Financial crisis: working people will pay

[Joanne98]

“Will my superannuation fund be next?” “Are my savings safe?” As working people in the developed economies watch the assets of one financial institution after another vaporise into nothingness, tens of millions are asking these dreadful questions.

Yesterday’s AAA assets are now junk and yesterday’s “risk-free” investments are losing money. No-one, not even the world’s central bankers, who are spending sleepless nights arranging rescue bailouts and emergency injections of trillions of dollars into a financial system frozen with fear and distrust, can answer them with 100% certainty.

Last fortnight’s actions by US Treasury secretary Henry Paulsen tell us why: on September 12 he refused to bail out Wall Street investment bank Lehmann Brothers, preferring to let firms that had dealt extensively in financial assets based on worthless subprime mortgages go to the wall or be taken over by others. But on September 17, faced with the collapse of the American International Group, Paulsen and Federal Reserve chairperson Ben Bernanke decided that the risks of letting the world’s largest insurance company sink were too great. AIG was too large — and too enmeshed in global financial markets — to fail.

So, in the free-market, Republican-run US, the state is becoming the owner-operator of a collapsing finance system, with the losses funded by the taxpayer.

Paulsen, Bernanke and their counterparts in Europe, Japan and Australia too will increasingly face this sort of choice: do they let the next stricken financial monster die or put it on government life support? And how do they decide, when no one knows where the rest of the toxic financial waste is buried, where interbank lending has nearly dried up and where, according to economic historian Harold James, “it is impossible to know what solvency means”?

Fictitious capital

To understand how the system has arrived at its worst crisis since 1929, it is necessary to consider some basic features of capitalism and how these have operated over the past 30 years.

Confronted with the decision as to where to invest its money, any business has to make a basic choice: invest in production or in financial assets (shares, bonds, etc). The decision will be influenced by the expected rate of return on each and its riskiness.

The more that individual firms invest in new production, the greater the overall (economy-wide) rate of investment will be, and — on condition that production gets sold profitably — the greater the mass of new value and new profit added. However, when firms invest in purely financial assets they are deciding to invest in claims on new value and profit, which in itself adds nothing to the mass of value added.

Conventional economics blurs this distinction, but for socialists Karl Marx and Frederick Engels it was central to understanding the boom-bust cycle of capitalism. They called these claims on future profit fictitious capital. For example, share certificates are simply “marketable claims to a share in future surplus value production” and the share market is “a market for fictitious capital”.

Setting up a market for any type of fictitious capital is the equivalent of setting up a casino — a place where people can speculate in these claims on future profit. During boom times, as the expectation of profit growth drives financial markets higher, the total nominal value of fictitious capital in circulation always grows more rapidly than the actual mass of profits. The less this gambling is regulated, the more manic it becomes.

However, a point is always reached where more is produced than can be sold profitably. The mass of profits then shrinks and the prices of the claims on profit shrink even more.

Over the past 30 years, bursting financial bubbles have become more frequent as we have experienced the biggest ever festival of fictitious capital. In 1980, world financial assets (bank deposits, government and private securities, and shareholdings) amounted to 119% of global production; by 2007 that ratio had risen to 356%.

This state of affairs was the result of the wave of financial deregulation that began in the early 1980s under British PM Margaret Thatcher and US president Ronald Reagan, and then spread out across most of the world. With every act of deregulation, new financial markets and instruments — new casinos — became possible. They opened up opportunities to speculate on the future movement of any financial market, to increase borrowing on the basis of expected rises in asset values, and to bundle various forms of fictititious capital into increasingly complex packages.

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http://dandelionsalad.wordpress.com/2008/09/22/financial-crisis-working-people-will-pay/