Capitalist credit crisis

The gamblers and swindlers on Wall Street have put more than 2 million people at risk of losing their homes in the immediate future. But, bad as that is, they have done more than that.

Many millions of workers are at risk of losing their jobs if the collapse of the housing boom turns into a general recession in the coming period.

Headlines about the recent plunges in the stock market all rotate around the billions in bad debts held by the biggest banks and investment houses. The latest plunge on Wall Street was precipitated by the recommendation of Goldman Sachs investment bank that its clients sell their stock in Citigroup, the largest commercial bank in the United States.

The “sell” recommendation was based upon the determination that Citigroup will have to declare $15 billion in bad debts in the first quarter of 2008, on top of the $8 billion to $11 billion in bad debts it will have to declare in the fourth quarter of this year. Furthermore, the analysts have no idea where and when this bad-debt crisis will end for the banks.

These bad debts mainly originated in the subprime mortgage swindle financed by Citigroup and by front groups it set up to cheat workers by offering them loans to buy houses—mortgages—

at low-interest teaser rates in the beginning. They promised that when the interest rates went up later on, the workers could refinance. This turned out to be a big lie. A prime target of these unscrupulous subprime loans was people of color, who had been denied more affordable loans because of racist lending practices.

Other giant investment houses, including Merrill Lynch and Bear Stearns, did the same thing and had to write off billions in bad debts. But while bank debt grabs headlines, other news about the capitalist economy deserves the attention of the working class.

Declining profits of suppliers and retailers

Lowe’s, one of the largest suppliers to home builders, just announced a 4.3 percent drop in same-store sales and a 10 percent decline in profits in the third quarter. More threatening was the fact that it also announced a projected further decline in the fourth quarter.

Home Depot, the other big supplier of home building materials, announced a 27 percent drop in profits and a 6.2 percent drop in sales. Home Depot also lowered its estimates for future profits.

FedEx, which is integral to U.S. corporate trade and production, has given Wall Street analysts warnings two months in a row that its profits would fall based on high fuel costs “and meager demand for U.S. freight, sending the company’s shares lower and darkening the outlook for the world’s largest economy.” (Financial Times, Nov. 16)

FedEx’s downward predictions came on the heels of the announcement that industrial production in the U.S. fell 0.5 percent in October—five times as much as the 0.1 percent predicted. It was the biggest decline since the aftermath of Hurricane Katrina and confounded the experts.

Another corporate giant, Caterpillar, issued its own prognosis of the U.S. economy, declaring it to be “near to, or even in, recession.” This assessment was accompanied by an announcement of a decline in North American sales of 11 percent or $5 billion in the third quarter. Caterpillar dominates in trucking and construction. The drop in home building and the sale of heavy trucks, many of which use Caterpillar engines, led the company to project a 12 percent decline in machinery and engines for the year in North America.

To round out the picture, Whirlpool, the world’s largest household appliance maker, had forecast earlier that its North American sales would fall by 2 percent to 3 percent this year. It was particularly concerned about stoves, refrigerators, washing machines and similar appliances. (Financial Times, Feb. 7 and Oct. 23)

No cheer for the holidays

In addition to worrying about the bellwether transportation, appliance and construction companies, Wall Street is on edge about the holiday shopping season for retailers. Knowing the masses are stretched to the limit on credit and facing higher gas prices, a credit crunch on personal borrowing, low wages and escalating costs for health care and food, the giant retailers are all shaking in their boots.

The holiday season usually starts the Friday after “Thanksgiving”—called the Day of Mourning by Native people. But this year the retailers are starting early, slashing prices and trying every marketing device to pull people into the stores. Wal-Mart started weeks early by slashing prices on 15,000 items.

While Wal-Mart held its own, it sales increase was based upon “shopping down,” as workers who are feeling the pinch abandoned stores like J.C. Penney, Kohl’s and others, whose earnings went down. Penney’s profits fell 8 percent and Kohl’s were down 13 percent, reflecting a decline in sales in both chains. Mike Ulman, CEO of J.C. Penney, referred to the housing crisis: “It’s hard to sell window coverings to homes that aren’t being built.” (Financial Times, Nov. 15)

Capitalist ‘overproduction’

Having cheated millions of people out of their money by pushing bad loans on them, the banks now have bad debts. The workers are facing foreclosure on homes they rightfully thought were theirs, and the end result is a classic economic contradiction of capitalism, caused by overproduction of housing.

It is called overproduction, not because people don’t need housing but because more was built than workers can pay for. The bankers and their agents pushed credit on the workers, making profit in the form of high interest on the mortgages. Now suddenly there are a mass of homeless people and a glut of houses that people cannot afford. This is capitalism.

Sales of new homes are at their worst level in a decade and sales of previously owned homes have fallen the most since records began. “The chief executive of Wells Fargo, the West Coast bank,” wrote the Financial Times on Nov. 19, “last week said the housing slump was the worst since the Great Depression.”

Builders and bankers are now using every conceivable device to get people to buy, including incentives such as “upgrades worth $30,000, offers to pay initial mortgage installments and gifts of Hummers and SUVs,” but these enticements have failed to bring people into the market. Sure they’re “giving away” Hummers and SUVs. Who can afford the gas for them?

The subprime mortgage crisis is part of the general indebtedness of the masses of workers and the middle class. It origin is in the need of the ruling class to avoid the crisis of overproduction which is inherent in capitalist production.

Each capitalist grouping tries to produce enough to capture the widest possible market and make the greatest mass of profit. At the same time, they try to get rid of workers or lower their wages in order to increase their rate of profit. The end result is that production eventually outstrips the ability of the masses to consume. Then production slumps or stops altogether, because no boss is going to sell without making a profit.

Pumping credit into the economy is a method the financial overseers of capitalism use to try to postpone the crisis. When the economy went into a recession in 2000, Alan Greenspan, then head of the Federal Reserve Board, lowered interest rates for the banks so it was cheaper for them to borrow and they could have more money to lend in order to earn interest.

Greenspan lowered the interest rates all the way down to 1 percent. Huge amounts of credit were pumped into the banking system. Some of this money was used for loans to corporate investors. But massive amounts of it went into promoting mortgage lending, subprime lending, credit card lending, personal loans, payday loans, and every type of loan that could be used to squeeze money out of the workers.

Marx on the credit system

Karl Marx, in his monumental work “Capital,” described the credit system under capitalism long ago: “The credit system appears as the main lever of overproduction and over-speculation in commerce, solely because the reproduction process [of capital], which is elastic by nature, is forced to its extreme limits.”

He explained that “the self-expansion of capital”—using profits for new investment, which expands production—“based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system.”

This leads, wrote Marx, “to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit social wealth.”

Thus, Greenspan and the fraternity of swindlers on Wall Street contrived to push capitalist production beyond its extreme limit, a limit set by the inability of workers’ wages to keep up with expanding capitalist production. They did this by pumping money into the banks, who in turn used it to suck the masses dry with fraudulent and exorbitant interest charges.

This rush to get rich by lending and speculating always ends up in a crisis. While the rich may lose some money, they have billions more to keep them going. They always shift the crisis onto the masses.

The only way to prevent this is for the workers to organize resistance—to stop the foreclosures and stop the layoffs that the big capitalists are planning right now, as their profits fall.