Bailout denied for workers’ homes, jobs as
Gov’t sinks more billions into failing capitalism
Published Dec 3, 2008 4:18 PM
Another day, another multi-billion-dollar bailout. The federal government
recently announced that it would give away $326 billion to Citigroup. The
government will now be backing approximately one-sixth of Citigroup’s $2
trillion in total assets.
Despite this massive pledge of financial aid, Citigroup shares led the way down
in a 680-point market plunge on Dec 1. The price of Citi’s stock fell 20
percent on the day. It seems $326 billion just doesn’t buy what it used
Secretary of the Treasury Henry Paulson has attempted to paint the bailout of
Citigroup as a regrettable but ultimately necessary use of taxpayer money.
Citigroup, like all the other bailout recipients, is “too big to
fail,” according to Paulson.
But while Paulson tries to spin the criminal giveaways to the banks as
emergency measures born out of unprecedented circumstances, the reality is that
the Federal Reserve System and the modern-day Treasury Department were designed
to help the capitalist class in the U.S. maintain its grip on power during
times of economic crisis.
The government that claims to be of, by and for the people will spend whatever
it takes of the workers’ tax money to preserve the class system that
exploits their labor.
How the Fed was born in stealth
In late November of 1910, a group of the most powerful bankers and financiers,
along with Secretary of the Treasury A.P. Andrews and members of the U.S.
Senate, met in secret at the Jekyll Island Club—an all-white, segregated,
elitist country club off the coast of Georgia. That secret meeting laid the
framework for the U.S. Federal Reserve System, which was officially established
Bertie Charles Forbes, the founder of Forbes magazine, later described the
meeting: “Picture a party of the nation’s greatest bankers stealing
out of New York on a private railroad car under cover of darkness, stealthily
riding hundred of miles South ... sneaking onto an island deserted by all but a
few servants ... under such rigid secrecy that the names of not one of them was
once mentioned, lest the servants learn the identity and disclose to the world
this strangest, most secret expedition in the history of American finance. I am
not romancing; I am giving to the world, for the first time, the real story of
how the foundation of our new currency system was written. ...” (Current
Opinion, December 1916)
One of the most prominent bankers at the meeting, besides J.P. Morgan, was
Frank A. Vanderlip. Vanderlip was president of National City Bank of New York,
which eventually grew into the modern-day Citigroup.
By the dawn of the 20th century, National City was already the largest U.S.
bank. Controlled by the Rockefeller family, it had expanded rapidly during the
1890s. Profits from U.S. imperial conquest in the Philippines, Puerto Rico and
Cuba, following the Spanish-American War of 1898, were funneled into National
City’s coffers. Vanderlip, then Assistant Secretary of the Treasury, had
negotiated a $200 million loan from the bank to the government to finance the
war. He was later rewarded with the post of bank president.
The bank was a pioneering force in the creation of securities and
derivatives—the late 19th-century predecessors of today’s
collateralized debt obligations (CDOs).
The Jekyll Island meeting was organized in the wake of the Panic of 1907. The
stock market had crashed, losing 37 percent of its value in a matter of weeks.
Large-scale bank runs leveled a number of prominent financial institutions. The
credit markets froze, leaving businesses and cities unable to finance their
The bankers, plus representatives from the Treasury Department and U.S. Senate,
who assembled on Jekyll Island in 1910 were seeking to create a more efficient
way for the government to funnel liquidity to the banks during times of
Vanderlip, Morgan and the rest of the ruling-class representatives at the
conclave created the framework for the Federal Reserve System in the hope that
a government bank would enable them to survive future crises.
Capitalism and crisis
The Panic of 1907 has sometimes been referred to as a “perfect
storm,” suggesting that it took an unlikely combination of events for the
crisis to occur. The same term has been used for the stock market crash of 1929
and subsequent Great Depression. The ruling-class politicians and pundits are
once again bringing out the “perfect storm” analogy in the current
global economic meltdown.
But the Panic of 1907 and the stock market crash of 1929 were not the result of
perfect storms in the financial markets. The current global economic meltdown
was not unforeseeable, nor was it caused by lax regulation in the financial
Rather, they are emblematic of the fact that crisis is written into the very
DNA of capitalism. Economic crises occur under capitalism because of an
economic law that Karl Marx and Frederick Engels first diagnosed, back in the
mid-19th century: overproduction.
The capitalists are compelled to constantly accumulate and expand their capital
or face extinction at the hands of other capitalists as they compete for market
This drive to constantly accumulate and expand leads them to increase
production regardless of the limits of the market—that is, of demand
backed by the ability to pay.
Crises of overproduction occur at the point during the business cycle when the
workers can no longer afford to buy back the multitude of goods and services
the capitalists have ordered them to produce, and markets become glutted on an
These exact processes are evident in the global economy today. Housing markets
around the globe have become glutted with millions of unsold homes. During what
is usually a busy holiday shopping season, products are piling up in warehouses
and factories as companies’ inventories continue to swell.
When markets become glutted, it puts downward pressure on the prices the
capitalists are able to charge for their commodities and services. Once they
are forced to lower their prices en masse, the chain of payment obligations
interconnected throughout the economy is broken in a million places. This is
why crises of overproduction ripple so forcefully through the financial system.
These exact processes are evident in the economy today.
After a construction boom from 2000-2006 that featured record-breaking
production of residential and commercial buildings, their prices have been in
freefall for two years. The sustained fall in the price of homes has broken the
complex chain of payment obligations that stretches from subprime mortgage
loans to CDOs—debt obligations—on Citigroup’s balance
Products ranging from electronics and toys, to automobiles and semi-conductors,
continue to pile up on warehouse floors around the globe. Companies are cutting
their prices by record amounts, leading capitalist economists to fret about the
possibility of a deflationary death spiral. Relatively large companies such as
Circuit City are defaulting on their debts and declaring bankruptcy, putting
further strain on the shell-shocked financial system.
Déjà vu: chaos of overproduction
Crises of overproduction, such as the one the world is currently suffering
through, are inherent to the capitalist mode of production. Frederick
Engels’ description of crises of overproduction in “Socialism:
Utopian and Scientific,” written in 1880, reads like a play-by-play
description of the processes that have unfolded in the economy over the last
Engels wrote: “Commerce is at a stand-still, the markets are glutted,
products accumulate, as multitudinous as they are unsaleable, hard cash
disappears, credit vanishes, factories are closed, the mass of the workers are
in want of the means of subsistence, because they have produced too much of the
means of subsistence; bankruptcy follows upon bankruptcy ...”
A recent edition of Forbes magazine bore the headline “How Capitalism
Will Save Us.” With layoffs surging, homelessness rising and nearly a
billion people around the world going hungry, the question for workers and poor
people is: How are we going to save ourselves from capitalism? Engels and Karl
Marx, who diagnosed capitalism so long ago, got it right. The answer lies in
the struggle for socialism and a world run by workers, not bankers.
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