by C.J. Atkins
As the campaigns of Barack Obama and John McCain raced toward the Election Day finish line, the country and the world seemed to sink into a panic as the economy was collapsing all around us. Banks were going belly up, stock prices went on a roller-coaster ride, companies announced major layoffs, and Washington politicians were scrambling to point fingers and shift the blame.
How did this crisis sneak up on us? How was everyone caught off guard?
The truth is that millions of families across the country were not surprised in the least. For them, the economy was already in trouble a long time ago. What was really going on was that the economic hard-times that many working people had been feeling for years were finally starting to trickle up to those at the top. But to really understand how we got to this point, it is necessary to look back several years (even decades) to some of the trends that have come to characterize the capitalist economy. The current crisis is not something that just popped up. It is the result of more than thirty years of pursuing an economic model that has ultimately failed.
The Golden Age
In the years following World War II, capitalism in the West seemed to gain a new lease on life after the near total collapse of the Great Depression. The economy recorded higher growth each year and both big business and the working class seemed to be benefitting. Profits for capitalists were soaring higher as productivity notched upward. In the U.S., McCarthyism had stripped organized labor of some of its best leaders and tamed the unions, guaranteeing relative stability for the big corporations that dominated the economy. But even those attacks on the left could not totally destroy the victories that workers and their unions had achieved in the New Deal years. So the working class (or at least a certain sector of it) was enjoying some of the gains of this period that came to be known as capitalism’s “Golden Age”. Incomes were rising and the increasing inequality between the richest and poorest groups in society was actually reversing for the first time. The state was playing a very active role in the economy with several countries having substantial parts of their industry under public ownership. Some were starting to say that the boom-and-bust cycle of capitalism that Karl Marx had analyzed was now a thing of the past.
For some groups, of course, this Golden Age had never really been so “Golden”. In the U.S., African Americans continued to suffer from the economic and political oppression of segregation and second-class citizenship. Most immigrants, too, were excluded. Outside the advanced capitalist countries, many of the nations of Africa, Asia, and Latin America were struggling for independence, but they remained mired in the poverty resulting from centuries of imperialism.
But by the 1970s this mythical period of a new crisis-free capitalism started to unravel. The economic growth that had been the necessary glue holding together the stable class relations of the post-war period stalled and stagnation set in. The mass output of consumer and industrial goods in the 1950s and 60s was finally starting to outstrip effective demand. Markets were flooded with products as the old problem of overproduction reappeared. Inflation and unemployment shot up at the same time that productivity started to decline. The capitalist class searched for a solution as they watched profit rates trend steadily downward. On an international scale, the dominant position of the U.S. in the capitalist world economy seemed to be under strain as well. Europe and Japan were becoming major capitalist powers and the U.S. dollar’s status as the world’s currency was under increasing pressure.
Neoliberalism: The Return of Market Fundamentalism
Part of the solution they discovered was a process that has become known as financialization. Over time, more and more capital investment was gradually moved out of the “real” economy – those industries where people actually make and sell material goods and services – to the financial sector of the economy, or what is sometimes known as the “paper” economy. Activities in sectors such as banking, insurance, and investment started to vastly expand.
Occurring simultaneously with this structural shift in the economy was an ideological attack by the ultra-right. Free market fundamentalists like Milton Friedman declared that government had no place in the economy. Privatization of public companies and services was urged. The removal of government oversight of banks and corporations was said to be the best way to restore profitability and economic growth. Taxes were too high and valuable money was being wasted on social programs. Labor unions were strangling companies into bankruptcy. The free market would solve all of these problems if only the state would get out of the way. It was all a rehash of the same ideology of liberal capitalism that Marx had critiqued more than a century earlier.
Of course, the free market crowd did not truly want the government to completely get out of economic matters. They had some big tasks that only the power of the state could carry out. With the election of Ronald Reagan to the presidency in 1980, they got just the man for the job. Unions came under fierce attack, the budgets for social programs were gutted, and financial regulations were stripped away. Interest rates were sent upward to squeeze out inflation and restore the power of the U.S. dollar in the world economy. This also had the effect of shuttering plants across the nation, sending millions to the unemployment lines. Combined with this neoliberal approach in the economy was a heightening of Cold War tensions with the Soviet Union. Money was poured into the arms race. This sent government deficits and debt soaring higher than any social program ever had. It seemed the dominance of the U.S. in the world capitalist system was being restored.
The trend of decreasing inequality that had characterized the “Golden Age” was also in full reverse. Corporate CEO salaries went through the roof as working class incomes failed to keep up with inflation. Millions of families started to rely more and more on credit and debt to maintain their living standards.
The “Victory” of Capitalism
By the early 1990s, the economic and political problems of the socialist states in Eastern Europe had resulted in the collapse of the governments there and the discrediting of communist parties around the world. The neoliberal ideologists and the mass media declared that the battle between capitalism and socialism was over. According to them, Marxist ideas had been proven wrong and the “invisible hand” of the free market had triumphed. It seemed governments everywhere were starting to agree that there was no alternative to unrestricted and unregulated capitalism. Even centrist and left politicians, such as Tony Blair in the U.K. and Bill Clinton in the U.S., could be accused of abandoning any pretense of egalitarianism and continuing the pursuit of neoliberal policies. People were told that the good times were here again.
Profit rates did increase once more and consumerism was back. But much of the celebration rang hollow for millions of poor and working people. Expenditures on social welfare continued to decline over the decade and good-paying full-time union jobs disappeared. The reliance on credit that had started to appear earlier increased even more as people ran up their credit cards and took out second and third mortgages on their homes.
At a superficial level, things looked good. GDP was indeed growing and everyone was talking about the “new economy” of service and high-tech jobs. Many jobs were actually being created. These “good” times though, were only sustained by repeatedly delaying the downturns that were a basic part of the capitalist economic cycle. Financial speculation and outright gambling inflated one investment bubble after another. In the U.S., the federal government used its fiscal and monetary policies to encourage such activity in order to avoid recession. In the late 1990s, there was the so-called dot.com bubble, which saw massive amounts of capital flood into the internet and high technology industries. As that hype died down, money began pouring back into other stocks.
The deregulation and financialization madness reached new heights under the administration of George W. Bush. Since the 1970s, Wall Street had been inventing all kinds of new ways to funnel money through financial channels in order to generate huge profits. There were various kinds of derivatives, credit default swaps (CDSs), collateralized debt obligations (CDOs), and a myriad other forms of ever-more complicated financial instruments created. Put more simply, much of this was simply the cutting up and endless buying and re-selling of what in essence were just very complicated IOUs. Nothing real was being produced in this sector, yet billions of dollars were being made. Finance, which had in the past accounted for a small percentage of U.S. economic activity accounted for nearly a quarter of the country’s entire economy by the first decade of the twenty-first century.
The Bottom Falls Out
As the stock bubble began to burst and the “real” economy started showing signs of trouble with mass layoffs in manufacturing, the short-lived recession of 2001 was softened with the inflation of a new bubble. This one, which had actually gotten its start in the late 1990s, was in the real estate and housing sector. Home prices had begun to rise rapidly for several years, but they really started to take off by the early 2000s. . Millions of families who already had homes took out new mortgages to cash in on their increasing equity. Some who could afford it started purchasing two or three homes expecting to sell at a profit.
Suddenly, even families who in the past had been turned down for a mortgage because of their poor credit or low incomes were told they too could become part of Bush’s “ownership society”. A new kind of home loan, the sub-prime mortgage, was made available to millions of poor families – a large number of them African American or Latino. They were told there was no danger in taking out a mortgage that far exceeded their ability to pay or one that had adjustable rates. They could always just sell the house and make a profit if there was ever a problem. It was all presented as a safe investment. And so with all these new customers, the home construction craze continued.
But after a few years, problems started to appear. Home sales began to slump. In the suburbs, entire newly-built neighborhoods were sitting empty. In the cities, expensive condos waited for residents who weren’t coming. More and more homes were piling up. Of course, this didn’t mean that everyone now had a home and too many had been built. The fact is that by 2007 there were approximately 12 million empty unsold homes in the U.S. while at the same time about the same number of people were homeless.
Home prices, which everyone had been told could only go up, mysteriously started to fall – and fast. But there really was no mystery at all. It soon became quite clear that there was once more a situation of overproduction. The housing bubble had burst. People very quickly discovered that they now owed more on their mortgage than their house was worth. And as those adjustable interest rates kicked in, many found themselves facing mortgage payments they simply could not afford. Hundreds of thousands started to lose their homes. The fuse was now lit for a major economic crisis.
As these families started to default on their mortgages, the effects spread throughout the economy. Like all of those very complicated IOUs discussed above, these mortgages had been split up, packaged with other loans and debts, and resold. They were sold to other banks, to mutual funds, to pension funds, to other companies, to international banks, to foreign governments. When the mortgage doesn’t get paid by the homeowner at the bottom, the effect goes right up the chain to every bank, company, or investor that holds a piece of it. Everyone is left with a little sliver of a loan that will never be paid back.
It took several months to fully develop, but by the fall of 2008 the effects were clear. Banks and firms that had invested heavily in the subprime mortgage mess were in big trouble. Lehman Brothers went under as the invisible hand did its job. Other banks panicked. They refused to make loans to one another, businesses, or consumers out of fear they would never be paid back. Credit markets rapidly froze as lenders held tight to their cash. The world’s biggest insurance company, AIG, teetered on the brink and mortgage giants Fannie Mae and Freddie Mac looked ready to collapse.
Free market mythology had brought capitalism to the edge of an abyss. It became obvious to almost everyone that if the government did not act, the economy could crash. And so the bailouts began. Billions of dollars of taxpayer money poured into the banks to “recapitalize” them. Many were effectively nationalized. In some countries, they actually were. State intervention in the economy was seen by all, even Bush, as unavoidable. In the election, McCain was left without an economic leg to stand on as his message of deregulation and tax cuts seemed out of touch with reality.
Bush and Paulson offered what has been called “socialism for the rich” but did not bother to throw any kind of lifeline to working people. Their half-hearted actions in the fall did little to resuscitate the sinking economy in any meaningful way. The Obama campaign, already riding a wave of popular dissatisfaction with eight years of war and mismanagement, was pushed over the top by an economy that was spiraling downward more every day. As December and January rolled on, little was done by the lame-duck Republican administration. Companies that had already been in trouble were now in even more dire straits. They were hemorrhaging jobs, with over 100,000 lost in a single week in January.
As Obama takes office, he inherits a capitalist economy in ruins. The veil over the thirty year myth has been lifted for all to see – neoliberalism has failed. No matter what Republican politicians or Fox News may claim, socialism is not on our immediate horizon to be sure, but a major overhaul of capitalism is. The period of neoliberal dominance coincides almost exactly with that of the ultra-right in our country. Now the political and economic dynamics have shifted dramatically. It falls to those of us on the left to assert ourselves into that reform process and help shape the next step for our country and the world.
C.J. Atkins is from Arkansas. He is currently a graduate student in political economy at York University in Toronto, Canada.