Economic crisis intensifies, spreads globally

A full-blown economic crisis is plaguing Wall Street, still the financial center of the world. A symptom of it could be seen on Oct. 19, when the Dow Jones Industrial Average price of stocks plunged an alarming 366 points. That day was also the 20th anniversary of the 1987 stock market crash.

Not every stock market plunge results in a capitalist economic crisis but the recent volatility with unpredictable ups and downs, panic and confusion has compounded the fears of a growing number of Wall Street prime players that a recession is on the horizon.

The stock market is a representation of the conditions of capitalist production—a barometer of economic trends and development—and generalizes the state of the capitalist economy.

How many of the investors are small and how great are their losses in paper wealth remains to be seen, but it will be in the billions of dollars. The subprime mortgage crisis and the decline in the housing market have led to the worst credit crunch in years, infecting the entire financial services industry with debt and non-performing loans.

The health of U.S. transnational banks, the heartbeat of monopoly capitalism and an integral sector of the stock market, is a significant influence on the fortunes of investors who trade billions of shares daily. Recently, Citicorp, Bank of America and Wachovia reported billions in losses. They have been forced to write down the value of non-performing loans they held that were invested in subprime mortgage instruments and in the broader housing market. They have joined forces with JPMorgan Chase in an attempt to mitigate the financial crisis, demanding that the Federal Reserve Board bail them out.

Fed Chairperson Ben Bernanke, whose public role is to protect the monetary integrity of the entire capitalist system, caved in to these demands. The Fed flooded hundreds of billions of dollars into the system, providing liquidity to the giant banking institutions to alleviate their credit crunch crisis. It also lowered its prime interest rate from 5.25 to 4.75 percent, making it easier for the banks to borrow from the government to pay down huge debts. However, a reduction of such magnitude can have other consequences, too.

The bailout only momentarily calmed the market. The slide and volatility then intensified and the dollar devaluated further. Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns and numerous other institutions that have invested in the real estate debacle continue to report losses. Pension funds, mutual funds, credit unions, insurance companies, mortgage institutions, hedge funds—all an integral part of the stock market—are also trapped in the quicksand of risk and speculation.

The industrial sector has now caught the financial virus, which has spread abroad. On the day the DJIA plunged 366 points, the stock market reflected negative reports from three major global industrial empires—signs that the financial crisis was impacting on the broader economy.

Earnings reports from Caterpillar, Honeywell International and 3M, all elite Dow Jones industrials, failed to meet expectations.

Caterpillar is a global industrial power with 44 percent of its sales overseas. Operating in 200 countries or more, its global investments are almost three times that of its U.S. investments.

Likewise, there are more Honeywell plants in operation abroad than in the U.S., providing technology, manufacturing and aerospace services in 95 countries.

Even though Caterpillar posted a 21 percent gain in quarterly profits, its stock went down 5.3 percent because of a lower profit forecast for the year. Net income at Honeywell climbed 14 percent, but the stock still fell nearly 4 percent. Shares of 3M plunged 8.6 percent on lowered revenue expectations; the company said it would be forced to cut prices. (New York Times, Oct. 20)

These three global corporate giants lowered their yearly earnings expectations even though they all had posted previous quarterly profits. The stock market reflects a deep concern that a downward trend in the strategic industrial sector will pull down the entire capitalist economy.

Against this backdrop of trouble, representatives of the G-7 countries—the U.S., Britain, France, Germany, Italy, Canada and Japan—met in Washington on Oct. 20-21. G-7 finance ministers and central bankers were looking to the United States to calm the volatile markets. Funds and banks around the world have been hit hard as a result of bond purchases and risk-backed bad loans, often bundled into financial instruments called collateralized debt obligations. Recently, the European Central Bank warned that the global credit squeeze could jeopardize the Eurozone—13 countries that have adopted the euro as their currency—as well as world economic prospects.

The G-7 conclave came at a time when oil was hovering around $90 a barrel, gold reached a record high of $760 an ounce, and the dollar hit record lows against the euro. The euro has risen in value to $1.43, making U.S. goods and services more attractive to 320 million West Europeans.

Tensions are rising between the U.S. and its European capitalist allies. In response to the devaluated dollar, the European Central Bank, as well as Japan and China, have begun dumping U.S. Treasury bonds, heightening fears of a fresh slide in the dollar and a spike in interest rates on U.S. bonds as the Treasury tries to attract investors. This will further weaken the dollar and stimulate inflation.

In the U.S., a slowing economy coupled with inflation will hit the workers and the oppressed hard, washing out their living standards. Those who have jobs will suffer a decline in the value of their labor power, which reflects wages and benefits expressed in devaluating dollars. Burdened by the rising costs of food, energy, shelter and health care, they will drown in credit card debt, foreclosures and unemployment.

Worker-consumers make up 70 percent of the GDP. They are already in the grip of recession.

Add the Iraq and Afghanistan quagmire, the threat that the Pentagon will attack Iran and Bush’s threat that this can become a third world war and it is clear that the capitalist system has become more crisis prone. No matter the dimensions of the crisis, it will intensify the struggle of the working class and oppressed at home while changing the character of the international situation.