Sub-prime crisis and crisis of capitalism

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Written & published in newspaper/magazine in January/2009

( Communist manifesto in 1848 …. In this crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production …)

A World Bank report states – “ the number of malnourished people with a record rise of 44 million  in the year 2008, is estimated to be total 967 million. The number of most hungry people is 1.4 billion and that of hungry people is another 3 billion. The hungry people in India, that claims to be largely free from the impact of global economic crisis, is 200 million. The situation of hungry people in the so called developed states of India are worse than Sub-Saharan Africa.” These are the official figures. The real situation is more horrifying than the official figures reveal. These figures are rising rapidly with every passing time. Thousands of working people are losing their jobs regularly. The factory shutters are getting down one after another. The unemployment rate and the number of unemployed are increasing leaps & bounds. The common toiling masses, the people of backward communities and countries, since long, have been facing the brunt of this crisis of the system in this way in their own lives. In the case of recent American Sub-Prime crisis also, the backward Afro-American, Hispanics in the American society have slided down further in socio-economic ladder. Those people, who do not have own roofs over their heads, also availed the sub-prime loan with a desire to have their own home.
But the happenings that made the leaders at the helm of the affairs of the system scary and jittery, are the fall of the centre of capitalism (that makes the system restless and fragile) and the shattered myth of liberal economy of self regulating market depending on supply and demand.
The American sub-prime crisis has its grievous impact on global economy. The inevitable fallout of the bursting of the profit bubble of the speculative finance which does not get invested in production sectors, is the norms of the crisis ridden capitalist system. The melting down of bullish speculative finance along with bursting of dot com bubble were experienced in the recent past several times. But on every occasion,   Government support has been extended to provide liquidity to the system to create financial bubble by spending tax payers’ money.
Just after the dot com crisis, American Federal Reserve Bank lowered the federal fund rate (Repo rate in case of Indian Reserve Bank i.e. rate of interest with which Reserve Bank provide credit to other Banks). Lower interest rates increased the lending of   housing loan of the Banks and the amount that household could pay for homes. As the housing price rose, this increased lenders’ confidence in the security of these newly issued mortgage loans. In this rising trend of housing price, the financial players started speculative investment on future prices. The private mortgage companies issued loans with high interest rate, but equating the initial installment (EMI) either on interest only or interest plus a very small portion of loan amount, to keep it at a very low level. As a result, the consumers with a very weak economic condition or credit worthiness started taking loans in large number. Some home owners took the loan by mortgaging the rising price of their homes and spent this loan amount on luxury goods.
 But the issuance of new loan is the beginning of the process. The private lending companies or the mortgage originator sells their mortgage backed loans to the Government institutions Freddie Mae, Fannie Mae, Government-insured entity Ginnie Mae or to Wall Street investment banks such as Goldman Sachs, Citibank, Merrill Lynch etc. These banks depending on the mortgages, then issue bonds to the market and the bonds are purchased by Pension Fund, insurance companies, Hedge Fund, the rich individuals from the market. The yield of these mortgage backed securities or bonds is supported by the pass-through of payments of interest and principal from the underlying pool of mortgage debt. Banks realizes profits as service charges. The collateralized debt obligation ( CDO ) is one of the most prevalent  amongst  plethora of financial assets engineered from the level of risk factors of these mortgage backed securities (MBS). Due to the large speculative investment on the rising home loans and home price, huge rise of this CDOs were recorded in between the year 2000 to 2006. Beginning in 2004, The Wall Street underwent rapid expansion and started purchasing CDOs from the sponsoring Bank by issuing ‘Asset backed commercial papers’ to raise fund. Commercial papers are short term debt from one to ninety days. To insure commercial papers, the sponsoring Bank guarantees a back up line of credit in the event that the issuer of commercial papers does not have sufficient cash on hand to settle these obligations at the time they come due. This way the sub-prime speculative market experienced a massive boom. The debt and investment has fiercely grown without any bound.
The explosive growth of profit in the speculative market was recorded till the installment payments of borrowers of sub-prime loan were smooth. But due to the rise in interest rate of Federal Reserve as a preemptive strike against inflation and rise in equated monthly installment (EMI) after the initial period of low EMI, the borrowers of sub-prime loan became incapable to pay the EMI and began defaulting on their obligations. The foreclosure of mortgaged houses started taking place and housing price began tumbling down. Alarm began to spread among the players in the market. The CDO buyers including Pension Fund, Hedge Fund, large insurance companies became panicky. The investment Banks started incurring loss. One after another institutions went bankrupt. The crisis spread to whole of Europe. Banks stopped issuing new loans and the FIIs started withdrawing capital from the share market by selling their equity holdings and worldwide crash in share market resulted. It’s a situation of both liquidity & profitability crunch. The productive investment becomes more scarce. Due to the fall in purchasing power, the consumer demand dips further. More & more production unit starts reducing their production level as well as retrenching the workers. As a result a vicious cycle of decreasing consumer demand and further adverse impact on capitalist system are set in motion.
When productive investment is not profitable, the capitalist earn profit from the bank financed investment in the financial market and the market explodes with artificial asset value which is many times more than the real asset value. In this situation, the capitalist pundits lead us to a mythical plane of self-regulating market without state intervention.

(Capital Volume 3 –“ …… Economic crisis first appear as financial crises because the slowdown in profitable productive activity forces small capitalists into ‘adventurous channels’ – speculation, fraudulent credit, fraudulent stock …..”)

The extreme form of this situation is revealed through recent sub-prime crisis. The present worldwide crisis of capitalism due to cover-production and declining consumer purchasing-power indicates great depression like situation after 1929 black Thursday. The capitalist roaders are reciting the rhymes of old formulations in unison to stimulate the system. Before verifying the effectiveness of the clichés pronounced by the capitalist roaders, let us see the situation of America, the centre of the global capitalist economy.
General Electric Chairman Jack Owell said “ there is a capacity of over-production in almost all industries.” This capacity of over-production makes new investment unprofitable that hinders the global economic growth. General motor incurred a loss of 10.6 billion in 2005 and Ford 7.24 billion in first three quarters of 2006. The steel production capacity is 20% i.e.  200 million tons more than the actual demand. Robert Brenner opined that net utilization level is merely 2.5 – 3% of total capacity of telecom network and only 13% in the case of Sea-bed cable network. The American trade deficit and budget deficit has skyrocketed. This deficit is financed by China, Japan and other countries who purchase American Treasury Bonds and create dollar reserves. These countries are also dependent on American consumer market. The decline in American consumer demand sends alarming signal to these countries, especially to China. By this time, many of the Chinese Export Industries have closed down making the workers jobless. The cheap Chinese labour is the key to china’s export business and attraction for foreign investment in China. Recession in American economy and rapid rise of unemployment and poverty are the cause of concern for the exporting countries like China. If the American recession deepens further, then China will try to come out of the symbiotic relation with America and search for alternative route. This alternative route will include the increase of internal consumer demand through state investment, opting for the policy of nationalization instead of privatization, formation of regional group for Asian trade in regional currency instead of dollar driven trade. This regional market is not at all negligible under the present scenario of squeezing global market, if the countries like China-Japan-India-Korea-Thailand are taken into consideration. If this happens, then the American Economy will be hit harder. The recession in America and Euro Zone in one hand and the challenges against the control over the world trade and sources of raw material like oil, has shaken & dwindled the American world hegemony. In these circumstances, the rise of many forms of regional groupings is not unexpected.
That the capitalist roaders have found a way out of the quagmire of recession in capitalist centre, leading towards depression, is still not in sight. To evade complete meltdown of the financial system in the event of the sub-prime crisis, the US Government announced an emergency bail out package of $700 billion to be used to buy up virtually worthless mortgage backed securities held by financial institutions. But it’s a matter of three days to dampen the spirit of those who discovered that this package is not yielding any result. Only a month after the Lehman Brothers collapse that set off the Banking crisis, the potential cost to the government of the latest bailout package comes to $2.5 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from Banks. This has now taken the form of offering liquidity to the financial system in a crisis, followed by directly injecting capital into such institutions and finally, if needed outright nationalization. Although the Federal Reserve and U.S. Treasury have been intervening massively, the full dimension of the crisis is still seem to elude them.
In these circumstances, a section of Capitalist class and the left intellectual like Pravat Pattanaik are advocating Keynesian prescription. The logics are as follows. In the phase of current economic recession which is perceived to be heading towards depression, the private capitalists would not make any productive investment. So Government should invest in production sector so that the investment generates new employment opportunity. Due to increase in employment, average income of the people will increase and as a result the demand for consumer goods will also increase. In this way of endeavour for full employment & increase of purchasing-power through reducing taxes, will increase the effective demand & thus crisis might be overcome. Pravat Pattanaik advocated imposition of  restriction on the global movement of the capital. He emphasized  increase of Government investment on agriculture, agricultural based industries and food-grain production for the countries like India-China and on infrastructure, welfare measures for the countries like America. But the question is, whether this increase of Government expenditure through the increase of Budget deficit & curtailing tax-burden on people, is  sustainable? This cannot be continued & the structural crisis of capitalism cannot be evaded by merely nationalizing Bank & Insurance sector and imposing Government regulation on finance market. The way, Savez  has nationalized the oil sector and the revenue being earned thereof is being spent for the upliftment of the living-standard of the common masses, similar measures should be taken to impose Government control over the wealth-resources and to reduce the inequality of income. The policy of steep hike of salary of a few and not providing minimum wages to a large section of people must be changed. Moreover, social control over the Government investment must be established, because there will not be any real change if the state investment is of bureaucratic nature. The bureaucratic capital & private capital are complementary to each other. That means that only advocating Keynesian prescription of increasing demand through full employment and state investment will not yield much result, unless socialist orientation is attributed in production & distribution.
During great depression after 1929 crash, Roosevelt implemented a part of Keynesian prescription, but the consequence is known to all. However, according to few, Keynes prescribed socialization of investment in his General Theory. Whatever it may be, the demand which would be created through the upliftment of living standard of common masses will be different from the production capacity of present commodities. So the crisis brewing up due to over-production & falling rate of profit needs to be countered through an approach of new socialist model of people’s power & welfare. Conflicts between two opposing forces is gaining momentum. The forces to create a world of hunger, malnutrition & joblessness is on the one side and people’s uprising &  working class emancipation to combat it on the other. Who will be victorious out of the conflicts between two opposing forces – a total destruction or a new creation  --  or a new deal of balance of compromise between two, will be visible in near future. It is certain that the capitalism has still not found a way out to revitalize it from the present great crisis & decay. For humanity to survive, capitalism must die.
                            Written on 30-01-2009  :  E-mail :                            


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