Just over 12 months ago, the heartland of capitalism was rocked by what was tagged the “sub-prime crisis”.
The initial reaction by the capitalists was to blame the victims: the poor, the blacks, the Latinos, the unmarried mums who had taken out “sub-prime” or high risk NINJA loans (“no-income-no-job” applicants) in order to insinuate their way into the bourgeois ideal of home ownership.
You could tell the poor were being blamed because they were alleged to have bought “MacMansions”, shiny-looking but shoddily-built houses that symbolized social-climbing aspirations by those whose class status determined that they were over-reaching themselves socially.
Increasing numbers of these would-be home-owners found that once the introductory discount repayments were reset they were unable to meet the higher real and long-term repayments that were required.
The discount rate was the bait, deliberately placed on the hook by get-rich-quick loan companies, but what they hoped to reel in was not the homebuyer but the home-land package. The loan sharks were guaranteed winners. They either won through the income stream from repayments, or if these could no longer be maintained, they simply pocketed payments to date, repossessed the real estate and put it back on the market, its exchange value, of course, having increased in the meantime. The out-of-home home-buyer was simply released, thrown back into the cruel sea.
The scale of the victimization is revealed in figures that show that whilst such sub-prime mortgages represented only around 13 per cent of all outstanding US housing loans, more than half of these loans entered foreclosure in the last quarter of 2007[1].
Those figures are bad enough. They show how desperate and vulnerable the poor are in the world’s richest country (relative, it must be admitted, to the absolute misery of so many in the Third World).
But a double effect was at work here.
Money as finance capital continually searches for ways in which to more quickly and effectively make returns on its own value. The use value of capital resides in its ability to remake its own value over and over again for the benefit of its owner. If it is simply sitting in an account then apart from its interest-earning function, it is effectively dead capital, capital without a use, or a use restricted to the minor returns of interest payments.
The speculative and parasitic character of the finance capitalists is determined by their need to seek higher and higher returns on the capital they own. One option is to invest in the process of production and realize returns in the form of the surplus value created by workers through their labour power. But the rate of profit through the exercise of this option is restricted by part of the capital becoming constant capital (plant and machinery, raw materials) in production, and fixed capital (plant and machinery) in the distribution or flow of capital. There is a determined length of time in all of this before returns outvalue the investment.
A better option (for the owner of finance capital) is to use it in situations where its current value is gambled against the potential for a faster gain in the form of more capital. The stock market, an early development in speculation under capitalism, is precisely such a form of parasitic gambling. The purchaser of shares does no useful productive work, but hopes to benefit by dividend payments and eventual resale of the shares at a profit when their price rises. Purchase of various types of bonds with guaranteed rates of return is somewhat less speculative, but no less parasitic.
Technology has created a bewildering array of permutations on the original functions of the stock market. Futures trading, currency trading, swaps and naked shorting are rampant in the world of finance. Gains can be made in seconds.
The same applies to the onsale of a long-term but relatively low-level income stream (the loan repayment) for a quick buck, worth less than the eventual cumulative value of the income stream, but a profit nonetheless on the original outlay (the loan). The purchaser gets something at less than its eventual value, the seller gets something for more than its current value. Housing mortgages, as debt packages, are ideal bases for such sales because of the belief that the underlying asset, the real estate, is always going to be worth more than the temporary cessation of repayments if there is a foreclosure.
So, according to the parasitic and speculative logic of finance capitalism, sub-prime mortgages were sold, in many cases, as soon as they were written. And to make their sale more attractive, they were often parcelled together with a smaller number of prime, or less risky, mortgages or other types of debt. The structure of these packages, (called collateralised debt obligations or CDOs), and how they invariably represent very shaky houses of cards, is explained in an earlier post, Crisis, you can bank on that!. For a time there was frenetic trade in financial packages of debt. CDOs were sold, repackaged, sold again, and even became CDOs of nothing else but other CDOs!
The initial reaction by the capitalists was to blame the victims: the poor, the blacks, the Latinos, the unmarried mums who had taken out “sub-prime” or high risk NINJA loans (“no-income-no-job” applicants) in order to insinuate their way into the bourgeois ideal of home ownership.
You could tell the poor were being blamed because they were alleged to have bought “MacMansions”, shiny-looking but shoddily-built houses that symbolized social-climbing aspirations by those whose class status determined that they were over-reaching themselves socially.
Increasing numbers of these would-be home-owners found that once the introductory discount repayments were reset they were unable to meet the higher real and long-term repayments that were required.
The discount rate was the bait, deliberately placed on the hook by get-rich-quick loan companies, but what they hoped to reel in was not the homebuyer but the home-land package. The loan sharks were guaranteed winners. They either won through the income stream from repayments, or if these could no longer be maintained, they simply pocketed payments to date, repossessed the real estate and put it back on the market, its exchange value, of course, having increased in the meantime. The out-of-home home-buyer was simply released, thrown back into the cruel sea.
The scale of the victimization is revealed in figures that show that whilst such sub-prime mortgages represented only around 13 per cent of all outstanding US housing loans, more than half of these loans entered foreclosure in the last quarter of 2007[1].
Those figures are bad enough. They show how desperate and vulnerable the poor are in the world’s richest country (relative, it must be admitted, to the absolute misery of so many in the Third World).
But a double effect was at work here.
Money as finance capital continually searches for ways in which to more quickly and effectively make returns on its own value. The use value of capital resides in its ability to remake its own value over and over again for the benefit of its owner. If it is simply sitting in an account then apart from its interest-earning function, it is effectively dead capital, capital without a use, or a use restricted to the minor returns of interest payments.
The speculative and parasitic character of the finance capitalists is determined by their need to seek higher and higher returns on the capital they own. One option is to invest in the process of production and realize returns in the form of the surplus value created by workers through their labour power. But the rate of profit through the exercise of this option is restricted by part of the capital becoming constant capital (plant and machinery, raw materials) in production, and fixed capital (plant and machinery) in the distribution or flow of capital. There is a determined length of time in all of this before returns outvalue the investment.
A better option (for the owner of finance capital) is to use it in situations where its current value is gambled against the potential for a faster gain in the form of more capital. The stock market, an early development in speculation under capitalism, is precisely such a form of parasitic gambling. The purchaser of shares does no useful productive work, but hopes to benefit by dividend payments and eventual resale of the shares at a profit when their price rises. Purchase of various types of bonds with guaranteed rates of return is somewhat less speculative, but no less parasitic.
Technology has created a bewildering array of permutations on the original functions of the stock market. Futures trading, currency trading, swaps and naked shorting are rampant in the world of finance. Gains can be made in seconds.
The same applies to the onsale of a long-term but relatively low-level income stream (the loan repayment) for a quick buck, worth less than the eventual cumulative value of the income stream, but a profit nonetheless on the original outlay (the loan). The purchaser gets something at less than its eventual value, the seller gets something for more than its current value. Housing mortgages, as debt packages, are ideal bases for such sales because of the belief that the underlying asset, the real estate, is always going to be worth more than the temporary cessation of repayments if there is a foreclosure.
So, according to the parasitic and speculative logic of finance capitalism, sub-prime mortgages were sold, in many cases, as soon as they were written. And to make their sale more attractive, they were often parcelled together with a smaller number of prime, or less risky, mortgages or other types of debt. The structure of these packages, (called collateralised debt obligations or CDOs), and how they invariably represent very shaky houses of cards, is explained in an earlier post, Crisis, you can bank on that!. For a time there was frenetic trade in financial packages of debt. CDOs were sold, repackaged, sold again, and even became CDOs of nothing else but other CDOs!
Nor did it stop there. Insurers offered to guarantee the income streams from various types of quite complicated financial packages. We are familiar with different types or lines of insurance such as life insurance, property insurance, car insurance, third party insurance and so on. These are handled by multiline insurers. Specialist insurers who were only allowed to insure returns on financial packages emerged. Restricted to this one line of insurance, they were called monoline insurers.
Much of what they insured was credit default swaps (CDSs). As the name implies, one party which is getting income from various types of bonds, mortgages or corporate loans, purchases protection from the risk of those income sources running into difficulty, or defaulting, from a second party to which it pays premiums in return for accepting the exposure to the risk of a default. CDSs can in turn be repackaged and sold, over and over again, with no regulatory control on the ability of the purchaser to meet the debt obligations if things go haywire.(Many Australian local government councils and super funds are sweating out the collapse of Lehman Brothers bank because many of the “dodgy structured debt packages…Lehman put councils into have Lehman as a default company”, meaning that they stand to lose millions in a “double whammy”.[2])
The scale of these innovations in speculation around essentially fictitious values of capital can be seen from the fact that the very first CDS was only issued in 1995 (by banker JP Morgan), and that by mid-2007, the value of the market had ballooned to an estimated $45 trillion – over twice the size of the US stock market![3]
Underpinning all of these multiple and inter-related houses of cards were sub-prime mortgages.
The reason that we append the word “crisis” to “sub-prime mortgage” is not that large numbers of workers defaulted on their loans – that was always an intended outcome under the profits-before-people regime of capitalism. The reason is that the uneven law of development saw real estate prices fall at a time when there had been a speculative boom in fictitious capital. Huge amounts of finance capital were revealed to have no basis in fact. They were simply over-produced and increasing numbers of paper representations of a commodity with a declining exchange value. This meant a real loss to the speculators and parasites of finance capitalism; hence their media and their economists and their politicians agreed that it was a “crisis”! Workers in crisis can be ignored, but not financiers, bankers and insurers!
Up until March 2008, and since the beginning of the sub-prime mortgage crisis in August 2007, the major global financial institutions of imperialism have reported write-downs (losses) of about $US190 billion[4]. This is money that no longer exists in the imperialist financial system. Since March many more billions would have disappeared.
As of September 2008, one of the biggest banks in the world, Lehman Brothers is bankrupt. Probably the largest insurer in the world, American International Insurer (AIG), has been saved from bankruptcy by the US Federal Reserve. It was too big to be allowed to fold or, as Murdoch’s Australian put it, “If AIG collapses, so does world insurance”. Another of the world’s biggest banks, Merrill Lynch, was saved from bankruptcy by a fire sale to another bank. US home loan specialist banks Freddie Mac and Fannie Mae were only spared from going down the gurgler by being effectively nationalised by the US government, leading to a chorus of derisive jibes about the free market always being prepared to privatise profits, but having to socialise (pass on to the people) the losses.These spectacular crashes of some of the biggest financial institutions in the world follow from the rescue last year of British bank Northern Rock by the British taxpayer, the collapse in March of huge US bank Bear Stearns, and last year’s collapse of major hedge fund Carlyle Capital.
(As a measure of their addiction to speculation, Carlysle Capital was leveraged at 32:1, and Fannie and Freddie at 80:1. That is, they had $1 of real money to fall back on for every $32 and $80 respectively that they had loaned out.[5])
The greed of the imperialist bourgeoisie underpins the speculative fiction of finance capital. The crisis in which this system is currently enmeshed is testimony to the continuing relevance of Marx’s critique of capitalism and Lenin’s analysis of imperialism.
More than ever before, a party is required which can lead the workers through revolution to the destruction of this anarchic system of boom and bust exploitation and its replacement with the next stage of human existence, socialism.
[1] Reserve Bank of Australlia, Financial Stability Review, March 2008
[2] Councils on a limb over Lehman failure, Australian Financial Review, Sept 16 2008
[3] Investopedia.com, Credit Default Swaps: An Introduction
[4] Op cit, Reserve Bank of Australia
[5] Mike Whitney, The Tumbrils Roll at Dawn on http://www.counterpunch.org/ Sept. 15, 2008
2 comments:
A good 'left"article analyzing the role of finance capitalists in the internal economy of the US ,but this US economy in the era of imperialism a "services based economy" is described in isolation.So , the economy is not seen in the context of "globalism"/imperialism.
That is by analyzing in a Marxist manner the international
interconnections in the flows of exploited surplus value and credit from the exploited third world countries and workers from countries like China ,that have enabled this high waged shopping mall economy to function on credit till now, to the tune of a couple of Billion everyday ,financing government deficit spending including for militarism and balance of trade problems .
Therby subsidisig on credit ,(transfered surplus value invested as capital )the fat lifestyles of all Americans including its labour aristocracy privileged by imperialism Reflecting that, your analysis is filed under "capitalism" as some sort of abstraction seen in isolation from the real world.while correctly pointing out:
The greed of the imperialist bourgeoisie underpins the speculative fiction of finance capital. The crisis in which this system is currently enmeshed is testimony to the continuing relevance of Marx’s critique of capitalism and Lenin’s analysis of imperialism."
More than ever before, a party is required which can lead the workers through revolution to the destruction of this anarchic system of boom and bust exploitation and its replacement with the next stage of human existence, socialism.
but, it is not a question of simply some problems of a
boom and bust cycle within an isolated US economy, as the main contradiction facing the international proletariat.
Good post - the parasitism of Finance Capital rarely gets a mention in mainstream media.
The discussion of the Crisis is still cast in neo liberal mode and we have to take it to a level of systemic analysis which your post does very well.
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