Today's financial alchemy

Centuries ago, kings and their royal entourages lived far beyond their means and, to compensate, conducted never-ending military campaigns, looting resources and land. War was expensive and failures soon led to empty treasuries.

Among the royal elite arose the idea that wealth could be created by transforming base metals into gold. Throughout the Middle Ages, armies of alchemists labored tirelessly to achieve this goal, but in vain.

Today’s alchemists have been assigned an impossible task: convert trillions in IOUs and debt into complex financial instruments to create wealth and profits for Wall Street masters. Economists, mathematicians and physicists from prestigious universities create incomprehensible computer models and concoct cocktails of financial instruments. Financial markets and the rating agencies can’t measure their value or estimate a dependable price.

The lack of transparency has confused and panicked the stock market. Billions have been lost in recent months. Hordes of investors, bankers and brokers have run for the sidelines clutching their paper wealth to shelter it from the roiling financial markets.

The crisis began with sub-prime loans packaged by mortgage lenders, bought by banks and other financial institutions and sold to investors. These collateralized debt obligations, split into smaller denominations called tranches, were distributed widely in the U.S. and abroad. They provided lenders with double-digit interest rates and exorbitant fees. Ten thousand hedge funds bought into these computer models—“quant funds”—with borrowed money.

Now the sub-prime mortgage collapse has sent these financial investors into retreat with heavy losses.

On Sept. 18, the Federal Reserve Board gave the stock market what it wanted—a whopping half-point cut in the prime interest rate, from 5.25 to 4.75. This unleashed a flood of cheap dollars to provide liquidity and free up credit—and the stock market responded immediately by shooting up at the fastest rate in four years. The frenzy and fear that had gripped the financial institutions was eased, even though many analysts remain uncertain whether the Fed’s response was too little, too late. They are those who believe that a collapse of the financial institutions is still in the making.

The Federal Reserve Board, the bankers’ bank, acted as the money spigot of last resort. This government bank is an integral sector of the stock market and works with the heads of the largest banks, the leaders of other exchanges, and government agencies such as the Securities and Exchange Commission. It is the main catalyst to protect the stock market—the generalizer and barometer intimately connected to the pension funds, banks, credit unions, insurance companies and mortgage brokers. Wall Street rests easier, for the moment.

The stock market bailout by the Fed will lead to an inflationary tide, which will dilute the living standards of the workers and the oppressed. The value of their labor power expressed in cheap dollars will make it more difficult for them to buy back what they produce, at a time when they are plagued by the rising cost of food, energy, shelter, education and health care and are drowning in credit-card debt and foreclosures.

Unemployment is on the rise.

Workers and oppressed face inflation and stagnation. We have what appears to be a rerun of the conditions that led to the stock market crash of October 1987, but more profound and global. The plunge of the dollar will destabilize global commodities markets, intensify the tensions among trading partners, and even unravel trade agreements.

The Iraq and Afghanistan occupations are leaving a trail of death, destruction and huge deficits. Regardless of its dimensions, the crisis of capitalism will heighten the struggle of the working class and oppressed and change the character of the international situation.