Economic meltdown

October 15, 2008

What a difference two weeks makes!

In late September, Republicans in Congress were laughing with scorn at the Democrats for suggesting that the U.S. government should buy stakes in the banks to forestall an economic meltdown. This strategy was derided as “too European” and interventionist.

Now Federal Reserve Chair Ben Bernanke, with pressure from foreign powers, is dragging Treasury Secretary Henry Paulson into doing just that. Why? Right now banks won’t lend money to each other, or to anyone else. They’re too scared they won’t get the principal back–they fear any bank might turn out to be a rotten shell. The resulting “credit freeze” and has the effect of bringing important economic activity to a screeching halt. Forecasting a looming disaster, the stock market has become bipolar and skittish.

The panic has meant that even conservatives are willing to cede some control of private enterprises to the government, at least for the moment.

Those of us disgusted with the system should ask, why not nationalize the banks permanently? They could be operated in the public interest, like the post office or the library, charging low interest for loans, paying their managers decent but not crazy salaries, but most importantly, not driven to make a profit no matter the cost. It turns out that would not be that expensive given that we’re having to shore them up when they are periodically looted by their owners.

This issue of the Iguana we direct you to several articles related to the economic crisis. We hope they will be more clarifying than recent news reports.

How did we get to this point?

We got to this point because, in the words of United Mine Workers union leader Cecil Roberts, “Too few people have too much money.” Inequality in the U.S. is approaching that of 1900. Indeed, economist Doug Henwood compares our period to the Gilded Age in a very clarifying short article in the Nation: . The richest 1% in the U.S. have more wealth than the bottom 95%. This punishing disparity didn’t come about without struggle. It is the result of sustained top-down class warfare, notably advanced under Carter when then-Federal Reserve chair Paul Volcker moved to create unemployment by pushing the federal funds rate up. This created a recession we know now as the “Reagan recession.” Eleven percent unemployment drove wages down, and they’ve been smothered ever since by a combination of slashed safety-nets and union-busting.

The right would like to blame the economic crisis on people of modest means who borrowed money to buy a house but couldn’t pay it back. But why are our wages so low (and employment so insecure) that we can’t afford housing? Why are we going deeper into debt to pay everyday bills? Why do 20% of U.S. households have zero or negative net worth? All of these things can be attributed to the decline in real wages in the U.S. Our wages peaked in the late 1960’s and have been falling since then, despite the fact that our productivity has risen more than 50% in the same period. Laws unfriendly to unions mean that we haven’t been able to bargain higher wages. So even though we’ve been very productive, our pay has not reflected the wealth we’ve created.

As an underpaid workforce, we’ve turned to borrowing to buy the things we need (housing, health care, higher education, lately even food and fuel). We’ve been using credit cards, taking out student loans, and borrowing against our homes (because their value was supposed to be going up, that seemed OK). But workers’ share of the money in the U.S. is not big enough to sustain our debt, never mind pay the interest rates that mortgage companies charged when low-interest mortgages reset to higher-interest mortgages. When we reached the breaking point, as millions of families did in the last two years, the banks that relied on our regular payments broke down too. Financial instruments which exaggerate both gains and losses have amplified the effect, but the basic problem remains that we are not paid enough to buy the products of our labor. Extending us credit could only hide the problem for so long. For a much deeper and extensive analysis of the crisis, see Sam Gindin and Leo Panitch’s article on Znet: “The Current Crisis, A Socialist Perspective,” at:

Where did the money go?
The employing class, rolling in cash due to our low pay, have been happy to lend us money, since they can get a return on it. Much better than paying it to us in wages! They’ve been investing in financial markets, including complicated insurance schemes which they expected would protect their investments while providing wild returns. All the money sloshing around tamed regulators and in many cases meant lobbyists could extract laxer laws from a pliant Congress. With the repeal of regulation came more and more fictional accounting which allowed firms to richly compensate their high-flying CEOs and owners. Like Enron, these firms looked profitable. Why not reward that? So the money went to make the very rich personally very richer–resulting in a new gilded age of $37 million apartments, $3 million birthday parties, $480,000 watches and $300,000 outfits, like that worn by Cindy McCain at the Republican convention. The rich have not been taxed much (certainly not nearly as much as they were in past eras), so instead an underfunded government has borrowed money from them, creating another source of financial wealth.

When banks and insurance companies started to fail, the “$700 billion bailout” was an attempt to inject ready cash from the U.S. Treasury into the remaining banks so they wouldn’t also go belly-up and bring the economy down with them. But people ask, where did the money go? Much of the money was already spent. Another great portion of it was imaginary, in that it relied on inflated expectations rather than goods in the real economy. Now it looks like the promise of $700 billion to buy bad assets isn’t enough to make private banks lend money to each other. Both sides of the aisle now agree that the government needs to buy them, or significant portions of them, to induce them to fulfill their lending role. More on the seriousness of the crisis can be found in an interview with the Monthly Review’s John Bellamy Foster, at

How will all this affect everyday people?
The recession has hit us first. Indeed, the last recession, the one that started with Bush’s first term, never really left if you look at our wages. Now we’re feeling the effects as millions face foreclosure and eviction or bankruptcy from unemployment and health care bills. The prices of food and fuel have nearly doubled in the last 3 years, whittling our savings down to nothing. And retirement funds linked to the stock market have lost 20% of their value over the past year (not counting recent market flailing), meaning many people who hoped to retire soon don’t dare. When people put off retirement, that makes jobs scarcer, and the general slowdown will amplify unemployment.

It is not an exaggeration to say that capitalism could bring us another Great Depression. (Some felt the Bush administration was crying wolf to shove through the bailout, but it may well turn out that the Administration was too slow to take action when banks started to fail, not too hasty.) But more likely is a long, miserable recession. Neither scenario automatically means our living standards must be further destroyed, however. Progressive measures that were unthinkable a year ago sound reasonable today, and we should push our advantage while the wage-slashers, union-busters and credit-pushers are in disarray.

Union folks, progressives and people who care about justice can (indeed, for our own survival, must) demand a major rearrangement of the priorities of our government. These should be aimed at blunting the blow of economic the downturn and increasing workers’ share of the national wealth. After all, it’s the gap between the rich and the rest of us that’s largely responsible for bringing our economy to a standstill.

Here are a few ideas:
–stop evictions; moratorium on foreclosures
–guarantee unemployment benefits that don’t run out
–raise the minimum wage to 1968 levels ($9.50 in 2007 dollars)
–make it easier to form and join a union (the Employee Free Choice Act would be a start).
–tax the rich and corporations as way of recovering some of the recent loot
–institute national health insurance for everyone–health care costs are the leading cause of family bankruptcy
–rewrite bankruptcy laws to work for everyday people not credit card companies
–rebuild and repair our infrastructure, putting people to work in good public jobs
–dedicate public funds to sustainable alternative energy with low carbon output
–build and fund public housing and cooperative housing instead of promoting expensive mortgages and “home-ownership” as a way to wealth.

What about the elections?
Barack Obama and the Democrats have cautiously supported some of these measures some of the time. Much of this support has been half-assed or absent when it mattered. And it’s true that the crisis has been a bipartisan creation, long in the making. However, if we want a legislature and executive branch we can push, a big mandate for an Obama administration and a large Democratic majority in both houses of Congress will give us a fighting chance. A Democratic victory would also allow us to see that Democrats are not enough, we need an explosively growing grassroots movement of working people of all colors to force our leaders to confront this crisis. Under Republicans, we’ll continue to be fed the line that we just need Democrats in power, and the Democrats will continue rightward.

What can we expect under a McCain-Palin administration, with its half-baked, pro-rich economic platform and profoundly militarist “us against the world” ideas? We’re getting a taste of where they’re going when we witness their appeals to white voters on the basis of racism and fear-mongering. At McCain and Palin rallies, people are rightly upset about the situation, but they’re led by the candidates to blame Barack Obama, yelling ‘kill him’ when Obama’s name is mentioned in association with former Weather Underground figure Bill Ayers, volunteering that Obama’s an Arab, that they fear for their lives if he’s elected president, and that the country is going ‘socialist.’

The McCain-Palin campaign and its right-wing supporters on talk radio and Fox News are trying to widen the fault lines in American on the basis of race, sex, religion and culture. If we allow ourselves to become divided along these lines in the middle of a depression, we won’t stand a chance to get the things we need. We already see the outlines of fascist ideology, where people blame immigrants or Black people or Arabs or feminists or trade unions or socialists because their future has suddenly become so uncertain. A disaster, economic or any other kind, can be endured only if we stand together and defend each other. We saw examples, both good and bad, in post-Katrina New Orleans.

Cynthia McKinney (Green Party) and Ralph Nader are each on the ballot for president in Florida, and, as expected, have much better platforms than the Democrats. McKinney, in particular, is an appealing choice–as a Georgia Congresswoman she bravely stood against the war and the Bush Administration’s attacks on human rights and civil liberties. However, she is polling at less than 2%. Florida is likely to be very close in this election. We live in a big state with a lot of electoral votes at stake. Floridians should think strategically when we vote. If the election is close enough to steal, the Republicans will steal it. Let’s not give them that chance. Their tactics are clear from recent years: In areas they control, they throw away votes, challenge Black and Democratic voters, engage in voting machine chicanery, and use intimidation and lies. So the election may turn out to be closer than we expect, which is another reason not to sit this one out.

But this election, even if there is an unprecedented Democratic sweep, is not going to be the answer to the fundamental problems with the way our economic lives are arranged. After the election, the hard work begins.