banks more than happy to put them into hock for the next 15 years with a student loan. Life has gone on. Not a single person has lost any of their money if it's in a bank or a treasury note or a CD. And the most amazing thing is that the American public hasn't bought the scare campaign. The citizens didn't blink, and instead told Congress to take that bailout and shove it. THAT was impressive. Why didn't the population succumb to the fright-filled warnings from their president and his cronies? Well, you can only say 'Saddam has da bomb' so many times before the people realize you're a lying sack of shite. After eight long years, the nation is worn out and simply can't take it any longer.

10. CREATE A NATIONAL BANK, A "PEOPLE'S BANK." If we really are itching to print up a trillion dollars, instead of giving it to a few rich people, why don't we give it to ourselves? Now that we own Freddie and Fannie, why not set up a people's bank? One that can provide low-interest loans for all sorts of people who want to own a home, start a small business, go to school, come up with the cure for cancer or create the next great invention. And now that we own AIG, the country's largest insurance company, let's take the next step and provide health insurance for everyone. Medicare for all. It will save us so much money in the long run. And we won't be 12th on the life expectancy list. We'll be able to have a longer life, enjoying our government-protected pension, and living to see the day when the corporate criminals who caused so much misery are let out of prison so that we can help reacclimate them to civilian life -- a life with one nice home and a gas-free car that was invented with help from the People's Bank.

Yours,

Michael Moore

MMFlint@aol.com

MichaelMoore.com

P.S. Call your Senators now.

Here's a backup link in case we crash that site again. They are going to attempt their own version of the Looting of America tonight. And let your reps know if you agree with my 10-point plan.