Bubble Economy 2.0: The Financial Recovery Plan from Hell by Michael Hudson

Global Research, February 11, 2009

Bubble Economy 2.0:
The Financial Recovery Plan from Hell
Michael Hudson

Martin Wolf started off his Financial Times column today (February 11) with the bold question: “Has Barack Obama’s presidency already failed?”[1] The stock market had a similar opinion, plunging 382 points. Having promised “change,” Mr. Obama is giving us more Clinton-Bush via Robert Rubin’s protégé, Tim Geithner. Tuesday’s $2.5 trillion Financial Stabilization Plan to re-inflate the Bubble Economy is basically an extension of the Bush-Paulson giveaway – yet more Rubinomics for financial insiders in the emerging Wall Street trusts. The financial system is to be concentrated into a cartel of just a few giant conglomerates to act as the economy’s central planners and resource allocators. This makes banks the big winners in the game of “chicken” they’ve been playing with Washington, a shakedown holding the economy hostage. “Give us what we want or we’ll plunge the economy into financial crisis.” Washington has given them $9 trillion so far, with promises now of another $2 trillion– and still counting.

A true reform – one designed to undo the systemic market distortions that led to the real estate bubble – would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide /Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet with Chicago Boy direction – a dress rehearsal of the mass financial bankruptcies they caused in Chile by the end of the 1970s) – the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world’s highest-paid economic planners.

Today’s economic collapse is the direct result of their planning philosophy. It actually was taught as “wealth creation” and still is, as supposedly more productive than the public regulation and oversight so detested by Wall Street and its Chicago School aficionados. The financial powerhouses created by this “free market” philosophy span the entire FIRE sector – finance, insurance and real estate, “financializing” housing and commercial property markets in ways guaranteed to make money by creating and selling debt. Mr. Obama’s advisors are precisely those of the Clinton Administration who supported trustification of the FIRE sector. This is the broad deregulatory medium in which today’s bad-debt disaster has been able to spread so much more rapidly than at any time since the 1920s.

The commercial banks have used their credit-creating power not to expand the production of goods and services or raise living standards but simply to inflate prices for real estate (making fortunes for their brokerage, property appraisal and insurance affiliates), stocks and bonds (making more fortunes for their investment bank subsidiaries) , fine arts (whose demand is now essentially for trophies, degrading the idea of art accordingly) and other assets already in place.
The resulting dot.com and real estate bubbles were not inevitable, not economically necessary. They were financially engineered by the political deregulatory power acquired by banks corrupting Congress through campaign contributions and public relations “think tanks” (more in the character of Orwellian doublethink tanks) to promote the perverse fiction that Wall Street can be and indeed is automatically self-regulating. This is a travesty of Adam Smith’s “Invisible Hand.” This hand is better thought of as covert. The myth of “free markets” is now supposed to consist of governments withdrawing from planning and taxing wealth, so as to leave resource allocation and the economic surplus to bankers rather than elected public representatives. This is what classically is called oligarchy, not democracy.

This centralization of planning, debt creation and revenue-extracting power is defended as the alternative to Hayek’s road to serfdom. But it is itself the road to debt peonage, a.k.a. the post-industrial economy or “Information Economy.” The latter term is another euphemistic travesty in view of the kind of information the banking system has promoted in the junk accounting crafted by their accounting firms and tax lawyers (off-balance- sheet entities registered on offshore tax-avoidance islands), the AAA applause provided as “information” to investors by the bond-rating cartel, and indeed the national income and product accounts that depict the FIRE sector as being part of the “real” economy, not as an institutional wrapping of special interests and government-sanction ed privilege acting in an extractive rather than a productive way.
“Thanks for the bonuses,” bankers in the United States and England testified this week before Congress and Parliament. “We’ll keep the money, but rest assured that we are truly sorry for having to ask you for another few trillion dollars. At least you should remember our theme song: We are still better managers than the government, and the bulwark against government bureaucratic resource allocation.” This is the ideological Big Lie sold by the Chicago School “free market” celebration of dismantling government power over finance, all defended by complex math rivaling that of nuclear physics that the financial sector is part of the “real” economy automatically producing a fair and equitable equilibrium.

This is not bad news for stockholders of more local and relatively healthy banks (healthy in the sense of avoiding negative equity). Their stocks soared and were by far the major gainers on Tuesday’s stock market, while Wall Street’s large Bad Banks plunged to new lows. Solvent local banks are the sort that were normal prior to repeal of Glass Steagall. They are to be bought by the large “troubled” banks, whose “toxic loans” reflect a basically toxic operating philosophy. In other words, small banks who have made loans carefully will be sucked into Citibank, Bank of America, JP Morgan Chase and Wells Fargo – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives are concentrated, and have used Treasury money from the past bailout to buy out smaller banks that were not infected with such reckless financial opportunism. Even the Wall Street Journal editorialized regarding the Obama Treasury’s new “Public-Private Investment Fund” to pump a trillion dollars into this mess: “Mr. Geithner would be wise to put someone strong and independent in charge of this fund – someone who can say no to Congress and has no ties to Citigroup, Robert Rubin or Wall Street.”[2]

None of this can solve today’s financial problem. The debt overhead far exceeds the economy’s ability to pay. If the banks would indeed do what Pres. Obama’s appointees are begging them to do and lend more, the debt burden would become even heavier and buying access to housing even more costly. When the banks look back fondly on what Alan Greenspan called “wealth creation,” we can see today that the less euphemistic terminology would be “debt creation.” This is the objective of the new bank giveaway. It threatens to spread the distortions that the large banks have introduced until the entire system presumably looks like Citibank, long the number-one offender of “stretching the envelope,” its euphemism for breaking the law bit by bit and daring government regulators and prosecutors to try and stop it and thereby plunging the U.S. financial system into crisis. This is the shakedown that is being played out this week. And the Obama administration blinked – as these same regulators did when they were in charge of the Clinton administration’ s bank policy. So much for the promised change!

The three-pronged Treasury program seems to be only Stage One of a two-stage “dream recovery plan” for Wall Street. Enough hints have trickled out for the past three months in Wall Street Journal op-eds to tip the hand for what may be in store. Watch for the magic phrase “equity kicker,” first heard in the S&L mortgage crisis of the 1980s. It refers to the banker’s share of capital gains, that is, asset price inflation in Bubble #2 that the Recovery Program hopes to sponsor.

The first question to ask about any Recovery Program is, “Recovery for whom?” The answer given on Tuesday is, “For the people who design the Program and their constituency” – in this case, the bank lobby. The second question is, “Just what is it they want to ‘recover’?” The answer is, the Bubble Economy. For the financial sector it was a golden age. Having enjoyed the Greenspan Bubble that made them so rich, its managers would love to create yet more wealth for themselves by indebting the “real” economy yet further while inflating prices all over again to make new capital gains.

The problem for today’s financial elites is that it is not possible to inflate another bubble from today’s debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new capital will induce banks to provide credit to real estate already over-mortgaged or to individuals and corporations already over-indebted. Moody’s and other leading professional observers have forecast property prices to keep on plunging for at least the next year, which is as far as the eye can see in today’s unstable conditions. So the smartest money is still waiting like vultures in the wings – waiting for government guarantees that toxic loans will pay off. Another no-risk private profit to be subsidized by public-sector losses.

While the Obama administration’ s financial planners wring their hands in public and say “We feel your pain” to debtors at large, they know that the past ten years have been a golden age for the banking system and the rest of Wall Street. Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1% of the population has raised their appropriation of the nationwide returns to wealth – dividends, interest, rent and capital gains – from 37% of the total ten years ago to 57% five years ago and it seems nearly 70% today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.

The officials drawn from Wall Street who now control of the Treasury and Federal Reserve repeat the right-wing Big Lie: Poor “subprime families” have brought the system down, exploiting the rich by trying to ape their betters and live beyond their means. Taking out subprime loans and not revealing their actual ability to pay, the NINJA poor (no income, no job, no audit) signed up to obtain “liars’ loans” as no-documentation Alt-A loans are called in the financial junk-paper trade.

I learned the reality a few years ago in London, talking to a commercial banker. “We’ve had an intellectual breakthrough,” he said. “It’s changed our credit philosophy.”
“What is it?” I asked, imagining that he was about to come out with yet a new magical mathematics formula?

“The poor are honest,” he said, accompanying his words with his jaw dropping open as if to say, “Who would have guessed?”

The meaning was clear enough. The poor pay their debts as a matter of honor, even at great personal sacrifice and what today’s neoliberal Chicago School language would call uneconomic behavior. Unlike Donald Trump, they are less likely to walk away from their homes when market prices sink below the mortgage level. This sociological gullibility does not make economic sense, but reflects a group morality that has made them rich pickings for predatory lenders such as Countrywide, Wachovia and Citibank. So it’s not the “lying poor.” It’s the banksters’ fault after all!

For this elite the Bubble Economy was a deliberate policy they would love to recover. The problem is how to start a new bubble to make yet another fortune? The alternative is not so bad – to keep the bonuses, capital gains and golden parachutes they have given themselves, and run. But perhaps they can improve in Bubble Economy #2.

The Treasury’s newest Financial Stability Plan (Bailout 2.0) is only the first step. It aims at putting in place enough new bank-lending capacity to start inflating prices on credit all over again. But a new bubble can’t be started from today’s asset-price levels. How can the $10 to $20 trillion capital-gain run-up of the Greenspan years be repeated in an economy that is “all loaned up”?

One thing Wall Street knows is that in order to make money, asset prices not only need to rise, they have to go down again. Without going down, after all, how can they rise up? Without a crucifixion for the economy, how can there be a resurrection? The more frenetic the price fibrillation, the easier it is for computerized buy-and-sell programs to make money on options and derivatives.

So here’s the situation as I see it. The first objective is to preserve the wealth of the creditor class – Wall Street, the banks and the other financial vehicles that enrich the wealthiest 1% and, to be fair within America’s emerging new financial oligarchy, the richest 10% of the population. Stage One involves buying out their bad loans at a price that saves them from taking a loss. The money will be depicted to voters as a “loan,” to be repaid by banks extracting enough new debt charges in the new rigged game the Treasury is setting up. The current loss will be shifted the onto “taxpayers” and made up by new debtors – in both cases labor, onto whose shoulders the tax burden has been shifted steadily, step by step since 1980.

An “aggregator” bank (sounds like “alligator,” from the swamps of toxic waste) will buy the bad debts and put them in a public agency. The government calls this the “bad” bank. (This is Geithner’s first point.) But it does good for Wall Street – by buying loans that have gone bad, along with loans and derivative guarantees and swaps that never were good in the first place. If the private sector refuses to buy these bad loans at prices the banks are asking for, why should the government pretend that these debt claims are worth more. Vulture funds are said to be offering about what they were when Lehman Brothers went bankrupt: about 22 cents on the dollar. The banks are asking for 75 cents on the dollar. What will the government offer?
Perhaps the worst alternative is that is now being promoted by the banks and vulture investors in tandem: the government will guarantee the price at which private investors buy toxic financial waste from the banks. A vulture fund would be happy enough to pay 75 cents on the dollar for worthless junk if the government were to provide a guarantee. The Treasury and Federal Reserve pretend that they simply would be “providing liquidity” to “frozen markets.” But the problem is not liquidity and it is not subjective “market psychology.” It is “solvency,” that is, a realistic awareness that toxic waste and bad derivatives gambles are junk. Mr. Geithner has not been able to come to terms with how to value this – without bringing the Obama administration down in a wave of populist protest – any more than Mr. Paulson was able to carry out his original Tarp proposal along these lines.

The hardest task for today’s banksters is to revive opportunities for creditors to make a new killing. (It’s the economy that’s being killed, of course.) This seems to be the aim of the Public/Private investment company that Mr. Geithner is establishing as the second element in his plan. The easiest free lunch is to ride the wave of a new bubble – a fresh wave of asset-price inflation to be introduced to “cure” the problem of debt deflation.

Here’s how I imagine the ploy might work. Suppose a hapless family has bought a home for $500,000, with a full 100% $500,000 adjustable-rate mortgage scheduled to reset this year at 8%. Suppose too that the current market price will fall to $250,000, a loss of 50% by yearend 2009. Sometime in mid 2010 would seem to be long enough for prices to decline by enough to make “recovery” possible – Bubble Economy 2.0. Without such a plunge, there will be no economy to “rescue,” no opportunity for Tim Geithner and Laurence Summers to “feel your pain” and pull out of their pocket the following package – a variant on the “cash for trash” swap, a public agency to acquire the $500,000 mortgage that is going bad, heading toward only a $250,000 market price.

The “bad bank” was not quite ready to be created this week, but the embryo is there. It will take the form of a public/private partnership (PPP) of the sort that Tony Blair made so notorious in Britain. And speaking of Mr. Blair, I am writing this from England, where almost every America-watcher I talk to has expressed amazement at Obama’s performance last week idealizing England’s counterpart to George Bush when it comes to unpopularity contests. Blair’s tenure in office was a horror story, not something to be congratulated for. He privatized the railroads and entering into the disastrous public/private partnership that doubled, tripled or quadrupled the cost of public projects by adding on a heavy financial overhead. If Obama does not realize how he shocked Britain and much of Europe with his praise, then he is in danger of foisting a similar public/private financialized “partnership” on the United States

The new public/private institution will be financed with private funds – in fact, with the money now being given to re-capitalize America’s banks (headed by the Wall St. banks that have done so bad). Banks will use the Treasury money they have received by “borrowing” against their junk mortgages at or near par to buy shares in a new $5 trillion institution created along the lines of the unfortunate Fanny Mae and Freddie Mac. Its bonds will be guaranteed. (That’s the “public” part – “socializing” the risk.) The PPP institution will have the power to buy and renegotiate the mortgages that have passed into the hands of the government and other holders. This “Homeowner Rescue Trust” will use its private funding for the “socially responsible” purpose of “saving the taxpayer” and middle class homeowners by renegotiating the mortgage down from its original $500,000 to the new $250,000 market price.

Here’s the patter talk you can expect, with the usual Orwellian euphemisms. The Homeowners Rescue PPP will appear as a veritable Savior Bank resurrected from the wreckage of Bubble #1. Its clients will be families strapped by their mortgage debt and feeling more and more desperate as the price of their major asset plummets more deeply into Negative Equity territory. To them, the new PPP will say: “We’ve got a deal to save you. We’ll renegotiate your mortgage down to the current market price, $250,000, and we’ll also lower your interest rate to just 5.50%, the new rate. This will cut your monthly debt charges by nearly two thirds. Not only can you afford to stay in your home, you will escape from your negative equity.”

The family probably will say, “Great.” But they will have to make a concession. That’s where the new public/private partnership makes its killing. Funded with private money that will take the “risk” (and also reap the rewards), the Savior Bank will say to the family that agrees to renegotiate its mortgage: “Now that the government has absorbed a loss (in today’s travesty of “socializing” the financial system) while letting let you stay in your home, we need to recover the money that’s been lost. If we make you whole, we want to be made whole too. So when the time comes for you to sell your home or renegotiate your mortgage, our Homeowners Rescue PPP will receive the capital gain up to the original amount written off.”

In other words, if the homeowner sells the property for $400,000, the Homeowners Rescue PPP will get $150,000 of the capital gain. If the home sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50 and the home sells for $600,000, the owner will split the $100,000 further capital gain with the Homeowners Rescue PPP. It thus will make much more through its appropriation of capital gains (the new debt-fueled asset-price inflation being put in place) than it extracts in interest!

This would make Bubble 2.0 even richer for Wall Street than the Greenspan bubble! Last time around, it was the middle class that got the gains – even if new buyers had to enter a lifetime of debt peonage to buy higher-priced homes. It really was the bank that got the gains, of course, because mortgage interest charges absorbed the entire rental value and even the hoped-for price gain. But homeowners at least had a chance at the free ride, if they didn’t squander their money in refinancing their mortgages to “cash out” on their equity to support their living standards in a generation whose wage levels had stagnated since 1979. As Mr. Greenspan observed in testimony before Congress, a major reason why wages have not risen is that workers are afraid to strike or even to complain about being worked harder and harder for longer and longer hours (“raising productivity” ), because they are one paycheck away from missing their mortgage payment – or, if renters, one paycheck or two away from homelessness.
This is the happy condition of normalcy that Wall Street’s financial planners would like to recover. This time around, they may not be obliged to make their gains in a way that also makes middle class homeowners rich. In the wake of Bubble Economy #1, today’s debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! The Homeowners Rescue PPP can appropriate for its stockholder banks and other large investors the capital gains that have been the driving force of U.S. “wealth creation,” bubble-style. That is what the term “equity kicker” means.

This situation confronts the economy with a dilemma. The only policies deemed politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; credit/debt to inflate a new Bubble Economy #2.

Lobbyists for Wall Street’s enormous Bad Bank conglomerates are screaming that all real solutions to today’s debt problem and tax shift onto labor are politically incorrect, above all the time-honored debt write-downs to bring the debt burden within the ability to pay. That is what the market is supposed to do, after all, by bankruptcy in an anarchic collapse if not by more deliberate and targeted government policy. The Bad Banks, having demanded “free markets” all these years, fear a really free market when it threatens their bonuses and other takings. For Wall Street, free markets are “free” of public regulation against predatory lending; “free” of taxing the wealthy so as to shift the burden onto labor; “free” for the financial sector to wrap itself around the “real” economy like parasitic ivy around a tree to extract the surplus.
This is a travesty of freedom. As the putative neoliberal Adam Smith explained, “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” But worst of all is the “freedom” of today’s economic discussion from the wisdom of classical political economy and from historical experience regarding how societies through the ages have coped with the debt overhead.

How to save the economy from Wall Street

There is an alternative to ward all this off, and it is the classic definition of freedom from debt peonage and predatory credit. The only real solution to today’s debt overhang is a debt write-down. Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population, operating via the financial sector.
If Obama means what he says, he would use his office as a bully pulpit to urge repeal the present harsh creditor-oriented bankruptcy law sponsored by the banks and credit-card companies. He would campaign to restore the long-term trend of laws favoring debtors rather than creditors, and introduce legislation to restore the practice of writing down debts to reflect the debtor’s ability to pay, imposing market reality to debts that are far in excess of realistic valuations.
A second policy would be to restore the power of state attorneys general to bring financial fraud charges against the most egregious mortgage lenders. The Bush Administration got these prosecutions thrown out of court by claiming that under an 1864 National Bank Act clause, the federal government had the right to override state prosecutions of national banks. Bush then appointed a non-prosecutor to this enforcement position.

On the basis of reinstated fraud charges, the government might claw back the bank bonuses, salaries and bank earnings that represented the profits from America’s greatest financial and real estate fraud in history. And to prevent repetition of the past decade’s experience, the Obama Administration might help popularize a new psychology of debt. The government could encourage “the poor” to act as “economically” as Donald Trumps or Angelo Mozilo’s would do, making it clear that debt write-downs are a right.

Also to ward off repetition of the Bubble Economy, the Treasury could impose the “Tobin tax” of 1% on purchases and options for stocks, bonds and foreign currency. Critics of this tax point out that it can be evaded by speculators trading offshore in the rights to securities held in U.S. accounts. But the government could simply refuse to provide deposit insurance and other support to institutions trading offshore, or simply could announce that trades in such “deposit receipts” for shares would not have legal standing. As for trades in derivatives, depository institutions – including conglomerates owning such banks – can simply be banned as inherently unsafe. If foreigners wish to speculate on financial horse races, let them.

Financial policy ultimately rests on tax policy. It is the ability to levy taxes, after all, that gives value to Treasury money (just as it is the inability to collect on debts that has depreciated the value of commercial bank deposits). It is easy enough for fiscal policy to prevent a new real estate bubble. Simply shift the tax system back to where it originally was, on the land’s site-rental value. The “free lunch” (what John Stuart Mill called the “unearned increment” of rising land prices, a gain that landlords made “in their sleep”) would serve as the tax base instead of burdening labor and industry with income taxes and sales taxes. This would achieve the kind of free market that Adam Smith, John Stuart Mill and Alfred Marshall described, and which the Progressive Era aimed to achieve with America’s first income tax in 1913. It would be a market free of the free lunch that Chicago Boys insist does not exist. But the recent Bubble Economy and today’s Bailout Sequel have been all about getting a free lunch.

A land tax would prevent housing prices from rising again. It is the most hated tax in America today, largely because of the disinformation campaign that has been mounted by the real estate interests and amplified by the banks that stand behind them. The reality is that taxing land appreciation rather than wages or corporate profits would save homeowners from having to take on so much debt in order to obtain housing. It would save the economy from seeing “wealth creation” take the form of the “unearned increment” being capitalized into higher bank loans with their associated carrying charges (interest and amortization) .

The wealth tax originally fell mainly on real estate. The most immediate and politically feasible priority of the Obama Administration thus should be to repeal the Bush Administration’ s drastic tax cuts for the top brackets and its moratorium on the estate tax. The aim should be to bring down the polarization between creditors and debtors that has concentrated over two-thirds of the returns to wealth in the richest 1% of the population.

If alternatives to the Bubble Economy such as these are not promoted, we will know that promises of change were mere rhetoric, Tony Blair style. Mr. Geithner may have given the game away in his February 10 statement that “Access to public support is a privilege, not a right.” The literal meaning of “privilege” is “private law” (Lat. leges), a law to benefit individuals as a special interest separate from the public interest. The problem is that Mr. Geithner is seeking to save a system that creates no real jobs products. The debt that banks sell is not really a “product.” Extracting interest and receiving public bailouts to make financial gamblers whole is extractive, not productive.

The banking system often has been characterized as parasitic. The metaphor is appropriate on more than one plane. Most people think of parasites simply as leeches, draining nourishment from the host. But biological nature is more complex. In order for parasites to succeed they must first numb the host’s pain-warning system so that they can get a foothold. They then take control of the host’s brain. The trick the host into believing that the parasite is part of its own body, and indeed even its child, to be nurtured, protected and given preference. They turn the host into a zombie. So the problem we are facing is not “zombie banks,” but the ability of Wall Street to create a zombie economy.

This is what the financial sector has done vis-à-vis the economy at large. It depicts itself and the rest of the symbiotic FIRE sector as part of the “real” economy, so that its extraction of interest, economic rent and monopoly prices is payment for providing a “service”: the privilege of credit creation, landlordship and “corporate management. Like his predecessor Hank Paulson, Mr. Geithner claims that recovery cannot occur until the banking system is put back on its feet in sufficiently solvent and indeed, prosperous condition to “get credit flowing again,” he said. “Without credit, economies cannot grow at their potential.” But is the solution really to create yet more debt for the already debt-ridden U.S. economy? It was the Greenspan debt bubble that brought it to a halt! Interest and amortization charges on new debt will eats into the ability of consumers and companies to spend and invest. Claiming that economic recovery must be led by renewed debt creation threatens only to deepen debt dependency and further erode discretionary consumer spending power.

When it comes to cleaning up the Greenspan Bubble legacy by writing down homeowner mortgage debt, the Treasury proposal offers homeowners $50 billion – just 0,5 percent of the $10 trillion Wall Street bailout to date, and less than half the amount given to AIG to pay its hedge fund speculators on their derivative gambles. The Treasury has handed out $25 billion to each and every big bank, so just two of these banks alone got as much as the reported one-quarter of all homeowners in America suffering from Negative Equity on their homes and in need of mortgage renegotiation. Yet today’s economic shrinkage cannot be reversed without a recovery in consumer demand. The economy has lost the “virtual wealth” in higher-priced homes and the stock market, and must rely on after-tax earnings. But I see little concern for wage earners in the Treasury plan. Without debt relief, consumer spending and business investment will not recover.

This debt dimension is what the Treasury’s “recovery” plan leaves out of account. It seeks to recover the debt-bubble economy, not the real economy of production and consumption.


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[1] Martin Wolf, “Why Obama’s new Tarp will fail to rescue the banks,” Financial Times, Feb. 11, 2009.
[2] “Geithner at the Improv,” Wall Street Journal editorial, February 11, 2009.

Michael Hudson is a frequent contributor to Global Research. Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, www.michael- hudson.com and his email mhmichael-hudson. com .

David Harvey - Why the U.S. Stimulus Package is Bound To Fail

Much is to be gained by viewing the contemporary crisis as a surface eruption generated out of deep tectonic shifts in the spatio-temporal disposition of capitalist development. The tectonic plates are now accelerating their motion and the likelihood of more frequent and more violent crises of the sort that have been occurring since 1980 or so will almost certainly increase. The manner, form, spatiality and time of these surface disruptions are almost impossible to predict, but that they will occur with greater frequency and depth is almost certain. The events of 2008 have therefore to be situated in the context of a deeper pattern. Since these stresses are internal to the capitalist dynamic (which does not preclude some seemingly external disruptive event like a catastrophic pandemic also occurring), then what better argument could there be, as Marx once put it, “for capitalism to be gone and to make way for some alternative and more rational mode of production.”

I begin with this conclusion since I still find it vital to emphasize, if not dramatize, as I have sought to do over and over again in my writings over the years, that failure to understand the geographical dynamics of capitalism or to treat the geographical dimension as in some sense merely contingent or epiphenomenal, is to both lose the plot on how to understand capitalist uneven geographical development and to miss out on possibilities for constructing radical alternatives. But this poses an acute difficulty for analysis since we are constantly faced with trying to distill universal principles regarding the role of the production of spaces, places and environments in capitalism’s dynamics, out of a sea of often volatile geographical particularities. So how, then, can we integrate geographical understandings into our theories of evolutionary change? Let us look more carefully at the tectonic shifts.

In November 2008, shortly after the election of a new President, the National Intelligence Council of the United States issued its delphic estimates on what the world would be like in 2025. Perhaps for the first time, a quasi-official body in the United States predicted that by 2025 the United States, while still a powerful if not the most powerful single player in world affairs, would no longer be dominant. The world would be multi-polar and less centered and the power of non-state actors would increase. The report conceded that US hegemony had been fading on and off for some time but that its economic, political and even military dominance was now systematically waning. Above all (and it is important to note that the report was prepared before the implosion of the US and British financial systems), “the unprecedented shift in relative wealth and economic power roughly from West to East now under way will continue.”

This “unprecedented shift” has reversed the long- standing drain of wealth from East, Southeast and South Asia to Europe and North America that had been occurring since the eighteenth century (a drain that even Adam Smith had noted with regret in The Wealth of Nations but which accelerated relentlessly throughout the nineteenth century). The rise of Japan in the 1960s followed by South Korea, Taiwan, Singapore and Hong Kong in the 1970s and then the rapid growth of China after 1980 later accompanied by industrialization spurts in Indonesia, India, Vietnam, Thailand and Malaysia during the 1990s, has altered the center of gravity of capitalist development, although it has not done so smoothly (the East and South-East Asian financial crisis of 1997-8 saw wealth flow briefly but strongly back towards Wall Street and the European and Japanese banks). Economic hegemony seems to be moving towards some constellation of powers in East Asia and if crises, as we earlier argued, are moments of radical reconfigurations in capitalist development, then the fact that the United States is having to deficit finance its way out of its financial difficulties on such a huge scale and that the deficits are largely being covered by those countries with saved surpluses – Japan, China, South Korea, Taiwan and the Gulf states – suggests this may be the moment for such a shift to be consolidated.

Shifts of this sort have occurred before in the long history of capitalism. In Giovanni Arrighi’s thorough account in The Long Twentieth Century, we see hegemony shifting from the city states of Genoa and Venice in the sixteenth century to Amsterdam and the Low Countries in the seventeenth before concentrating in Britain from the late eighteenth century until the United States eventually took control after 1945. There are a number of features to these transitions that Arrighi emphasizes and which are relevant to our analysis. Each shift, Arrighi notes, occurred in the wake of a strong phase of financialization (he cites with approval Braudel’s maxim that financialization announces the autumn of some hegemonic configuration). But each shift also entailed a radical change of scale, from the small city states at the origin to the continent-wide economy of the United States in the latter half of the twentieth century. This change of scale makes sense given the capitalist rule of endless accumulation and compound growth of at least three per cent for ever. But hegemonic shifts, Arrighi argues, are not determined in advance. They depend upon the emergence of some power economically able and politically and militarily willing to take on the role of global hegemon (with its costs as well as its advantages). The reluctance of the United States to assume that role before World War II meant an interregnum of multi-polar tensions that could not halt the drift into war (Britain was no longer in a position to assert its prior hegemonic role). Much also depends on how the past hegemon behaves as it faces up to the diminution of its former role. It can pass peaceably or belligerently into history. From this perspective the fact that the United States still holds overwhelming military power (particularly from 30,000 feet up) in a context of its declining economic and financial power and increasingly shaky cultural and moral authority, creates worrying scenarios for any future transition. Furthermore, it is not obvious that the main candidate to displace the United States, China, has the capacity or the will to assert some hegemonic role, for while its population is certainly huge enough to meet the requirements of changing scale, neither its economy nor its political authority (or even its political will) point to any easy accession to the role of global hegemon. Given the nationalist divisions that exist, the idea that some association of East Asian Powers might do the job also appears unlikely as does the possibility for a fragmented and fractious European Union or the so-called BRIC powers (Brazil, Russia, India and China) to stay on a common path for long. For this reason, the prediction that we are headed into another interregnum of multi-polar and conflictual interests and potential global instability appears plausible.

But the tectonic shift away from United States dominance and hegemony that has been under way for some time is becoming much clearer. The thesis of both excessive financialization and “debt as a principal predictor of leading world powers’ debilitation” has found popular voice in the writings of Kevin Phillips. Attempts now under way to re-build US dominance through reforms in the architecture of both the national and the global state-finance nexus appear not to be working while the exclusions imposed on much of the rest of the world in seeking to re-shape that architecture are almost certain to provoke strong oppositions if not overt economic conflicts.

But tectonic shifts of this sort do not come about as if by magic. While the historical geography of a shifting hegemony as Arrighi describes it has a clear pattern and while it is also clear from the historical record that periods of financialization precede such shifts, Arrighi does not provide any deep analysis of the processes that produce such shifts in the first place. To be sure, he cites “endless accumulation” and therefore the growth syndrome (the three per cent compound growth rule) as critical to explaining the shifts. This implies that hegemony moves from smaller (i.e. Venice) to larger (e.g. the United States) political entities over time. And it also stands to reason that hegemony has to lie with that political entity within which much of the surplus is produced (or to which much of the surplus flows in the form of tribute or imperialist extractions). With total global output standing at $45 trillion as of 2005, the US share of $15 trillion made it, as it were, the dominant and controlling share-holder in global capitalism able to dictate (as it typically does in its role as the chief shareholder in the international institutions such as a the World Bank and the IMF) global policies. The NCIS report in part based its prediction on loss of dominance but maintenance of a strong position on the falling share of global output in the US relative to the rest of the world in general and China in particular.

But as Arrighi points out, the politics of such a shift are by no means certain. The United States bid for global hegemony under Woodrow Wilson during and immediately after World War I was thwarted by a domestic political preference in the United State for isolationism (hence the collapse of the League of Nations) and it was only after World War II (which the US population was against entering until Pearl Harbor occurred) that the US embraced its role as global hegemon through a bi-partisan foreign policy anchored by the Bretton Woods Agreements on how the post-War international order would be organized (in the face of the Cold War and the spreading threat to capitalism of international communism). That the United States had long been developing into a state that in principle could play the role of global hegemon is evident from relatively early days. It possessed relevant doctrines, such as “Manifest Destiny” (continental wide geographical expansion which eventually spilled over into the Pacific and Caribbean before going global without territorial acquisitions) or the Monroe Doctrine which warned European Powers to leave the Americas alone (the doctrine was actually formulated by the British Foreign Secretary Canning in the 1820s but adopted by the US as its own almost immediately). The United States possessed the necessary dynamism to account for a growing share of global output and was quintessentially committed to some version of what can best be called “cornered market” or “monopoly” capitalism backed by an ideology of rugged individualism. So there is a sense in which the US was, throughout much of its history, preparing itself to take on the role of global hegemon. The only surprise was that it took so long to do so and that it was the Second rather than the First World War that led it finally to take up the role leaving the inter-war years as years of multipolarity and chaotic competing imperial ambitions of the sort that the NCIS report fears will be the situation in 2025.

The tectonic shifts now under way are deeply influenced, however, by the radical geographical unevenness in the economic and political possibilities of responding to the current crisis. Let me illustrate how this unevenness is now working by way of a tangible example. As the depression that began in 2007 deepened, the argument was made by many that a full-fledged Keynesian solution was required to extract global capitalism from the mess it was in. To this end various stimulus packages and bank stabilization measures were proposed and to some degree taken up in different countries in different ways in the hope that these would resolve the difficulties. The variety of solutions on offer varied immensely depending upon the economic circumstances and the prevailing forms of political opinion (pitting, for example, Germany against Britain and France in the European Union). Consider, however, the different economic political possibilities in the United States and China and the potential consequences for both shifting hegemony and for the manner in which the crisis might be resolved.

In the United States, any attempt to find an adequate Keynesian solution has been doomed at the start by a number of economic and political barriers that are almost impossible to overcome. A Keynesian solution would require massive and prolonged deficit financing if it were to succeed. It has been correctly argued that Roosevelt’s attempt to return to a balanced budget in 1937-8 plunged the United States back into depression and that it was, therefore, World War II that saved the situation and not Roosevelt’s too timid approach to deficit financing in the New Deal. So even if the institutional reforms as well as the push towards a more egalitarian policy did lay the foundations for the Post World War II recovery, the New Deal in itself actually failed to resolve the crisis in the United States.

The problem for the United States in 2008-9 is that it starts from a position of chronic indebtedness to the rest of the world (it has been borrowing at the rate of more than $2 billion a day over the last ten years or more) and this poses an economic limitation upon the size of the extra deficit that can now be incurred. (This was not a serious problem for Roosevelt who began with a roughly balanced budget). There is also a geo- political limitation since the funding of any extra deficit is contingent upon the willingness of other powers (principally from East Asia and the Gulf States) to lend. On both counts, the economic stimulus available to the United States will almost certainly be neither large enough nor sustained enough to be up to the task of reflating the economy. This problem is exacerbated by ideological reluctance on the part of both political parties to embrace the huge amounts of deficit spending that will be required, ironically in part because the previous Republican administration worked on Dick Cheney’s principle that “Reagan taught us that deficits don’t matter.” As Paul Krugman, the leading public advocate for a Keynesian solution, for one has argued, the $800 billion reluctantly voted on by Congress in 2009, while better than nothing, is nowhere near enough. It may take something of the order to $2 trillion to do the job and that is indeed excessive debt relative to where the US deficit now stands. The only possible economic option, would be to replace the weak Keynesianism of excessive military expenditures by the much stronger Keynesianism of social programs. Cutting the US defense budget in half (bringing it more in line with that of Europe in relation to proportion of GDP) might technically help but it would be, of course, political suicide, given the posture of the Republican Party as well as many Democrats, for anyone who proposed it.

The second barrier is more purely political. In order to work, the stimulus has to be administered in such a way as to guarantee that it will be spent on goods and services and so get the economy humming again. This means that any relief must be directed to those who will spend it, which means the lower classes, since even the middle classes, if they spend it at all, are more likely to spend it on bidding up asset values (buying up foreclosed houses, for example), rather than increasing their purchases of goods and services. In any case, when times are bad many people will tend to use any extra income they receive to retire debt or to save (as largely happened with the $600 rebate designed by the Bush Administration in the early summer of 2008).

What appears prudent and rational from the standpoint of the household bodes ill for the economy at large (in much the same way that the banks have rationally taken public money and either hoarded it or used it to buy assets rather than to lend). The prevailing hostility in the United States to “spreading the wealth around” and to administering any sort of relief other than tax cuts to individuals, arises out of hard core neoliberal ideological doctrine (centered in but by no means confined to the Republican Party) that “households know best”. These doctrines have broadly been accepted as gospel by the American public at large after more than thirty years of neoliberal political indoctrination. We are, as I have argued elsewhere, “all neoliberals now” for the most part without even knowing it. There is a tacit acceptance, for example, that “wage repression” - a key component to the present problem - is a “normal” state of affairs in the United States. One of the three legs of a Keynesian solution, greater empowerment of labor, rising wages and redistribution towards the lower classes is politically impossible in the United States at this point in time. The very charge that some such program amounts to “socialism” sends shivers of terror through the political establishment. Labor is not strong enough (after thirty years of being battered by political forces) and no broad social movement is in sight that will force redistributions towards the working classes.

One other way to achieve Keynesian goals, is to provide collective goods. This has traditionally entailed investments in both physical and social infrastructures (the WPA programs of the 1930s is a forerunner). Hence the attempt to insert into the stimulus package programs to rebuild and extend physical infrastructures for transport and communications, power and other public works along with increasing expenditures on health care, education, municipal services, and the like. These collective goods do have the potential to generate multipliers for employment as well as for the effective demand for further goods and services. But the presumption is that these collective goods are, at some point, going to belong to the category of “productive state expenditures” (i.e. stimulate further growth) rather than become a series of public “white elephants” which, as Keynes long ago remarked, amounted to nothing more than putting people to work digging ditches and filling them in again. In other words, an infrastructural investment strategy has to be targeted towards systematic revival of three percent growth through, for example, systematic redesign of our urban infrastructures and ways of life. This will not work without sophisticated state planning plus an existing productive base that can take advantage of the new infrastructural configurations. Here, too, the long prior history of deindustrialization in the United States and the intense ideological opposition to state planning (elements of which were incorporated into Roosevelt’s New Deal and which continued into the 1960s only to be abandoned in the face of the neoliberal assault upon that particular exercise of state power in the 1980s) and the obvious preference for tax cuts rather than infrastructural transformations makes the pursuit of a full-fledged Keynesian solution all but impossible in the United States.

In China, on the other hand, both the economic and political conditions exist where a full-fledged Keynesian solution would indeed be possible and where there are abundant signs that this path will likely be followed. To begin with, China has a vast reservoir of foreign cash surplus and it is easier to debt finance on that basis than it is with a vast already existing debt overhang as is the case in the US. It is also worth noting that ever since the mid 1990s the “toxic assets” (the non performing loans) of the Chinese Banks (some estimates put them as high as 40 per cent of all loans in 2000) have been wiped off the banks’ books by occasional infusions of surplus cash from the foreign exchange reserves. The Chinese have had a long-running equivalent of the TARP program in the United States and evidently know how to do it (even if many of the transactions are tainted by corruption). The Chinese have the economic wherewithal to engage in a massive deficit-finance program and have a centralized state- financial architecture to administer that program effectively if they care to use it. The banks, which were long state owned, may have been nominally privatized to satisfy WTO requirements and to lure in foreign capital and expertise, but they can still easily be bent to central state will whereas in the United States even the vaguest hint of state direction let alone nationalization creates a political furor.

There is likewise absolutely no ideological barrier to redistributing economic largesse to the neediest sectors of society though there may be some vested interests of wealthier party members and an emergent capitalist class to be overcome. The charge that this would amount to “socialism” or even worse to “communism” would simply be greeted with amusement in China. But in China the emergence of mass unemployment (at last report there were thought to be some 20 million unemployed as a result of the slow-down) and signs of widespread and rapidly escalating social unrest will almost certainly push the Communist Party to massive redistributions whether they are ideologically concerned to do so or not. As of early 2009, this seemed to be directed in the first instance to revitalizing the lagging rural areas to which many unemployed migrant workers have returned in frustration at the loss of jobs in manufacturing areas. In these regions where both social and physical infrastructures are lagging, a strong infusion of central government support will raise incomes, expand effective demand and begin upon the long process of consolidation of China’s internal market.

There is, secondly, a strong predilection to undertake the massive infrastructural investments that are still lagging in China (whereas tax reductions have almost no political appeal). While some of these may turn into “white elephants” the likelihood is far less since there is still an immense amount of work to be done to integrate the Chinese national space and so to confront the problem of uneven geographical development between the coastal regions of high development and the impoverished interior provinces. The existence of an extensive though troubled industrial and manufacturing base in need of spatial rationalization, makes it more likely that the Chinese effort will fall into the category of productive state expenditures. For the Chinese, much of the surplus can be mopped up in the further production of space, even allowing for the fact that speculation in urban property markets in cities like Shanghai, as in the United States, is part of the problem and cannot therefore be part of the solution. Infrastructural expenditures, provided they are on a sufficiently large scale, will go a long way to both mopping up surplus labor and so reducing the possibility of social unrest, and again boosting the internal market.

These completely different opportunities to pursue a full-fledged Keynesian solution as represented by the contrast between the United States and China have profound international implications. If China uses more of its financial reserves to boost its internal market, as it is almost certainly bound to do for political reasons, so it will have less left over to lend to the United States. Reduced purchases of US Treasury Bills will eventually force higher interest rates and impact US internal demand negatively and, unless managed carefully, could trigger the one thing that everyone fears but which has so far been staved off: a run on the dollar. A gradual move away from reliance on US markets and the substitution of the internal market in China as a source of effective demand for Chinese industry will alter power balances significantly (and, by the way, be stressful for both the Chinese and the United States). The Chinese currency will necessarily rise against the dollar (a move that the US authorities have long sought but secretly feared) thus forcing the Chinese to rely even more on their internal market for aggregate demand. The dynamism that will result within China (as opposed to the prolonged recession conditions that will prevail in the United States) will draw more and more global suppliers of raw materials into the Chinese trade orbit and lessen the relative significance of the United States in international trade. The overall effect will be to accelerate the drift of wealth from West to East in the global economy and rapidly alter the balance of hegemonic economic power. The tectonic movement in the balance of global capitalist power will intensify with all manner of unpredictable political and economic ramifications in a world where the United States will no longer be in a dominant position even as it possesses significant power. The supreme irony, of course, is that the political and ideological barriers in the United States to any full-fledged Keynesian program will almost certainly hasten loss of US dominance in global affairs even as the elites of the world (including those in China) would wish to preserve that dominance for as long as possible.

Whether or not true Keynesianism in China (along with some other states in a similar position) will be sufficient to compensate for the inevitable failure of reluctant Keynesianism in the West is an open question, but the unevenness coupled with fading US hegemony may well be the precursor to a break up of the global economy into regional hegemonic structures which could just as easily fiercely compete with each other as collaborate on the miserable question of who is to bear the brunt of long-lasting depression. That is not a heartening thought but then thinking of such a prospect might just awaken much of the West to the urgency of the task before it and get political leaders to stop preaching banalities about restoring trust and confidence and get down to doing what has to be done to rescue capitalism from the capitalists and their false neoliberal ideology. And if that means socialism, nationalizations, strong state direction, binding international collaborations, and a new and far more inclusive (dare I say “democratic”) international financial architecture, then so be it.

The financial crisis will be "more extreme and more serious than that of the 1930s",

The financial crisis will be "more extreme and more serious than that of the 1930s", cabinet minister Ed Balls has predicted.

Mr Balls, a former economic adviser to Gordon Brown, said the global recession would be the most serious for "over 100 years", the Yorkshire Post reported.

He told a Labour conference that these were "seismic events that are going to change the political landscape".

The Conservatives said the remarks were "staggering and very worrying".

Mr Balls, the schools secretary, made the comments at Labour's Yorkshire conference at the weekend, the newspaper reported.

Mr Balls and Downing Street have attempted to play down the significance of his remarks, insisting he had been pointing out the unique nature of the global financial crisis and was not predicting that the impact on ordinary people would be worse than that experienced during the Great Depression of the 1930s.

SOURCE: BBC NEWS

F. William Engdahl Interview - Two Years of Recession or Ten Years of Hell ? Part One and Two and Three and Four

Contribution to the Forum on the Global and Financial Crisis

on 30 January 2009 at De Balie, Amsterdam
By Prof. Jose Maria Sison
Chairperson, ILPS International Coordinating Committee

It is of utmost importance for the working class and the rest of the people exploited by the system of monopoly capitalism to discuss and clarify to themselves what they can and must do about the current grave financial and economic crisis. They are necessarily concerned about being ceaselessly victimized by the monopoly bourgeoisie, extending from the extraction of the surplus value in the process of production to the complexities of capital overaccumulation and abuses of finance capital.

In this connection, I wish to point out certain facts in order to show in a comprehensive and profound way how the current grave crisis has come about and how the working class and the rest of the people have been exploited and oppressed on a global scale, especially in the last three decades under the signboard of “neoliberal globalization”. Consequently, it becomes easier to discuss what the people can and must do about the crisis in terms of raising their consciousness, organizing and mobilizing themselves for making protests and demands in order to bring about the necessary social change for the better.


I. Certain Facts About the Crisis

We must counter the onesided, narrow, fragmentary and shortsighted explanations of the crisis in the US and on a global scale. These have been made by the industrial and financial magnates, their political agents, their academics and publicists in order to obfuscate the origin and development of the crisis, to continue the misrepresentation of monopoly capitalism as “free market” capitalism, to continue making the most out of the mess in the system of greed and to confound and confuse the people.

Whatever is the dominant policy stress of the imperialist state and the monopoly bourgeoisie, whether the policy is called Keynesian or neoliberal, it is in the very nature of monopoly capitalism to exploit and alienate the working class from what it produces, maximize the extraction of surplus value, raise the organic composition of capital and accumulate and overaccumulate both the productive and finance capital in the hands of the monopoly bourgeoisie, especially the financial oligarchy.

Pressing down the wage level cuts down effective demand and results in the crisis of overproduction. Raising the organic composition of capital in order to increase productivity and competitiveness results in the tendency of the profit rate to fall. The recurrent and worsening rounds of boom and bust and recessions have been temporarily overcome by heavy doses of debt financing. The overall decline of US industrial production since the mid-1970s has been accompanied by an unprecedented financialization of he US economy. But ultimately the overaccumulation of capital (especially through the overvaluing of assets, the multiplication and spiralling of derivatives and the generation of fictitious capital through unregulated credit expansion for the purpose of monopoly control and speculation) leads to the super-large financial and economic crisis, like the Great Depression and what now portends to be the Greater Depression.

The so-called neoliberal or “free market” policy stress has been significantly distinct from the previous so-called Keynesian policy stress a) in unbridling and letting loose the naked self-interest or greed of the monopoly bourgeoisie as the driving force of the economy ; b) in blaming as the cause of the problem of stagflation the rising wage level and social spending by the US government in the 1945-75 period, instead of the recurrent crisis of overproduction, the overaccumulation of capital and the demand-pull inflationary effect of military spending (the arms race, overseas deployment of US military forces and the wars in Korea and Indochina);

c) in seeking to make more capital and profit-making opportunities available to the monopoly bourgeoisie through the denationalization of the neocolonial economies, privatization of public assets, trade and investment liberalization and deregulation or removal of restraints on abusing the working people, the environment and the financial system, and d) in accelerating the centralization and concentration of capital (especially in the form of finance capital) in the US and a few other centers of global capitalism.

The monopoly bourgeoisie in the US and other imperialist countries has successfully waged a class struggle against the working class by using the imperialist state to attack the trade union and other democratic rights, to press down wages and erode hard-won social benefits, cut back on social spending and to deliver taxpayer money to the monopoly firms in the form of overpriced contracts in military production and continuous supply of fuel and other raw materials for strategic stockpiles, direct and indirect subsidies and insurance for overseas investments. At the productive base of society, the state guarantees the legal property right of the monopoly bourgeoisie in order to maintain the exploitative relations of production and provides the laws and coercive apparatuses to keep the working class under control. Even as it misrepresents itself as “free market” capitalism, monopoly capitalism has always used the state for purposes of exploitation and oppression. As the partner of private monopoly capitalism, state monopoly capitalism takes more forms than state ownership of enterprises, even as nationalization is a form that may become conspicuous in time of severe crisis.

In accumulating and overaccumulating capital, the US monopoly bourgeoisie has not been satisfied with the extraction of surplus value in the process of production, the privilege of tax cuts and grabbing of taxpayer money, access to the bank deposits and pension funds of the workers, expansion of credit and money supply in relation to deposits, the creation of derivatives that speculate on fluctuations in the stock, bond and currency markets and taking of superprofits on cheap commodities and debt service from the economic hinterland of the world. After inveigling millions of worker and middle class families to buy into the “hightech bubble” in 1995-2000 and making them lose their savings, the US imperialist state and the monopoly bourgeoisie drew the American households to the “housing bubble” from 2002 onwards at teaser interest rates at the beginning.

This would promote an unprecedented level of consumerism based on the artificially rising housing values and further consumer credit (in addition to housing equity loans, auto loans, credit cards and so on). The “housing bubble” complemented the so-called military Keynesianism of Bush, which pumpprimed the US military-industrial complex but not the entire economy in terms of increased demand, employment and production. The new bubble was one more and a bigger device to fleece the American working class and ultimately to securitize debts, especially bad mortgages, and generate the most arcane forms of derivatives, like the collateralized debt obligations, asset-backed securities, credit default swaps and structured investment vehicles.

The imperialist state looks like it is violating its dogma of “free market” or “state non-intervention” in using public funds to bail out the largest private banks, investment houses, mortgage companies, insurance companies and some key productive enterprises like the Big Three of US car production

But in the first place, such a dogma is a slogan of pretence. It is completely untrue that the imperialist state is going “socialist” when it uses taxpayer money for private corporate bailouts. Forms of state monopoly capitalism should not be mistaken for socialism. In times of big crisis like the Great Depression and the current grave crisis, the monopoly bourgeoisie deliberately avails of monopoly state capitalism to bail out the distressed monopoly firms and to assist the stronger firms to absorb the failing firms. Bush, Bernanke of the Federal Reserve Board and Paulson of the US Treasury Department cooked up with their Wall Street confreres the scheme of bailing out the banks with taxpayer money to the flagrant detriment of Main Street.6.

The purpose of the scheme is simply to pump prime the assets of the big banks and other financial corporations , allow them to dump the toxic assets and hope in vain that they thaw out the credit freeze and resume lending operational capital to producer firms. But would such producer firms take further credit for production under the depressed conditions of the crisis of overproduction? The scheme is anti-worker, anti-people and anti-socialist. The imperialist state and the monopoly bourgeoisie are not as interested in bailing out the workers from mass layoffs, home foreclosures, loss of pensions and other social benefits and other disasters as bailing out first the financial and industrial giants. Obama’s so-called stimulus package of USD 850 billion can provide temporary jobs only to a small part of the rising numbers of unemployed. It is a poor afterthought in terms of tardiness and smallness in relation to the trillions of dollars already deployed for the bailout of the financial giants since 2007. It is starkly clear that the bailout funds for the Big Three is anti-worker because it is preconditioned by the reduction of wages and benefits for the workers.

The highest US authorities in the outgoing and incoming administrations admit that the current financial and economic crisis will not blow away in one or two years. It can last for as long as ten years or even more. The gravity of the crisis can be deduced from the enormity and significance of the debts incurred by the US government, the private corporations and the American households. All these debts are beyond the capacity of the debtors to pay back. To collect the debt payments and/or write off the debts would deflate and further depress the economy. The US national debt has soared because of budgetary and trade deficits. The budgetary deficit involves a huge amount of debt service, the tax cuts for the corporations and the wealthy and heavy military spending.

The trade deficit involves the outsourcing of consumer goods and the decline of US manufacturing for export (except big industrial items and agricultural surpluses) since the 1970s. The use of US treasury bonds and taxpayer money to bail out the US financial and nonfinancial giants aggravates the crisis. Not only the financial corporations are in trouble with huge amounts of bad mortgages and other bad debts and worthless paper assets, the nonfinancial corporations are also in a big financial mess as shares of stocks and corporate bonds lose their value and the loss of effective demand and lack of sufficient fiscal stimulus stagnate and depress industrial production, the basic service sector and the real economy as a whole. The American households are losing jobs and homes by the millions and have savings of close to zero.

The current global financial and economic crisis has dramatically spread from the US to the rest of the world for several reasons. The US is the center of the world capitalist system. It has imposed the policy of “neoliberal globalization” on its imperialist allies and the less developed countries. It has subordinated veritably the whole world through bilateral and multilateral economic and trade relations and through its control of the Group of 8, the OECD, IMF, World Bank, WTO and other international agencies. The US is where both productive and finance capital have been most concentrated. It is the principal destination of foreign direct investments. It has been described as the engine of global economic growth and the biggest consumer market. Its currency is practically the world’s reserve currency. It has become the world’s biggest debtor, ceaselessly printing dollars and selling stocks and bonds to foreign entities. It absorbs the biggest bulk of the exports of the other imperialist countries, the so-called emerging markets and the oil-exporting and raw-material producing countries of the world. China, India and other so-called emerging markets are now in a severe crisis due to the international credit crunch and reduced US demand for their exports. The general run of third world countries which export nothing more than raw materials and some semi-manufactures are the most devastated by the drying up of international credit and by the fall in US demand for their exports.

In contrast to its longrunning arrogance and practice of setting the line for its allies, the US was at a loss on how to solve the global financial and economic crisis during the recent G-20 Summit. Bush prated about preserving “free market” capitalism. But the declaration of the summit encouraged all the participants to adopt whatever monetary and fiscal measures they deemed best. Discredited and with extremely limited resources, the IMF could not be referred to as a rallying point. Neither could the World Bank because no country would provide it with capital. And of course, the WTO is still bogged down in failure to resolve outstanding issues in the Doha round of talks. These are now overtaken by the current crisis. Countries that used to be lectured to by the US, like France, Russia, China, India and Brazil took their turns in lecturing to Bush. The financial and economic relations between the US and China, which are supposed to be the biggest global partners, are now increasingly unstable. The sweat shops on the eastern coast of China, owned largely by foreign investors and producing consumer goods for the US market, are closing down or reducing production and throwing out tens of millions of people out of their jobs. The US and foreign exchange holdings of China are vulnerable to capital flight and the value of US treasury bonds and corporate securities in the hands of China can evaporate as fast as the US proceeds to further enlarge its national debt and keep the interest rate at close to zero for the purpose of reviving the US credit system.

The broad masses of the people, especially the workers and peasants, suffer from the global financial and economic crisis in terms of reduced employment and income, the deterioration of their living conditions and intensification of exploitation and oppression. The crisis has resulted in widespread social discontent and unrest. It is generating the people’s resistance in the imperialist countries, in the so-called emerging markets and former revisionist-ruled countries and in all the third world countries. For the people’s resistance in any country to be resolute and effective in confronting imperialism and reaction and in seeking reforms and social revolution, there has to be a revolutionary party of the working class to lead both the organized and spontaneous masses. For several decades, the imperialists and their reactionary allies have launched offensives to destroy or weaken the working class parties and the progressive trade unions and other mass organizations. But now the gravity and long duration of the current financial and economic crisis opens excellent opportunities for the progressive forces and movement of people for national liberation, democracy and socialism to grow in strength and advance.

II. What People Can and Must Do

What the people can and must do about the global financial and economic crisis ranges from seeking relief, recovery and reforms within the imperialist-dominated world capitalist system to the most fundamental criticism of this system and raising the demand and undertaking the actions for revolutionary change towards socialism.

When I speak of reforms within the system, I do not mean harking back to the misappropriation of the term by the dishonest purveyors of “free market” capitalism who used it against the basic rights and interests of the working people in the industrial capitalist countries and in the less developed countries. At the moment, key bourgeois political and economic authorities are swinging back to the Keynesian general theory of equilibrium and the management of effective demand through fiscal measures.

As far as I am concerned, reforms within the framework of Marxist political economy can be undertaken to serve the immediate demands of the working people for employment, decent income, better working and living conditions and the availability of basic social services, even as the long term goal of the people’s revolutionary movement is to replace the system of monopoly capitalism with the socialist system.

To take an important phrase from the Communist Manifesto, the battle for democracy must be won whether the popular movement for socialism be in the imperialist countries or in the far less developed countries dominated by imperialism. The consciousness, organization and mobilization of the broad masses of the people must be raised to a level high enough to effect basic reforms immediately and social revolution in the long run.

In the industrial capitalist countries, the economic basis for socialism exists. But the monopoly bourgeoisie never gives up its political and economic power voluntarily. It uses its state power to impose fascist rule if the persuasive and deceptive role of the bourgeois political parties fails to mislead the people and stabilize the system. Thus, the battle for democracy must be won against the potential or actual rise of fascism and the use of imperialist war by the monopoly bourgeoisie to regiment the people. In this regard, we recall the Great Depression, the rise of fascism and World War II.

In the far less developed countries, where there are still large vestiges of feudalism, winning the battle for democracy involves not only upholding, defending and promoting the collective and individual rights of the people, especially civil and political liberties, but also addressing substantively the demand for national industrial development, the peasant clamor for land reform and engaging the peasant masses in the new democratic revolution led by the working class as the long term agent for socialist revolution and construction.

Information and Education Campaigns Whatever significant degree of social change is called for in the short term or in the long run, the people must comprehend the problematic situation that they are in and the possible and necessary solutions that must be carried out with their conscious, organized and militant participation. In this regard, the working class parties and mass organizations of various exploited classes and sectors must engage in information and educational campaigns.The current global financial and economic crisis cannot be comprehensively and profoundly understood by those who analyze it from the narrow viewpoint of those who wish to preserve the system of monopoly capitalism. They are like frogs in the well.

Those who continue the Marxist and Leninist tradition of critiquing the political economy of capitalism and monopoly capitalism have a clear advantage as they have an overview of the inhuman and anti-labor character of the US and world capitalist system and the need to strive for the socialist system.

Research and analysis of the exploitative roots and development of the current global financial and economic crisis must be undertaken for the purpose of drawing up programs and declarations of political action. These must also take into account the impact and implications of the global financial and economic crisis on the global political crisis as manifested in the intensification of the major contradictions in the world.

The working class parties and mass organizations can add to their accumulated knowledge the analysis and advice of experts of political economy and international politics who truly understand the crisis comprehensively and profoundly. In this connection, there is now a rising demand for the Marxist critique of the capitalist political economy and the Leninist critique of monopoly capitalism and theory of state and revolution.

This is a time of discredit and embarrassment for those bourgeois economists who have followed the path of Milton Friedman and the Chicago School, for those neoconservatives who believed in strengthening US global hegemony by spreading the “free market” and “liberalism” with the leverage of US military superiority and for those neo-Kautskyite globalists who peddle the notion of supra-imperialism as a benign industrializing force.

The crisis has served to negate in the most telling way all the prior propaganda done by the monopoly bourgeoisie to hype the dogma of the “free market” through the dominant mass media, the schools, the think tanks, political parties and the nongovernmental organizations bound by the rule of civility in obeisance to the bourgeois state and big business. The working class party, the mass organizations and the broad masses of the people must carry out information and education campaigns as counter-offensive to the ideological, political, economic and military offensives of imperialism and reaction.

Social investigation must be undertaken among the people in order to learn from them how they are being afflicted by the crisis, what are their most pressing demands and what they are capable of doing to confront the crisis and bring their social movement forward. The social investigation can be of varying scales, from the basic level of local communities and work places to the national level. The purpose of social investigation is for the working class parties and mass organizations to learn from the people what must be done in order to arouse, organize and mobilize them.

There are various forms and ways of carrying out campaigns of information and education. These include the conferences, forums and seminars where the political activists and the experts can learn from each other and the mass meetings and rallies for expressing protest and demands and spreading wide the demand for social change and gauging at every given time how many people are being drawn to the mass movement. The working class parties and mass organizations can avail of the electronic media as a cheap and fast way of generating and accelerating the campaign of information and education.

Organizational Campaigns In the industrial capitalist countries, the monopoly bourgeoisie manages to stay as the ruling class and control the state for its own purposes, whether there is a duopoly of the Republican and Democratic parties as in the presidential form of government of the United States or an oligopoly of parties as in the parliamentary forms of Europe and Japan. There are variations among the the so-called mainstream parties but they are all within the predetermined framework or confines of the monopoly capitalist state system. In the semifeudal neocolonies, the joint ruling classes of the big compradors and landlords likewise maintain a variety of political parties to conjure the illusion of democracy. These parties are required to stay within the bounds of the big comprador-landlord political system.The ruling bourgeois class can tolerate a working class party if it does not challenge the state system of bourgeois rule and seeks reforms exclusively within the framework of bourgeois law and order. It takes every effort to induce and persuade a working class party to stay within the bounds of bourgeois rule. But it does not hesitate to use the coercive apparatuses of the state to malign and suppress the working class party when this is deemed as a threat to the system for seeking to supplant the class rule of the bourgeoisie with that of the working class in order to establish an anti-imperialist or socialist state.

At any rate, there is the need for a working class party to lead the people in seeking basic reforms within the bourgeois political system or in seeking to replace this with the socialist system. Basic social reforms as well as social revolution are not possible without the working class party that is capable of leading the organized and unorganized masses. Without such a working class party, the big bourgeoisie continues to rule society unchallenged and unhampered through the political parties which it uses for preserving the system, for intra-class and intra-systemic competition for political power among the bourgeois factions and for warding off any political party that seeks to overthrow bourgeois rule.

There must be a trustworthy working class party committed to the propagation and realization of the program of social change and capable of leading the broad masses of the people, especially the working people. Such a party is best relied upon for confronting the global financial and economic crisis and solving the problems for the benefit of the people and with their active participation. Without a working class party, the bourgeois parties would prevail over the working people who are unorganized and spontaneous or who are limited to mass organizations.

In carrying out organizational campaigns in the face of the current grave financial and economic crisis, efforts must be resolutely undertaken to build a genuine working class party that surpasses the bourgeois laborite, reformist social democratic or revisionist communist parties. Building such a working class party is quite challenging because of the long running attempts of the monopoly bourgeoisie to stigmatize as “terrorist” revolutionary forces that call for national liberation, democracy and socialism. But the current crisis conditions are favorable for building such a party.

The trade unions and other mass organizations must be built in order to uphold, defend and promote the rights and interests of the exploited classes and sectors of society. In the industrial capitalist countries, the most important of these are the mass organizations of workers, migrant workers, immigrants, the various nationalities, youth, women, the professionals and cultural workers. In the semifeudal neocolonies, the most important mass organizations are those of workers, peasants, youth, women, the intelligentsia and the minorities. These classes or sectors are adversely affected by the crisis in particular ways.

The class and sectoral mass organizations must further form multi-class and multisectoral federations and alliances in order to underscore common interests and build political unity cumulatively and progressively. The genuine working class party offers to them as guide its general line and program of action, encourages their political and organizational initiatives and thereby wins their abiding support . Mass organizations with different ideological, political and religious affinities can form formal and informal alliances to pursue common courses of action on the basis of consensus and coordination.

Within a country, mass formations can be established and developed at various levels, from the basic level through intermediate levels to the national level. These mass formations can in turn become components of similar formations at the international level. The International League of Peoples’ Struggle has been working hard to build its national chapters and its global region committees. It is a form of international alliance but is ever ready and willing to form broader alliances along the anti-imperialist and democratic line of people’s struggle.

Mass mobilizationsIn connection with information and educational campaigns and organizational campaigns, the broad masses of the people in their millions must be mobilized to denounce the exploitative and oppressive character of the system of monopoly capitalism, now sharper and more destructive than ever before, and to demand social, economic and political changes, ranging from basic reforms to the fundamental revolutionary transformation of society.The battle for democracy must be carried out according to the objective and subjective conditions obtaining. The legal forms of struggle must be carried out where these are possible and to whatever extent these are possible. The full spectrum of human rights, civil, political, social, economic and cultural, must be upheld, defended and advanced for the benefit of the exploited and oppressed people. The people must be able to act accordingly as the the socio-economic crisis results in political crisis and the forces and agents of monopoly capitalism malign and try to discredit democratic protest as unlawful rebellion or even as terrorism and thus justify increased political repression.

In countries where the ruling classes engage in state terrorism and/or imperialism engages in wars of aggression and military intervention, the people have the sovereign right to mobilize themselves for all forms of resistance, including revolutionary armed struggle. At the moment, legal mass movements and revolutionary armed struggles are going on and advancing in several countries in Asia, Africa and Latin America, where the people are the most oppressed and exploited. The current severity of the global financial and economic crisis, the exacerbation of exploitation and oppression, the blatant political repression or naked state terrorism and the imperialist wars of aggression impel the people to wage armed revolution.

To become most effective in making protests and demands, the mass movement for social change must be based at the level of the local communities, the factories, farms, schools and churches. It is indestructible when there are dedicated activists of the working class party and the mass organizations who are deeply rooted among the toiling masses and who arouse, organize and mobilize them at the basic level. This fact is well demonstrated in cases where the most vicious campaigns of deception cannot sway the people against the progressive mass movement as well as in cases where the counterrevolutionary state carries out a campaign of military and police suppression but fails to defeat or weaken the revolutionary mass movement of the people.

When the mass movement is well-established at the basic level, especially among the working people, then it can easily build and support the organs of leadership and organizational effectivity at various levels, up to the national level. It can mobilize significantly large and effective numbers of people at the centers of the towns, districts, provinces, regions and the capital of the country. The higher levels of leadership and organization and the lower levels can interact to drive the mass movement forward according to the general political line.

Anti-imperialist and democratic mass movements are well-rooted in many countries. These have become interconnected with their counterparts within global regions. The cohesion and coordination of the mass movements within a global region can be effected through conferences, seminars, forums, a standing regional committee and timely consultations.

The formation of global region committees and organizations does not always have to precede the formation of the international organization. An international organization can be formed by calling for the participation of people’s organizations based in various countries. The International League of Peoples’ Struggle was first established as an international organization and subsequently called on its member-organizations to form national chapters before pushing in earnest the formation of the global region committees and organizations.

At the moment, there are several international formations or combinations of people’s organizations. These can be consensus-based formal and informal alliances. They can make declarations and agreements of anti-imperialist solidarity, mutual support and cooperation. We are witness to the growing unity, cooperation and coordination of these international organizations in carrying out mass mobilizations to oppose the vile policies and acts of imperialism and reaction and call for a new and better world of greater freedom, democracy, development, social justice, healthy environment and peace.

III. Prospects

The current financial and economic crisis is far from over in the US and in the world. The bursting of the bubbles in housing, bank credit, the stock market and derivatives has not yet run its full course and continues to deflate values in trillions of dollars due to debt deleveraging in the trillions. The bubble in derivatives has been the biggest in the entire history of capitalism and is estimated to range from 500 trillion to a quadrillion dollars on a global scale. The corporate bond bubble among the giant industrial firms is expected to burst in a big way this year. So is the bubble in US treasury bonds that has rapidly inflated due to the bank bailouts in the trillions.

The real economy is bound to be further afflicted by bankruptcies, drastic production cutbacks, decline of employment and incomes and the further loss of effective demand. The accumulation of debt financing by governments and private corporations in so many decades is cascading into and collapsing on entire economies. The Keynesian stimulus packages of the US and other governments are puny and restricted by the persistent neoliberal policy bias and the ever insistent demands of the financial and nonfinancial corporations to be the first served with the bailouts.

Let us recall that the pumppriming fiscal measures adopted by Roosevelt under the New Deal did not really solve the Great Depression and stabilize the US economy. These measures would counter now and then the depressed conditions only to be pushed back by “free market” arguments against deficit spending in a period of lower tax collection. It was largescale civil and military production related to World War II that finally stimulated the US economy.

There is good reason to be wary of Obama’s kind of top economic advisers like Volcker, Rubin and Sommers and his top appointees to the US Treasury Department (Geithner), the US Securities and Exchange Commission (Schapiro), the Commodity Futures Trading Commission (Gensler) and so on. These are exponents of unregulated “free market” capitalism, especially Sommers and Geithner who were instrumental in pushing the Financial Services Modernization Act and the Modernization of Commodity Futures Act during the time of Clinton in 1999. Geithner is a dyed-in-the-wool factotum of Wall Street, like his former bosses Bernanke and Paulson. It is highly probable that the glittering Obama promises of stimulating the economy the New Deal/Keynesian way would be squashed under the pressures of unwieldy bipartisanship and the persistence of the neoliberal policy bias.

The US policy makers under the Obama administration have already indicated that they will continue to chant the slogan of “free market” capitalism, retain as much as they can a high level of deregulation favoring the financial and industrial giants and carry out a number of measures to reverse the industrial decline of the US. These measures include Keynesian pumppriming (like public works, expansion of social services and green energy projects), military production and taking back some of the manufacturing of consumergoods conceded previously to US allies.

The current financial and economic crisis is grave enough to threaten and undermine the position of the US as the No. 1 economic and military power. But the decline of the US as the unquestioned No. 1 imperialist power will not occur rapidly on a straight line. The other imperialist powers have also taken a big hit as a result of hewing to the line of “neoliberal globalization”. This is well illustrated in a current cynical joke among Washington insiders, Republican and Democratic, that the financial crisis would have been far worse for the US had it not succeeded in exporting the toxic financial products to Europe, Japan and elsewhere. The US is still in a position to adopt self-serving policies to slow down its decline and further beggar its own imperialist allies and neocolonial underlings.

However, such policies will be very harmful to other countries and the people of the world and will provoke them to react and adopt their own policies. The currents of multipolarization will thus become stronger. In fact, the struggle among the imperialist powers for a redivision of the world in terms of political hegemony and economic territory (sources of cheap of raw materials and cheap labor, markets and fields of investment) will become more intense. The adverse effects of the crisis on the so-called emerging markets and the general run of raw material-exporting countries in the third world are leading to social and political turmoil.

The severity and dire implications of the global economic crisis push the imperialist powers to intensify aggression and military intervention and accelerate their preparations for war. The trend of US-instigated aggressive wars has conspicuously risen since the disintegration of the Soviet Union and global recession that hit Japan the hardest. Since its economic slowdown at the turn of the century, the US has become even more aggressive with the so-called global war on terror as a convenient pretext, to pumpprime the military industrial complex, as well as further expand an consolidate its global hegemony.

The NATO allies of the US, notably Germany and France, have been less enthusiastic in supporting US military campaigns and programs such as in Iraq and elsewhere in the Middle East and in the former Soviet bloc countries. Russia is wary of the US and NATO policies and track record of expansion and aggression and have formed with China and some Central Asian states the military alliances, Collective Security Treaty Organization (CSTO) and Shanghai Cooperation Organization (SCO).

No one can accurately predict how long the global financial and economic crisis will persist and how the imperialist powers can solve or aggravate it. But there is ample ground and ample time for the working class, the mass organizations and the broad masses of the people to further strengthen themselves against the onslaughts of monopoly capitalism and all reaction and carry out mass movements to make demands for basic social reforms in all countries and to wage revolutionary struggles in an ever increasing number of countries.

At any rate, the Greater Depression is still looming ahead. There will be more widespread social and political turmoil in various countries of the world. Wars of aggression and military intervention are in the horizon. The most effective counter to this is in the ceaseless consolidation and expansion of the revolutionary mass movements for national liberation, democracy and socialism.

Thanks to Marxist Leninist for this contribution.