It's a dark times for capitalism indeed. It's like out of some grim dystopian science fiction novel. The Dow Jones fell over 1000 in one week. And then popped back 900 a few days later. And then fell 700 plus again. It again fell over 500 yesterday (10/22) now it's up a 172 today. As Steven Colbert said the other night it's like a roller coaster except you vomit money. All over Europe and Asia markets are churning viciously. Whole countries are stone broke. No one knows what to do. The US now has a slush fund of some 700 billion dollars originally to buy the so-called toxic debt that has triggered the crisis/panic. But continually beaten back by worldwide pessimism and a frozen credit market, they almost daily reconsider and float new grand schemes to see how the markets reacts. But no one is sure including the government officials who plead for the money or the Congress who grudgingly granted it are sure if they are not simply throwing good money after bad.
We thought that September 15th was a bad day. In a previous post I called it a ' bad day at Black Rock' after the famous western. Little did we know that it was merely a precursor far way worse things to come – what could be a full scale global economic collapse. Maybe not. But they sure wouldn't tell us in advance. Back went it started last month it seem like a few investment banks were on the rocks. But so what. It was kind of entertaining in a vicarious way to watch the financial sector temporarily seize up. And later as the drama played out many we thought (naively) that if Uncle Sugar came to the rescue, somehow conjuring up hundreds of billions of dollars (from God know where) and bailed out a few of these bastards (which everyone hardily resented) that eventually this credit constipation would dissipate. It hasn't! Now trillions are being erased worldwide as markets plummet. Every single market is being hammered as panic sets in everywhere as everyone tries to cash out of their investments and traders try to cover their margins. Plus lots of opportunistic short selling no doubt.
What is so infuriating is that a shadowy elite of really big time wheelers and dealers - investment bankers, hedge fund managers and the really rich for whom they worked , have made obscene amounts of money while truly hosing up the entire global banking system in the process. They couldn't just make their zillions on ordinary financial legerdemain. No their greed got most of them at they included high risk action into the mix. All of this as we now know was being recycled and repackaged from the originating banks into some vague stratosphere of international capital as (risk minimized) financial instruments know as “derivatives”, ½ a trillion worth
Not satisfied to just merely peddle overvalued real estate , these greed heads started including mortgages specifically designed for those who could not afford them often simply for the commission. Already the preponderance of recent home buyers could only barely afford their mortgages since the spread between salaries in most jobs didn't anywhere near match the ¼ to ½ million dollar price tag for an ordinary tract home. But it was the nature of a deregulated market to expand indefinitely until some externalities eventually kick in. These new so-called “subprime mortgages” was their undoing. They become time bombs that were neatly hidden into the whole bloody package. A pack of surreptitious Bolsheviks could not have done a better job. Again the money was too good to turn down and there were no cops on the beat. Wall Street and those who took their lead from the USA, financial biggies world wide, all climbed aboard this financial Titanic. They were assured they had invented a perpetual motion machine. After all complex algorithms, complex legal language defining the priorities repayment upon default , special insurance, high bond ratings assured all parties involved that everything was cool at least for the time being.
It all begin to unravel when the rising tide of home values eventually peaked sometime last year and the began , alas, to retreat. Once these marginal “homeowners” who had zilch equity suddenly discovered they owned more on than their place than it was worth, they simply walked. And now it has all come tumbling down. Now day after day the stock markets as well commodity markets world wide as plunge ever further downward in repeated rounds of panic selling. And billions of Dollars, Pounds, Yen, Rubles, Francs vaporize.
How could the finest financial minds of our time working for the worlds preeminent financial institutions and the august and powerful government authorities charged with overseeing this complex process allow this to happen? The answer again lies in ideology. . We have had 30 years of political support for a bogus and highly opportunistic economic ideology known by the confusing term of Neoliberalism. Neoliberalism as an economic mindset and basis for policy across our (narrow) political spectrum which ironically came into its own as just as the term “liberalism” became a popular pejorative to throw at anyone politically left of Ghegis Khan. Once the Soviet Union imploded, “red baiting” went out of style. So derisively calling someone a liberal had to suffice. Neoliberalism provided credibility and ideologically support for right wind populist the anti tax rebellion and (an air-headed) libertarian small government movement. (It termed neo liberalism because liberalism in its formal definition is a term for those pro free market “progressives” of colonial times who were at the time at war with something called Merchantilism, a defunct import/export economic ideology. It started in late 1970s when Republicans, and so called conservatives and libertarians with only feeble resistance from the Democrats argued that the US standard of living was falling because we were overtaxed and our businesses were over-regulated. When in fact in the 1970s the entire capitalist edifice was suffering an aggregate fall in the rate of profit (a normal tendency of capitalism over time according Marxists) hence lower wages. Lower profits, lower wages equals social unrest.
So in rides the neo liberal right with an easy answer – blame Keynsian economics for the inherent defects of capitalism. Keynsian economic theory had dominated since the Great Depression. In fact it was essential in saving capitalism was it was implemented to the scale necessary in WW II. The brilliant idea of the political right, who always resented the Democrat FDR and his successes, was to remove the regulatory apparatus as much as was politically possible, that is any mechanical governor on the engine of capitalism and let it run unrestrained. Forget the bearings, forget oil changes, forget preventative maintenance - run it full blast without any controls. It's actual academic credentials came from the anti-Keynesian rebellion led by economist Milton Friedman, out of the University of Chicago. To Friedman government spending as a tool of economic counter cyclical policy should be phased out if not eliminated and manipulation of the money supply would suffice for controlling the business cycles. Fiscal policy (gov spending to manage business cycles) was out and monetary policy (fussing with the money supply through the Federal Reserve) was in. This as the military-industrial complex consumes 1/3 of our national budget and totally inter penetrates our economy. So it was always bullshit. No one really believed it. It was used by corporations and Republicans and bankers as they lobbied opportunistically for wholesale deregulation of the US economy including the key banking and financial sector .
Now all of that is history. Neoliberal ideology and the policy mix it wrought we would hope is now throughly discredited. Two centrist candidates, one center right (McCain) representing the military-industrial complex, failed Bushian neoliberalism and a tragically failed geopolitical agenda called neoconservative, and one out of the tradition of the pro-business, quasi-progressive, identity politics (gays, blacks, feminists) center-left (Obama) vie for the US presidency amidst the worst financial panic in 70 years. Neither have yet said how they will confront it.
