Subprime Mortgage Debacle - the latest twist in the crisis of overproduction
In the preface to his book Imperialism - the eve of social revolution published earlier this year, Harpal Brar wrote the following:
"The last recession, which began with the bursting of the dotcom bubble in the second half of 2000 and lasted for 3 years, furnished yet further eloquent testimony to the truth of the postulates of Marxism. That crisis has been followed by recovery, during which period business has become brisk, production recovered and stock markets became buoyant, with the result that 2006 was the best year for equities since 2003. Helped along by a wave of mergers and acquisitions (i.e., a process of increased monopolisation or elimination of competition), a fall in the price of oil, indications from the US Federal Reserve that it had for the time being called a halt to raising interest rates, and the failure of the expected economic slowdown to materialise, global equities rounded off their best year since 2003. The US, European and most Asian stock markets recorded double-digit gains during 2006. On 2 February 2007, the Dow Jones Industrial Average closed at a record high of 12,661.18. In London, the FTSE 100 rose to 6346, its best level since January 2001. On 22 February the Nikkei broke through the 18,000 barrier for the first time in 7 years. Other stock markets also made similar gains. During 2006, while the global economy grew at 3.8%, the US, European and Japanese economies recorded economic growth of 3.3%, 2.7% and 2.4% respectively. Meanwhile, the Chinese economy grew by a whopping 10.5% in 2006 and the Indian economy by 8.4%. Latin America grew by 4.8% and eastern Europe by 6.3% (see Financial Times leading article of 30 December 2006).. Even the economies of Brazil and Russia have recovered considerably thanks to a dramatic rise in the price of oil and other minerals, enabling both of them to pay off a considerable proportion of their foreign debts...
"One does not have to be a prophet to be able to foretell the inevitable and fairly sharp crash that is bound to follow this short period of industrial and commercial prosperity and stock market buoyancy, for the very means which capitalism uses to overcome the barriers inherent to it '...again place these barriers in its way and on a more formidable scale' The bourgeoisie gets over these crises through 'enforced destruction of a mass of productive forces' (e.g., the closure of hundreds of 'less efficient' factories, especially in the US and western Europe), on the one hand, and 'by the conquest of new markets, and by the more thorough exploitation of the old ones', on the other - that is '... paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented'. 
"Indeed, as Marx showed, the '... real barrier of capitalist production is capital itself. The sole raison d'être of capitalist production is the preservation and self-expansion of capital. The narrow limits within which this self-expansion, resting on the expropriation and pauperisation of the labouring masses, takes place and can alone take place - '...these limits are continually in conflict with the methods of production employed by capital for its purposes, which drive towards unlimited extension of production... The means - unlimited development of the productive forces of society - comes continually into conflict with the limited purpose, the self-expansion of capital'. This conflict finds vents in periodic capitalist crises, which '...are always but momentary and forcible solutions of existing contradictions. They are violent eruptions which for a short time resolve the disturbed equilibrium'.
"Since capitalism is powerless to get rid of the contradiction inherent in it, namely the contradiction between social production and private appropriation, since it cannot do away with the impoverishment of the masses, periodically recurring crises of overproduction are the inevitable result.
"All the signs are that recovery of the global capitalist economy, and with it the buoyancy of the stock markets, is but a temporary - and fleeting - phenomenon, a prelude to their plunge following the next bad news lurking just round the corner". (pp. ii-iv).
Sure enough, the month of August this year has seen the chickens coming home to roost. Credit froze, stock exchanges plunged 10% or more all round the world, some quite large companies went bust while major banks lost billions of pounds, all in the midst of what is generally claimed by bourgeois economic commentators to be a fundamentally healthy world economy.
According to various bourgeois commentators, the massive cuts in interest rates by the authorities in response to previous bouts of market turbulence in 1998 and 2000, while they managed to put demand into the economy, restore confidence, boost stock markets, effect a steep rise in house prices, and generally get the whole show back on the road, at the same time they created the conditions for the unleashing of the demons of inflation. But, for a while inflationary forces, with their effect on corporate profitability, not to mention the devastating effect on those with fixed incomes, were held in check by certain unusual circumstances in the world economy:
"In truth, the crunch would have come a lot sooner were it not for China's growth as a manufacturing giant. That nation's ability to provide the world with electronics and clothing at cheap prices has kept global inflation down. The investment of Asian banks of their huge cash surpluses in Western currencies has also helped in that respect. Without these factors, interest rates would have risen in the West some time ago and exposed most of the dubious borrowing" (Editorial, The Independent, 11 August 2007).
Yet despite these countervailing tendencies, inflation in the Western economies had begun to bite, as a result of which over the last two years, the national banks of the various imperialist countries have been edging interest rates upwards. The result is threatening to bring down on our heads the postponed crisis of 2001, which was itself the postponed crisis of 1997 (the currency collapses in the Far East). Each of these crises in their time led to massive bankruptcies, lay-offs, pension fund losses, etc., and caused suffering to millions of people but in each case, central bank intervention staved off for the time being what would have been a disaster of far greater magnitude and destructive power. It was inevitable that the crisis would re-emerge in one form or another - and the question now preoccupying the entire bourgeoisie is whether its worst effects can once more be postponed.
The characteristics of the present crisis
If the 2001 crisis was triggered by the bursting of the dotcom bubble, the present one takes a different form insofar as it was set off by sub-prime default. As The Independent article quoted above says: "It began in the US where the 'sub-prime' mortgage market - hefty housing loans to people with little or no regular income - began to flounder as the Federal Reserve raised interest rates and borrowers began to default on their repayment. Without this revenue coming in, the holders of this dodgy debt - the hedge funds, the banks - began to struggle to meet their other financial commitments". And Liam Halligan in The Sunday Telegraph of 19 August 2007 ('This crisis isn't over yet') demonstrates how this housing problem spread further afield: "Earlier this year ... US house prices started falling. Sub-prime lending had created a building boom, which in turn caused a property glut. Many of the low 'teaser' rates on sub-prime loans then began to expire. As borrowing costs spiralled, more and more Americans sank under their debts. Defaults rose and repossessed homes hit the market, driving prices even lower, so cash-strapped borrowers could no longer remortgage their way out of trouble. Little wonder a quarter of US sub-prime mortgages are now expected to end in tears". Debts at risk in America are thought to include not only some $800bn of sub-prime debts (currently facing a default rate of 12.4%) but also some $700 bn of 'Alt A' loans which have also become unmarketable even though the borrowers are "mid-tier" borrowers thought to be good credit risks, at least at the time the loans were made.
Bad debts of $100 bn, enormous as they sound, are as nothing, however, compared to the vast sums likely to be lost as a result of the current crisis. The reason for this is that debt has become a commodity in the past few years to a far, far greater extent it ever was in the past. It has long been possible for companies to make debenture issues, i.e., to borrow from the public, giving the lenders in return what are in effect IOU's that confer a right to interest as well as repayment of the debt (debentures). These can be traded on stock exchanges. Debenture issues, as indeed any kind of borrowing, is very good for shareholders at times when profits are high compared to interest rates, because the extra profit (after payment of interest) will go to the shareholders. If, however, profits are low as compared to the interest that has to be paid, shareholders suffer a double whammy: not only are profits low, but debenture interest has to be paid out of them, leaving very little for shareholders. Sometimes businesses sold their book debts at a discount to collection agencies or to their own creditors, leaving the latter to collect the sums due from debtors, but leaving the businesses in question with ready cash which they could use for business purposes. In recent years, however, there has been an enormous boom in the buying and selling of debt (i.e., of the rights of the creditor to recover the loan plus interest from the debtor):
"The sub-prime problem has caused panic beyond the US because, instead of holding loans on their balance sheets, lending banks have been offloading them to investors. In a global market for debt, financial institutions almost anywhere in the world could have taken on the risk of the loans in return for what seemed an attractive return.
"Investment banks have come up with ever-more ingenious ways of packaging up debt and selling it on to other financial institutions such as hedge funds, banks and insurers [This can be done with assets such as mortgages, credit card debts, leases and corporate loans]. This was meant to make the financial system more stable by dispersing risk and reducing the chance of a single bank being sunk by bad debts. But being able to offload debt encouraged some lenders to loosen their lending standards and make loans to riskier borrowers ...
"But it gets more complicated than that. To make risky assets like sub-prime loans more attractive, investment bankers have packaged them up with higher quality loans into derivative products called collateralised debt obligations (CDOs) that were given high ratings by agencies. But as sub-prime defaults increased, investors found themselves sitting on explosive losses from what they thought were low-risk investments" (Sean Farrell and Danny Fortson, 'Anatomy of a global credit crisis', The Independent, 22 August 2007).
Damage throughout the world
These investors, however, were by no means restricted to the United States. Any financial institution anywhere could and did invest in CDOs which, with a high credit rating (officially classified by Standard & Poors or Moodys as low risk) yet offering a relatively high return, seemed apparently to be especially attractive investments.
The US fund, Sowood Capital Management, lost half its value in July and has since gone bust. Losses forced Bear Stearns to close three hedge funds, while Goldman Sachs had to spend $3 billion bailing out its hedge funds. Basis Capital Fund Management and Absolute Capital Group, both of Sydney, froze their investor accounts. The investment team at Harvard University too has lost $350m so far on a bad hedge-fund investment.
"Fresh signs of trouble for US mortgage lenders and ripple effects even across the Pacific unleashed a massive sell-off in Asian markets Wednesday ...[1 August]," and on the same day "Macquarie Bank, an Australian financial services giant, announced that investors in two of its funds might lose 25 percent of their money. The funds, worth $873 million, actually held no subprime securities, but other holdings fell in value in the wake of that debacle, forcing Macquarie to liquidate assets - the first sign that the crisis was spreading to other sectors of the credit market" (Carter Dougherty, 'Turmoil over loans resounds outside US', IHT 2 August 2007). On 9 August PNB Paribas, the French bank, froze three of its funds until such time as liquidity recovers. The German bank IKB had to be bailed out to the tune of €3.5 billion by its biggest shareholder, the state-owned KfW bank, i.e. by taxpayers' money. Deutsche Bank suffered a 30% fall in one of its funds too, while Dutch merchant bank NIBC on 9 August confessed to having lost £93 million on US asset based securities. UBS, the Swiss bank, has issued a warning that lower profits are to be expected - and so on and so forth. In France Oddo & Cie had closed 3 funds making huge losses on its CDOs, and AXA has closed a further two which have been hit by a rash of redemptions (pull-out of investors). Germany's Union Investment has frozen redemptions from a $1.1bn fund invested in sub-prime loans.
The credit squeeze
However, damage is being done not only to institutions that are exposed to sub-prime risk, either through their own holdings or through the holdings of their debtors, but also to organisations that have nothing whatever to do with sub-prime mortgages. The reason for this is the credit crunch that widespread exposure to CDOs has caused. CDOs are sold privately rather than traded on the open market. The result is that nobody knows who has got what CDOs or how many of them, or how much money any given financial institution is set to lose as a result of the subprime crisis. As a result, when it comes to lending money, every potential borrower is suspect.
"Charles Dumas, of Lombard Street Research, speculates about the frenzied conversations that will have been taking place in bank boardrooms on both sides of the Atlantic since the fallout from the 'toxic waste' of sub-prime lending began to spread.
"Chairman/CEO: 'How much of this stuff do we own, and what's our exposure - to hedge funds owning toxic waste, as well as to the waste itself?'
"Chief credit officer (I paraphrase): 'I haven't the faintest idea'.
"Chairman/CEO: 'You've got two weeks to sort it out, and meantime no more lending'.
"So the credit business closes down while the bean-counters work 24/7. What gets caught? Huge leveraged buyout deals that have little to do with mortgages." (Heather Stewart, 'Debt scare: markets in crisis: will it get worse?' The Observer, 5 August 2007).
Sean Farrell and Danny Fortson in The Independent of 22 August describe the fall-out in the following terms:
"The panic has spread beyond sub-prime because people have decided that assets in general were not 'priced for risk'. Suddenly, banks and the investors to whom they have been selling all stripes of debt in recent years, have lost faith in what they are buying. Many of the big banks know that like themselves, their rivals have off balance-sheet conduits that are in some cases chock-full of CDO's and other debt instruments that are so much toxic waste. What no one knows however is just how bad it is, or how widely spread the damage will be. So until some clarity emerges, everyone is battening down the hatches. Private equity firms have shelved takeover plans, banks have stopped lending, and debt investors aren't interested in taking on any more. Instead widespread de-leveraging is occurring, as investors reduce their debt levels that reached unsustainable levels after years of incredibly low interest rates."
Riskier (high-yield) forms of credit have of course been particularly severely hit, with debt issues for the week to 26 July 2007, having fallen to $322 million from $9.7bn in the last week of June, financing incidentally that is crucial for private equity deals.
"A bottleneck of deals has been held back since the borrowing taps were tightened. Toby Nangle, fixed income investment manager at Barings, reckons 13 deals, worth $43 bn, have been postponed or cut back in the past two weeks - and banks are sitting on a total backlog of up to $400bn of incomplete deals, which are financed with short-term borrowing, and stuck on their balance sheets, waiting to be sold on. The latest casualties were the banks backing KKR's £9bn takeover of chemist Alliance Boots, which conceded on Friday that they had been unable to sell on any of the debt that funded the takeover" (Heather Stewart, ibid.).
Normally merchant banks, in exchange for a fat fee, offer to finance takeovers and mergers. For the moment, however, it has become very difficult to raise the necessary finance to complete any takeover or merger, with the result that such activity has almost ground to a halt. Thus Cadbury Schweppes has had to delay a £7bn sale of its US drinks division because of 'extreme volatility' in the debt markets. Chances lessened of a private equity bid battle for £11bn Virgin Media. Barclays and Mizuho, underwriters of a £4.8bn debt for the AA and Saga merger have not attracted other banks to syndicate although the deal is not delayed. CVC will find it difficult to compete with Imperial Tobacco's £11bn takeover offer for Altadis because of credit markets. The interest charged on the debt backing Advent International's £550m purchase of Lloyds TSB's share registration division has significantly increased (see Paul J Davies and Lina Saigol, 'Fears mount of end to private equity-fuelled buy-out boom, Financial Times, 28 July 2007).
Stock markets hit
What all this means is that the availability of borrowed money to buy shares has dried up. Therefore demand for shares has fallen, and so, as a result, has the price. But this is not the only pressure on shares. The most important pressure comes from the fact that companies which routinely borrow in order to finance their activities are unable to do so, forcing them to sell assets which they hold, such as shares, both to pay off existing debts as they become due and to provide funds to stay in business. There are also compensating factors that create something of a demand for shares: the fact that investment in loans has become unattractive and those who have money need to invest in something else (why not shares?) and the fact that share prices have lowered drastically and the hope that they will rise sooner or later (except in the case of companies that fail before this is possible) does mean there is some demand for shares, but this has not proved sufficient to prevent major slides in share prices. The FTSE 100 dropped by 4.1% on 16 August alone falling through the 6000 barrier to 5859.9, when it was only in June that it seemed poised to break through the 7000 barrier. Indeed, on 25 August the FTSE 100 was down about 10% from its peak two months ago.
"No market and hardly a stock escaped the carnage; in Tokyo the Nikkei closed down 2 per cent, Singapore lost 3.7 per cent, Korea down 7 per cent, France 2.6 per cent and Germany 1.7 per cent. In New York, a crucial market because of the lead it offers the rest of the world, shares fell as much as 2 per cent but pulled off a late rally to end just 0.12 per cent down on the day" (Sean O'Grady, 'Stock market suffers biggest fall in four years', The Independent, 17 August 2007). According to John Duffield writing in The Sunday Telegraph of 19 August ('A broader crisis is unlikely'), "Globally, £2,000bn has been wiped off the value of quoted companies, a sum that dwarfs even the biggest estimates for bad loans in the US sub-prime mortgage market ... Since UK shares peaked in June, they have fallen 10 per cent ...".
Of course, the shares in companies such as banks which find themselves saddled with toxic waste debts and nowhere to dump them will necessarily plummet because of the direct losses those companies are incurring. For instance, "Ken Murray, manager of the Blue Planet Worldwide Financials fund, points out that Bears Stearns - which started the current sub-prime crisis when two of its hedge funds got into difficulty - has $13bn of equity compared with $50bn of MBSs [mortgage-backed securities] on its books. 'If there is a write-down of 25 per cent of the value of these MBSs, it wipes out the equity'" (Heather Connon, 'Share turmoil: the sub-prime panic has spread far beyond Wall Street', The Observer, 19 August 2007). By 11 August, the Standard & Poors financials index had already lost more than 9% this year, with investment banks such as Bear Stearns, of course, and Lehman Brothers being the hardest hit. They were down by 33% and 25% respectively. Furthermore, financial companies are finding it far more expensive to insure against bad debt, again reducing their profits, plus they are losing out on fees for arranging takeovers and mergers - these amounted to $8.4bn for Wall Street bankers in the first half of this year, so it's not an insignificant part of their business that has come crashing to a halt.
As for the US mortgage companies, some 50 sub-prime lenders have gone bankrupt or closed since late 2006, and American Home Mortgage, the US's tenth largest home lender, has filed for bankruptcy, laying off almost all its 7,400 employees - and this is a company that lends to mid-tier borrowers, not sub-primes!
Intervention to ward off the worst effects of crisis
To try to limit the effects of lending panic, loans have been made available to those affected by the European Central Bank, the Federal Reserve, the Bank of Japan and the Reserve Bank of Australia: According to Sean O'Grady (op.cit), "Over the past week [to 17 August], the Fed has injected $88bn, while the ECB has put up €211bn", essentially to prevent the system seizing up. In particular, the central banks are anxious to ensure that the credit squeeze does not interfere with the flow of productive capital, leading to recession. It is one thing for speculators to lose out at each other's expense, it is quite another when those losses actually translate in the real economy to impede the renewed production of the wealth with which the speculators gamble. "A 'credit crunch', properly understood, occurs when would-be borrowers with plans for productive capital expenditure are denied access to loans ... not when lenders are leery of meeting the demands of any speculator who would like to gear up" (Ambrose Evans-Pritchard, 'AHM bankruptcy triggers jitters in Europe as debt crisis spreads', The Daily Telegraph, 7 August 2007.
Nevertheless, many bourgeois commentators are deploring the Central Bank intervention because they are aware that it is not only productive capitalists who will get their hands on the loans but also speculators who will be saved from the worst consequences of their irresponsible speculations. "Giving a desperate alcoholic a drink out of pity is hardly the best way to help him or her go dry ..." (Editorial, The Business, 18 August 2007).
Incursions of the crisis into the real economy
Most bourgeois commentators are confident that the present crisis will be ridden out because the underlying economy is strong, but as William Rees-Mogg reminded us in the Mail on Sunday of 19 August: "Three months after the great Wall Street Crash of 1929, Andrew Mellon, the multimillionaire banker from Pittsburgh who was Secretary of the American Treasury, appraised the economic outlook for 1930: 'I see nothing in the present situation which is either menacing or warrants pessimism...I have every confidence that there will be a revival of activity in the spring and that, during this coming year, the country will make steady progress'. In fact, 1930 turned out to be the year in which the Wall Street Crash was followed by the slump. Mellon's forecast, which proved so mistaken, was probably as good an economic forecast as could be made at the time.
"We cannot be sure whether last week's crash in world stock markets will prove to be a healthy correction after a period of inflationary finance or the start of a more profound and dangerous readjustment, possibly even a slump."
If the crisis could be confined to rich investors losing their shirts, then very few tears need be shed. However, this is not going to be the case, notwithstanding central bank interventions.
"...this is a 'real economy' problem, not just a financial problem. America will suffer as a result of the current turmoil, and could even go into recession, which will harm the rest of the world. Weaker equity and credit markets in the UK will certainly undermine our corporate investment. British jobs that would have been created, or saved, now won't be because of the US sub-prime fiasco" (Liam Halligan, The Sunday Telegraph, 19 August 2007, op.cit.).
The most obvious victims of the crisis are scarcely mentioned in our bourgeois press - the poor proletarians who bought humble homesteads but who have now lost them. Because they are poor the rents they have to pay are excessively burdensome and keep rising, but most people who buy their houses find that their repayments (originally about the same or less than rent) over the years remain fairly stable and at the time of retirement cease altogether. Is it any wonder that the poor aspire to home ownership? But the effect of rapid interest rises in the US has been devastating: A typical example is given by The Times of 11 August (Siobhan Kennedy, 'In retrospect the crisis was inevitable'): "For Felipe Deluna, a native Mexican who moved to America when he was 19, it meant that the 1 per cent interest he was paying on his mortgage quickly became 7.7 per cent. And Mr Deluna, who earned $2,000 a month, was facing mortgage repayments of $4,500. Like thousands of other homeowners in similar circumstances, it didn't take long before Mr Deluna ran into severe trouble and was forced into a distressed sale of his home". This particular article in The Times is one of very few that have given any thought to the poor who tried to take what at the time appeared to be eminently sensible steps to better themselves. The Telegraph has carried several articles referring to such people as "trailer trash", and even The Observer called them "ninjas" (no income, no jobs, no assets). In actual fact, the majority are undoubtedly perfectly respectable and honest people whose only crime is to be poor.
We have already mentioned losses by pension funds in the value of their investments. These are exacerbated by the fact that yields on safe investments, in particular Treasury bills, have fallen drastically as investors pile into them. This may mean that pension funds actually have to sell assets in order to meet their ongoing commitments to pensioners. Since enormous losses were caused to pensioners in the last crisis, the British bourgeoisie has hastily restructured most pensions so that pensioners' entitlement is not to receive an income that is a percentage of final salary, but only a pot of enforced "savings" which are invested at the date of retirement in purchasing an annuity from an insurance company. Anybody retiring the day after the FTSE fell 4% would presumably receive a 4% smaller pot and a 4% lower pension for the rest of their life! Lower pensions reduce the purchasing power of consumers thereby stoking up crises of overproduction.
Workers in the financial services industry in this country are also likely to be adversely affected and possibly permanently damaged by the latest turmoil; "The financial services industry in the City of London comprised an inordinate proportion of the overall UK economy - about a tenth of the national GDP. If a slowdown occurs here, the knock-on effects for the rest of the country would be widespread. Not least would be the housing sector, which has been propped up especially in the Southeast, by City workers armed with bulging bonuses. In the UK house prices are showing the first signs of slowing after more than a decade of growth" (Sean Farrell and Danny Fortson, 'Anatomy of a global credit crisis', The Independent, 22 August 2007).
Even before the crisis there were worries beginning to emerge about the inflated price of houses in the UK as well as UK sub-prime lending which grew by 28% last year. Obviously risky loans lead to more defaults and "An estimated 14,000 properties were taken back during the first six months of 2007 because borrowers could not meet repayments - 30 per cent up on the same period last year" (Rob Griffin, 'Economic timebomb', Sunday Express, 19 August 2007). All this does suggest that house prices may come down, as they have done in America. This would be good for first time buyers who need a house to live in, but possibly bad for the economy as a whole as fewer people will be able to remortgage their properties to borrow money to spend on purchasing the mass of overproduced commodities that glut the market. This in turn means businesses being unable to continue, insolvent liquidations, unemployment of workers, downward pressure on wages, all further squeezing effective demand for overproduced commodities, producing the vicious downward spiral that monetary interventions on the part of government and state banks are designed to ease. However, these interventions also cause problems - we have seen that the present crisis is a product of the interventions that eased the 2001 crisis - so that the best the bourgeoisie and all their economic gurus can manage is to spread the inexorable pain over time, let it happen more gently in the hope that the proletariat, that puer robustus sed malitiosus [a robust but malicious child], will not be wakened from its slumber to give effect to the only real cure for capitalist crisis, which is the overthrow of the entire capitalist system.
The blame game
As ever, the honed intellects of bourgeois economic correspondents, all of them paid hacks of our bourgeois ruling class, somehow seem to be incapable of grasping the elementary truth that crises are unavoidable so long as we have capitalism. Notwithstanding the fact that for over 150 years - since capitalism became the dominant mode of production in fact - capitalist countries have all been wracked periodically by vicious crises, still the penny hasn't dropped that capitalism and crises are somehow connected - never mind that they are inseparable from each other. In fact, it goes against the grain for the bourgeoisie and its hired intellectual coolies to understand such a simple phenomenon. Every time there is a crisis, the financial pundits are out there making excuses for the capitalist system, and this time is no exception. Thus John Kay in the Financial Times of 14 August ('The same old folly starts a new spiral of risk') bewails "Greed mingled with self delusion, honest incompetence with conscious deception" that causes risk to gravitate "not to those best able to bear it but to those least able to comprehend it."
As mentioned above, poor US proletarians unable to keep up with repayments unilaterally hiked up by the lenders to levels up to 7 times higher than those originally set are derided, but more than that, they are accused of having en masse made fraudulent mortgage applications, mis-stating their incomes and having no intention of ever paying anything. In addition, those who lent money to them without properly checking them out are blamed for dishonest greed to collar massive arrangement fees running into several hundreds or even thousands of pounds. "It is for good reason that so-called stated income, stated assets' mortgages are now better known in America as 'liars' loans': up to 95% of them were issued on the basis of at least some incorrect information. Lenders failed to check even publicly-available information given to them by loan candidates; they simply did not care ..." ('Why we must resist a knee-jerk reaction to global market turmoil', The Business, 25 August 2007).
The question has to be asked, however, is: what is it that caused lenders, who would usually be very careful to whom they lent their money because of wanting to be sure of repayment, to throw caution to the wind in this most extraordinary way? Unfortunately for bourgeois commentators, the answer to this mystery can only be found by resorting to Marxism which, for them, is out of bounds. It is a consequence of the contradiction under capitalism between social production and private appropriation, which periodically results in crisis of overproduction. In a society where production is consciously planned to cater for the needs of its members, a crisis of overproduction would be an absurdity. Under capitalism, the means of production belong not to the class which has produced it but to an alien class which exploits them - the bourgeoisie. The only use of this wealth as far as these owners are concerned is its self-expansion: it has to be put to work to make even more money. But in a situation such as we have of permanent overproduction, it is difficult to find profitable avenues of investment involving the creation of new values (production), so these owners have to resort to speculation, desperately seeking to make a profit, essentially at each other's expense. Ambrose Evans-Pritchard in The Daily Telegraph of 21 August 2007, in an article entitled, believe it or not, 'Capitalism not to blame for the debacle', goes on to prove the opposite of what he intended:
"Untangling the varied causes of this credit debacle is not easy but the central banks of Asia and the developing world have surely played a key role by hoarding reserves. Their motive is either to hold down currencies or to ensure that they need never again suffer bitter medicine from the IMF.
"The sums are staggering: China $1,330bn, Japan $924bn, Russia $414bn, South Korea $251bn, Taiwan $266bn, India $229bn, Brazil $147bn, Singapore $144bn, Malaysia $98bn, Thailand $73bn ...
"These reserves have risen from $3,000bn in 2003 to $6,700bn today. The vast bulk has been invested in G10 government bonds or agency debt ...
"The effect has been to drive down global bond yields ... the yields on offer have not been enough to meet their [i.e., pension funds' and insurance companies'] long-term liabilities. So when the alchemists hawked ... CDOs... with an AAA or Anglo-American rating and a bumper yield they could hardly resist". In other words, capitalists were being forced to invest in dodgy loans because they cannot but be driven by the need to make the greatest possible profit. Any fund manager who had sat back in the years of plenty investing funds in relatively safe but low yield securities would have been unable to hold on to his job for five minutes when other fund managers were making a killing with high yields from securities that had not yet been exposed as toxic waste but had, on the contrary, maximum security ratings. Such then becomes the demand for CDOs that mortgage brokers are put under heavy pressure to deliver high interest mortgages - but borrowers won't agree to high interest unless they have to, i.e., their ability to repay is in doubt to a greater or lesser extent. This drives mortgage brokers out into the street to try to find people who will agree to borrow and, naturally, not too many questions are asked under those circumstances.
Without the assistance of Marxism it is impossible to understand why highly respectable agencies such as Standard & Poors or Moodys would give AAA ratings to what are in effect largely junk bonds. But these agencies were also under pressure from the big rich investment banks from whom they derive their income to give high credit ratings to CDO's, focusing their attention on the safe debt part of the packages rather than the risky side and relying on the CDO's previous history of negligible default.
"Now apply the same argument to a turkey living on a farm. Each day, the turkey is fed. Each morning, when the turkey wakes up, it expects to be fed again. Each day, its expectation is proved correct. Then, a few days before Christmas, the turkey's expectations are dealt a fatal blow. The fallacy of induction applies not only to turkeys but also to investors within financial markets who often forget that past performance need not be a guide to future returns" (Stephen King, 'Manias, panics and costly chain reactions, The Independent, 20 August 2007).
But the 'forgetfulness' is not due to a poor memory but to the necessities of the capitalist system, in which fraud of various kinds is inescapable in each capitalist's desperate struggle for survival. If one credit rating agencies took too close a look at what was really tied up in the CDO, rather than just a glancing reference to historical data, what would happen? The bank which makes its money selling CDOs would stop doing business with it and switch to one of its rivals...
Hamish Macrae in The Independent of 23 August 2007 ('It was better for the market froth to be blown away sooner rather than later') sighs: "It would have been better had the great wall of money that has been washing round the world for the past five years or so not been created..." Ah! If only one could have capitalism without its nasty side! But huge investment funds looking for a profitable outlet for their deployment in a market starved of opportunities is another unavoidable feature of capitalism. If you really want capitalism, you have to accept it warts and all, and there is no point in sighing for it to be otherwise than as it is.
To quote again from Harpal Brar's Imperialism, the eve of the social revolution of the proletariat, "As Marx explained long ago, the fever of speculation is only a measure of the shortage of outlets for productive investment: the depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices [or for that matter the prices of derivatives such as CDOs]. The crisis of overproduction is a reflection of the over-accumulation of capital, which, unable to find profitable opportunities for productive investment, seeks a way out in stock market and other speculative activity in an endeavour to make a profit. The tendency for the mass of surplus value to increase at a slower rate, as Marx showed, than the total capital employed is expressed in the TENDENCY OF THE RATE OF PROFIT TO FALL, which only goes to show that profit is an inadequate basis for the constant development of society's material conditions of existence" (p.57-8).
Under socialism, freed from the orgies of destruction inherent in the capitalist system, society as a whole goes on accumulating more and more wealth, all deployed in increasing everybody's standard of living. Under capitalism all that happens is that the divide between rich and poor gets wider and wider, while the rich get fewer in number. Wealth is periodically being destroyed in a bid to "correct" market disequilibrium, the underlying cause of which is the crises of overproduction. Furthermore, in their struggle for domination, for markets, sources of raw materials and avenues for export of capital, monopoly capitalists regularly plunge the world into devastating wars of conquest or inter-imperialist wars, which claim the lives of tens of millions of people and bring untold material destruction.
Conditions for resort to the violence of war are developing fast throughout all these various debacles. Liam Halligan draws attention in The Sunday Telegraph of 19 August ('This crisis isn't over yet') that: "...the long-term importance of current events goes way beyond the latest turn of the global economic cycle, despite the massive human impact that has. Just consider the contrast between the major Western economies right now and the 'emerging giants' of the East. After a decade of super-charged growth, China has the world's biggest trade surplus and the largest haul of foreign exchange reserves: $1.3 trillion. Russia, on its knees just a decade ago, has the world's third biggest reserves. America, meanwhile, has fewer dollar reserves than India, Singapore and Brazil and the largest trade deficit on the planet. The UK has the world's third largest trade deficit.
"The fact is, the increasingly indebted Western world - with America at its core - is now far more vulnerable to financial melt-down than some of the nations we used to deride. ... China, India and Russia between them will account for more than half of global growth next year. It's staggering to think, though, that when sentiments improve and investors' appetites eventually return, there could well be a 'flight to quality' - but away from the West and towards the economic powerhouses of tomorrow".
If this is indeed the case and the countries mentioned are in a position to challenge western imperialist domination of the world, it is hardly conceivable that the US and Europe will give up their position of dominance without a fight. They simply cannot afford to lose it, for the effect would be to reduce them to minor players edged out of opportunities for superexploitation that have been their lifeblood for far too long. Preparations for armed confrontation with China and Russia in particular are already underway, with the US's missile defence programme and the ceaseless media 'exposures' of 'evil' doing by the governments of both countries. While it may seem inconceivable that any country would be mad enough to go to war against China or Russia when, as is the case now, US imperialism is unable to subdue even small and poor countries like Iraq and Afghanistan, we have seen time and again how the profit motive drives monopoly capitalists to acts of madness.
The time is long overdue for the proletariat of the world to fulfil its historic mission of overthrowing capitalism for once and for all. Every time capitalism taunts the proletariat by dismissing them as trailer trash or ninjas, every time capitalism deprives workers of their jobs, their livelihoods, their homes, every time it withdraws funding from pensions, hospitals, schools, it is poking the proletariat in the ribs and urging it to wake up and do its duty. The capitalists, like the turkeys on the turkey farm, have got used to the fact that day after day, week after week, the proletariat fails to respond. But, as was pointed out above, inductive reasoning of this kind has its limitations: one day the proletariat will once again respond - as did the Russian proletariat, for instance, on the occasion of the Glorious October Revolution of 1917 - and the expectations of the bourgeoisie will be dealt a fatal blow. Then the party will begin! There will be joy in the streets of the proletariat.
 Nevertheless, even during this period of prosperity, the level of unemployment in the richest imperialist countries has ranged from 5-10%. One can just imagine what will happen when this period of prosperity is over! As to the majority of humanity inhabiting the oppressed nations of the world, their conditions of existence continue to be dire.
 'A good year ahead for the global economy'.
 K Marx, Capital Vol III, p. 250.
 K Marx and F Engels, The Communist Manifesto, p.38.
 K Marx, Capital Vol III, p.250.
 Ibid. p.250 and p.249.
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